“A good compromise is when both parties are dissatisfied”
― Larry David
I should note that I’m not a Larry David fan, and have watched only a few minutes of “Curb Your Enthusiasm” over the years, but it’s enough of a cultural touchstone that many people will know who and what the reference is. It’s doubly appropriate because I am dissatisfied with a recent nationwide compromise and didn’t get what I wanted. But then, as Larry David suggests, this must be a good compromise.
I’m talking, of course, about the One Big Beautiful Bill Act.
As the country headed into a wonderful holiday weekend where we celebrated the 249th anniversary of Independence Day, much of the conversation and news around our nation was focused on the passage by our U.S. Congress of the One Big Beautiful Bill Act (OBBBA).
Unless, of course, you are a total sports fan who watches and reads only sports – in which case the news last weekend was inundated with what seemed to be an outrageous move by the Milwaukee Bucks of the NBA. They waived a player who they must still pay $113 million over the next five years, and signed a different player to a four-year, $107 million deal. I guess $100 million isn’t much money anymore in pro sports!
But back to the OBBBA… if you are interested in what it really says, and not what someone else will tell you it says, you can go directly to Congress’s website here, and download all 870 pages of it. Or, keep reading and I’ll happily tell you about a few of the things I was dissatisfied with.
First, Section 70103 on page 218 updates a policy for a “Temporary senior deduction.”
What it does is provide a new $6,000 per year federal tax deduction for every taxpayer who has attained the age of 65 before the close of the taxable year. It does begin to phase out when someone’s modified adjusted gross income exceeds $75,000, but it never drops to zero.
This is what was touted as the elimination of federal taxes on Social Security benefits. As someone who is fast approaching the day when I’ll be getting Social Security benefits, the concept of not paying federal taxes on them was very appealing. And, although that should be something that would be very easy for the federal government to accomplish from an operational standpoint, it can’t be done in this reconciliation bill due to the 1974 Budget Act. That law does not allow reconciliation bills to alter Social Security’s benefit structure.
Therein lies the compromise. By giving those above the age of 65 an additional $6,000 standard deduction, in many cases that would effectively wipe out the federal taxes those people paid on their Social Security benefits. Of course, it means you don’t see the benefit until after you file your taxes the following year, so it’s not an immediate gratification. And, although this benefit is available right away, it only lasts through the 2028 tax year. Going forward, I would like to see the federal government do what it needs to do to eliminate federal taxes from Social Security benefits forever.
Then, Section 70201 on page 247 outlines a new policy of “No tax on tips,” and Section 70202 on page 257 outlines a new policy of “No tax on overtime.”
It has been decades since I worked a job where tips or overtime came into play. However, in both cases I easily recall how important they were to my livelihood at the time. Granted, back in those days all the tips I received were in cash and (I hope there’s a statute of limitations on this!), I’m not sure how accurately I was reporting them. Which may be why, as an act of taxing rebellion, I still often tip in cash. Even when I add a tip on my credit card, I’ll sometimes also leave extra cash.
But nowadays, a lot of tips, and almost all overtime payments, go through employers and are then taxed as wages. Which, if employers had to adjust for a federal tax change on only a portion of your income – that from tips or overtime – this could put a lot of stress on employers’ payroll systems.
And therein lies the compromise. Nothing changes for employers – they will still dock everyone for federal taxes on tips and overtime just as they do now. It is then up to each taxpayer to file their annual tax return, and deduct those tips and overtime from their federal tax liability.
Then there are limitations on how much an individual can deduct — $25,000 for tips and $12,500 for overtime – and those limits phase out once someone’s modified adjusted gross income is more than $150,000 a year. And, these deductions are only good for years 2025 through 2028.
Although I understand the phasing out of the benefit once you pass a certain income level, I would have liked there to be no limit on deductions for tips as the majority of people in tipping occupations are nowhere near those income levels. How do we know this? Because, according to the Social Security Administration, in 2023 earning $150,000 placed you in the top 8% of earners, meaning the majority of all occupations are not near those income levels. And, even though it’s predicted that in the long run this will turn out to be a very popular benefit and continued past 2028, it would be nice for that cut-off to not exist. Compromise.
Lastly, Section 70411 on page 367 outlines a “Tax credit for contributions of individuals to scholarship granting organizations.”
This will create a tax credit for every taxpayer of up to a maximum of $1,700 per year for qualified contributions to scholarship granting organizations. These organizations will in turn use the donations to fund scholarships for eligible elementary or secondary students within the same state – scholarships that will be used to pay for any educational expenses.
The dollar amount of the scholarships themselves are not limited, but they can only be given to students who are members of households with incomes less than 300% of their area median gross income. But states will be able to elect whether or not they want to participate in this program, so it’s not mandatory. And, this tax credit doesn’t take effect until 2027.
Granted, it will likely take some time for these “scholarship granting organizations” to get created and up-and-running, but I don’t see why some could not be in place for 2026, especially since the school year doesn’t start until late summer/early fall.
In addition, the tax credit was originally proposed to be $5,000 per person, and although it’s a dollar-for-dollar reduction in your federal tax, most people won’t have a spare $5,000 laying around to donate with the expectation of “getting it back” when they file their taxes. Consequently, it would be great if the donation limit was eliminated completely.
And, although these scholarships can be used at any public, private or religious school that is determined by each respective state to be a “school,” and will cover the vast majority of students, homeschooled students are left in the dark. The latest figures show 3.4% of K-12 students in the U.S. were homeschooled during the 2022-23 school year. Yet they see no benefits from these scholarships. That should change soon and forever.
As I said, there are a few things in OBBBA I was dissatisfied with, but as the quote alludes to, it must be a good compromise then. I just hope the next compromise gets better.
