Congress Provides Certainty to Tax Laws -- For Now
By Anne Christopulos
Ever since tax rates were lowered in 2017, tax planning had to be accompanied by a caveat that the low tax rates established by Congress in 2017 may not continue after 2025. With the passage of the 2025 Budget Reconciliation Bill, we now know that Congress has made the lower tax rates permanent, or as permanent as anything that can be superseded by a future Congress. In addition, there are a variety of additional tax changes that we can now incorporate into our tax planning, although again with a caveat that some may not continue after a few years.
While higher income taxpayers enjoy the largest tax savings in dollar terms, because the lower tax rates are applied to their higher incomes, many senior taxpayers will realize significant tax savings from a new, although temporary, deduction. Also, many taxpayers whose state and local tax (SALT) deduction was capped at $10,000 may benefit from a higher limit; whether they do or not depends on if the higher cap brings their itemized deductions above the standard deduction.
The major losers in the new bill are the renewable energy industry and its proponents. Tax breaks for buying electric vehicles and solar panels, among other clean energy products, are being either reduced, phased out, or eliminated altogether.
Provisions from the 2017 bill made permanent or modified
- The current tax brackets, lowered by the 2017 tax bill, will remain in place. All brackets, except the highest bracket (37%), will be inflation-adjusted after 2025. In 2026, there will be an extra year of inflation for the brackets below 24%.
- The higher standard deduction instituted in the 2017 bill, together with the elimination of the personal and dependent exemptions, remain in place. Starting this year, the standard deduction has been boosted by $1,500, in addition to the inflation-adjusted amounts already scheduled.
- The child tax credit increases to $2,200 per child under 17 and is made permanent, adjusted for inflation each year. It phases out for incomes above $200,000 (single) and $400,000 (joint filers). Both the child and the taxpayer now must have a Social Security number.
- Beginning in 2026, the child and dependent care credit will increase from 35% to 50% of claimed qualifying expenses for lower-income taxpayers. The credit begins to reduce when Adjusted Gross Income exceeds $15,000, but will not fall below 20% regardless of income. The maximum amount of claimed expenses allowed is $3,000 (one child) and $6,000 (two or more children).
- The 20% Qualified Business Income (QBI) deduction has been permanently extended, and the phase-in threshold, where the deduction begins to decline, will increase from $50,000 of taxable income in 2025 to $75,000 in 2026 for single filers, and from $100,000 to $150,000 for joint filers. Also, there is now a minimum $400 QBI deduction for anyone with at least $1,000 in QBI.
- The higher estate and gift tax exemption will basically remain in place and is set at $15 million per individual beginning in 2026. It will be inflation-adjusted in subsequent years.
- The cap on the State and Local Tax (SALT) deduction has been raised from $10,000 to $40,000. However, the $40,000 cap is reduced by 30% of each dollar over $500,000 in adjusted gross income (AGI) with a $10,000 floor. For example, if AGI is $600,000, the cap is reduced by $30,000 (30% x $100,000), bringing it back to $10,000. Taxpayers with AGI above $600,000 will still be able to deduct $10,000 in SALT. In 2030, the cap will be back to $10,000 for everyone, unless extended by Congress.
New tax provisions
- There is a new $6,000 per person deduction for people 65 and older whose income falls below certain limits. The deduction phases out by 6 cents for every dollar over Modified Adjusted Gross Income (MAGI) of $75,000 for single filers and $150,000 for joint filers. It is scheduled to end after 2028, but some experts predict it will be extended beyond that year due to political pressure. (The existing $2,000 addition to the standard deduction for single filers and the $1,600 per person addition for married filers are still in place for people over 65.)
- Starting in 2026, taxpayers who use the standard deduction and do not itemize will be able to deduct up to $1,000 (single)/$2,000 (joint filers) in charitable contributions. The contributions must be direct cash gifts to qualifying charitable organizations and not to donor-advised funds or private foundations. In addition, there will be a 0.5% income threshold for itemizers, meaning that deductible contributions will be reduced by 0.5% of the taxpayer’s contribution base, which for most people is their Adjusted Gross Income.
