While House Republican lawmakers approved a Senate-passed budget outline, "the details still need to be ironed out," according to Ed Slott of Ed Slott & Co., and the "actual tax and spending provisions are as yet unknown." But generous gift and estate tax exclusions as well as standard deductions would likely continue, Slott said.
The House voted 216-214 Thursday to pass the Senate's budget, which outlines the parameters for trillions of dollars in tax cuts and an increase to the debt ceiling.
It's clear "that the tax cuts from the Tax Cuts and Jobs Act (TCJA) will be extended, and possibly modified," Slott told ThinkAdvisor Friday in an email.
However, another big question: "We also don’t know if the tax cuts will be extended or made permanent," Slott said.
For most taxpayers, "extending the tax cuts is good news, especially for small businesses who will be able to continue taking advantage of one of the biggest benefits of the TCJA, which is the 20% deduction for Qualified Business Income," Slott said.
"It would be nice if that deduction could apply to more businesses, since many service type businesses (like financial advisors, accountants, lawyers, consultants, etc.) currently may not qualify due to income limits. Most small businesses have gotten used to the big deductions here, so hopefully they can continue to count on that," Slott relayed. "It would be a shock to their tax planning if they couldn’t."
Standard Deductions
The large standard deductions "have helped many taxpayers keep their tax bills low, without itemizing their deductions (many of which were eliminated by the TCJA, as a trade-off for the increased standard deductions)," Slott continued. "Around 90% of taxpayers now claim the standard deduction, and that would continue or even increase if the TCJA provisions are extended, because these larger standard deductions increase each year for inflation."
SALT Cap Increase
House Republicans said Thursday that the federal limit for deducting state and local taxes, known as the SALT cap, could be raised to $30,000 from $10,000.
Raising the cap could help homeowners and others in states like New York and New Jersey where income and property taxes are high, Slott said. Some Republicans from high-tax states have threatened to block the bill without an increase.
Estate and Gift Tax
"The generous estate and gift tax exemption amounts (currently $13,990,000 per individual) may also continue, and these levels will increase for inflation each year," Slott said, but repealing the estate tax won’t happen.
"Similarly, there was talk of repealing the federal income tax and abolishing the IRS — that won’t happen either."
How Will a Tax Bill Be Paid For?
"It won’t, so taxpayers should take full advantage of more years of low rates, for example by doing more Roth conversions, more gifting for higher net worth people worried about potential future estate taxes, and accelerating more income into the lower brackets," Slott said.
Also, "more workers should shift their retirement contributions from 401(k)s to Roth 401(k)s, to lock in future tax-free retirement income, as a hedge against future higher tax rates," Slott said. "Smart taxpayers have already been doing these things since the TCJA was enacted, so this planning should continue, at least until some future Congress deals with the mounting national debt."
Added Slott: "We are currently at record high debt levels and record low tax rates (national revenue) at the same time. This combination cannot continue without future revenue from increased taxes. That’s why taxpayers should take maximum advantage now while the good years of low tax rates last."
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