Trump’s new tax breaks set to be a ‘feast and banquet’ for Americans in 2026
President Trump speaks at a New Year’s Eve party at Mar-a-Lago. AP
WASHINGTON — Americans are set to see major changes when they file their taxes, as President Trump’s newly enacted tax overhaul begins to take effect. The administration is betting the reforms will boost economic growth and ease voter anxiety ahead of the November midterm elections.
“2025 is about setting the table,” Treasury Secretary Scott Bessent said recently. “The feast and the banquet will come in 2026.”
Consumer spending makes up roughly 70% of U.S. gross domestic product, and the administration expects higher take-home pay to translate into stronger economic activity. The nonpartisan Tax Foundation estimates that average after-tax income will rise by 5.4% under the new law, potentially accelerating spending across the economy.
The tax changes were enacted through Trump’s sweeping “One Big Beautiful Bill Act,” which he signed into law on the Fourth of July after pressing Republicans to consolidate key campaign promises into a single package passed without Democratic support. The provisions apply to the 2025 tax year, meaning many taxpayers will begin to see the impact through refunds issued early this year.
According to the Tax Foundation, upper-middle-income earners — those in the 60th to 80th income percentiles — are expected to see the largest gains, with after-tax income rising by about 6.3%. The bottom 20% of earners would see an average increase of roughly 2.6%.
The legislation preserves the lower individual and corporate tax rates enacted in Trump’s 2017 tax reform, extends full expensing for business investments, maintains incentives for investment in designated opportunity zones, and expands depreciation and equipment write-offs.
The rollout comes at a politically sensitive moment for the president, as Republicans risk losing control of Congress in the midterm elections. While the economy continues to grow and inflation fell to 2.7% annually in November, Democrats recently scored wins in off-year elections by focusing on affordability issues. Polling averages compiled by RealClearPolitics show that a majority of Americans currently disapprove of Trump’s handling of the economy.
SALT cap raised to $40,000
One of the most significant changes is an increase in the cap on state and local tax (SALT) deductions to $40,000, up from $10,000 under the 2017 law. The change is expected to benefit taxpayers in high-tax states such as California and New York.
Taxpayers who itemize can deduct state and local income, property, and sales taxes above the standard deduction, which the new law also raises for 2025: to $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household.
No tax on tips
Another centerpiece of the law fulfills Trump’s pledge to exempt tip income from taxation. Tips are now tax-free up to $25,000 per individual, a change expected to benefit workers in industries such as food service, hospitality, personal care, and entertainment.
The deduction phases out for individuals earning more than $150,000 and couples earning more than $300,000, according to Treasury Department guidance.
No tax on overtime pay
Workers who earn overtime will also see relief. The law allows taxpayers to deduct the “premium” portion of overtime pay — the extra amount earned beyond a standard hourly wage. For example, workers paid time-and-a-half may deduct the additional 50% premium.
The maximum deduction is $12,500 for single filers and $25,000 for joint filers, with income-based phaseouts beginning at the same thresholds as the tip exemption.
Social Security-related deduction for seniors
While the law does not directly eliminate taxes on Social Security benefits, it introduces a new deduction aimed at seniors. Taxpayers aged 65 and older may claim an additional $6,000 deduction per person, or $12,000 per couple, stacked on top of other deductions.
The full deduction applies to individuals earning up to $75,000 and couples earning up to $150,000, with a gradual phaseout for higher incomes. Economists say the provision will eliminate tax liability for many middle- and lower-income retirees.
Domestic car loan interest deduction
The law also introduces a new deduction for interest paid on auto loans for vehicles assembled in the United States. Taxpayers may deduct up to $10,000 per year in interest, and qualifying vehicles include cars, SUVs, pickup trucks, and motorcycles.
The policy is designed both to lower tax bills and to encourage purchases of American-made vehicles. It follows Trump’s broader trade strategy, which includes tariffs on many foreign-made vehicles and revised trade agreements with key partners.
The legislation also ends the $7,500 electric vehicle tax credit enacted under the previous administration for vehicles purchased after Sept. 30, 2025.
Charitable deductions and other provisions
Taxpayers who take the standard deduction may now deduct up to $1,000 per filer in charitable donations, allowing a married couple to deduct up to $2,000 even without itemizing.
The law also establishes new “Trump accounts” for children born between 2025 and 2028, providing $1,000 in government seed funding for long-term investment accounts similar to 401(k)s. Parents may contribute up to $5,000 annually, with withdrawals restricted until adulthood.
Additional provisions include higher taxes on large university endowments, a new 1% tax on remittances sent abroad, and an expanded excise tax on nonprofits that pay executives more than $1 million annually.
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