On February 6, 2025, the White House announced a series of tax cuts primarily benefitting the middle class and retirees. Here’s what’s on the table:
- No tax on tips
- No tax on Social Security benefits for seniors
- No tax on overtime pay
- Renewing the Trump Tax Cuts from the 2017 Tax Cuts and Jobs Act
- Adjusting the SALT cap
- Eliminating special tax breaks for billionaire sports team owners
- Closing the carried interest loophole for hedge fund managers
- Tax cuts for Made in America products
The administration is calling this the largest tax cut in history for working Americans, and with Republicans in control of Congress, these proposals are likely to move forward.
Tax Cuts Means Greater Financial Freedom
As someone who is committed to helping as many people as possible reach financial freedom sooner, it’s hard not to be pro-tax cuts. After all, the more money we keep, the greater wealth we can build to live our desired lifestyles. This isn’t about politics—it’s about economic opportunity and personal finance strategy.
One of the biggest reasons I retired early in 2012 was because I didn’t want to grind away 60+ hours a week, constantly stressed and dealing with chronic pain, only to hand over ~40% of my income in taxes. Instead of complaining, I chose to make less money and negotiate a severance package. If taxes were lower, I would have worked for at least four more years.
Making 80% less money that first year felt weird initially, but not paying six figures in income taxes and enjoying the freedom of public parks on a weekday felt incredible.
Of course, tax cuts mean less government revenue, so the White House is looking for spending cuts to compensate. While USAID (1% of spending) and other discretionary spending programs might see reductions, the real challenge is in cutting major budget items.
U.S. Government Spending Breakdown
The government spent about $6.75 trillion in 2024 according to the Treasury Department, with Social Security, National Defense, and Health comprising of 50% of total spending. Hence, if the White House wants to run a balanced budget, it must find and equal amount of cuts and/or have more economic growth. Here's the top 5 spending breakdown:
- Social Security (21%)
- National Defense (15%)
- Medicare & Health (13%)
- Interest on Debt (13%)
- Income Security & Other Entitlements (9%)
Breaking Down the Proposed Tax Cuts
Let’s now go through each of the proposed tax cuts.
1) No Tax on Tips
Big win for service workers. If you work for tips, you often rely on customer generosity to make a living. You should get to keep 100% of what you earn. Many restaurant servers, bartenders, and hotel workers barely scrape by, so this tax exemption is well deserved.
2) No Tax on Social Security for Seniors
Fantastic move for retirees. Seniors paid into the system their entire lives. Taxing their already modest benefits never made much sense. Given that Social Security benefits already provide a poor return compared to investing in the stock market or even a 60/40 portfolio, letting retirees keep more of their money is a fair policy.
Currently, FICA taxes require employers to withhold 6.2% Social Security tax and 1.45% Medicare tax from an employee’s wages. Employers must match these taxes, bringing total FICA contributions to 15.3%.
The amount of tax-free income retirees can earn will keep going up, which means less financial burden for their children and for society. Retirees deserve to finally keep more of what they’ve paid in.
3) No Tax on Overtime Pay
This is a huge incentive for workers to put in extra hours and work harder – one of my predictions for what a second Trump presidency means for your finances. Eliminating overtime taxes means higher take-home pay, which in turn boosts spending, saving, and investing. It may also lead to a stronger GDP as worker output increases.
I’ve always believed people can work longer than the standard 40 hours a week if they want to get ahead financially. Now, with tax-free overtime, there’s an even greater incentive to hustle. I probably would have easily worked five more years if I got to keep 20 hours a week of earnings tax free.
4) Renewing the Trump Tax Cuts from the 2017 Tax Cuts and Jobs Act
This move brings certainty to taxpayers and businesses, which is good for investors. One of the biggest concerns before 2025 was that the 2017 tax cuts would expire, leaving financial planners, investors, and businesses scrambling. Now, there is not as big of a rush to conduct Roth IRA conversions either.
Key provisions being renewed:
- Lower individual tax rates, including the top rate reduction from 39.6% to 37%.
- Higher standard deduction: $15,000 for individuals, $30,000 for married couples that should keep going up.