- The tax benefit on itemized deductions for taxpayers in the 37% tax bracket will be limited to 35%, rather than 37%. This will be accomplished by reducing the total by 2/37, with an adjustment for taxable income that straddles the 35%/37% brackets.
- A new deduction of up to $10,000 was created for auto loan interest for certain vehicles, and it is available to non-itemizers. The vehicle must be for personal use and assembled in the US. The deduction is phased out by $200 per $1,000 of Modified Adjusted Gross Income over $100,000 (single filers)/$200,000 (joint filers). This deduction expires after 2028.
- There are now deductions for · qualified tip and overtime income that can be used whether deductions are itemized or not. The limit on tips that can be deducted is $25,000. The limit on overtime income is $12,500 and overtime income is defined as “overtime excess” payment, which means… Both deductions phase out above $150,000 (single)/$300,000 (joint) in Modified Adjusted Gross Income and are in place for the tax years 2025-2028 only.
- Energy efficiency credits for EVs, hybrids, charging, and energy efficient home improvements under the Inflation Reduction Act will end for property placed in service after 2025. Energy efficient credits for home improvements, such as solar panels, made in 2025 can still be claimed on 2025 tax returns (i.e. filed in 2026), but this will be the last year they are available. The clean vehicle credit for electric vehicles purchased before September 30, 2025, may still be eligible for a clean vehicle credit up to $7,500 for a new EV or $4,000 for a used EV.
- 100% of expenses for business equipment are now permanently allowed to be written off if placed into service after January 19, 2025.
- A new type of account was created, called the “Trump Account”. The federal government will provide a credit of $1,000 to each child born to an American citizen in the years 2025-2028. Additions of up to $5,000 can be made to the account by parents, or others, each year. Up to $2,500 (lifetime) can also be added by employers who might want to offer an additional benefit to their employees. The money cannot be withdrawn until the child reaches age 18, after which the account follows distributions rules in place for Traditional IRAs, which allow penalty-free (but not tax-free) withdrawals, within dollar limits, for certain purposes before age 59 ½, including education and a first-time home purchase. The money must be invested in a diversified fund that invests in mostly US-based companies. The accounts will not be available until 2026.
There are many other provisions in the bill, but the above list includes most that may be applicable to individual taxpayers.
Investing for Newborns
Parents and grandparents of newborns may be wondering whether they should save for their child’s education in a Trump account rather than a 529 account, a college savings program that was created in 1996 and is administered by each state. To answer that question, we can look at one basic difference between the two types of accounts.
- With a 529, there are no income taxes on the withdrawals, as long as the money is used to cover qualifying expenses for education. Also, annual contributions are allowed up to the gift tax exclusion ($19,000 in 2025), with a lifetime cap in most state plans of at least $300,000.
- With a Trump account, once the child reaches age 18, the account, in essence, becomes a non-deductible Traditional IRA. Earnings are tax-deferred and become taxable upon withdrawal. (Contributions, which are made after-tax, are, of course, not taxed when withdrawn.) After the $1,000 initial gift from the government, annual contributions are limited to $5,000, indexed for inflation.
There are many other differences, too. For example, with 529 accounts there are a variety of options for investing the money, which vary according to each state’s plan. With a Trump account, the money must be invested in a broadly diversified fund comprised of the stocks of mostly US companies until age 18.
The bottom line is that a 529 plan account is specifically for education, while a Trump account is a savings account that can give a child a head start on saving for retirement.
If you have any questions about taxes or other topics, reach us anytime at (833) 888-0534 x2 or info@westbranchcapital.com
The views and information contained in this article and on this website are those of West Branch Capital LLC and are provided for general information. The information herein should not serve as the sole determining factor for making legal, tax, or investment decisions. All information is obtained from sources believed to be reliable, but West Branch Capital LLC does not guarantee its reliability. West Branch Capital LLC is not an attorney, accountant or actuary and does not provide legal, tax, accounting or actuarial advice.
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