The House has passed the “One, Big, Beautiful” reconciliation bill, and the bill has been sent to the Senate, where further changes are expected to be made. Below is a summary of the current proposed legislation that will impact individual taxpayers.
Expiring TCJA Tax Provisions Extended
The provisions made in the Tax Cuts and Jobs Act in 2017 are set to expire at the end of 2025. The current bill would either extend or make permanent most of those provisions.
- Make the expiring rate and bracket changes of the TCJA permanent and increase the inflation adjustment for all brackets excluding the 37 percent threshold
- Make the expiring standard deduction levels permanent and temporarily boost the standard deduction by $2,000 for joint filers, $1,500 for head of household filers, and $1,000 for all other filers from 2025 through the end of 2028
- Make the personal exemption elimination permanent
- Make the $750,000 limitation and the exclusion of interest on home equity loans for the home mortgage interest deduction permanent
- Make the state and local tax (SALT) deduction cap permanent at a higher threshold of $40,000, phasing down to $10,000 at a rate of 30 percent beginning at modified adjusted gross income of $250,000 for single filers and $500,000 for joint filers
- Make the expiring child tax credit permanent; temporarily increase the maximum credit to $2,500 from 2025 through the end of 2028; inflation adjust the $2,000 max in years thereafter
New Provisions in the Bill
- 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; deduction limited to $10,000 and phases out by $200 for every $1,000 of income above $100,000 for single filers and $200,000 for joint filers
- Temporarily increase the additional standard deduction for seniors by $4,000 for tax years 2025 through 2028
Changes to HSAs after enrollment in Medicare Part A
As it stands, if you want to make contributions to an HSA, you have to delay enrolling in both Medicare and Social Security. This is because most individuals who are collecting Social Security benefits when they become eligible for Medicare at age 65 are automatically enrolled in Medicare Part A. You cannot decline Part A while collecting Social Security benefits. To make HSA contributions, you can only be enrolled in a high-deductible health plan (HDHP).
Current Law:
Individuals entitled to Medicare Part A are ineligible to contribute to a health savings account (HSA) even if they are still enrolled in a private high-deductible health plan (HDHP).
Proposed change:
Under the new law, Medicare Part A-eligible “working” seniors enrolled in an HDHP can still contribute to an HSA. Existing HSA contribution rules and penalties for non-qualified medical expenses that apply to those under 65 will also apply to this group.
Treatment of Tips
By law, you’re supposed to report all your tips to your employer if they total $20 or more in a single month. Your employer includes those tips in your paycheck calculations, withholding federal income tax, Social Security tax, and Medicare taxes, just like they do for your hourly wages. When you file your tax return, your reported tips are included on your W-2 and added to your other income to determine how much you owe. Even if you get paid in literal cash, the IRS expects you to keep a record and report it.
So, currently, tips aren’t treated any differently than your regular paycheck when it comes to taxes.
The bill proposes a temporary deduction from gross income for tips earned by workers in “traditionally and customarily tipped industries”. This means that taxpayers would still report their tip income, but they would be able to deduct a certain amount from their taxable income.
The deduction is limited to $25,000 of tip income and is available to taxpayers with $160,000 of income or less. The deduction only applies to federal income tax. Social Security and Medicare would still apply to tip income. And the states have not weighed in whether they will adopt certain provisions of the bill for state income tax.
A key point: the bill focuses on “cash” tips. The IRS generally treats “cash” tips as tips received in cash, credit card and through electronic payment methods.
Please stay tuned, the Wegner CPAs tax advisors will keep you updated on the status of the House passed Tax Bill and any changes that come out of the Senate deliberations.
