Permanent Provisions: Building a New Foundation

Hey everyone, Ryan here.

Navigating the world of finance often means keeping up with changes to the tax code, which can feel like trying to hit a moving target. Recently, new legislation has introduced some significant updates, making some previous tax provisions permanent while also introducing new temporary ones.

It’s a lot to digest, so let's walk through some of the key changes to help you get a clearer picture.

Permanent Provisions: Building a New Foundation

One of the most significant aspects of the new bill is that it makes several provisions from the 2017 Tax Cuts and Jobs Act (TCJA) permanent. For years, taxpayers have faced uncertainty as these rules approached their expiration dates. This move aims to provide more stability for long-term financial planning.

  • Lower Tax Rates: The lower income tax rates established by the TCJA are now permanent. Without this change, rates would have reverted to higher, pre-2017 levels.

  • Business Deductions: The pass-through business deduction, also known as the Qualified Business Income (QBI) deduction, is also permanent.

  • Standard Deduction: The standard deduction will increase in 2025 to $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers. It will continue to be adjusted for inflation annually.

  • Estate Tax Exemption: The federal estate tax exemption will be set at $15 million per individual starting in 2026 and indexed to inflation. This is a substantial increase from the pre-TCJA level it was scheduled to return to.

Of course, in Washington, "permanent" simply means there's no longer a built-in expiration date. Congress always retains the authority to make future changes.

Updates to Deductions and Credits

The new law also adjusts several popular deductions and credits that affect families, charitable giving, and education savings.

Charitable Giving

There are a few key changes here. Starting in 2026, those who take the standard deduction can deduct cash donations to qualified charities—up to $1,000 for individuals or $2,000 for joint filers.

For those who itemize, the rules are also changing. The tax benefit for charitable deductions will be capped at 35%. So, a taxpayer in the 37% bracket donating $1,000 would receive a $350 tax benefit, not $370. Furthermore, a new threshold is being introduced: only contributions exceeding 0.5% of your adjusted gross income (AGI) will be deductible. For example, if a couple has an AGI of $100,000, they would only be able to deduct donations made above the first $500.

Child Tax Credit

The Child Tax Credit increases from $2,000 to $2,200 for the 2025 tax year and will be indexed to inflation going forward. The income phaseout levels remain at $400,000 for joint filers and $200,000 for single filers.

529 Education Savings Plans

The use of 529 plans has been significantly expanded. Funds can now be used for a wider range of K-12 expenses, including tutoring, curriculum materials, and standardized test fees. The annual K-12 distribution cap is also doubling from $10,000 to $20,000 per child, beginning in 2026.

Additionally, 529 funds can now pay for credentialing and licensing programs, such as for skilled trades or professional exams like the CPA or bar exam.

Temporary Tax Changes (2025-2028)

The legislation also includes several temporary provisions set to last from 2025 through 2028. It's important to note their temporary nature when planning.

  • SALT Deduction Cap: The State and Local Tax (SALT) deduction cap will be temporarily raised from $10,000 to $40,000 in 2025 for taxpayers earning less than $500,000. This cap will increase by 1% annually through 2029 before reverting to $10,000 in 2030.

  • Tax-Free Tips and Overtime: For the period between 2025 and 2028, tip income and overtime pay will be exempt from federal income tax, subject to certain income phaseouts and caps.

  • New Federal Savings Accounts: Children born between 2025 and 2028 to U.S. citizen parents will be automatically enrolled in a federal savings account with an initial $1,000 deposit. These accounts will allow for annual contributions of up to $5,000 (indexed for inflation) and will grow tax-deferred.

  • Enhanced Deduction for Seniors: Individuals aged 65 and older will receive an additional $6,000 deduction ($12,000 for married couples if both spouses are 65+).

  • Car Loan Interest Deduction: Interest paid on a loan for a qualified vehicle purchased for personal use will be deductible.

Phasing Out Green Energy Credits

Finally, the bill repeals or scales back some green energy tax credits for individuals.

  • The $7,500 tax credit for purchasing a new electric vehicle will be eliminated for vehicles purchased after September 30, 2025.

  • The Residential Clean Energy Credit, often used for home solar panels and other energy-efficient improvements, will be eliminated for installations made after December 31, 2025.

This is just a high-level overview, and the specifics of how these changes might apply to you can be complex. It's always a good idea to understand the landscape, especially when major shifts like these occur.

If you have questions, please feel free to reach out. As always, we strongly encourage you to consult with your tax advisor to understand how these updates may affect your personal financial situation.