On February 6, 2025, the White House announced a series of tax cuts, mainly benefiting the middle class and retirees. Here is the thing on the table:
- No tax notice
- There is no tax on social security benefits for the elderly
- No overtime tax
- renewal of Trump’s tax cuts in the 2017 tax cuts and jobs bill
- Adjust the salt cap
- Eliminate special tax breaks for billionaire sports team owners
- Close the interest carrying loophole of hedge fund managers
- Tax cuts for products made in the United States
The administration calls it the biggest tax break in U.S. jobs, and the recommendations are likely to move forward in a situation where Republicans control Congress.
Tax cuts mean greater financial freedom
As someone who is committed to helping as many people as possible achieve financial freedom as quickly as possible, it is hard not to cut taxes. After all, the more money we keep, the more wealth we can build to achieve the way we need to live. It has nothing to do with politics, but about economic opportunities and personal financial strategies.
One of the biggest reasons I retired in early 2012 was because I didn’t want to keep stressing and dealing with chronic pain over 60 hours a week, only diminishing tax revenues over 40%. Instead of complaining, I chose to make more money and negotiate severance payments. Initially, the money for the first year was reduced by 80%, but it was incredible that it would not pay six-digit income tax figures and enjoy the freedom of the park on weekdays.
Of course, tax cuts mean less government revenue, so the White House is looking to cut spending to compensate. While USDA (1% of expenditure) and other discretionary expenditure plans may be reduced, the real challenge is to cut major budgetary projects.
U.S. government spending breakdown
According to the Treasury Department, the government spent about $6.75 trillion in 2024, with its social security, defense and health accounting for 50% of total spending. So if the White House wants to run a balanced budget, it must find and equal cuts. Here is the expenditure breakdown:
- Social Security (21%)
- National Defense (15%)
- Medicare & Health (13%)
- Interest on debt (13%)
- Income security and other rights (9%)
If the White House wants to balance the budget, it must find up to $2 trillion in spending cuts to offset tax cuts. No simple task.
Decompose the proposed tax cut
1) No tax
A great victory for the service staff. If you work for prompts, you usually rely on the generosity of your clients to make a living. You should keep your income 100%. Many restaurant servers, bartenders and hotel staff have little scratches, so they deserve tax exemption.
2) Tax on social security for the elderly
A wonderful move for retirees. The elderly pay the price to the system throughout their lives. The benefits of taxing them already modest never make much sense. Given that Social Security benefits already offer poor returns compared to investing in the stock market or the 60/40 portfolio, it is a fair policy to keep retirees more money.
Currently, the FICA tax requires employers to deduct 6.2% Social Security Tax and 1.45% Medicare Tax from employees’ wages. Employers must match these taxes to bring the total contributions to FICA to 15.3%. Retirees should end up retaining more of the fees they pay.
3) No tax on overtime pay
It’s a huge motivation to get workers to pay extra. Eliminating overtime tax means higher take-home salary, which increases spending, savings and investments. As workers’ output increases, it may also lead to stronger GDP.
I always think that if people want to be financially successful, they work longer than the standard 40 hours. Now, with tax-free overtime, there is more motivation to be busy.
4) Renew Trump’s tax cuts from the 2017 Tax Cuts and Jobs Act
The move brings certainty to taxpayers and businesses, which is beneficial to investors. One of the biggest concerns before 2025 is that the 2017 tax cuts will expire, leaving financial planners, investors and businesses scramble for the first time. Now, there is not that big rush to do a Roth IRA conversion.
Key regulations are being renewed:
- Reduced personal tax rates, including the maximum interest rate to 37% from 39.6%.
- Higher standard deductions: $15,000 for individuals and $30,000 for married couples, should continue to increase.
- The company tax rate remains at 21% (down from 35% before 2017).
- Pass the 20% deduction of the business owner to benefit the entrepreneur.
- Territorial tax system: U.S. companies no longer pay tax on foreign income.
5) Adjust the salt cap
State and local tax (salt) deductions were introduced in 2017, limiting the amount of property, income and business taxes tax that taxpayers can deduct from federal tax bills, at $10,000 per year.
This disproportionately hurts homeowners in high-tax states like California, New York and New Jersey. High-income homeowners can save thousands if the hat is adjusted.
I want to adjust the salt hats based on local housing prices, not blanket hats. Mississippi’s $10,000 cap is very different from San Francisco’s $10,000 cap. The proportional adjustment is more meaningful.
Higher salt hats may lead to price increases in real estate demand in cities. With the momentum of the return to office movement, we should see the increasing demand for real estate in big cities.
6) Eliminate special tax relief for billionaire sports team owners
Does anyone care? Probably not. But this raises the question – why do they get tax breaks in the first place? Billionaire team owners do not need special treatment. Steve Ballmer (owner of the Los Angeles Clippers, with a net worth of about $122 billion) can afford more taxes.
7) Close the interest loopholes carried
The interest loopholes carried allow hedge fund managers and private equity investors to tax performance-based compensation at a lower capital gains rate (20%) rather than a higher average income rate (37%).
As a limited partner of eight private funds, I don’t mind. This is an unfair advantage, making wealthy investors pay less taxes than salaried workers. Yes, the total partner must invest in the long term, which helps fund entrepreneurship, innovation and economic growth. However, such a huge difference in tax rates seems shocking. Close this vulnerability will generate billions of dollars in additional tax revenue without affecting most Americans.
8) Tax reduction for products made in the United States
This is the driving force for promoting domestic manufacturing. By reducing taxes on goods produced in the United States, companies have more reasons to keep production at home and create more American jobs.
What will happen next?
With Republicans controlling Congress, there are great opportunities for these tax cuts. But negotiations on cutting the stay and how to fund it can take several months.
Currently, the focus is on reducing government spending to help offset lost revenue. Although agencies like the United States Agency for only about 1% of the federal budget, if the government wants to avoid increasing government debt, it will need to make larger cuts elsewhere.
Reduce taxes and more efficient government
These tax cuts can be a major financial victory for middle-class Americans and retirees. If you:
- Work
- Rely on social security
- Long-term overtime fee
- Own a small business or through an entity
- Living in a high tax state affected by salt hats
You can see the real benefits in the coming years. Such tax cuts provide greater financial flexibility and help Americans save, invest and build wealth faster.
Reader, what do you think of these latest tax cuts? Do you agree with them or do you think some people are going too far? How much taxes do you pay per year and how will these changes affect you? Also, what do you think about Doge’s active cuts on USDA and other government organizations? Are these the right areas to expand backwards, or will there be unexpected consequences? Let’s discuss it!
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