House Tax Plan: The Details Advisors Need to Know

It’s important to remember that this is just proposed legislation, Levine stresses. Still, advisors now have a clearer idea of where the negotiations on key issues stand, including the cap on the state and local tax deduction, the elimination of taxes on tips and overtime, the estate tax exemption amount and much more.

Estate Tax Exemption and Tax Brackets

The draft legislation would increase the lifetime estate tax exemption to $15 million and create a permanent extension of the current income tax brackets.

Under current law, the exemption resets to around $7 million per person in 2026. In the draft bill, the new base amount for 2026 will increase to $15 million per person, or $30 million for a married couple.

The legislation does not establish a new, higher tax bracket for top earners, an idea floated recently by Trump and some Republican lawmakers.

SALT Cap Increase

The proposed legislation, Levine observes, would increase the current $10,000 cap on deductible state and local taxes, known as the SALT cap, to $15,000 for spouses filing separate returns and to $30,000 for everyone else.

“If that's not as high as you were hoping, then I’ve got even worse news,” Levine writes.

Namely, the higher deduction limits would be phased out as income increased, starting at $200,000 for spouses filing separate returns and at $400,000 for everyone else. As income rises, the higher caps would be reduced to as low as their current limits.

'Double Dose' of Marriage Penalty

“I’ll go out on a limb and make a prediction (always dangerous when it comes to tax policy) that this language may change quite a bit before the final version,” Levine warns. “For starters, I’m not sure the max caps are high enough for many REPUBLICAN SALT caucus members to support. ... But what might be a bigger issue for some is that the draft language does NOT get rid of the significant marriage penalty associated with the cap.”

In fact, Levine says, the proposed legislation actually makes the marriage penalty significantly worse, because it would apply to a larger dollar amount.

“The new income phase-out would ALSO be subject to the marriage penalty!” Levine laments. “So, as written, the max SALT cap would be subject to a double dose of the marriage penalty!”

What About Taxes on Tips?

As Levine observes, the bill would seek to make tips tax-free by allowing a deduction for “qualified tips,” defined as “any cash tip received by an individual in an occupation which traditionally and customarily received tips on or before December 31, 2024.”

There are limitations to prevent the deduction from turning a business activity into negative income, Levine notes, and tips to “specified service businesses” are not eligible.

“Sorry advisors, no turning your taxable advisory fees into tax-free tips!” Levine warns.

Levine says there is some significant inherent complexity in the proposed legislation’s approach to eliminating taxes on overtime.

Above vs. Below the Line
 
“After re-reading the "No Tax On Tips and Overtime" provisions, they are NOT above-the-line deductions,” Levine explains. “Rather, they are what I refer to as ‘below-the-below-the-line’ deductions, like the [qualified business income] deduction. In short, you don't have to itemize to claim them, but they won't reduce AGI. The car loan interest provision does, however, appear to be a genuine above-the-line deduction.”

Tax Break for Seniors

The legislation’s proposed tax break for seniors is “a doozy” from a complexity perspective, Levine says. The upshot is that “seniors” would be entitled to an additional potential deduction of $4,000, but there is a laundry list of caveats.

For example, the additional deduction would only apply for four years — i.e., through 2028 — and it would be phased out by 4% of income in excess of $150,000 for joint filers and $75,000 for everyone else.

Levine says he is “pretty sure” that “senior” in this context means “someone 65 or older by the end of the year,” since the legislation is “basically bolting this provision onto the section covering additional standard deduction amounts.”

Car Loan Interest Deduction

Another section of the legislation would create a new deduction for interest on loans for passenger vehicles, subject to certain restrictions and conditions.

The maximum annual deduction is $10,000, and this amount is phased out by 20% of income in excess of $200,000 for joint filers and $100,000 for all others. The deduction will apply to “toys” like motorcycles, ATVs and campers, Levine notes, but “final assembly” must take place in the U.S. to qualify.

“The bill goes on to define ‘final assembly,’” Levine observes, “but I can definitely envision some ‘games’ being played to do only the ‘final-ist’ of final assembly in the U.S., to try and maximize less expensive foreign labor, while still allowing interest to qualify for the deduction.”

Would this apply to older loans that are outstanding? It’s somewhat unclear as written, Levine says, but his sense is that the likely intended answer from Congress is no.

“[That] makes sense intuitively,” Levine says. “They want to promote NEW economic activity.”

MAGA Accounts

The ninth section of the bill spells out the creation of a new type of tax-favored investment account, the Money Account for Growth and Advancement (MAGA).

New contributions to MAGA accounts would be accepted beginning in 2026 for “beneficiaries” (defined similarly to 529 plan beneficiaries) under 18. No distributions are allowed before a beneficiary’s 18th birthday, while distributions from 18 to 24 are limited to 50% of the account’s value when the beneficiary turns 18.

Other proposed rules stipulate that the account must be established before beneficiary turns 8, and there is an inflation-adjusted maximum annual contribution limit starting at $5,000. Additionally, the account must be invested in the “stock of a regulated investment company” that invests in diversified U.S. equities, does not use leverage, and “minimizes fees and expenses.”

Distributions of principal, once allowed, would be tax-free. Distributions of gains, if they are made “exclusively” for “qualified expenses,” would be taxed as long-term capital gains for the distributor. All other distributions would be taxed as ordinary income and, if the beneficiary is under 30, subject to an additional 10% penalty.

What would count as a qualified MAGA account expense? Higher education costs, purchase of primary residence by first-time homebuyers, expenses related to a small business that has taken a small-business loan, and post-secondary credentialing costs are some examples.

At beneficiary age 31, the account will be deemed distributed and will be taxable according to the rules laid out above. If the beneficiary dies, rules similar to rules for health savings accounts (HSAs) apply.

HSA Changes

The draft legislation would also establish that enrollment in Medicare Part A would no longer prohibit someone from making contributions to health savings accounts.

Additionally, catch-up contributions of spouses could also be made to the same HSA, while tax-free distributions of HSA funds could be made for expenses incurred after enrolling in a qualifying health plan, but prior to establishing an HSA — provided the HSA is established within 60 days of enrollment.

Pictured: Jeff Levine