- Corporate tax rate remains at 21% (down from 35% pre-2017).
- 20% deduction for pass-through business owners, benefiting entrepreneurs.
- Territorial tax system: U.S. companies no longer pay taxes on foreign earnings.
5) Adjusting the SALT Cap
The State and Local Tax (SALT) deduction cap was introduced in 2017, limiting the amount of property, income, and sales taxes that taxpayers could deduct from their federal tax bill to $10,000 per year.
This disproportionately hurt homeowners in high-tax states like California, New York, Connecticut, Hawaii, Washington, Massachusetts, and New Jersey. If the cap is adjusted, higher-income homeowners could save thousands. Since 2017, home prices everywhere have risen aggressively. Hence, it’s not just the expensive states that will benefit from a higher SALT cap.
Instead of a blanket cap, I’d like to see the SALT cap adjusted based on local home prices. A $10,000 cap in Mississippi is very different from a $10,000 cap in San Francisco. A proportional adjustment makes more sense.
Higher SALT caps could result in a noticeable uptick in demand for real estate in higher priced cities. With the return to the office movement also building momentum, we should see big city real estate shine in the coming years.
6) Eliminating Special Tax Breaks for Billionaire Sports Team Owners
Does anyone care? Probably not. But it raises the question—why did they get tax breaks in the first place? Billionaire team owners don’t need special treatment. Steve Ballmer (L.A. Clippers owner, ~$122 billion net worth) can afford to pay more taxes.
7) Closing the Carried Interest Loophole
The carried interest loophole allows hedge fund managers and private equity investors to have their performance-based compensation taxed at the lower capital gains rate (20%) instead of the higher ordinary income rate (37%).
As a limited partner in eight private funds, I don't mind. It’s an unfair advantage that lets wealthy investors pay lower taxes than salaried workers. Yes, the general partners have to invest for the long term, which helps fund entrepreneurship, innovation, and economic growth. But such a huge difference in tax rates seems egregious. Closing this loophole will generate billions in additional tax revenue without impacting most Americans.
8) Tax Cuts for Made in America Products
This is an incentive to boost domestic manufacturing. By lowering taxes on goods produced in the U.S., companies have more reasons to keep production at home, creating more American jobs. This is another win for the American worker.
What Happens Next?
With Republicans controlling Congress, these tax cuts have a strong chance of passing. However, negotiations over which cuts stay and how they’re funded will likely take months.
For now, the focus is on reducing government spending to help offset lost revenue. While agencies like USAID only account for about 1% of the federal budget, larger cuts will need to come from elsewhere if the administration wants to avoid adding to the national debt.
Less Taxes, More Efficient Government
For middle-class Americans and retirees, these tax cuts could be a major financial win. If you:
- Work a tipped job
- Rely on Social Security
- Put in long hours with overtime pay
- Own a small business or pass-through entity
- Live in a high-tax state affected by the SALT cap
You could see real benefits in the years ahead. Tax cuts like these provide more financial flexibility, helping Americans save, invest, and build wealth faster.
Personally, I’m most excited about no taxes on Social Security benefits and the potential increase in the SALT cap. I don't factor Social Security into my retirement plans, so having this tax-free income starting in my mid 60s means less of a need to save and invest. I’m also thrilled to potentially lower my annual six-figure property tax bill given how inefficient my city government is. Any savings will go toward increased spending on my family.
Given our propensity to spend, we should also consider how these tax cuts might impact inflation. Let’s see if Americans actually get to keep more of our hard-earned money!
Readers, what are your thoughts on these latest tax cuts? Do you agree with them, or do you think some go too far? How much are you paying in taxes each year, and how would these changes impact you? Also, what are your thoughts on DOGE’s aggressive cuts to USAID and other government organizations? Are these the right areas to scale back, or will there be unintended consequences? Let’s discuss!
