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As President Trump, officials in his administration and congressional Republicans start working on a big tax bill to extend expiring tax breaks in 2017's Tax Cuts and Jobs Act (TCJA) and to make other tax changes, they are eyeing lots of revenue-saving measures to help offset the cost of the bill or at least some of the cost. A 10-year extension of all the expiring provisions in the TCJA would add nearly $5 trillion to the debt, and that’s not counting the other tax breaks that President Trump promised to corporations and various groups on the campaign trail.
The House Budget Committee has floated an extensive list of revenue-savings options that are on the table. The list incorporates savings on multiple fronts, including energy, transportation, education, health, welfare, customs and immigration, trade, infrastructure, the federal workforce, and of course, taxes.
We will look at some current tax breaks that are under fire.
1. Home Mortgage Interest Write-Off
Prior to 2018, taxpayers who itemize on Schedule A of Form 1040 could deduct interest on up to $1 million of mortgage indebtedness secured by their primary home or a single secondary home incurred to buy, construct, or substantially improve the residence. The Tax Cuts and Jobs Act cut back the write-off, allowing interest to be deducted on up to $750,000 of total home acquisition debt. The $750,000 limit generally applies to debt incurred after December 15, 2017. If Congress does nothing, then the higher $1 million loan cap will automatically be revived after 2025.
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However, instead Republicans are looking at paring this deduction back further to help pay for the cost of tax legislation. An option is to end the break or to lower the $750,000 cap on which mortgage interest can be deducted to $500,000. If Congress ends or lowers the cap, we would expect any change to apply to mortgages taken out on or after the date of any tax bill.
2. Municipal Bond Interest
Currently, interest earned on state and local bonds (munis) is tax-exempt for federal income tax purposes. Repealing this break is a revenue-raising option. The same goes for tax-free interest received from private activity bonds, Build American bonds and the like.
3. Tax Breaks for Families
The child and dependent care tax credit for working parents and the head-of-household filing status would be repealed. If the head-of-household filing status is eliminated, these filers will then have to use the filing status for single individuals, resulting in a lower standard deduction amount and less favorable income tax brackets.
Also, parents who claim the $2,000 (per child) child credit would need to have Social Security numbers. Currently, SSNs are required only for the children.
4. Education Tax Breaks
Republicans want to scrap the up-to-$2,000 Lifetime Learning Credit, the up-to-$2,500 American Opportunity tax credit, and the up-to-$2,500 Form 1040 above-the-line deduction for interest paid on student loans for higher education. They also propose taxing scholarship and fellowship grants.
5. State and Local Tax (SALT) Deduction
Taxpayers who itemize on Schedule A of the 1040 can currently deduct their state and local tax deductions up to a $10,000 cap. If Congress does nothing, this cap disappears at the end of 2025. At that point, taxpayers could then claim the SALT write-off — as they did prior to 2018.
The House Budget Committee's list of potential revenue options sets forth the following five alternatives to handle this tax break, some of which are revenue-saving measures, while others would hike the cost of any tax bill:
- Repeal the SALT deduction in its entirety
- Double the $10,000 cap to $20,000 for married taxpayers filing a joint tax return
- Increase the cap to $30,000 for joint-return filers and to $15,000 for all other filers
- Let the $10,000 cap expire at year-end, but, beginning in 2026, allow filers to deduct only property taxes, and not state and local income or sales taxes
- Eliminate the SALT deduction for businesses
6. Other Tax Breaks in Jeopardy
Here are some other actions that are being considered by Republican lawmakers that could impact popular tax breaks:
- Nix green-energy tax breaks that were enacted in the Inflation Reduction Act
- Make various changes to Obamacare subsidies
- End the employee tax exclusion for employer-paid meals, transportation and on-premise gyms
- Have the COVID-19-related employee retention tax credit retroactively sunset on January 31, 2024
- Repeal the federal tax exemption for nonprofit hospitals
- Increase the current 1.4% excise tax on the net investment income of private colleges with large endowments to 14%
- Repeal the federal tax exemption for credit unions
- Ax charitable contribution deductions for donations made by individuals to hospitals and other tax-exempt health organizations
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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