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House Passes Tax Bill Raising SALT Cap
The U.S. House of Representatives passed the Republican tax bill Thursday after members agreed to a late amendment to raise the cap on the state and local tax (SALT) tax deduction to $40,000 ($20,000 for married filing single) beginning in 2025. The current SALT cap is $10,000, and previous versions of the legislation would have increased the cap to $30,000. The $40,000 cap would phase out for taxpayers with a modified adjusted gross income (MAGI) of over $500,000 ($250,000 MFS). Additionally, both the $40,000 SALT cap and the $500,000 income phaseout would increase by 1% per year from 2026 through 2033.
Other provisions in the tax bill make permanent many of the other changes included in the 2017 Tax Cuts and Jobs Act that were set to expire at the end of 2025. It also:
Makes the standard deduction permanent and temporarily increases the amounts
Temporarily increases the child tax credit to $2,500
Temporarily provides a deduction for qualified tips
Permanently increases the estate and gift tax exemption, indexed for inflation
Repeals most of the clean energy credits included in the Inflation Reduction Act
Temporarily provides a car loan interest deduction
Temporarily provides seniors with an additional standard deduction of $4,000
Permanently provides for “Trump account” child savings accounts
Limits tax benefits of itemized deductions to phase out the deduction by 2% for each dollar of AGI above the 37% bracket threshold
The tax package must still pass the Senate and be signed by the president before it becomes law. The bill is likely to be amended in the Senate because some senators have said they oppose some provisions in the legislation that passed the House. We continue to monitor the tax legislation as it moves through Congress and will provide updates on changes that could impact your tax practice.
The tax legislation, which passed the U.S. House of Representatives Thursday, would eliminate the pass-through entity tax (PTET) deduction, which allows eligible pass-through entities to avoid the cap on the state and local tax (SALT) deduction. Instead, specified service trades or businesses (SSTBs) like accountants, dentists, doctors, nurses, veterinarians and lawyers would be subject to the new $40,000 ($20,000 MFS) federal, state and local tax deduction limit. Other points to consider regarding the bill:
SSTBs would be unable to deduct state and local income taxes at the entity level.
Disallowed state and local taxes at the entity level would pass through the entity owners’ returns, limiting their individual SALT deduction, instead of increasing their eligible deductions.
Corporations will still not be subject to a limitation and will keep their 21% tax rate, unlike pass-through entities.
Current SSTB rules limit the qualified business income (QBI) deduction, and eliminating the proposed PTET deduction could increase the tax bills of small business owners.
TIGTA Finds Decreases in EITC Audits
A Treasury Inspector General for Tax Administration (TIGTA) report found that, during the 2024 fiscal year, the IRS significantly decreased the number of earned income tax credit (EITC) audits it conducted and the number of correspondence audits that specifically focused on refundable credits, including the EITC.
The decrease in EITC audits increased the likelihood that the agency will meet the goals of the 2022 Treasury directive instructing the IRS not to use resources provided by the Inflation Reduction Actof 2022 to increase audit rates on small businesses or households earning less than $400,000 a year. TIGTA also noted that the IRS rebalanced its EITC enforcement efforts to address racial disparities in auditing the credit by increasing its outreach and education efforts.
Court Bars IRS from Assessing ESRP Penalties
A Texas federal court judge issued a decision effectively preventing the IRS from assessing penalties against employers who do not provide affordable minimum health insurance coverage as required by the Affordable Care Act (ACA). Under the ACA, employers that are required to provide minimum health coverage to their employees face an employer shared responsibility payment (ESRP) penalty for failing to do so. The ruling did not invalidate the ESRP penalty, but it did find the penalty couldn’t be assessed in the manner described in the current regulations.
The judge found that, under the text of the act, the IRS can only assess penalties against employers after the employer received a notice/certification from the U.S. Department of Health and Human Services (HHS) through an ACA exchange. However, a 2013 HHS regulation delegated the notification process to the IRS. The judge concluded that the IRS could only assess an ESRP penalty after HHS and the ACA exchange issued the required certification. Because HHS and the exchanges do not currently have a system for issuing certifications to employers, the IRS can’t assess penalties for ACA violations.
The judge did not bar the IRS’s enforcement of ESRP penalties elsewhere. But if the decision is not overturned on appeal, other taxpayers could successfully challenge ESRP penalties using the same arguments. The government has yet to file an appeal for the decision and HHS has not issued any statement as to whether it plans to revise its regulations to comply with the decision.
You Make the Call
Question: Jim has a home office. Jim is self-employed and files Schedule C (Form 1040), Profit or Loss From Business. The home is not a residential rental property. It is 3,100 square feet, and the home office portion is 450 square feet. He installed a new HVAC system in January of 2025, which cost $12,000 and serves the entire home, not just the office. Can a portion of the HVAC cost be deducted as a home office expense?
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