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Based on the discussion thus far, I don’t see how these ‘tax cuts’ will actually positively impact the middle class in reality. Further, it looks like DOGE wants to raid social security and medicare which could be devastating (Musk calls it a Ponzi scheme..time will tell). The new administration wants to give $5T — that Trillion — in tax cuts, but where the heck is all that coming from exactly? I feel strongly that cutting every social program with no care about the real impact on real people who depend on them is a terrible thing. And they started with programs that are a drop in the bucket toward finding the $5T (trillion!) they want to give to the richest corporations and individuals. I’m happy to hear facts otherwise but a) the $$ has to come from somewhere and b) destroying all social programs is a terrible way to try doing that.
I think some discussion about how the SALT tax cap got into play by the first Trump administration would be worth mentioning. Many people saw it as a cynical way to extract more tax from people who live in areas with higher cost of living–think along the coasts. Now that it increasingly hurts a different kind of American (due to the costs of houses rising), they are considering weakening the effect of the cap.
Thanks for this recap. Good news! I hope it all passes. Closing a couple loopholes for seriously rich people is a step in the right direction.
ZERO federal taxes on citizens of USA period = NO irs = freedom. My Dad & Mom had a small plumbing shop 1960s to 2000. I was taught “Yes Ma’am the bill is a $100 check or $80 cash”. This billing practice and excellent accountant resulted in was free tuition for all four children at SUNY colleges.
That would be nice. But how are we going to pay for everything? There is also a responsible for those who can to help those who are struggling. At least I feel strongly about this obligation if we are lucky enough to build wealth in this great country.
Left to our own devices, human nature is to hoard as much money as possible. There needs to be some mechanism to help others automatically.
Hi Sam, I always helped my family with working all the offered overtime and a second job. Pay for everything is the problem solved with cutting spending. I can tell you from experience in Maryland those “struggling are well paid.
Example in Western NYS the re-buy is 25 years
Eastern shore of Maryland re-buy is 250 years
Years to re-buy house is house value / property & school taxes
My Wife the doctor provided millions of dollars in free care, unreimbursed care and hospital demanded free care.
I worked at FDA for six months in 1978/79 waste is the word.
How are tips defined? Call me cynical but I can see Wall Street chicanery calling bonues and other forms of compensation, tips.
Tips are income outside of your standard salary. Never thought of bonuses being classified as tips. Maybe!
But why be salty about that unless their compensation hurts you?
I’m happy if more people can keep their money.
It’s a bit misleading to call these all middle class tax cuts. The one I wanted to comment on was social security taxes as one of many uninformed takes. This pays a large percentage of existing pay outs and will just make fund not be able to pay fully sooner.
What do you think they should be called if most of the benefits go to the middle class since the middle class pay most of the taxes?
All of those tax cuts are on the democrat wish list except for renewing the 2017 tax cuts as-is as the benefits were very skewed to the rich. Not 100% sure on the made in America thing though. But I’d be shocked if the rest of those things were in the final bill. I feel they are just for show but I guess we will see. I really don’t want to be so cynical on this but experience tells me otherwise. Here’s hoping they materialize.
Social Security benefits should not be taxed. When you work you pay taxes to pay for these benefits and when you retire you are taxed when you receive them. It looks like double taxation to me. Our COLA adjustments are hardly keeping up with inflation. It’s enough seniors pay Medicare B and part D prescription medication tax. This amounts to 22% of my benefits and on top there are income taxes. These taxes increase faster than my COLA so my check gets smaller and smaller each year. In addition many states tax Social Security benefits also. Given all of this Social Security is perhaps the most taxed form of income. In my case well over 55%%. I am fortunate enough to receive other income but for most seniors Social Security is the most important source of retirement income.
Could you expand on getting taxed 55% on SS? I’m trying to figure out how this is possible so I can prepare when I’m eligible. And also how to minimize that tax rate.
Thx!
Sam,
Seniors are taxed on 50% of their SS benefits after a certain amount of income. That is not the tax rate. My parents are on Social Security and they pay the maximum rate for Social Security and it is not that high. They have to tax the benefits especially for wealthy SS families like mine or the Social Security trust fund will not be able to pay benefits. Seniors like to whine and moan, but if seniors are subject to these taxes they are wealthy and can afford it.
