While the House Ways and Means Committee has indicated reviewing President Trump’s massive tax package on Tuesday next week, there has been further information released regarding how the bill could address the ability to exclude overtime wages, the expansion of the state and local tax deduction limitation, and the elimination of personal electric vehicle credits.
Overtime Wages
On May 6th, Senator Rob Portman (R-OH) introduced Overtime Wages Tax Relief Act (S. 1606) as the first framework publicly provided on how President Trump’s campaign promise of not taxing overtime wages would be applied. Based on the proposal, if an individual qualifies, they 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 MJF) 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 amount of the exclusion will start to be reduced if modified adjusted gross income exceeds $100,000. The deduction is reduced by $50 for every $1,000 the taxpayers adjusted gross income that exceeds $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 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 taxpayers that utilize the standard deduction or elect the itemized deduction 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 Republicans 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 discussing raising the SALT cap to $30,000. However, the Tax Foundation findings that increasing the SALT cap to $15,000 for single filers ($30,000 for joint filers) would generally only impact highest income earnings, 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 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 indicated an interest in 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, 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 are updating this estimate to be significantly higher.
Under the Inflation Reduction Act, individual taxpayer’s could qualify for a new clean vehicle credit if purchased in 2023 or after, 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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