The One Big Beautiful Bill’s Hidden Truths

The One Big Beautiful Bill Act (OBBBA) has been heralded as a groundbreaking piece of legislation, promising extensive tax relief and sweeping changes to the U.S. tax landscape. However, beneath the surface of the touted benefits lies a complex web of provisions that may not deliver on all political promises. From unchanged taxation on Social Security benefits to the intricate details of supposedly tax-free overtime pay and tips, taxpayers must navigate a landscape that remains riddled with nuanced complexities. As individuals and families look to maximize their financial benefits, understanding these hidden truths is crucial for strategic tax planning.

No Tax on Social Security

Despite all the political promises and the “no tax” name of this section (and others) of the bill, there has been no change in the way Social Security benefits are taxed. As it stands, the taxability of Social Security benefits continues to depend on a taxpayer’s “provisional income,” which consists of their adjusted gross income (AGI), non-taxable interest, and half of their Social Security benefits. For example, single filers with provisional incomes below $25,000 and couples with less than $32,000 have been, and continue to be, exempt from federal taxation on their Social Security benefits. Those with incomes in the middle range can see up to 50% of these benefits taxed, while those with income above certain thresholds may have up to 85% of their benefits subject to tax.

Temporary Deduction for Seniors

The 2025 Act does introduce a temporary deduction for individuals 65 and older, offering up to a $6,000 deduction per year available from 2025 to 2028. For a married couple where both spouses are 65 or older, the deduction can be up to $12,000 when they file a joint return. This deduction is subject to Modified Adjusted Gross Income (MAGI) phaseout limits. MAGI in this case is defined as Adjusted Gross Income (AGI) increased by certain foreign income that has been excluded from AGI. For most seniors their MAGI will be the same as their AGI. This deduction is structured to benefit both itemizers and non-itemizers by being deductible when figuring their taxable income.

No Tax on Overtime Pay

Another common misconception is that overtime pay will not be taxable. The One, Big, Beautiful Bill Act (OBBBA) introduces a unique provision that creates some confusion: while it allows a deduction for the premium portion of overtime compensation—specifically, the extra pay received over the standard hourly rate—this only affects income tax calculations, leaving payroll (FICA) taxes fully applicable to all overtime pay. The possible deduction is capped at $12,500 for individual taxpayers and $25,000 for joint filers, with an additional phase-out for those with higher Modified Adjusted Gross Income (MAGI) beyond certain thresholds. Critically, this is only a temporary deduction, available from 2025 through 2028, offering a window for potential income tax savings but with no effect on the obligatory payroll taxes, which continue to apply to the entire overtime pay.

No Tax on Tips

There is the notion that all tip income is now entirely tax-free. This claim, however, oversimplifies the truth and overlooks essential details about the current tax regulations.

While the OBBBA introduced a limited exclusion for tip income, it’s important to clarify that only a portion of such income is eligible for this tax break, and it remains subject to a defined cap. This cap limits the amount of tip earnings that can be excluded from income tax, meaning that not all tip income is free from taxation. Any tips exceeding this cap will still be considered taxable. Plus, tips received in some specified occupations or businesses will not qualify for the deduction.

Moreover, it’s crucial to understand that tip income is not exempt from all forms of taxes; it remains subject to payroll taxes. Thus, while a fraction of tips might escape federal income tax within certain limits, Social Security and Medicare deductions still apply, ensuring that individuals must continue to account for these contributions from their tip earnings.

Additionally, the new provision allowing for a partial exclusion of tip income is only a temporary measure. Set to expire at the end of 2028, unless further legislative actions extend its duration or make it a permanent deduction, this feature is time constrained. Those who benefit from the exclusion must plan accordingly for its eventual expiration.

OBBBA and State Taxes

As outlined in “The One Big Beautiful Bill’s Hidden Truths,” the implementation of the Act’s tax provisions will not look the same in every state. While the federal law includes changes such as deductions for qualified overtime pay and tips, whether those provisions apply at the state level depends on each state’s conformity to the Internal Revenue Code.

Some states follow a rolling-conformity approach, automatically adopting federal tax changes unless legislation provides otherwise. Others use a fixed-date conformity system or selectively adopt certain federal provisions. As a result, federal deductions and exemptions do not automatically translate into state-level tax treatment in many jurisdictions.

States including Rhode Island and Massachusetts generally conform to portions of the federal tax code, but they do not adopt every federal change without review or legislative action. Taxpayers in these states may therefore see differences between federal and state treatment of items affected by the Act.

The overall landscape remains fluid, with states continuing to evaluate how federal changes will impact their budgets and tax structures. For individuals and business owners, the key takeaway is that federal updates do not guarantee identical state treatment. Reviewing both federal and state implications will be essential for accurate filing and effective planning.

Conclusion

While the One Big Beautiful Bill Act brings forward certain tax cuts and benefits, it is imperative to unravel the underlying truths that may temper some of the initial enthusiasm. The unchanged taxation on Social Security, the conditional and temporary nature of deductions for seniors, and the misinterpretations surrounding tax-free overtime and tip income highlight the need for diligent tax planning and awareness. As taxpayers strive to leverage these provisions, recognizing the time-bound nature and specific conditions of these benefits will be essential in crafting a fiscally responsible and informed approach, ensuring ongoing adaptability in the face of evolving legislative landscapes.

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