- Article Highlights:
- Key Provisions in the House Version
- Permanent Extension of the Increased Standard Deduction and Changes to Tax Rates
- Senior Bonus Deduction
- Adjustment to the Qualified Business Income Deduction (QBI)
- Estate and Gift Tax Exemption Enhancements
- Saver's Credit Adjustments
- “No” Tax on Social Security Income
- “No” Tax on Overtime
- “No” Tax on Tips
- Reinstatement of Bonus Depreciation
- Increased State and Local Tax (SALT) Deduction Limit
- Termination of Certain Deductions
- Why Taxpayers Should Avoid Rushing Tax Planning
Legislative activity in the United States House of Representatives has sparked widespread debate about the proposed Make American Families and Workers Thrive Again tax package. This article examines the key components of the House version of the tax bill, as deciphered from the document "Description of The Budget Reconciliation Legislative Recommendations Related to Tax," and other sources, and emphasizes the importance of careful tax planning given the potential for legislative changes by the time it is reconciled with the Senate version.
Key Provisions in the House Version
The House of Representatives has suggested various modifications aimed at extending and improving tax breaks established by the Tax Cuts and Jobs Act (TCJA), which was passed in 2017. Most of the TCJA provisions are set to expire by the end of 2025. Below is a summary of some significant provisions:
1.Permanent Extension of the Increased Standard Deduction and Changes in Tax Rates: The plan wants to make the standard deductions that were increased under the TCJA permanent. Furthermore, interim increases are planned for 2025 to 2028, with an additional $1,000 boost for individuals, $1,500 for heads of family, and $2,000 for married couples. The TCJA also temporarily changed the tax rates and brackets, including lowering the top rate from 39.6% to 37% and indexing the bracket thresholds to inflation. The 2025 law permanently establishes the TCJA's income tax brackets and adjusts the indexing system.
2.Senior Bonus Deduction: According to present law, up to 85% of Social Security benefits may be taxable based on the recipient's other sources and levels of income. The House bill intends to cut the taxation of Social Security payments from 2025 to 2028 by giving people 65 and older an additional $4,000 standard deduction, which is reduced when modified adjusted gross income surpasses $150,000 for married couples ($75,000 for others). Those who itemize deductions would be entitled for a comparable deduction.
3.Adjustment to the Qualified Business Income Deduction (QBI): The measure would raise the QBI deduction, also known as the Sec 199A deduction, from 20% to 23% and make the changes permanent. The mechanics of phase-in limitation have been altered for simplicity.
4.Estate and Gift Tax Exemption Increases: The unified estate and gift tax exemption will be permanently increased to an inflation-indexed $15 million.
5.Child Tax Credit Modifications: Scheduled upgrades will temporarily increase the child tax credit from $2,000 to $2,500 per qualified kid through 2028, before returning to $2,000 beginning in 2029. Additional changes affect indexing, refundability, and Social Security number reporting.
6.Saver's Credit Adjustments: Changes to the Saver's Credit are intended to encourage more savings among low- and middle-income families. The law makes donations to ABLE accounts permanent for the beneficiary who is the account's intended recipient, thereby treating them like contributions to more regular retirement plans.
7."No" Tax on Overtime: For the years 2025 through 2028, the act establishes a deduction for overtime premium pay, specifically for non-highly compensated employees under the Fair Labor Standards Act.
8."No" Tax on gratuities: The tax plan creates a new above-the-line tax deduction for eligible gratuities received by employees in occupations where tipping is common. The gratuity must be given spontaneously, without negotiation, and selected completely by the consumer. The deduction applies to both employees and independent contractors as long as the tips are received in qualified occupations as specified by the Treasury Department. It is not applicable to highly compensated individuals.
9.Reinstatement of Bonus Depreciation: The 100% first-year depreciation deduction is planned for corporate property placed in operation between 2025 and 2030.
10.Increased State and Local Tax (SALT) Deduction Limit: The House bill would raise the SALT deduction limit from $10,000 to $40,000 for people earning $500,000 or less. This extension is significant because it has the potential to benefit a large number of taxpayers who were previously constrained by the TCJA's deduction cap.
11.Abolition of Certain Deductions: The personal exemption deduction is permanently repealed. The new law maintains restrictions on miscellaneous itemized deductions.
There are additional difficulties, but these are the most important.
Why Taxpayers Should Avoid Rushing Tax Planning
While the proposed adjustments may look appealing, taxpayers should avoid making hasty tax decisions based only on the House proposal. Here are some reasons why.
1.Legislative Uncertainty: The proposed tax bill is still being developed, with considerable variations between the House and Senate versions. Until the law is reconciled and completed, forecasts may differ dramatically.
2.Political Disagreements: There are numerous points of contention inside and between the two political parties. These include the amount of relief and the duration of tax cuts, among other things. Such discrepancies suggest that the current provisions may change drastically.
3.Potential Compromises: As discussions advance, compromises may result in the elimination of specific sections or revisions that affect the practical ramifications of the legislation. It's possible that new provisions will be added to the mix.
4.Long-term Planning Risks: Taxpayers may face risks if they change their financial or tax strategy in response to pending legislation. Making significant decisions now could result in adverse tax liabilities if the law is fully implemented.
5.Need for Personalized Analysis: Due to the complexity and variety of tax situations, generalist legislation may not meet the demands of all taxpayers. Specific rules, such as revisions to income brackets or estate planning, necessitate in-depth consideration customized to specific circumstances.
Conclusion
While the House tax bill includes significant improvements intended at increasing economic growth and providing tax relief, households and tax preparers must view these potential changes with caution. With the Senate currently working on its version and parliamentary discussions expected, taking quick action based on the present House measure could be premature. Professionals involved in tax planning should be watchful, keeping up with changes and waiting for a final, reconciled bill before making significant tax planning choices.
