With the House Ways and Means Committee reviewing President Trump’s massive tax package starting next Tuesday, further information has been released which indicates how the bill could address the ability to exclude overtime wages, expand the state and local tax deduction limitation, and potentially eliminate personal electric vehicle credits
Overtime Wages
On May 6th, Senator Rob Portman (R-OH) introduced the Overtime Wages Tax Relief Act (S. 1606) as the first publicly provided framework to address President Trump’s campaign promise of excluding overtime wages from taxable income. Based on the proposal, a qualifying individual can exclude up to $10,000 in overtime compensation, or $20,000 in the case of a joint return.
The ability to fully deduct $10,000 (or $20,000 MFJ) in overtime compensation will only apply if the taxpayer has modified adjusted gross income that does not exceed $100,000 (or $200,000 in the case of joint return). The deduction is reduced by $50 for every $1,000 of adjusted gross income in excess of $100,000, allowing single taxpayers to receive a portion of the deduction when earning up to $300,000 or $600,000 for a joint return. For example, based on the current phase out, an eligible married filing joint return taxpayer would still receive a $5,000 overtime exclusion provided their modified AGI does not exceed $500,000.
Overtime compensation has been defined as compensation paid to the taxpayer which is at least 1.5 times the taxpayers regular rate and is in excess of the maximum number of hours specified in section 7 of the Fair Labor Standards Act of 1938, or a collective bargaining agreement that provides that the maximum number of hours is not less than 40 hours for a 7-day work week.
In addition, the deduction would apply to all taxpayers, regardless of whether they take the standard deduction or elect to itemize their deductions for purposes of calculating taxable income. Lastly, the required federal withholding tax payments for a taxpayer will be adjusted by the Secretary of Treasury to adjust for the overtime exclusion.
SALT CAP
It appears that the SALT cap will be one of the last tax issues to be resolved, as Republicans are still split on whether it should be adjusted. Currently, the House of Representatives consists of 220 Republicans and 213 Democrats, only allowing three Republican votes to be lost in order to approve the House tax reform bill. There are five representatives in the House who currently are unified to vote against the tax reform bill if the SALT cap is not modified, including Reps. Nick LaLota (New York), Andrew R. Garbarino (New York), Michael Lawler (New York), Tom Kean Jr. (New Jersey) and Young Kim (California).
Based on the Committee for a Responsible Federal Budget report, eliminating the SALT cap would cost approximately $85 billion per year. The price associated with the elimination of the SALT appears to be a non-starter as fiscal hawks, accounting for approximately 30 votes in the House, vehemently oppose elimination. Due to the large fiscal impact related to complete elimination, the discussions have been focused on increasing the SALT cap, with Speaker Johnson suggesting an increase to $30,000. However, the Tax Foundation’s report that a SALT cap of$15,000 for single filers ($30,000 for joint filers) would generally only impact high income earners, with over 85% of the benefit going to the top 10% of taxpayers, may still be a hurdle. In response to Speaker Johnsons $30,000 SALT cap discussion, Representative LaLota quickly dismissed a $30,000 cap, stating it would not pass the House.
As an alternative to elimination and an increase in the SALT cap, some representatives have suggested only providing the SALT deduction to taxpayers making less than a designated amount of income per year. Rep. Nicole Malliotakis (R-NY) recently told Politico that the elimination of SALT should only apply to individuals under $400,000 or $500,000 in annual income.
Electric Vehicle Credits
Speaker Johnson indicated that as part of the House tax reform bill[TK1] , the EV tax credit for personal vehicles will most likely be eliminated. While the initial estimate provided by the Congressional Budget Office in 2022 was only $7.5 billion over a 10 year period, some reports are indicating this cost to be significantly higher.
Under the Inflation Reduction Act, individual taxpayers could qualify for a new clean vehicle credit for purchases in 2023 and subsequent years, for a maximum amount of $7,500. However, to obtain the credit, individuals adjusted gross income could not exceed $150,000 for single taxpayers (or $300,000 for joint filers). In order to claim the credit, the vehicle must have been made by a qualified manufacturer and meet certain critical miner and battery components
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