Four weeks ago, the House of Representatives narrowly passed its version of tax reform legislation with a vote of 215 to 214. This sweeping bill, referred to as the One Big Beautiful Bill, encompasses various proposals aimed at modifying tax policies significantly. Among the notable provisions, it seeks to extend numerous expiring tax benefits from the 2017 Tax Cuts and Jobs Act (TCJA), introduce new tax incentives promised during the Trump campaign, eliminate clean-energy tax credits for individuals and businesses, and implement cuts to Medicaid to alleviate some of the bill's financial impact.

In response, the Senate has unveiled its own tax plan, which shares some similarities with the House bill. Like the House version, the Senate proposal aims to extend many of the expiring provisions from the TCJA, reduce energy credits, introduce new tax breaks, and scale back Medicaid funding. However, there are also significant differences that have drawn criticism from various factions within the Republican party. Before proceeding to a Senate vote on any package, negotiations will be necessary to resolve these discrepancies, though we will focus on the most significant distinctions here.

One notable point of contention is the deduction for state and local taxes (SALT) that individuals report on Schedule A of their Form 1040. The TCJA previously capped the SALT deduction at $10,000. The House bill proposes to increase this cap to $40,000, with the deduction gradually phasing out for taxpayers with modified adjusted gross incomes exceeding $500,000. Conversely, the Senate intends to maintain the cap at $10,000 permanently, describing this as a temporary measure while negotiations continue. The House bill's passage was significantly influenced by a deal reached between House GOP leaders and members from high-tax states who advocated for a higher cap. Senate leaders hope to find a compromise figure that could satisfy both sides, but if negotiations stall, a complete reconsideration may be necessary.

Both the House and Senate versions aim to retract the clean-energy tax benefits initially established under the 2022 Inflation Reduction Act. Nonetheless, the Senate's proposal generally allows for a more extended timeline before these credits are phased out. While both bills propose restoring three business tax breaks, the Senate plan aims for these to become permanent, including 100% bonus depreciation, immediate expense recognition for domestic research and development costs, and relaxed rules on interest deduction limits for larger firms. In contrast, the House bill would only reinstate these breaks through 2028.

Furthermore, two non-tax elements could create additional challenges. The Senate version suggests deeper cuts to Medicaid than the House version, and its proposal involves increasing the debt ceiling by $5 trillion, compared to $4 trillion in the House's plan.

Moving on to health care, individuals requiring long-term care may find that they can deduct unused costs as medical expenses on Schedule A of their Form 1040 if their total medical expenses exceed 7.5% of their adjusted gross income (AGI). Long-term care encompasses expenses related to in-home care, assisted living, and nursing home services for individuals who are chronically ill, meaning they require assistance with at least two daily activities for 90 days or longer. This classification also extends to individuals requiring substantial supervision due to conditions such as dementia. The chronic illness must be validated by a licensed healthcare professional.

For eligible individuals, the costs of lodging and meals at a nursing home or assisted living facility qualify as medical expenses if primarily due to medical care. Additionally, the premiums for long-term care insurance policies are also considered deductible medical expenses, with limits based on age. These limits increase with age, allowing taxpayers aged 71 or older to deduct up to $6,020, while younger filers can deduct lesser amounts down to $480 for those under 40. For self-employed individuals, long-term care premiums can be deducted on Schedule 1, and new tax breaks related to these premiums are set to take effect starting next year.

In terms of energy credits, homeowners who wish to take advantage of tax credits for energy-efficient home improvements should act swiftly. The House version seeks to eliminate these tax credits for improvements made after 2025, while the Senate aims to cut the credits for improvements made 181 days or more post-enactment. Since these credits can only be claimed in the year in which the improvements are completed, homeowners should prioritize these upgrades while the credits are still available.

Additionally, the One Big Beautiful Bill proposes an interest deduction for auto loans. This provision would allow individuals purchasing vehicles for personal use between 2025 and 2028 to deduct up to $10,000 in interest paid on their auto loans each year. This deduction is particularly beneficial for taxpayers who take the standard deduction, as well as those who itemize on Schedule A. However, it has income limits that phase out the deduction for modified adjusted gross incomes above $200,000 for joint filers and $100,000 for others.

Lastly, the bill introduces a proposal aimed at school choice for K-12 education by․․․