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. 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’ve never factored 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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