Pending Taxes
On May 12, House Republicans released their proposed tax legislation for extending and amending TCJA. This legislation must make it through the Senate and Joint Committee work. Let’s review though what the Ways and Means Committee suggested.
Core Provisions
Current marginal tax rates, elimination of personal exemptions, increased AMT exemptions, would be extended permanently. The current standard deduction of $15,000/$30,000 would increase $1000/$2000 annually for four years. Taxpayers aged 65 and older get an additional $4000 bonus deduction. A nice benefit because aging isn’t for sissies.
SALT Provisions
The deductibility or not of state and local taxes, called SALT taxes, has been quite the topic of discussion. Under proposed legislation, SALT limits would remain, though they would be increased to $30,000, with phase-outs to $10,000 for higher incomes. Language has been added which would restrict the ability to use state level workarounds for pass-through entities. Such workarounds were a common state legislative response, for benefit of owners of Sub-S entities, once the $10,000 SALT limit kicked in.
Section 199A – QBI
The QBI deduction would be permanent with two changes. First, the deduction amount would increase from 20% to 23%. And a change to the phase-out rules for higher-income business owners would result in greater use of QBI deductibility for “Specialized Service Trade or Business” (SSTB) entities, such as doctors, lawyers and other specialties.
Campaign Fulfillment
Included is language which allows deductibility of tip and overtime income and for up to $10,000 in interest on new or refinanced auto loans. Side note – we discourage in the strongest possible terms anything that even closely resembles an auto loan. Buy a junker and build from there. Cash all the way. Proposed legislation also expands the use of 529 funds for some professional education, reforms HSA accounts including a doubling (to $16,000 for families) of the maximum contribution. And finally, introduces a “Money Account for Growth and Advancement” or MAGA account for children, which the federal government would open and fund with $1000, for every US citizen born from 2025 to 2028.
On this last point. If this survives into the final bill, be cautious. This has the golden rule written all over it. Not that one. The one which states “he who as the gold makes the rules”.
Child Tax Credit
Would go to $2500 for tax years 2025 through 2028, return to $2000 thereafter.
Estate Tax Exemption Limits
Would go to $15 million per person, $30 million per married couple. Indexed for inflation.
MAGA Child Savings Accounts
Legislation would allow such accounts to be opened on behalf of any beneficiary before their 8th birthday. Contributions of up to $5000 per year could be made through age 17. No distributions until age 18 or older. Through age 24, distributions are limited to 50% of age 18 balance. Unlimited access starting at age 25. Account must be fully distributed by age 31.
Acceptable investments include funds and ETFs which invest in US equities, don’t use margin, and are cost-effective. Be interesting to see how all this shakes out, and what kind of feeding frenzy ensues from fund shops.
Acceptable uses of funds from such accounts include higher education expenses, credentialing expenses, small business or farm startup costs, and first-time home purchases. And our federal debt will spot the first $1000 for those born 2025 through 2028.
Other Provisions
Qualified Opportunity Zones are extended. Clean energy credits get the axe.
Summary
The legislation works to make permanent a number of TCJA temporary provisions. To make good on Trump campaign promises. Though it, like almost all Congressional action, simply kicks the accountability can down the road. Which is one of the best reasons we can think of for not buying federal debt, short of 90-day bills.
Let us know if and as you have questions.
And until we see you again, wishing you only the best.