My parents make $80,000 a year combined with no deductions of any kind. Their tax rate was around 15%. That is not high. Most Americans pay less than 20% and they still bitch. My highest tax rate when I made $88,000 was 16% federal income tax. That is nothing and I was happy to pay it. Seniors need to stop bitching and stop lying also. I have seen the numbers and no one in America is overtaxed unless they are stupid or have a bad accountant.
I think if you factor in that you have to pay for Medicare part b and part d, which is deducted from your social security check, I can see how it would add up to be a lot. When I did some calculations, I calculated I would need to pay $360 per month. That amount is taken out of the check. I Don’t know if it’s taken out of the net or the gross.
85% of SS is taxable, although to be fair, you only previously paid taxes on 50% of it, since your employer paid on the other 50%.
Great point.
Unless, you are a solopreneur who ends up paying both sides.
Sam, Use the AARP 1040 work sheet. Max 85% of SS income taxed and taxed SS decreases based on total income.
Not difficult at all. In economics you always need to think at margin. Because I did not make too much money during my working career my SS benefits are not very much above average. Even though I am not ultra rich, I pay the same amount of Medicare part B and D premiums as Bill Gates, Warren Buffet, and Steve Ballmer. In addition, after adding 85% of my SS benefits to my other income this marginal increase in income moves me to the 32% tax bracket. Unlike RMDs which I send 100% to charity to lower my taxes, I can’t get rid of Social Security payments. State taxes are icing the cake. Given all of that 55% is probably a very low estimate. Getting rid of income tax on SS benefits would not only lower my income and income tax by at least 15 grand but could also move us one notch lower when it comes to Medicare premiums.
You are not paying 55% tax rate, no way. Taxes are on your total income, not just your Social Security benefit and everyone has to pay health care premiums too! Young people pay a lot higher premiums than people on Medicare. If I add my health premiums into my tax bill my tax would be well above 40%, but that is not how things work. Health care is a required part of life and paying for it is not a big deal. Medicare is cheap and a great deal for seniors. Again you are using your Social Security check to pay taxes you owe on other money. That does not mean you are paying a higher rate than anyone else. If you are in the 32% bracket you are rich and you should be grateful for that. That means you have plenty of money to do what you want.
Maybe we exposed his accountant and will save Ed money!
I would not like to pay income tax on my social security payments. But if you look at the outflow breakdown set out above, to SAVE any REAL amount of money to do that, we would have to cut social security and defense to do that. We are not doing that now. We are only going to essentially save pennies not dollars. Musk should have been told to look at waste and inefficiency at the the pentagon/defense first. Pennies will not save us.
It really comes down to how much debt we’re willing to have and the associated consequences of it. Musk has been very vocal about debt bankrupting the country. It currently stands at $36T. The tax cuts, absent major defense and entitlement reductions, would add substantially to that.
Tax on SS benefits is inconsequential because those benefits are small (under $2000 per month on the average) and the maximum benefit is only around $4000 a month and partially exempt already. The problem is fraud and abuse of the system. Checks are sent to people without valid SS numbers, 150-year recipients, deceased, and so on. Together with Medicaid and Medicare the amount of fraud exceeds one hundred billion dollars. Getting rid of it would allow for not only no tax on SS benefits but also will extend life of the Social Security fund.
Excellent points.
I would like to see actual proof of all this supposedly rampant fraud in SS… is that real or is it b.s? There is likely some fraudulent things going on in every single program – government or not – in the U.S. The real question is whether it actually amounts to anything real.
You are right and this will be addressed too. There is enormous waste at the Pentagon especially when it comes to contracts and the number of personnel including flag officers should be cut substantially. We have more four star generals and admirals we ever had in history even though the the number of people in service and the number of ships are shrinking year after year.
I appreciate the way that you’ve captured this. There’s a lot to like in many of these tax cuts. At the same time, I also appreciate you capturing where our current tax dollars go. All to often we’re led to believe that if we cut red tape, eliminate foreign aid, and shrink government we’ll be able to reduce the tax burden. The reality is that in order to pay for these cuts we have to be willing to reduce our spending in areas that we’ve shown little if any interest in addressing historically. Less revenue from taxpayers means less revenue for defense, social security, health and paying off our debt. You simply can’t accomplish one without impacting the other. And that’s the conversation I’m waiting to hear more about.
I worked 60 plus hour weeks most of my career. The overtime raised my Social Security substantially. I can also see how tax free could increase disposable income and more investable funds. Not everyone is disciplined to save or invest, I would like to see more financial classes in High School and beyond, teach a man to fish as they say. Thoughts?
I agree on the Social Security being tax free , as it’s already been taxed just like a Roth.
I’ve known different friends throughout the years that made a lot of money in New York and California. All made substantially more money for similar work because of living in a high cost area and finally moved out and to Arizona and bought houses nicer and still came out $500,000 to the good and no mortgage. Any Thoughts?
A lot of people on the tip end would pay very little to nothing to Social Security. If they didn’t plan or life happened they would be a burden to the system. Any thoughts?
Thanks for your post, Sam! As always, I love your optimistic nature & am always grateful to hear the bright side of things. I agree! Lower taxes are the way to stimulate the economy. It’s been proven time and again that American workers know how to spend our hard-earned dollars much better than the government. We are much more efficient, and we are much more generous in giving to causes that actually help the people that really need it. I am also grateful to have someone looking into the widespread abuse of government management of our taxes. Americans never voted on using our tax money for frivolities or corruption in any form and thank the Good Lord this is ending! I’d love to see a 10% tax across the board for every worker with absolutely no deductions. The very rich would pay the same percent as the lower income earners, but their share would obviously be much greater in dollar amount, and they would not need to pay thousands just to have their taxes prepared every year. I know it’s simplistic, but if the government withheld 10% of all pay coming in, we would not even need to file taxes. IRS could almost be eliminated:)
“I am also grateful to have someone looking into the widespread abuse of government management of our taxes. Americans never voted on using our tax money for frivolities or corruption…” So you’re telling us the guy who was hit with $354.9 penalty for criminal tax fraud, later convicted of 34 felonies for falsifying business records, and then three days before being inaugurated launched a personal meme coin $Trump and $Melania which enabled him to bilk his followers collectively out of billions and allows anyone with the means to anonymously bribe him, is the guy to root out corruption in the federal government? The absurdity of it all hurts my head.
Politically motivated bananna republic prosecution doesn’t count.
Regardless of how good these proposed changes may or may not be, financially speaking, I can’t help think of the costs to get them. Who will be hurt when the bigger expense items are up for cuts? And how can the government be more efficient with less revenue? If it is so inefficient now, wouldn’t it just become more so? I worry that the excitement over potential short-term gains (less taxes, more income) is overshadowing the potential long-term loss of a government that is further unable to invest for our collective futures.
I get the politics of it and having to get a package that can get the necessary votes but the salt tax cap should be decreased to zero and not increased. If it stays double it to 20k for the married field jointly only.
It’s a subsidy to states that over tax their residents already.
The republicans instituted the SALT cap in their 2017 Tax Cuts and Jobs Act and now they say they are doing us a favor by raising the cap?
Sam, if you buy this, I’ve a bridge to sell…making promises and implementing them are very different. Keeping the tax brackets low will help the Rick new than anyone else but hey, I’ll go for it. Hedge funds giving up their bonuses, we’ll see.
What are your thoughts on why a Republican control Congress would not pass most of these tax cut suggestions?
They will try, give them time. Though the hedge funds giving loophole may be an issue.
OK, the great thing about this debate is that we’ll see within 12 months whether these tax cuts go through or not.
I agree with all but one of the proposals. Eliminating tax on tips is simply a slap in the face to other low paid workers who do not get similar benefit.
But others are covered by minimum wage laws (local). Many with tips are not paid by minimum wage and tips are were to make up the difference. I do haope that any tip $s that go back into the business (and not to staff) are taxed as income.
Expected tips are part of the agreed compensation for this industry, so why shouldn’t their pay be taxed like mine is?
