The U.S. House of Representatives recently passed a new tax bill that could bring major changes to how individuals and businesses file their taxes, especially when it comes to deductions. One of the most talked-about updates is the proposed increase to the State and Local Tax (SALT) deduction cap, which would offer some relief to taxpayers in high-tax states. The Senate still needs to pass the bill and the president must sign it into law, but here’s a breakdown of the key changes and how they could affect you.
Key Change: SALT Deduction Cap Raised
Under the new bill, the SALT deduction cap would increase from $10,000 to $40,000 starting in 2025. For those filing as married but separately, the cap would be $20,000. This is a significant jump from the current cap, which many taxpayers have found limiting.
However, there are income restrictions. The higher deduction would phase out for individuals with a modified adjusted gross income (MAGI) over $500,000, or $250,000 for married filing separately. From 2026 through 2033, both the cap and the income threshold would increase by 1% each year.
Changes Affecting Business Owners: PTET Deduction Elimination
Another major provision targets pass-through entities. The bill proposes eliminating the Pass-Through Entity Tax (PTET) deduction, which has allowed certain businesses to work around the SALT cap by deducting state and local taxes at the entity level.
If passed:
- Specified service trades or businesses (SSTBs) such as accountants, dentists, doctors, nurses, veterinarians, and lawyers would no longer be able to use the PTET deduction.
- Instead, these taxes would pass through to the owner’s return and be subject to the new $40,000 SALT cap.
- Corporations would not be affected and would continue to benefit from the 21% flat tax rate.
This change could significantly increase tax bills for small business owners who rely on the PTET deduction to lower their taxable income.
Other Notable Provisions
In addition to changes around the SALT cap and PTET deduction, the bill includes several other updates:
- Standard deduction: Made permanent, with a temporary increase in the deduction amounts.
- Child tax credit: Temporarily increased to $2,500.
- Tip income: New temporary deduction for qualified tips.
- Estate and gift tax exemption: Permanently increased, adjusted for inflation.
- Clean energy tax credits: Most credits from the Inflation Reduction Act would be repealed.
- Car loan interest: New temporary deduction available.
- Senior taxpayers: Additional standard deduction of $4,000 for seniors.
- “Trump accounts”: Permanent child savings accounts introduced.
- Itemized deduction limits: Deductions would phase out by 2% for every dollar of AGI over the 37% tax bracket threshold.
What’s Next?
The bill has passed the House, but it must still be approved by the Senate and signed by the President before becoming law. Some senators have already voiced opposition to parts of the legislation, so further changes are likely.
At Scout Tax, we’re closely monitoring these developments and will keep you updated on what this means for your personal or business taxes. If you have questions about how the proposed SALT cap changes, PTET deduction elimination, or other tax provisions may impact you, our team is here to help.
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