Some Tax Breaks For Individuals May Go Away
Many tax breaks that were part of the Tax Reform Act of 2018 and existed before 2018 are on the potential chopping block. Below is a list of a few, along with an updated IRA Beneficiary Rule and 2025 retirement plan contributions for 401(K’s) and Individual Retirement Accounts.
Municipal Bond Interest
The tax-exempt status of municipal bonds could be repealed. The main appeal of municipal bonds has been their exempt status from federal taxes. The exemption allows the debt issuers to pay less interest than banks and other debt issuers. Depending on an investor’s tax rate, the after-tax net return could be higher on municipal bonds than on conventional debt. Repealing the exemption would force debt-issuing states, municipalities, and local governments to increase their borrowing costs. How will the states offset the added borrowing costs?
Child and Dependent Care tax credit
The child and dependent care tax credit for working parents and the head of household filing status could be repealed. No tax credit for dependent care will create higher out-of-pocket costs. The credit for 2024 was $3,000 for one child and $6,000 for two or more children. The credit loss would equate to $250 a month for one child and $500 per month for two or more children. Ouch!
Education breaks
The main credits and deductions available for secondary education could be eliminated, including the Lifetime Learning Credit, the American Opportunity tax credit, and the up-to-$2,500 above-the-line deduction for student loan interest could be repealed. Raising the hurdle to receive a secondary education for many potential students can restrict opportunities to compete for jobs in the global, technologically-driven future economy.
The State Tax And Local Tax (SALT) Deduction
Since 2018, taxpayers have been limited to a $10K yearly deduction for state, local, and property taxes. Californians who typically itemize their deductions are hit hard by this limitation. What changes are in store for this limitation is unclear, as many in Congress want a continuation of the restriction, and many want the repeal of the limitation to a full deduction. There should be some compromise with this one because many impacted states have wealthier people who make political contributions. We’ll see.
Update on Beneficiary IRA RMD rules
Many IRAs inherited after 2019 must be subject to a 10-year window. The IRA funds must be paid to the beneficiary within 10 years after the year of death. Spouses, minor children (until age 21), the chronically ill or disabled, and people not more than 10 years younger than the decedent are exempt from the 10-year rule.
If an IRA owner dies on or after his or her RMD start date, then IRA beneficiaries must withdraw at a minimum yearly RMD from the Inherited IRA. If the owner died in 2020, 2021, 2022, or 2023, the beneficiary won’t be penalized for not taking an annual RMD in 2021 – 2024. However, he or she must take an RMD starting in 2025, and the entire balance must be withdrawn within the 10-year rule.
2025 Retirement Plan Key Dollar Limits
The Maximum 401(K) Contribution $23,500
Catch Up For Ages 60 to 63 $11,250
Catch Up If Born Before 1976 $7,500
Traditional Roth and IRA Contribution Limit $7,000
Catch Up If Over Age 50 $1,000
Quality financial advice includes tax expertise in all main financial areas, such as retirement, investment, and estate planning. Please feel free to contact us at (925) 484-1671 or email at anthony@carrwealth.com if you have a question or would like to schedule a no-charge initial consultation. I look forward to hearing from you.
Tony Carr
