Tax Newsletter Edition 1
Hello Former 15.518ers:
Welcome to the first edition of this tax newsletter. I have thought about doing this for years, turns out this is a great time to start! The Big Beautiful Bill (BBB aka OBBB (O=One) ) was signed by the President on July 4. Many probably agree the bill isn’t completely beautiful (tax bills rarely are), but a tax bill of some sort was completely necessary this year. As you may recall from class, many (not all) provisions from the TCJA expired or changed either before or on 12/31/25.
There are some good things in the bill and some good international outcomes (in my opinion). But there are some worrying things in the bill as well - most notably the impact on the projected deficits and national debt.
Let’s tackle just a few things at a time.
[I should note this newsletter is not tax advice and the topics discussed are covered at a high-level. Before making decisions, consider your own specific facts and circumstances and check the details of the law.]
Three Individual Provisions
The SALT deduction cap. Prior to the TCJA (prior to 2018), taxpayers who itemized their deductions could deduct all the state and local taxes (SALT; including income and property taxes) they paid. It is important to note, however, that the benefit would sometimes be negated by overall limits on itemized deductions and/or the Alternative Minimum Tax (AMT: more on these issues in future editions). The TCJA put a direct limit of $10,000 on the SALT deduction. As I said in class, you may have heard your parents utter profanities about this limitation, and by now, you yourself may be cursing the SALT limitation (especially if you are in NY or CA). There are varying viewpoints on this limitation. One view is from the blue states. The blue states generally have relatively high state and local taxes, and the blue states argue the SALT cap was a limitation put on by Republicans to harm Democrats. Another view is that some states choose to have high state and local taxes and why should the states with low state and local taxes effectively subsidize (potentially via the US government) the high-tax states. (Which one of those you agree with might depend on what side of the aisle you are on; or you might think both are potentially true.) Yet another view is that allowing a deduction for state and local taxes paid prevents double taxation – that deduction prevents us from paying Federal taxes on the amount of income used to pay state and local taxes (and thus, we should be able to deduct in full). Finally, and most people agree with this one, is that the SALT deduction benefits relatively high-income people. There was a lot of lobbying from taxpayers on both sides of the aisle over the last 7 years to lift the limit from $10,000. The BBB raises the SALT deduction limit to $40,000 (through 2029) but it starts to “phase out” once income (Modified Adjusted Gross Income) reaches $500,000. This means that once a taxpayer’s income reaches $500,000, the limitation will be decreased (down to $10,000) as income rises. In other words, taxpayers with taxable incomes over $500,000 will not get the full $40,000.
Of course, the irony is that many of the people with state and local taxes over $40,000 also have incomes over $500,000. So…the $40,000 is not quite as generous as it sounds at first.
The BBB did not end what are known as ‘workarounds’ for passthrough businesses. After the TCJA, creative tax planners devised ways to have passthrough entities (S corporations, LLCs, LLPs, partnerships) pay state income taxes at the entity level and thus deduct those taxes at the entity level to avoid the SALT deduction limit for individuals. During the negotiations leading up to the BBB, there were proposals to end or limit the SALT deduction for businesses as well, including even C corporations (which they dubbed the C-SALT). In the end however, the C-SALT was not enacted nor were any rules to prevent the ‘workarounds’.
In my humble opinion, leaving the business deduction alone but imposing some limit on individuals is probably the right answer (but reasonable people, including you, could disagree of course).
Standard deduction: The standard deduction was raised in the BBB. For 2025, the standard deduction will be $31,500 for a married couple (filing jointly) and $15,750 for single filers (amounts will be adjusted for inflation annually). The standard deduction was doubled in the TCJA and bumped up a little in the BBB. This really simplifies taxes for a lot of people. Indeed, the Joint Committee on Taxation estimated that the number of filers who itemized deductions on their tax returns fell from 46.5 million in 2017 to just over 18 million in 2018, indicating that a large portion of taxpayers transitioned from itemizing to taking the standard deduction. In addition, raising the standard deduction resulted in fewer households having to pay Federal income taxes. One group that might not like the higher standard deduction is charities, because a charitable donation is an itemized deduction. Thus, more people taking the standard deduction means fewer people getting a tax benefit for donations to charity which probably leads to fewer charitable donations. So…
Charitable deduction: The BBB adds a charitable deduction for non-itemizers. Now in addition to taking the standard deduction, taxpayers can deduct charitable donations up to $1,000 for single taxpayers or $2,000 for married filing jointly taxpayers. This is “permanent” after 2025 (which does not actually mean permanent, it just means it is not currently scheduled to end).
That’s a wrap on the first edition. Hope it is useful!