Many taxpayers might notice a bit more money in their wallets over the coming years due to a tax and spending reduction plan that Republicans aim to finalize soon.
Recently, the House Methods and Instructions Committee approved a bill that incorporates nearly all individual income tax credits from the 2017 Taxation and Employment Act. These benefits might not stand out to taxpayers while they continue enjoying them. However, if these provisions eventually expire, many people could be caught off guard by a potential tax increase next year.
The proposal also aims to offer temporary tax relief to specific groups, including parents, seniors, and some low-wage workers.
Overall, most taxpayers are projected to see an average decline in their federal income tax rate over the next decade, with the exception of those earning the least.
For example, households with incomes between $60,000 and $80,000 are expected to see an average tax rate drop to 11.4% by 2027, down from 13.1% under current regulations. Meanwhile, those earning more than $1 million will experience a decrease from 31.1% to 28.3%.
On the flip side, individuals making below $15,000 might see an increase in their tax rate, rising to 4.8% from 4%, primarily due to the expiration of boosted premium subsidies under the Affordable Care Act.
The tax measures in this package could still undergo changes before a full vote in the House, leaving room for further Senate amendments.
Additionally, the law includes various provisions that might negatively impact some Americans, including cuts to Medicaid and food assistance, the removal of tax credits for electric vehicles and energy-efficient appliances, and a reconfiguration of the federal student loan system.
Among those who might benefit from the proposed tax credits are:
Parents could see an increase in the child tax credit from 2025 to 2028, with amounts rising from $2,000 to $2,500 for married couples earning up to $200,000, and up to $400,000. However, fewer families may be able to take advantage of this as it now requires children to have a Social Security number.
Low- and middle-income seniors are expected to benefit from a $4,000 increase in the standard deduction during the 2025-2028 period. But, this will phase out for individuals earning above $75,000 and couples making double that. This measure substitutes for the promise made by former President Donald Trump to eliminate taxes on Social Security benefits.
Certain taxpayers will be able to deduct income earned through tips, fulfilling a significant Trump campaign promise. However, this only applies to traditional tipping jobs and will be effective from 2025 to 2028, excluding those making more than $160,000 in 2025.
For the next four years, many hourly employees won’t have to pay federal income taxes on overtime pay. This also applies to those who are not categorized as highly compensated, continuing a Trump-era commitment.
Additionally, taxpayers with car loans can deduct up to $10,000 in interest each year from 2025 to 2028. But, tax credits for married couples earning over $100,000 and $200,000 will begin to be phased out. This, too, was part of Trump’s campaign promises and applies to those who own passenger cars made in the U.S.
