On July 4, President Trump signed into law H.R.1, the $3.3 trillion budget reconciliation spending and tax cuts bill. The Senate passed the measure on July 1, by a 50-50 vote with the tie broken by Vice President JD Vance. The Senate made a raft of changes to the version the House passed on May 22. The House approved the Senate-passed measure, without changes, on July 3, by a 218 to 214 vote. Enactment came after multiple all-night, high-drama, tension-filled days as Congress raced to meet their target July 4 date for signing the measure into law.
The new law addresses most of President Trump’s domestic policy agenda—it provides more funding for immigration enforcement, border security, and defense. It cuts Medicaid, nutrition assistance, and other federal spending. It also cuts taxes and prevents a tax increase by extending tax rules that were scheduled to expire at the end of 2025.
Generally, the new law extends (with some modifications) current law individual income rates, the standard deduction, and a host of other tax rules that were scheduled to expire at the end of this year. Most of the extensions do not have an expiration date and so are viewed as permanent. Some have been modified (e.g., the bracket break points at the lower end of the income spectrum, a slightly higher standard deduction, etc.).
The new law extends the Section 199A 20 percent deduction for noncorporate qualified business income (QBI). The extension is permanent (i.e., there is no expiration date). The new law also includes extension, without an expiration date, of two important business tax rules: depreciation and business loan interest deductibility. Details on these provisions and other provisions that are of particular interest to NAIFA members and their clients are in separate stories below.
As enacted, H.R.1 excludes some provisions that were in the House-passed version of the bill. These include all but two of the health savings account (HSA) expansion provisions and the creation of CHOICE health plans.
Also in the new law are provisions that set the estate exemption at $15 million/person, limit the amount of itemized deductions a taxpayer in the 37 percent tax bracket can take, expand ABLE accounts (savings accounts for the benefit of people with disabilities) and tax-favored education savings, create a new tax-favored children’s savings account program, and provide an above-the-line $1,000/person charitable contribution deduction. The amount of an individual’s charitable contributions for a tax year will be reduced by 0.5 percent of the taxpayer’s contribution base for the tax year. For corporations, the floor will be 1 percent of the corporation’s taxable income, and the charitable contribution deduction cannot exceed the current 10-percent-of-taxable-income limit. There is also a new limitation on the $1 million cap on the deductibility of executive compensation—the cap is extended to include the top execs at all the companies in a controlled group.
Some other high-profile issues now in the law include tax-free tip income (up to $25,000 for those with incomes under $75,000 ($150,000/joint) for five years, a five-year increased deduction (of up to $40,000 for taxpayers earning $500,000 or less) for state and local taxes (SALT), and an income-limited deduction for up to $10,000 in interest paid on domestic car loans. There are also an expanded child tax credit and education-related tax rule changes.
A $5 trillion increase in the federal debt limit is also now part of the law.
More details on the new law’s provisions of particular interest to NAIFA members and/or their clients are in separate stories below and in the PDF Chart summarizing key provisions with a comparison against the pre-enactment law.
Prospects: Expect a flurry of implementing regulations on most if not all of these new tax rules. While there are ongoing concerns about the effect of IRS staff cuts on its ability to promulgate regulations expeditiously, the Treasury Department is geared up to get necessary guidance out as quickly as possible. Also expect ongoing debate about the new law’s potential impact on the federal deficit—there are many projections, some official and some from the private sector, predicting that the new law could add between $2.4 trillion and more than $5 trillion to the deficit over 10 years. There are also predictions that the law’s triggering of economic growth could actually result in deficit reduction of $500 billion or more over 10 years. This will be fodder for debate on policy, economy, and political grounds for the foreseeable future.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Mike Hedge – Senior Director – Government Relations, at mhedge@naifa.org.