Congress Shapes Big Tax Legislation
Coming up on four months into President Trump’s second term, Republicans this week are finalizing the details of the massive tax reform bill, which will surely be the biggest action Congress takes this term, and perhaps of the entire Trump Administration.
They are trying to balance at least some attempt to lower the budget deficit, while cutting revenue, and relying exclusively on Republican votes. In the House of Representatives, they can only afford to lose 3 votes of 220, and only 3 votes of 53 in the Senate. If they cut spending too much, especially on popular programs like Medicaid, they’ll lose moderate votes in swing districts (like NJ’s Tom Kean). If they don’t cut the deficit enough, they’ll lose votes from a group of strong conservatives on the right.
Most of the tax bill does not actually involve lowering taxes at all–it just extends the cuts from the 2017 Tax Cuts and Jobs Act signed in Trump’s first term. Most of those tax cuts expire at the end of the year, and if Republicans fail to pass a bill, then they will need to either compromise with Democrats or else almost all American taxpayers will see a tax increase.
Nevertheless, the current draft includes some bigger wins for small businesses. Not only does the bill keep the 199A qualified business deduction, which lets pass-through entities (s-corps and LLCs) make a flat deduction of 20%, it actually increases the deduction to 23%. With the corporate tax rate staying the same, this change is a nice boost for small businesses and helps them compete.
The bill also extends the “bonus depreciation”, and increases it all the way back to 100%, and keeps it there through December 2029. This 2017 change allowed businesses to deduct the cost of eligible assets in the first year they are placed in service, rather than depreciating them over their useful life. It started at 100% but has been gradually phasing out (currently it’s at 40% for 2025). The change would also be retroactive to January 19th of this year, so any qualified investments made in 2025 could be deducted at 100%.
The exemption level for the federal death tax also is raised to $15 million, and that level of exemption is made permanent.
The standard deduction would be increased again, by $1,000 for individuals and $2,000 for joint filers (currently $12,000/$24,000). Seniors (65+) would get a $4,000 increase in the deduction (as long as they’re earning under $75,000 a year for individual, $150,000 for joint), and would be able to take the $4,000 off even if they itemize.
It would temporarily make auto loan interest deductible for itemizers and non-itemizers for autos with final assembly in the United States for tax years 2025 through 2028.
There was some talk of actually increasing the income tax for those earning more than $200,000/$400,000 a year, but ultimately that did not make it into the bill.
Salary earned from working overtime would also be exempted from federal income tax for workers earning under $160,000 a year, as would income earned from tips (but only if the job “traditionally and customarily received tips” before 2025). It remains to be seen if either of those provisions could potentially be manipulated to allow more workers to get exempted from income taxes. As we know, gas attendants do get tips from some customers (especially those from out of state or if the attendant washes the windshield).
The bill also currently plans to institute a new $250 annual fee for owners of electric vehicles, and a $100 fee for hybrid owners. The idea being that owners of these vehicles are not paying federal gas taxes to maintain the roads. Last year New Jersey implemented a similar fee for the same reason, meaning EV owners in the state would have to pay $500 a year to own their vehicles, which is more than the average $300 a year the average NJ motorist pays in gas taxes, though of course those on the road more are paying more in gas tax. Congress is now also planning to almost completely phase out the tax incentives for EV purchases by the end of 2026. One analysis estimated this would increase the price of the average new EV by $5,600.
One of the biggest sticking points, and it does risk blowing up the whole deal, is one of interest to us in NJ. That is the cap on the state and local tax (SALT) deduction. Since 2017, taxpayers can only deduct up to $10,000 in property taxes from their federal income tax bill, which is now what the average home in the state pays in property taxes. A group of Republicans from New York, NJ, and California are pushing for that to be dramatically increased, and are credibly threatening to kill the bill if they don’t get the concessions they want.
The current draft of the bill increases the deduction to $30,000 but leaves it at $10,000 for individuals earning $200,000+ or joint filers earning $400,000+ in income.
Even if this current draft passed the House, the Senate has the ability to force amendments, so everything here is subject to change. Republicans are hoping to have the bill passed out of the House by Memorial Day and signed into law by July 4th.
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