The House Ways & Means Committee advanced a comprehensive tax bill this week to avoid an expiration of the 2017 Tax Cuts and Jobs Act (TCJA) at the end of the year. The measure also introduces a slew of new tax breaks including a temporary deduction for workers receiving tips and overtime pay. This tax bill will be part of broader legislation that will include spending reductions and likely address the federal debt ceiling.
There are still procedural hurdles to overcome before the legislation is brought to the House floor for a vote, and modifications are likely. For example, lawmakers from higher-taxed states such as California and New York are calling for a larger increase in the deduction for state and local taxes (SALT). The Senate is going through a similar process. The two chambers will have to agree on a final package that would eventually make its way to the president’s desk for signing.
More details on key provisions are detailed in our Special tax alert update.
Here are some of the highlights of the legislation in its current form:
- The current income tax rates and brackets are extended permanently (there are no changes to long-term capital gains or qualified dividend tax rates).
- The current standard deduction, which was doubled under the TCJA, is extended permanently and includes a slight increase for tax years 2025 through 2028.
- The cap on deducting SALT is increased permanently from $10,000 to $30,000 with a phase-out of the increased amount once income exceeds $400,000. All taxpayers, regardless of income, will still be able to deduct the current $10,000 limit.
- The Trump campaign promises of no taxes on tips and overtime are included in the proposal, but are generally not available for those who are considered "highly compensated." (In 2025, workers with earnings over $160,000 are considered highly compensated.) Both of these provisions are temporary and will sunset at the end of 2028.
- The lifetime exclusion for gifts and estates is increased to $15 million beginning in 2026 and made permanent which includes annual adjustments for inflation for future years.
- No reduction in taxes on Social Security. However, the proposal includes an extra $4,000 standard deduction for seniors (For individuals below $75,000 in income, $150,000 for married couples.) The deduction would sunset after 2028.
- Rollback of clean energy tax preferences introduced during the Biden administration such as tax credits for buying electric vehicles.
- Renewal and expansion of Qualified Opportunity Zones, including a new round of opportunity zone investments available beginning in 2027 through the end of 2033. This program provides tax benefits for eligible investors if they invest capital gains in an economically distressed area or opportunity zone as defined by the IRS.
- No changes to tax treatment of municipal bonds including private activity bonds.
- Creation of a new, tax-favored account for those under age 18 called “MAGA accounts” (Money Account for Growth and Advancement) where funds can eventually be used for a variety of reasons including, for example, education, home purchase or starting a business.
Expect change
The finish line is a long way off and there will be changes throughout the process. But the current legislation offers a look at the direction of the tax policy, and taxpayers may begin to see what aspects of the proposal may impact their individual financial situation.
The House has set a goal of voting on the proposal by Memorial Day.
Ref. 5330608
More in: Taxes