Senate's ‘big beautiful' bill trims popular tax breaks — 4 ways it could impact your taxes

Yahoo

15 hours ago

The Senate's version of the massive tax bill squeaked through on a 51-50 vote on Tuesday and, while it largely matches the tax bill that passed the House in May, there are some key differences that could pose problems for House Republicans, who must now either vote on the Senate's version 'as is' or face drawn-out negotiations that would put their hoped-for July 4 deadline for passage out of reach.
The Senate version of the bill adds much deeper cuts to Medicaid than the House version does. And, while the Senate did bow to House Republican pressure and raised its annual cap on the state and local taxes deduction to $40,000 from $10,000, the Senate extended that cap for just five years, until 2030. (The so-called SALT deduction is a key tax provision for many taxpayers who itemize their deductions in high-tax states such as California, New York and New Jersey.)
'Some members of the Senate GOP want to restrain components of the tax breaks approved by the House, and a moving target appears to be the so-called SALT deduction,' says Mark Hamrick, senior economic analyst at Bankrate.
Here are some of the key tax provisions in the Senate-approved bill — and how it could affect your bottom line if the bill becomes law. Keep in mind that both proposed bills would maintain the lower income tax rates and higher standard deduction initially set by the Tax Cuts and Jobs Act of 2017 — provisions that are set to expire at the end of 2025 unless Congress acts.
The state and local tax (SALT) deduction has long been a sticking point in the GOP's tax bill. Some House Republicans from high-tax states initially stalled the bill from advancing unless the current $10,000 SALT cap was increased.
The House bill would allow taxpayers to claim up to $40,000 annually in SALT deductions ($20,000 if married filing separately), with the tax break phasing out for taxpayers with income of $500,000 or more ($250,000 or more if married filing separately). That compromise was enough to win over Republican holdouts.
The Senate's version of the bill takes a different stance: It would hike the SALT cap to $40,000 but only for five years, at which point the cap would drop back to $10,000. It remains to be seen whether House Republicans will accept the temporary status of the $40,000 cap.
The $10,000 SALT cap was originally enacted under the 2017 Tax Cuts and Jobs Act (TCJA) and expires at the end of 2025 unless Congress acts. Under the current law, the cap applies to most taxpayers, while those who file as married filing separately are limited to a $5,000 cap, regardless of income. Prior to the TCJA, there was no cap on claiming state and local taxes as an itemized deduction.
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As part of the tax bill, the House proposed an increase to the child tax credit — from the current $2,000 to $2,500 per child under the age of 17. But the Senate's version scales back the increase, raising the credit to only $2,200 per child starting this year.
Under the Senate's bill, the child tax credit would increase starting in 2025 and continue through 2028. The plan would also make the current income thresholds permanent, allowing families to qualify if their modified adjusted gross income (MAGI) doesn't exceed $400,000 for married couples filing jointly and $200,000 for single filers. The Senate's version of the bill would adjust the amount of the credit for inflation annually.
If Congress doesn't act, the value of the child tax credit will revert back to $1,000 per child and lower income thresholds would apply — $110,000 for married couples and $75,000 for all other filers.
Trump campaigned on the promise that he would eliminate taxes on tips and overtime pay. Both the House and Senate versions of the bill carry out his promise, but in different ways.
The House version of the bill includes a provision to exclude qualified tips from income taxes, with a phaseout starting at $160,000 of modified adjusted gross income (MAGI) for all taxpayers. A similar measure applies to overtime pay.
However, the Senate's version provides a much different picture.
It would allow a deduction worth up to $25,000 for qualified tips and $12,500 for qualified overtime pay, creating two new deductions, which would be available from 2025 through 2028. These provisions would gradually phase out for taxpayers with MAGI exceeding $150,000 for single filers and $300,000 for joint filers.
Some experts argue that while both proposals could offer some tax relief to millions of Americans, few would see a significant benefit. Fully 40 percent of U.S. households that report tip income would not see any tax break from the proposal, according to a report by the Tax Policy Center, a nonpartisan research organization. Of those households making less than $33,000 a year, just 1.4 percent of households would benefit from no tax on tips, and for those households, their average tax cut would be $450 a year.
Learn more: No tax on tips or overtime: What workers should know
Along with the previously mentioned tax provisions, the Senate takes a different stance on several key tax-related measures. The Senate's version of the bill modifies the House-approved version as follows:
Car loan interest deduction: The House bill includes a tax deduction for interest paid up to $10,000 for interest paid on both new and used vehicles. The Senate version narrows the benefit, allowing the deduction for new vehicles only.
Standard deduction for seniors: The Senate increases the additional standard deduction for seniors to $6,000, compared with $4,000 in the House bill. Read more: New bonus tax deduction worth up to $6,000 may come soon for older Americans.
Qualified business income (QBI) deduction: While the House proposal boosts the QBI deduction from 20 percent to 23 percent, the Senate bill keeps it at 20 percent.
'The differences in the House and Senate where the GOP prevails may translate to potentially protracted negotiations,' Hamrick says. 'It appears Congress and the president are content with further fueling the federal debt and deficits, even though it is generally understood the situation is not sustainable in the long-term.'
Learn more: The average tax refund each year, and how tax refunds work