Senators John Basso (R-Wyoming), Senator Mike Crapo (R-Idaho) and Senator Lindsey Graham (R-SC) told reporters after the Senate passed the Trump settlement package on July 1, 2025.
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The tax cuts are at the heart of a massive legislative package defended by President Trump and passed Tuesday by Senate Republicans.
Many new tax credits in the bill – car loans, tips, overtime payments, and for older Americans – are configured as tax credits.
How much money you save with tax credits that reduce your taxable income depends on your bracket. The deduction is more valuable to high-income households and less beneficial to low-income earners, experts said.
“The most modest income workers can’t use tax credits at all,” says Carl Davis, research director at the Institute for Taxation and Economic Policy, a left-leaning policy think tank.
Senate Republicans passed the law on Tuesday with the narrowest margin. It now heads towards a house where its fate is uncertain.
“Big Beautiful” Bill Tax Credit
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According to the Responsible Federal Budget Committee, the Republican bill, originally called one big beautiful bill law, has a net tax cut of over $4 trillion.
Among them are some new tax credits.
Auto Loan Interest: Households can deduct up to $10,000 annual interest on new car loans from their taxable income. Tip: Workers can deduct tips of up to $25,000 each year from taxable income. (Married couples filing joint tax returns can deduct up to $25,000.) Senior “Bonus” Deduction: Americans over the age of 65 can deduct up to $6,000 from their taxable income.
If established as drafted, these deductions will be temporary available from 2025 to 2028. There are also various restrictions, such as income restrictions.
Why tax credits aren’t that valuable to low-income people
Tax credits reduce taxable income, that is, taxable income. You can find your taxable income on the 15th line of Form 1040 Personal Income Tax Return.
The proposed tax credit may sound large, but there are several reasons why low-income earners may not see too much profit, experts said.
1. Taxable income is required
Households need taxable income to benefit from the deduction, according to Garrett Watson, director of policy analysis at the Tax Foundation.
Low-income earners are already making significant economic benefits from standard deductions, Watson said.
The standard deduction is worth up to $15,000 for singles and $30,000 for married couples jointly filed in 2025 (if the bill was drafted, the standard deduction would be $15,750 for single filers and $31,500 for married filings jointly).
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To get monetary benefits from new tax credits on car loans, seniors, tips and overtime, households must exceed these thresholds, experts said.
According to an analysis by Yale University’s Budget Institute last year, a third of the 2022 leaning workers, or more than 37%, earned enough low enough to not borrow federal income tax.
That means that “meaning shares” of leading workers will not benefit from tax credits on tips, it said.
2. Value depends on the tax bracket
The relative value of the tax credit depends on the household’s tax range, experts said.
There are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%. High-income households generally fall into higher tax limits. Therefore, you can earn greater profits by reducing your taxable income.
“If you’re on a slightly higher bracket, all the dollars you get to deduct it is worth more to you.
For example, two households (one in 22% bracket and one in 10% bracket) each deduct a $1 tip income. The former receives 22 cents worth of tax benefits, while the latter is worth one worth of 10 cents, Davis said.
3. Some deductions are limited
There are other reasons why households cannot make the most of certain deductions.
For example, households will need a car loan of more than $10,000 per year, Jonathan Smoke, chief economist at automotive market research firm Cox Automotive, Jonathan Smoke, who spoke to CNBC last month.
According to Cox Automotive Data, this is only about 1% of new car loans that are as big as this.
In comparison, the average new car buyer can deduct $3,000 in interest from taxable income in the first year of the loan, Smoke said. That sized deduction will result in an average gross tax benefit of less than about $500 in the first year of the loan, he said.
Tax credits above the line
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However, there are two factors: tax credits that seek to better target the benefits of low-income and middle-income households.
One is all known as the “above” deduction.
This means that households can claim standard deductions, regardless of whether they use standard deductions or itemize them.
High-income households may be more likely to include items. This means that it details a list of eligible deductions for your tax return.
Taxpayers will itemize when the deduction is above the standard deduction. Some deductions are only available to taxpayers who make items, such as “salt” (or state and local income and property tax deductions) and mortgage interest.
New deductions also have income restrictions, which prohibit them from highest-income households.
For example, the value of overtime deductions begins to decrease when an individual’s income exceeds $150,000 ($300,000 for married couples who are jointly submitting). When income exceeds $75,000, the value of a senior “bonus” decreases ($150,000 if you are married and submit jointly).
Tax credit
Tax credits are another mechanism for lowering household tax bills.
Tax credits reduce tax liability dollars for dollars. (If you are charging a $1,000 credit, you can reduce your tax amount by $1,000.) Credits have the same dollar value regardless of your tax bracket.
Unlike the deduction, “the benefits of tax credits are distorted into low- and middle-income households,” the Congressional Budget Office wrote in 2021.
Credits can be “refundable” or “non-refundable”.
Refundable: Credits can reduce tax bills to below zero. In this case, you will receive a tax refund. For example, according to the CBO example, if you have a tax liability of $500 and you qualify for a $600 refundable credit, you will receive a $100 refund. Some credits are partially refundable and limit the size of the refund. No: Any other credits are non-refundable. This means that you can reduce the tax bill to zero, but not too low. Non-refundable or partially refundable credits may prevent low-income individuals from obtaining full value.
The largest individual credits measured in total government spending are child tax credits, income earned tax credits and health insurance premium tax credits, the CBO said.
The Senate Act will forever increase the maximum child tax credit to $2,200 starting in 2025, and index this figure for inflation from 2026. Credits will be partially refunded.
However, currently, 17 million children are not receiving a $2,000 child tax credit, as families don’t earn enough money or pay enough taxes.
