Lawmakers are considering new bills to make several provisions of the TCJA permanent and to introduce additional modifications to tax law. The following article provides an update on new tax legislation, and presents an example of how raising the SALT cap could provide a measure of tax relief.
Tax policy is now at the top of the agenda for the US Congress.
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the US tax code, including lowering income taxes for many. But much of the TCJA is set to expire at the end of 2025.
The House narrowly passed their version of a new tax bill, entitled “The One Big Beautiful Bill Act” on May 22. The Senate is now debating their version. Identical legislation must pass through both chambers before becoming law.
Here are some of the key provisions of the House version of the new tax law:
Makes permanent the current 7 individual federal income tax brackets
- Bumps up standard deduction by $1,500 in 2025; and $1,000 per year in future years
- Provides an additional standard deduction of $4,000 for those over 65 until 2028; phases out for individuals earning above $75,000 and couples earning above $150,000
- Increases child tax credit to $2,500 per year for next four years
- Introduces new kind of child savings account (“Trump Savings Account”) designed to help parents save, where parents can contribute $5,000 annually in after-tax dollars until child reaches age 18
- Expands estate tax exemption to $15 million per person / $30 million per couple
- Raises cap for the State and Local Tax (SALT) deduction to $40,000 per household starting in tax year 2025 from the current $10,000
We will report more fully on the tax changes when legislation is finalized.
However, since the increase in the SALT cap, if it does pass, likely will result in more people itemizing their taxes (versus taking the standard deduction), and could yield significant tax savings, we’ve provided an example of how it may work, below.
The House bill increases the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for taxpayers earning up to $500,000. The cap and income threshold would increase by 1% annually over the next ten years under the proposed bill.
The SALT deduction allows taxpayers who itemize to deduct certain state and local taxes—such as income and property taxes—from their federal taxable income.
The $10,000 cap was introduced in 2017 under the TCJA and has been a point of contention, particularly for residents in high-tax states where state and local taxes often exceed this limit.
If enacted, this change in the SALT cap could provide substantial tax relief for taxpayers who have significant state and local tax liabilities.
Homeowners with high property taxes or individuals with substantial state income taxes could see a notable reduction in their federal taxable income, potentially lowering their overall tax burden.
As an example, let’s assume that a family with annual income of $275,000 has the following expenses:
- Property taxes: $18,000
- State income taxes: $10,000
- Mortgage interest: $8,000
- Charitable contributions: $12,000
Since their property and state income taxes are currently subject to the SALT cap of $10,000 under the current law, their deductions would total $30,000:
- SALT: $10,000
- Mortgage interest: $8,000
- Charitable contributions: $12,000
Since their total itemized deductions of $30,000 would be less than the standard deduction, they would take the standard deduction of $33,200 in 2025 (assuming no change from the current law).
If the SALT cap is increased to $40,000, this same family would be able to deduct all their property and state income tax, and they would have the following deductions:
- SALT: $28,000 ($18,000 property plus $10,000 state income tax)
- Mortgage interest: $8,000
- Charitable contributions: $12,000
This family would then be able to itemize $48,000 in deductions, giving them an additional $14,800 in deductions. If they are in the 24% tax bracket, the increased SALT cap would save them $3,552 in Federal taxes.
While the House has passed their bill, it still requires approval from the Senate, where the outcome is uncertain due to differing views on fiscal policy and tax equity.
Therefore, while the proposed changes could offer tax advantages for some, they are not yet law.
We will continue to monitor the progress of this legislation and assess its implications for your individual tax planning strategies.
-RK