The OBBB and what it means for you
The One Big Beautiful Bill is more than 1,000 pages long of complicated and in-depth tax changes that are in effect for at least the next few years.
This entire month, I’ve been focused on educating people through my Wednesdays with Wendy about the bill, and, more importantly, what it could mean for them. I’m going to be quick to clarify that nothing I say in this blog should be taken as tax advice for your situation. You need to consult with a licensed tax preparer about your individual tax situation. After all, like many laws, the effects of the OBBB are different for each person!
The biggest changes that I’m covering are:
No tax on tips,
No tax on overtime, and
Changes to SALT.
No Tax on Tips
I’ll be honest – I’m still shocked that they actually did this. Not charging federal income taxes on tips has been discussed for years but with the OBBB, it is finally true, at least for tax years 2025-2028, that is! After that, Congress will have to extend or change the provision.
I think it’s important to note right away that an employee or employer can’t simply report all income as tips to avoid paying federal taxes on that income! There are rules and guidelines on what and how the tips can be a tax deduction. For example, only 68 jobs in eight categories qualify for being able to deduct their tips from their taxes.
A person can also only deduct $25,000 in tips from their taxes. Finally, all the other payroll taxes, such as state taxes, Social Security, and Medicare taxes, must still be paid on the tips so the amount must still be reported as income. This is why they are a deduction for federal income taxes and not simply left off the tax forms. One final note: you don’t have to itemize deductions to earn this deduction. You can deduct your tips if you otherwise qualify, even if you take the standard deduction.
No Tax on Overtime
This change is also slated to be for tax years 2025-28 unless Congress changes or extends it. But this deduction is $12,500 per person; if you are married and filing jointly, each of you can take this deduction! You must be able to furnish evidence of how much of your pay is from regular time and how much is overtime. If you are an employer, you need to be reaching out to your payroll company before the end of the year to figure out how this will be handled on payroll.
Changes to SALT
The OBBB increased the deduction for state and local taxes paid to $40,000. This is an itemized deduction for individuals. So that amount, along with other itemized deductions you pay, must be greater than the standard deduction for you to claim it on your tax return.
What this means for you: If you are paying estimated taxes, you can make your 4th quarter estimated STATE tax payment by Dec 31, and then that amount can be deducted on your 2025 tax return. If you wait until January 15, when the 4th quarter estimate is due, you will have to wait and deduct that amount on your 2026 tax return. I suggest not waiting until the last minute to make your state estimated tax payment so it doesn't get lost in the holiday shuffle.
For S Corps and other pass-through entities - If your state is one of the 36 states that has enacted a pass-through entity tax (PTET), and you make a state income tax payment before Dec 31, you'll be able to deduct that as a business expense on your business tax return for 2025. Arkansas is one of these states, so check with your tax preparer today!
Need Help?
Do you need help figuring out how these tax changes affect you and your payroll? Schedule a time with me, and we can discuss what you need!