Senate Advances Tax Cut Bill Amid Concerns Over Beneficiary Impact

After the Senate approved a major tax cut bill on July 1, 2025, Senators John Basso (R-Wyoming), Mike Crapo (R-Idaho), and Lindsey Graham (R-SC) spoke to the media. This legislation, supported by President Trump, focuses heavily on tax reductions.

Included in the package are various new tax credits aimed at specific expenses—such as car loans, tips, and overtime wages—along with measures for older Americans. However, the actual savings from these tax credits depend largely on income brackets. Those in higher income tiers see more significant benefits, while low-income earners often receive less value, as noted by experts.

“The most modest income workers can’t take advantage of tax credits at all,” said Carl Davis, research director at the Institute for Taxation and Economic Policy, a policy think tank with a left-leaning perspective.

The passage through the Senate was done with a slim margin, and the proposal is now headed for an unpredictable fate in the House.

“Big Beautiful” Bill Tax Credit Details

The Republican initiative, initially labeled the One Big Beautiful Bill Act, is projected to result in net tax cuts exceeding $4 trillion, according to the Responsible Federal Budget Committee. Among its features are several new tax credits:

• Car loan interest: Up to $10,000 in annual interest on new car loans can be deducted from taxable income.
• Tips: Workers may deduct up to $25,000 annually from their taxable income for tips received.
• Overtime salary: Up to $12,500 can be subtracted from taxable income regarding bonus pay, with married couples filing jointly able to deduct $25,000.
• Senior “Bonus” Deduction: Americans aged 65 and older can deduct up to $6,000 from their taxable income.

These deductions, if enacted as proposed, are set to be temporary from 2025 to 2028, with certain income restrictions applied.

Why Low-Income Individuals May Struggle with Tax Credits

Tax credits are designed to lower taxable income, which can be found on Form 1040. While these credits might seem beneficial, experts highlight multiple reasons why low-income earners may not gain substantial advantages.

1. Taxable Income Requirement

To benefit from these deductions, households must already possess taxable income, as Garrett Watson, a director of policy analysis at the Tax Foundation, explains. Low earners often gain more from standard deductions, which can reach up to $15,000 for individuals and $30,000 for married couples filing jointly in 2025.

If they want to derive financial benefits from the new credits—related to car loans, senior deductions, and tips—households must earn above established thresholds. Research by Yale University found that more than 37% of workers earned too little to owe federal income taxes in 2022.

2. Tax Bracket Variability

The value derived from tax credits varies by income tax bracket. Higher-income households typically benefit more from deductions, leading to greater savings.

For instance, a household in a 22% tax bracket would save more from a $1 deduction compared to a household in a 10% bracket, as illustrated by Davis.

3. Limitations on Deductions

Households need to have substantial loan amounts to maximize certain deductions. For instance, only about 1% of new car loans surpass the $10,000 threshold necessary for the interest deduction, which means most average borrowers see modest benefits.

Targeting Tax Credits Towards Low and Middle-Income Households

There are two key factors aimed at making tax credits beneficial for lower-income households. One method focuses on “above-the-line” deductions, allowing people to claim standard deductions without having to itemize. This approach helps counterbalance advantages typically enjoyed by higher-income groups that often itemize deductions.

Taxpayers frequently only itemize their deductions when they exceed the standard rates, but many new credits face income restrictions, limiting access to higher earners.

Understanding Tax Credits

Tax credits can also effectively lower household tax obligations. Unlike deductions, credits reduce tax liability dollar for dollar, providing the same relief regardless of income bracket.

These credits can be classified as “refundable” or “non-refundable.” Refundable credits can lead to refunds from the tax authority, while non-refundable credits only lower tax payments to zero, preventing low-income taxpayers from gaining full value.

The current Senate legislation aims to expand child tax credits to $2,200 starting in 2025 and adjust this figure for inflation from 2026 onward. Yet, many families—about 17 million children—are not receiving the full child tax credit due to insufficient income levels, underscoring ongoing concerns regarding the adequacy of the proposed measures.