Ask the Editor: Reader Questions, April 4 — The Tax Bill

Each week, in our new Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on the topic of Congress’s and President Trump’s tax agenda. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Q1: Tax Bill Forecast

Will Congress pass major tax changes this year? And if so, when?
Republican lawmakers in Congress and officials in Trump’s White House are in the midst of negotiations to extend the tax changes in President Trump’s 2017 Tax Cuts and Jobs Act that will automatically expire at the end of this year. They include lower individual income tax rates and wider tax brackets, higher standard deductions and child tax credits, bigger lifetime estate-and-gift-tax exemption, alternative minimum tax easings and much more.

The odds are very good that Congress will pass a tax package this year, despite a series of hurdles that they will have to overcome. These include:

• The cost of the bill
• Types of offsets
• What to do with the existing $10,000 cap on state and local tax write-offs on Schedule A of the Form 1040
• How to handle Trump’s other tax promises to specific groups of individuals, such as no tax on tips or overtime pay
• The razor-thin Republican majority in the House
• The less-than-60 GOP majority in the Senate, requiring Republicans to accomplish their agenda through the complicated budget reconciliation process and
• Non-tax issues related to the border security and defense provisions also included in the bill.

The possible timing of enactment of a tax package is sometime this summer. But it could drag into the fall. Representative Jason Smith (R-MO), the chair of the House Ways & Means Committee, has said the goal of House Republicans is to put a bill on President Trump’s desk by Memorial Day for him to sign. But that timing is aggressive, considering all the hurdles that need to be jumped. Most tax policy experts believe the second half of 2025 is a more realistic timeframe.
— Joy Taylor, Editor The Kiplinger Tax Letter

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Q2: Social Security benefits

Will the tax bill make Social Security benefits fully tax-free for federal income tax purposes?
No, unfortunately, that won’t happen, much to the dismay of Social Security recipients, many of whom currently pay federal income tax on up to 85% of their Social Security benefits, depending on their provisional income. Trump has vowed to end all federal income tax on the benefits, which would put a dent in the Social Security Trust Fund, from which these monthly benefits are paid. Although most federal income tax receipts go to the government’s general revenues, income tax paid on Social Security benefits is targeted for the trust funds that pay out Social Security and Medicare benefits. Nearly $50 billion from income taxes to Social Security benefits was allocated to the Social Security Trust Fund in 2023.

Congressional Republicans are using the budget reconciliation process to circumvent the 60-vote filibuster rule in the Senate. Under this process, only a 51-vote majority is needed to pass legislation in the upper chamber. But there are technical rules involved with budget reconciliation. One major rule is that the bill’s provisions can’t increase federal deficits outside of a 10-year window. Another rule is that you can’t use budget reconciliation on anything directly affecting Social Security. So any proposal to change the federal taxation of Social Security benefits cannot properly be included in a budget reconciliation bill.

Instead, congressional GOP taxwriters are looking at other ways to provide tax benefits for seniors. One possible alternative is to increase the additional standard deduction amount for taxpayers who are 65 and older
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Muni bond interest

I heard that lawmakers working on the tax package are thinking about eliminating the tax-free interest break for owners of state and local bonds (munis). Is this accurate, and what’s the risk that this break will be axed?
Currently, interest earned on munis is tax-exempt for federal income tax purposes. Repealing this exemption is an option for raising revenue that was included in an extensive list of revenue-saving options released earlier this year by the House Budget Committee. And recently, Stephen Moore, an informal economic adviser to Trump, said that nixing the tax break for muni investors was currently in play in the Republican tax negotiations on Capitol Hill. This in and of itself doesn’t mean that this popular break will be eliminated. States and local governments rely on munis to fund all sorts of infrastructure projects. And powerful lobbying groups will push Congress hard to keep the tax break for muni investors. We’ll just have to see how the tax bill unfolds over time before we fully know the fate of the muni interest exemption.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Estate Tax

What’s going to happen with the estate tax in the tax package that Congress is working on?
The federal lifetime estate-and-gift-tax exemption for 2024 deaths is $13,610,000, and the highest estate tax rate is 40%. The 2025 exemption is $13,990,000. After 2025, this figure is expected to drop to $7 million or so, unless Congress acts.

We do think the most likely option congressional Republicans will take in the upcoming tax bill is to keep things as they are, meaning extend the current $13,990,000 lifetime estate-and-gift-tax exemption (with annual inflation increases) and the top 40% tax rate. Trump wants to extend the tax cuts in his 2017 law, and this promise would almost certainly include the current lifetime estate-and-gift-tax exemption.

Whether there could be additional easings remains to be seen. Repealing the estate tax and the generation-skipping transfer tax is an idea that always draws strong Republican support. Another possibility is to lower the tax rate and/or raise the exemption amount. The authors of Project 2025 proposed a federal estate tax rate of no higher than 20%. And some Republican lawmakers have talked about doubling the amount of the lifetime estate-and-gift-tax exemption.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Income Tax Repeal

I heard that some Republicans want to repeal the federal income tax. How likely is it that they’ll be able to do this in the tax bill they’re currently working on?
The federal income tax isn’t going away anytime soon. It is true that some Republicans in Congress support proposals to end the U.S. federal income tax and replace it with a consumption-based tax. Even President Trump has briefly talked about ending income taxes. Despite this, as White House officials and congressional Republican taxwriters debate about what will or won’t be in a tax bill this year that would generally extend expiring tax provisions, income tax repeal isn’t on the table. It’s been around since 1913, when President Wilson signed it into law eight months after the 16th Amendment was ratified by the states. More than 110 years later, the federal income tax won’t be repealed, at least for a while.

I’ll also address some recent comments by Commerce Secretary Howard Lutnick. He first said that Trump wants to eliminate federal income taxes for individuals who earn less than $150,000. Sounds good, right? But there’s a big condition attached to this. Lutnick later clarified that this tax cut plan is aspirational and would only be pursued in the future when, or if, the federal government could achieve a balanced budget. The last time the budget was balanced was under then-President Bill Clinton’s administration. Also, given that the federal deficit currently exceeds $36 trillion and is expected to go even higher if Republican lawmakers can get their tax package passed, the feasibility of the U.S. having a balanced budget anytime soon is extremely low.
— Joy Taylor, Editor The Kiplinger Tax Letter

More on Ask the Editor

We have already received many questions from readers on topics such as figuring tax basis when you sell a converted rental home, tax considerations when owning master limited partnership units in an IRA, distributions from Roth IRAs, whether internet scam victims can deduct a theft loss, and much more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Subscribers of The Kiplinger Tax Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter. (Get a free issue of The Kiplinger Tax Letter or subscribe.)