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What You Need to Know About the 2025 House Tax Proposal

The first year of any new Presidential administration typically results in significant legislation. This year, this trend coincides with the impending sunset of the Tax Cuts & Jobs Act (TCJA), enacted in 2017, reverting to tax laws that were in place nearly a decade ago. To that end, members of the House of Representatives have introduced their initial budget reconciliation proposal. This is the first proposal in what’s expected to result in a spirited debate regarding the size and scope, and so we encourage you not to overreact or front run any of the proposed changes. Below are high-level themes coming from the proposal:

Changes to Individual Tax Provisions

The proposed bill has significant changes to the current income tax code. Below is a high-level summary of these changes and their impact to taxpayers. For a more detailed analysis of the changes, qualifications and additional provisions, access our full recap of the bill.

Proposed Changes

What It Means for Taxpayers

Current ordinary tax rates and brackets for individuals and trusts would remain in place. There would also be no change to the tax rate on capital gains and dividends.

This would avoid the rate increases that were expected after the sunset of TCJA.

The lifetime gift and estate tax exemption would increase by roughly $1 million. This also includes the generation skipping transfer exemption.

The exemption was expected to fall by roughly half the current exemption amount in 2026, to $7 million dollars. This provision would avoid that significant decrease.

The child tax credit would increase to $2,500 for 2025-2028 before returning to $2,000 in 2029. The $500 credit for other dependents and current income-based phaseout levels would remain in place.

This would increase the credit by $500 for the next four years for those who qualify.

The higher standard deduction would remain in place, temporarily expanding by $2,000 for couples ($1,000 for singles) through 2028.

This would avoid the standard deduction falling by nearly half in 2026, which would have resulted in as much as $13,000 in additional taxable income.

Overtime and tip income would be tax-exempt for those with income below a threshold. Other new deductions would include a $4,000 deduction for those age 65+ and for interest paid on a qualifying car loan.

There are other additional qualifications that apply, but this could lower the tax cost for many taxpayers.

The state and local income and property taxes (SALT deduction) would increase by $20,000 beginning in 2026. Phaseout restrictions apply.

Previously, techniques have been used to circumvent the current $10,000 SALT deduction to reduce a taxpayer’s state income tax liability. These techniques would be subject to new rules, mitigating their impact.

Many provisions from the original TCJA bill would be permanent, related to the Alternative Minimum Tax, personal exemptions, mortgage and home equity loan interest, casualty losses, miscellaneous deductions and more.

These proposals would mean a permanent loss of some deductions, but also a reprieve from some additional taxes under the AMT.

Additional provisions include eliminating various tax credits and related provisions for energy-efficient cars and homes.

These repeals would be effective for 2026, so there is still time to take advantage of them.

 

Changes to Business Income Tax Provisions

Business owners may see additional tax planning opportunities with the new proposal, including:

  • The Qualified Business Income deduction to owners of pass-through businesses would be made permanent, and increase by 3% in 2026. The phaseout rules would also be modified beginning next year.
  • Property acquired and utilized from mid-January 2025 through end of 2029 would be eligible for a 100% depreciation deduction in that year.
  • The Section 179 deduction would be increased to $2.5 million for property placed in service after 2024, with the beginning of the phaseout range increased to $4 million of property.
  • Charitable gifts by a corporation would only be deductible to the extent that they exceed 1% of the business’s income. Existing 10% cap on charitable deductions would remain in place.

 

Changes to Health Savings Accounts (HSA)

  • Contribution limits would effectively be doubled beginning in 2026, with income phaseout rules applying.
  • Revisions as to who can contribute to an HSA, and how HSA funds can be used are also included in the proposal.

 

Additional Miscellaneous Taxes

  • A new savings account for minors has been proposed. The account must be established before the child reaches age 8 and can accept annual contributions of up to $5,000 until the minor reaches 18, with additional qualifications. Those born in 2025-2028 could receive a government contribution of $1,000 to the account.
  • An increase in qualified expenses for 529 plans to be used for elementary, private, religious and homeschools, and expenses for credentialing classes, exams and continuing education programs.

 

Partner with Your Baird Financial Advisor

If we’ve learned anything from previous proposals, it’s that anything can change. While it’s important to be ready to react to these changes, make sure you don’t overreact to any proposals that may not take effect. Your Baird Financial Advisor is connected to tax and policy experts who are monitoring the situation and will provide timely guidance and strategies as legislation is finalized.

The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.

 

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