IRS Leadership Change and Tax Season Insights
The IRS is stepping up to address significant challenges with new leadership under Frank Bisignano, a well-known former Wall Street executive. Bisignano took on the role of IRS chief executive in October, and Treasury Secretary Scott Bessent is set to act as the IRS administrator in 2025. This comes after a period of instability, with six leaders being hired and replaced in quick succession.
How effectively the IRS navigates the upcoming 10-week tax season may carry considerable political weight, especially with the president’s commitment to deliver record tax refunds this year. So, let’s dig into some essential insights regarding SALT deductions, Trump accounts, and related matters.
What’s New This Year?
A key aspect to note is the SALT Earned Income Tax Credit. SALT refers to “state and local taxes,” allowing taxpayers to lower their federal tax bill by deducting what they have paid in state and local taxes from their federal taxable income.
Changes in SALT Deduction
For the past seven years, taxpayers could only deduct state and local taxes up to $10,000. However, a tax and spending bill from the Trump administration, which narrowly passed Congress last July, has significantly raised that cap to $40,000.
Who Benefits from the Increased SALT Limit?
This change largely favors wealthier individuals with high-value properties, particularly in areas like the western suburbs of Boston, where local property taxes exceed $25,000. These taxpayers can now protect a sizable portion of their income by deducting their state income tax (set at a flat rate of 5%) or state sales tax (which is 6.25%), alongside their local property taxes. It’s worth noting that the law requires taxpayers to choose between state income tax or sales tax for the deduction, not both.
Reason Behind the Increase
The increase in the SALT deduction was mainly aimed at preserving the backing of Republicans from affluent suburban districts like New York for a piece of legislation that tends to advantage the wealthy over the less fortunate. Notably, no member of Massachusetts’ Congressional delegation, which has no Republicans, supported the bill.
Restrictions on SALT Deductions
Indeed, there are limits; the $40,000 cap will be phased out for high-income individuals and joint filers.
Other SALT Limitations
SALT deductions are available strictly to those who opt to itemize their deductions. Taxpayers can either itemize their deductions or take the standard deduction, typically choosing to itemize only if their deductions exceed the standard deduction.
Standard Deduction Amounts
Last year’s tax laws raised the standard deduction for single filers from $14,600 to $15,750, and for joint filers from $29,200 to $31,500. These increases are quite significant, benefitting a wide array of taxpayers, including many who are low- to moderate-income and do not itemize. Additionally, taxpayers aged 65 and older can claim an extra $6,000 deduction.
Common Deductions
Aside from state and local taxes, common deductions include mortgage interest for primary or secondary homes, charitable contributions, and out-of-pocket medical or dental expenses. However, it’s worth mentioning that only about 10% of taxpayers have enough deductions to itemize.
What is a Trump Account?
This refers to a newly established tax-advantaged savings and investment account for children, somewhat similar to an IRA. Parents can contribute up to $5,000 annually until the child turns 18. Like IRAs, earnings from these accounts are tax-free, although withdrawals will be taxed based on the beneficiary’s income tax rate.
Government Funding for Trump Accounts
Yes, children born between January 1, 2025, and December 31, 2028, will receive an initial $1,000 from the government per account at their birth, which can be seen as a form of seed money. Parents, employers, and others can later contribute more.
Children Born Before 2025
Any child under the age of 18 with a Social Security number can open an account, but the $1,000 seed money is exclusive to those born within the specified period.
How to Establish an Account
Establishing an account isn’t automatic; it requires filing IRS Form 4547 on your 2025 tax return. To receive the $1,000 contribution, you must specifically indicate this on the form, as merely opening an account won’t trigger the deposit. There was significant support for the Trump Account initiative when Michael Dell of Dell Technologies vowed a $6.25 billion contribution to add $250 to the accounts of children up to 10 years old from households earning less than $150,000 annually.
New Rules for Tips and Overtime Pay
Eligible taxpayers can receive up to $25,000 in tips and an additional $12,500 in overtime pay, with certain phased-out limits for higher earners.
Child Tax Credit Changes
This year, the child tax credit will increase by $200, bringing it to $2,200 for each eligible child under 17. Remember, a tax credit directly reduces the tax owed, in contrast to deductions that lower taxable income. Some low-income families may receive up to $1,700 in cash per child if they owe little or no taxes.
Submitting Files for Free
There was a free filing option known as Direct File that had been trialed in Massachusetts and other states in recent years, but it was discontinued by the Trump administration.
Protect Yourself from Scammers
Finally, one crucial point: anticipate a rise in scams involving individuals pretending to be the IRS or fake “tax resolution” agencies. These scammers may contact you via phone, text, or email, claiming you owe taxes or are eligible for some relief programs. Always be cautious about sharing your Social Security number, bank details, or sending money to settle any dubious tax claims.
