During President Donald Trump’s first term, Republicans implemented significant tax cuts for both individuals and corporations. However, as the end of the year approaches, the individual tax rates introduced in the Tax Cuts and Jobs Act are set to expire, leading to increased tax liabilities for many households unless legislative action is taken. In response, lawmakers are considering a new tax reform bill aimed at maintaining current tax rates while also providing substantial benefits for American families.
This proposed bill seeks to prevent a tax increase for middle-income households by keeping the individual tax rates at their current levels. Additionally, it plans to raise the standard deduction to $16,000 for individuals and $32,000 for couples. According to an analysis by the Tax Policy Center, the combination of extending lower tax rates and introducing new tax breaks could result in an average savings of $2,900 per household by 2026. While approximately 80% of households are projected to benefit from these changes, it is expected that the top 20% of earners will receive the majority of the tax savings.
One of the most notable changes in the proposed tax reform is the increase in the maximum child tax credit, which would rise by 25% to $2,500 per child. This increase is designed to assist around 75% of households that qualify based on their income. However, it is important to note that low-income families will not have access to the full credit. The new threshold allows eligible parents earning up to $400,000 annually to claim the full benefit, which will remain at $2,500 for the next four years before adjusting for inflation in 2029. In 2024, an estimated 40 million households are expected to claim this credit. Unfortunately, the proposed changes would also mean that undocumented immigrants, even if their children are U.S. citizens, would no longer qualify for the child tax credit, disqualifying around 2 million American children.
The bill also aims to assist senior citizens by increasing their tax deductions. Seniors with an adjusted gross income of less than $75,000 (or $150,000 for couples) will see an additional $4,000 deduction for the next four years. Additionally, the legislation proposes raising the pass-through deduction for certain business incomes from 20% to 23%. This change primarily benefits high earners, with only 1 in 100 households in the lowest income group benefiting from the deduction, while 1 in 4 households in the top quintile would see advantages.
In a controversial measure, the bill proposes cuts of $715 billion to Medicaid, impacting one of the most critical social service programs in the country. This legislation would require Medicaid recipients above the federal poverty line to contribute to their healthcare costs, introduce work requirements for able-bodied childless adults, and increase verification processes for recipients. According to the nonpartisan Congressional Budget Office (CBO), this could lead to as many as 8.7 million people losing their Medicaid benefits.
Furthermore, states would face increased costs associated with providing and administering SNAP benefits, forcing them to decide between finding the funds to maintain benefits or cutting support for vulnerable populations. The CBO has indicated that low-income Americans may experience a decline in overall household finances as a result of these changes, despite receiving a small tax cut.
The proposed tax reform also seeks to roll back recent changes made under President Biden's administration regarding student loan forgiveness. This rollback is projected to save the government approximately $295 billion over the next decade. Additionally, there are ongoing discussions surrounding state and local tax deductions, which remain a contentious issue in the negotiations. If the bill passes the Senate, it is likely to increase the amount of state and local taxes that can be deducted from federal taxable income, although specific details remain uncertain.
Republicans are advocating for a significant increase in the cap for these deductions, potentially raising it from $10,000 to $40,000 for taxpayers earning less than $500,000 by 2025, with annual increases planned for the following decade. This proposal has drawn criticism for primarily benefiting high earners in states with high taxes.
As the legislative process continues, the implications of these tax reforms will be closely monitored, particularly regarding their impact on middle-income families and social services.
