How Tax Legislation Can Change Your Financial Plan

Hello,

As you may have seen, the Senate Finance Committee released its draft of the tax provisions for the new Bill.

While at this time nothing is set in stone, here's what you need to know for now:

How close are we to a final bill/law?

The Senate will pass its version in short order. Then a Conference Committee will resolve the differences between the House and Senate versions of the bill. Then it's back to the chambers to be re-passed before it can go to the President for signature.

There are some meaningful differences between the two bills. While the Conference Committee will try to resolve those differences, any changes from the original versions could result in one or more Congresspersons deciding to change their vote.

What is the same between the Senate and House version of the bill?

The following are the same (or really close) in the two bills, and are likely to remain "as is" in the final bill text: Permanent extension of the current tax rates (which were set to increase)

Permanent repeal of personal exemptions.

Permanent $15MM inflation-adjusted gift/estate tax exemption amount beginning in 2026.

Pease limit (3% reduction in itemized deductions for every dollar in excess of a threshold) permanently repealed.

Creation of "Trump accounts" (formerly known as "MAGA Accounts"), with $1,000 pilot program for children born in 2025 - 2028.

Expansion of 529 qualified expenses (e.g., costs related to post-secondary credentialing programs, as well as expenses for elementary and secondary schooling).

Temporary above-the-line deduction (available 2025 - 2028) for auto-loan interest, subject to certain limitations (e.g., income phase-out, location of vehicle assembly).

Increase the maximum Section 179 deduction to $2.5MM, and increase the beginning of the phaseout to purchases of property in excess of $4MM.

What is somewhat similar between the two bills? There are some differences between the House and Senate versions of the provisions described below, but they are relatively minor.

Both bills would make the current "doubled" standard deduction permanent, but the House bill would give a modest "boost" to the standard deduction for a few additional years.

Both bills would limit the value of most itemized deductions to 35% (limiting the value of those deductions for those in the highest 37% tax bracket), but the House bill further limits the value of SALT (State & Local Tax Deduction) deductions to "just" 32%.

Both bills permanently extend the current "doubled" child tax credit, but with a little something extra. The House bill temporarily increases the credit to $2,500 (through 2028) per eligible child, at which point it would revert back down to $2,000, while the Senate's bill would permanently increase the credit to $2,200 per eligible child.

Both bills create a new, temporary tax break for tips (through 2028), but while the House bill would create an unlimited deduction for Qualified Tips, the Senate's version would limit the deduction to a maximum of $25,000 per person, and would subject the deduction to a phaseout as income exceeds $150,000 ($300,000 for joint filers).

Both bills create a new, temporary tax break for overtime wages (through 2028), but the House bill would create an unlimited deduction for Qualified Overtime, the Senate's version would limit the deduction to a maximum of $12,500 ($25,000 for joint filers), and would subject the deduction to a phaseout as income exceeds $150,000 ($300,000 for joint filers).

Both bills would bring back 100% bonus depreciation, retroactive to January 20 of this year. But while the House bill only calls for the 100% deduction through 2028, the Senate version of the bill would make it permanent.

Where are there major differences between the House and Senate versions of the bill?

SALT Deduction: (State & Local Tax) The current version of the Senate bill would retain the $10k ($5k for separate filers) cap on SALT deductions.

The House version of the bill would increase the maximum SALT deduction to $40,000 ($20,000 for separate filers), subject to phaseouts that could reduce the maximum back down to current limits as income rises.

QBI Deduction: While both the House and Senate versions of the bill would make the QBI deduction permanent, there are some very significant differences between the bills. For starters, while the House version of the bill would increase the deduction to a maximum of 23% of business income, the Senate version retains the current 20% limit.

The bigger difference between the two bills is how they treat high-income owners of Specified Service Businesses (most white-collar professions).

The Senate's version of the bill provides extremely limited relief to such individuals, by only modestly increasing the phaseout range over which the deduction is phased out from $100k to $150k for joint filers, and from $50k to $75k for all other taxpayers.

By contrast, the House version of the bill would create an entirely new - and far more taxpayer friendly - version of the phaseout (by reducing the allowed deduction by 75% of the amount that a taxpayer’s income exceeds their applicable threshold).

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Clear as mud, right?

This is certainly not an exhaustive list of the changes by either the House or Senate versions of The Bill. It's also worth noting that there will be a fair number of non-tax-related provisions that impact areas of financial planning as well (changes to student loans, etc.).

If/when a final version of the bill is enacted, we will cover its many changes in detail.

For now the information above is merely intended to keep you informed of the latest developments.