The bill passed by the House is now before the Senate. It meets President Trump’s campaign promise to make provisions of the 2017 Tax Cut and Jobs Act or “TCJA” permanent. That law made substantial changes to tax rates, deductions and credits for individuals, corporations and other entities as well as including the qualified business income deduction or QBID. We provide an abbreviated summary of the new bill at the bottom.
However, the impact on the national debt from the reduced revenue due to the cuts has raised concerns with investors and led to downgrading the rating for Treasury bonds. One estimate has a ten-year cost of $3 trillion, which could explain why the bill raises the debt ceiling by $4 trillion.
Will this bill suffer the same fate as the Trump bill in 2017 to overturn the Affordable Care Act? That bill had passed the House only to be thrashed to death in the Senate. We will post updates when the Senate finishes with its version.
What is the Impact of New Tax Law?
We have been reviewing the impact of the new law and this is not simplification!
Here is one example: the increase in the deduction allowed for state and local tax or “SALT” to $40,000 could reduce taxes for many, if they can include more state and local taxes when they itemize. But, the impact is blunted because the standard deduction also increased (you take the larger of the two). Then the benefit of itemized deductions is reduced above a certain income level. The above-the-line charitable deduction also reduces the impact of itemizing. And increasing the SALT deduction could mean you owe the Alternative Minimum Tax or “AMT.” In other words, you have to run tax projections to determine the best action.
In previous posts, we have advised bunching of deductions into a single year so you can optimize itemizing. That planning may be both more important and tougher to do.
Many new provisions that initially sound good involve complex qualifications that could mean few taxpayers use them. For example, there are so many savings accounts to which this bill adds the Trump account and expands other provisions. On the other hand, access to health savings accounts or HSAs for seniors could provide a new resource for planning.
The expiration of electric vehicle credits and energy-efficient home credits may mean acting sooner on some purchases.
We have to see what the final law looks like to know how best to respond. If you want us to review the impact on your taxes, please let me know.
In the meantime, please contact us if you have any questions and good luck!
Steven
A Quick Summary:
The new law will keep tax rates and the AMT exemption the same.
It increases the state and local tax or SALT limit to $40,000, but then cuts it back for income over $500,000.
It extends the standard deduction from TCJA with a temporary increase to $32,000 for married filing joint taxpayers or “MFJ” for 2025-2028 and adds a $4,000 bonus standard deduction for taxpayers over 65, but this phases out over $150,000 for MFJ.
There is no tax on qualified tip income or overtime if your income is below the cap.
The electric vehicle or EV credit ends for some in 2025 and all the rest at the end of 2026 as does the credits for energy efficient homes by 12-31-2025.
The estate and gift tax credit rises to $15 million in 2026.
You can deduct up to $10,000 of car loan interest, but with a phaseout for income over $200,000.
You can contribute up to $5,000 per year into a new Trump account for a child until through age 18 which can then be used for education, business or a new home. Qualified distributions are subject to capital gains tax while all others pay ordinary rates plus 10%.
The new law restores the “above the line” deduction for up to $300 to a charity for married couples or $150 for all others.
It temporarily increases the child credit from $2,000 to $2,500 through 2028, subject to the same phaseouts as the current law.
There is a new credit not to exceed 10% of gross or $5,000 for contribution to scholarship granting institutions.
Adoption credits are expanded as are ABLE accounts. Roll overs from tuition plans to ABLE accounts are allowed.
Qualifications for tax-free distributions from 529 plans are expanded.
The QBID goes from 20 to 23%.
Seniors receiving Medicare can contribute to health savings accounts or HSAs if they have a high-deductible health insurance plans. This is a great way for tax sheltered growth to cover future bills. The new law allows taxpayers and spouses to make catch-up contributions.
Pass through entity tax deductions or “PTET” are only allowed for entities that are qualified businesses under Section 199A – the QBID provision.
There is an increase on tax on private foundations and college endowments.