Key Takeaways From The New Tax Law
On July 4, 2025, a major federal tax bill was signed into law following its passage by both the House and Senate, titled the Tax Simplification and Family Relief Act of 2025. The act introduces sweeping changes to the current tax code, including adjustments to deductions, credits, and income thresholds that will impact individuals, families, retirees, and business owners. The law will have immediate and significant implications for financial planning.
The law is extensive with over 800 pages and far reaching with many nuances. Below is a summary of several key changes that could impact your financial plan:
Social Security
While the new law does not establish a separate exemption for Social Security income, it effectively reduces taxable income for many retirees through an enhanced standard deduction for individuals age 65 and older. Although benefits will still factor into the calculation of adjusted gross income, the combination of the senior deduction and a higher standard deduction means that a greater number of retirees will fall below the threshold where Social Security benefits are subject to federal income tax.
Standard Deduction Amounts & Senior Bonus
Higher Standard Deduction (effective 1/1/2025)
- Married couples: $31,500
- Single filers: $15,750
- Heads of household: $23,625
New Senior Bonus Deduction (effective 2025 - 2028)
- Up to $6,000 for individuals age 65+
- Up to $12,000 for couples
- Phases out at higher incomes
Education Planning
The new law expands how 529 plan funds can be used. Previously, they were limited to mostly college costs and up to $10,000 per year for K–12 tuition. 529s can now cover up to $20,000 annually in tax-free withdrawals for K-12 tuition and a wide range of additional expenses—such as curriculum, tutoring, online resources, dual enrollment, standardized tests, and workforce training or credentialing. Many of these previously uncovered expenses will directly help home schoolers. Furthermore, up to $35,000 in unused 529 funds can be rolled into a Roth IRA under certain conditions. Beneficiaries can also be changed to other relatives.
Small Business & Investment Incentives
The new law includes several provisions designed to support entrepreneurs, closely held businesses, and professionals. Key incentives focus on encouraging investment, growth, and innovation through tax savings including:
- 100% Bonus Depreciation Restored - Normally, when a business buys something like a $100,000 piece of equipment, it has to spread the tax deduction out over several years (called depreciation). With 100% bonus depreciation, the business can deduct the entire $100,000 right away—in the first year it starts using the asset. This allows for significant upfront tax savings and greater cash flow flexibility.
- Pass-Through Deduction Preserved – The new law keeps in place the 20% deduction for qualified business income (QBI) from pass-through entities such as LLCs, S-corporations, and sole proprietorships. This allows eligible business owners to deduct up to 20% of their business income on their personal tax return, helping reduce their overall effective tax rate.
- Incentives for R&D and Capital Investment - The new law strengthens tax benefits for businesses that invest in research and development (R&D) and long-term capital assets, aiming to fuel innovation, manufacturing, and domestic business growth.
These changes are especially beneficial for business owners looking to reinvest in their operations, expand their workforce, or fund long-term innovation.
Tips & Overtime Pay
Tax Year 2025 – Starting with income earned January 1, 2025, workers can claim above-the-line deductions for:
- Up to $25,000 in cash tips.
- Up to $12,500 in overtime pay (or $25,000 for married couples filing jointly).
- These deductions will reduce taxable income in your 2025 tax return, filed in spring 2026.
Expiration:
Both deductions are temporary, expiring after the 2028 tax year.
Limits & income phase-out:
Overtime and tip deductions phase out for individuals earning above $150K (joint filers above $300K)
Federal Deductions Temporarily Increased
The State and Local Tax (SALT) deduction allows itemizing taxpayers to deduct state and local income, sales, and property taxes on their federal return.
- Under the 2017 Tax Cuts and Jobs Act (TCJA), the SALT deduction was capped at $10,000 per return—regardless of filing status.
- The 2017 TCJA cap affected taxpayers in high-tax states (e.g., NY, NJ, CA, IL), especially homeowners and high-income earners.
Under the Tax Simplification and Family Relief Act of 2025, the SALT cap is significantly increased for middle-income taxpayers starting in tax year 2025:
- The new SALT Deduction Cap is increased to $40,000 for taxpayers with adjusted gross income under $500,000.
- For taxpayers with AGI of over $500,000, a phase out applies.
This adjustment is designed to restore part of the SALT deduction for middle- and upper-middle-income taxpayers—particularly those who:
- Itemize deductions
- Live in high property tax states
- Have W-2 income or are small business owners in states with high income taxes
Auto Loans
Consumers who purchase a new car assembled in the United States can deduct up to $10,000 per year in interest paid on qualifying auto loans. The tax break incorporates purchases made between 2025 and 2028, and you won’t need to itemize to claim the deduction. This tax break is also subject to phase out for higher income earners.
Estate-Tax Exemptions
Starting January 1, 2026, the federal estate and gift tax exemption increases from the current ~$13.99 million to $15 million per individual (or $30 million for married couples), and it resets future inflation indexing based on 2025 levels. Without this law, the exemption would have reverted to approximately $7.2 million per person, as outlined in the 2017 Tax Cut and Jobs Act (TCJA) "sunset" provisions. This larger exemption is considered "permanent" and will remain in place indefinitely—unless altered by subsequent legislation. The new law gives families more certainty around inter-generational tax‑free wealth transfers.
Looking Ahead
Our Covenant team is closely monitoring these developments and actively incorporating the changes into our financial planning conversations to make sure your financial plan and strategies align with evolving policy and market dynamics, so that you can stay focused on what matters most.
If you have specific questions or would like to discuss your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us at contactus@covenantwealthstrategies.com to set up time to discuss further.
Disclosures:
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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