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Here’s how Trump’s new tax law affects people with low incomes
Although President Donald Trump’s “One Big Beautiful Bill Act” offers new tax deductions and credits across different income levels, low-income households – the bottom 20% of income earners – are largely excluded from any significant tax benefits.
“It’s particularly shocking because the law is so big,” said Elaine Maag, a senior fellow at The Urban-Brookings Tax Policy Center. “Typically, when trillions of dollars are spent, you see it really spread across the income distribution.”
The bill was signed into law over the summer.
Benefits that people with low incomes do receive may be outweighed when considered alongside other provisions in the bill, said Andrew Reschovsky, professor emeritus of public affairs and applied economics at the University of Wisconsin-Madison.
This is especially true of cuts to safety net programs such as Medicaid and the Supplemental Nutrition Assistance Program, or SNAP, Reschovsky said.
“This is the dilemma – if you count those things in with the tax side, the net will be that a lot of people are going to be worse off.”
Credits and deductions
A credit is an amount subtracted directly from the tax you owe while a deduction reduces the amount of income that can be taxed. Both can help keep more money in taxpayers’ pockets.
The bill establishes new credits and deductions.
The bill increases the:
- Child Tax Credit from $2,000 per qualifying child to $2,200.
- Child and Dependent Care Credit, which allows taxpayers to subtract certain costs associated with caring for children under 13 or dependents incapable of self-care.
The bill introduces new deductions for:
- Workers in jobs where tips are common, allowing them to deduct up to $25,000 of tip income.
- Individuals who work overtime, allowing them to deduct up to $12,500 of overtime pay.
- People 65 and older, allowing them to deduct $6,000.
Limitations
These changes may appear to help people who are financially struggling. But the bill affects federal taxes, so its new deductions and credits apply only to income taxable by the federal government.
People with low income generally owe little or no federal income tax.
Older low-income adults, for example, often rely primarily or entirely on Social Security benefits and are generally not subject to federal taxes. This means that a new $6,000 deduction would not benefit them, Rechovsky said.
Rechovsky noted other reasons the new deductions are misleading or extremely narrow.
“Yes, you’re a waiter and you benefit from not paying taxes on your tips,” he said. “But take someone in the same income range who works as a home health care worker – they don’t benefit at all.”
Reschovsky also questions how those with low incomes would benefit from reducing the amount owed on overtime pay.
“One of the reasons some people are low-income is that they’re lucky to get a 40-hour workweek,” he said.
The same limitation applies to the new credits.
An analysis by Maag estimates that in 2025 about 17 million children under 17 – or one in four – will receive less than the full value of the Child Tax Credit because their parents earn too little.
The bill also changes which families qualify based on citizenship status.
The Child Tax Credit will be limited to children who are U.S. citizens and have at least one parent with a valid Social Security number.
About 2 million U.S. citizen children will lose their Child Tax Credit because of this new requirement, Maag wrote, citing an analysis from the Joint Committee on Taxation.
Safety nets
One benefit to people with low incomes from the bill is that it makes permanent many provisions from the 2017 Tax Cuts and Jobs Act, including lower income tax rates and larger standard deductions.
“It’s true across the board that if taxes go down, your income after taxes goes up,” Reschovsky said.
But for those with low incomes, the increase is minimal and will likely be outweighed by changes to Medicaid, premium subsidies provided by the Affordable Care Act and changes to SNAP.
For example, the lowest 10% of earners may see a $1,600 reduction in annual income and benefits, mainly due to cuts in Medicaid and SNAP, according to the nonpartisan Congressional Budget Office.
“It’s just that classic view … that, ‘Well, these people are just sucking on the teat of the federal government, so we’re going to just make it as hard as possible for them to do that, because they’re just freeloaders,’” said Anthony Myers, program director of the Riverworks Financial Clinic.
Where to get help
For people with incomes under $67,000, free tax assistance is available through programs such as the IRS’ Volunteer Income Tax Assistance, or VITA.
VITA sites can be found using the IRS Free Tax Prep Help website.
Maag and Myers recommend making appointments as soon as possible.
In addition to serving as a VITA site, Riverworks Financial Clinic operates year-round as the City of Milwaukee Financial Empowerment Center.
Residents of the city who are 18 years and older can get free one-on-one financial counseling there.
“Anyone that’s struggling with any of these (One Big Beautiful Bill Act) provisions, we can assist them with navigating through this,” Myers said.
Here’s how Trump’s new tax law affects people with low incomes is a post from Wisconsin Watch, a non-profit investigative news site covering Wisconsin since 2009. Please consider making a contribution to support our journalism.