Call me a cynic but the “No tax on Tips” is campaign rhetoric and if enacted will likely lead to ubiquitous attempts at tax evasion and fraud. First off, I don’t know anyone in the service industry who accurately reports tips. They all intentionally put an arbitrary low number on their tax return to avoid paying taxes therefore there is no significant benefit to enacting the law. Also, this will be a disincentive for owners to pay their service staff a liveable wage and they will be stuck at $2.13/hr until the end of time. Another consideration is how is “no tax” defined? Are we talking income tax, payroll tax, etc? Is the law going to be specific to those working in the service industry or are savvy/shady business types now going to report that they are being paid in “tips” to avoid paying taxes? I’m looking forward to learning that Jamie Dimon is now being $39 million per year in “tips”.
A non-cynical view of this situation is that it will encourage a debate on the necessity of “tips” in our society. Would it not be better to abolish “tips” completely and pay service workers liveable wages with healthcare and retirement benefits like the vast majority of working Americans enjoy? Raise your hand if one of the reasons you enjoy traveling outside of the US is that other more sophisticated societies don’t allow tipping. I’ll never forget the time I was a study abroad student in Australia and the bartender slid my tip back at me and told that wasn’t necessary in his country. I was flabbergasted and after 27 years it still remains one of the best financial moments in my life.
I’m just getting warmed up on how preposterous this campaign pledge is, so I will stop before my keyboard melts.
Visit Europe Japan, etc. No tips and it is included in the cost of a meal. The price you see on the menu is what you pay: full transparency. Yes this would be far better in the US. It would force business owners to manage and pay their staff rather than customers.
My experience is from the 90s, but I can’t think it has changed much. Taxes on credit cards were reported in full, so Actuals. Tax on cash was reported at an expected 8% by the restaurant. You could report more, of course. Many times you’d get a 2 week check for $3 or so.
Most people didn’t understand it then, and most probably still don’t. Tax illiteracy is common.
No one I knew would have preferred a higher wage in lieu of tips, even when the place was slow. When I go out, I tip $2 or so on the card, and leave the rest in cash.
I also believe in tipping cash whenever possible to decrease $$ to the feds.
Sam – I would love to hear your take on early retirement and the implications of social security. Is there a magic number like you see with some pensions where say you work 20 years you get $30,000 a year for life but if you make it one more year there’s a jump to $40,000 per year but one more year after that only takes you to $41,000 a year? I’m in the dark how early retirement impacts SS.
I wrote a post about the best time to take Social Security.
In general, I don’t think anybody who strives to retire early should think about or depend on Social Security. Just treat it as a bonus once you become age eligible. If we focus on building our taxable portfolios, rental property portfolios, and other passive income investments to cover our expenses, we’ll be fine.
When I get SS, my plan is to spend/give away 100% of it every deposit I get. The best feeling is to help others and give money away to those in need. At that age, time, and level of wealth, that is my plan.
FS readers should have a goal that they make so much and have accumulated so much wealth that SS doesn’t matter.
As a physician practice owner (business owner), we don’t get the 20% deduction on QBI. I never understood why the government really puts the nail to physicians (ie, low Medicare reimbursements, low VA reimbursements, almost non-existent Medicaid reimbursements). Hopefully they will remove the physician exclusion and put us in with almost all other business owners.
Thanks for explaining all of the proposed tax cut changes in such an easy to understand way and so quickly after the news broke. There’s certainly a lot to take in and I can see the benefits of the changes themselves. Now we’ll just have to wait and see how the govt will “pay” for them in further detail and what actually passes into law. Lots to watch for this year.
Carried interest being fixed is great and should have occurred earlier. Getting an incentive fee paid as if it’s capital gains is not the original intent fair taxation. Everything I see above makes logical sense, but of course people and firms will find ways to use these laws to exploit and reduce their tax bill if they can on overtime and tips – even with tight specifics.
I’m hopeful that common sense continues to be drivers of policy conversations on tax and other matters.
Vance was a venture fund partner and would likely be at risk if carried interest is taxed at ordinary income, and many of Trump’s donors are from the venture community. I don’t see Trump aggressively pushing this part of his tax plan through Congress. I would bet it dies.