Update on legislative efforts to extend key provisions of the TCJA

As the expiration date of the Tax Cuts and Jobs Act (TCJA) approaches, significant legislative efforts are underway to extend key provisions of this landmark tax reform. Enacted in 2017, the TCJA brought sweeping changes to the tax code, affecting individuals, businesses, and estates. With many provisions set to expire at the end of 2025, lawmakers are considering a new bill to make several provisions permanent and introduce additional modifications.

The House Ways and Means Committee released the full legislative text for markup on May 12, titled “The One Big Beautiful Bill Act.” This bill passed the U.S. House of Representatives on May 22. Now, the bill will head to the Senate for consideration, where the Senate could make changes to provisions outlined below. Identical legislation must pass through both chambers before being signed into law. The Treasury Secretary has asked Congress to raise the debt ceiling before the scheduled August recess, setting a soft deadline for passing this bill.

Ten key provisions financial advisors should know

It is important to note that this legislation is not yet passed and is subject to change. The list below is also not exhaustive of all provisions.  

1. Permanent extension of certain TCJA provisions: 

• Individual federal Income tax rates: Permanently extended with inflation adjustments starting in 2026.
• Standard deductions: Increased standard deduction made permanent and starting in tax year 2025, temporarily expands the standard deduction by $1,000 for single filers, $1,500 for a head of household, and $2,000 for joint filers through tax year 2028.
• Cap on itemized deductions: Limits the value of itemized deductions to 35%. In most cases, individual taxpayers will get the full value of their itemized deductions, except for those in the highest (37%) individual income tax bracket.
• SALT (state and local taxes) deduction: The bill raises the cap to $40,000 starting in tax year 2025 per household (no difference between individuals and married filing jointly) up to income of $500,000 then phases down by 30%. Regardless of income level, all taxpayers would still be guaranteed a SALT deduction of $10,000. Both the cap and income level would increase by 1% annually through 2033.
• Alternative minimum tax (AMT): Increased exemption amounts and phase-out thresholds permanently extended, with a slight inflation adjustment from the original TCJA provision.
• Child tax credit: Permanently extends the increased child tax credit and temporarily increases the amount from $2,000 to $2,500 for tax years 2025 through 2028.
• Advisor action step: Review clients’ income levels and deductions to optimize tax benefits, including managing taxable income, maximizing or accelerating deductions, and taking advantage of Roth conversion opportunities.

2. Increased estate tax exemption: Permanently increases the exemption amount to $15 million per person and $30 million joint starting in 2026 and indexed for inflation thereafter.

• Advisor action step: Encourage clients to revisit their estate plans and gifting strategies.

3. Enhanced QBI pass-through deduction (Section 199A): Makes permanent and increases the deduction from 20% to 23% and expands qualifying activities for pass-through businesses such as sole proprietorships, partnerships, and S corporations.

• Advisor action step: Review clients’ business structures and income to maximize enhanced deductions.

4. Introduction of "Trump" Savings Accounts, formerly called MAGA (Money Savings Accounts for Growth and Advancement): The new tax bill introduces a new kind of child savings account, designed to help parents save for their children’s future. Starting in 2026, parents of any child under the age of eight can open a Trump Savings Account and contribute up to $5,000 annually in after-tax dollars, with the contribution limit indexed for inflation. Parents, relatives, and entities can fund the account until the beneficiary reaches 18.  

Key Features:

Access to funds: Account holders cannot take distributions until age 18. At that point, they can access up to 50% of the funds for higher education, training programs, small business loans, or first-time home purchases. At age 25, they can withdraw any amount up to the full balance for these purposes. At age 30, they have full access to the account for any purpose.

Tax treatment: Distributions for qualified purposes have the gains taxed as long-term capital gains, while distributions for other purposes have gains taxed as ordinary income.

$1,000 seeded account (pilot program): This is a federal pilot initiative that complements the Trump account but has distinct eligibility and funding rules. Children born between January 1, 2024, and December 31, 2028, will receive a one-time $1,000 deposit per child into a Trump account from the federal government. The $1,000 does not count towards the $5,000 annual contribution limit.

• Advisor Action Step: Prepare to answer questions about the potential for tax-advantaged growth and flexibility, while assisting clients on what type of account to fund first to meet a client’s goals.

5. 529s Use expansion: Expands the use of 529 plans to cover K–12 education to include homeschooling and post-secondary credentialing expenses such as certifications, licenses, and other professional qualifications.

• Advisor action step: Review clients’ education savings strategies.

6. Modifications to health savings accounts (HSAs): Introduces several key changes to HSAs including:

• Medicare Part A enrollees contributions: Individuals enrolled in Medicare Part A can now contribute to HSAs. Normally, penalty-free withdrawals from HSAs commence at age 65, but if funds are used by a Medicare Part A enrollee for non-qualified withdrawals, they would be subject to a penalty.
• Spousal catch-up contributions: Both spouses can make catch-up contributions to the same HSA.
• Additional contribution limits: Individuals who have AGI up to $75,000 annually or $150,000 in the case of families can contribute an additional $4,300 (or $8,550 family) each year to their HSA, indexed for inflation. Such additional amounts will phase out starting at $100,000 for individuals and $200,000 for joint filers.
• Gym memberships: HSAs can be used to pay for gym memberships up to a certain limit.
• Advisor action step: Review clients’ HSA eligibility and advise on tax advantages.

7. Enhanced standard deduction for seniors: Additional $4,000 standard deduction for each individual age 65 and older through 2028. The bill includes an enhanced deduction for seniors who are single filers with an AGI up to $75,000 and joint filers with an AGI up to $150,000, with a phase-out rate of 4% for income above these thresholds.

Advisor action step: Inform seniors about the potential enhanced deduction and incorporate income planning to attempt to reduce the taxable portion of a client’s Social Security benefits.

8. No tax on tips: Creates a new deduction for qualified tips received during the year. However, this excludes highly compensated individuals and those defined under Section 199A. 

• Advisor action step: Identify clients who can benefit and adjust tax planning strategies.

9. No tax on overtime: Proposes a deduction for qualified overtime compensation received during the year. The deduction applies to overtime that exceeds the employee’s regular rate and is available through 2028. Highly compensated employees are excluded, and the deduction is only available to non-itemizers.

• Advisor action step: Help clients track overtime earnings and maximize this deduction.

10. ABLE accounts tax proposal changes: Extends increased contribution limits and allows 529 plan rollovers, designed to help individuals with disabilities save for qualified expenses without jeopardizing their eligibility for public benefits.

• Advisor action step: Advise clients on the benefits of ABLE accounts and the Saver’s Credit.

Embracing tax policy changes

Tax policy is dynamic and subject to change. Advisors should focus on “no regrets” planning, making beneficial decisions regardless of future tax changes.

At Vanguard, we understand the complexities of tax-efficient investing and are committed to helping advisors and their clients navigate these changes. Our comprehensive suite of tax-efficient investment solutions is designed to maximize returns while minimizing tax liabilities. Together, we can help your clients achieve their financial goals with confidence, even in the face of an ever-changing tax landscape.

Important information:

All investments are subject to risk, including the possible loss of the money you invest.

Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice.