On May 22, 2025, the U.S. House of Representatives narrowly passed the Budget Reconciliation Legislative Recommendations Related to Tax after making amendments. The bill is projected to increase the federal deficit over the 2025-2034 period by roughly US$3.8 trillion attributable to tax changes. The bulk of the fiscal impact is related to an extension of key provisions of the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025. The bill now goes to the Senate, where changes are likely. The goal is to have the bill passed by July 4, 2025.

Key tax provisions include:

• No tax on overtime earnings for the 2025 to 2028 tax years. Individuals who meet the existing definition of a “highly compensated employee” are ineligible to receive the deduction. For 2025, the income threshold to be considered a “highly compensated employee” is US$160,000.
• No tax on tips for the 2025 to 2028 tax years. Individuals who meet the existing definition of a “highly compensated employee” are ineligible to receive the deduction. For 2025, the income threshold to be considered a “highly compensated employee” is US$160,000.
• An increase in the standard income tax deduction for 2025 to US$16,000 (up from US$15,000) for an individual filer, US$24,000 for a head of household (up from US$22,500), and US$32,000 for married individuals filing a joint return (up from US$30,000). Cost-of-living adjustments thereafter.
• The ability to deduct annually up to US$10,000 of interest on passenger vehicle loans for the 2025 to 2028 tax years, and only on cars manufactured in the U.S. The deduction begins to be phased out for individuals with adjusted gross income exceeding US$100,000 (or, in the case of married individuals filing a joint return, US$200,000) and is fully eliminated when income is at least US$150,000 (US$250,000 in the case of a joint return).
• A new tax-preferred savings account for children. The federal government contribution consists of a one-time credit of US$1,000 for each child born after December 31, 2024 and before January 1, 2029 who is a U.S. citizen at birth. The contribution limit for a taxable year is $5,000 (adjusted for inflation annually). Distributions are not permitted from the account until the account beneficiary attains age 18.
• An increase in the maximum federal deduction allowed for State and Local Tax (SALT) – from US$10,000 to US$40,000 per household earning up to US$500,000 (US$250,000 for married taxpayers filing separately) starting in the 2025 tax year. For incomes above this limit, the deduction cap would be phased out to a minimum cap of $10,000. Both the US$40,000 cap and the income thresholds will increase by 1% annually through 2033. The SALT deduction includes property, income and sales taxes. Anyone that itemizes can deduct property taxes, but most choose between deducting their state and local income taxes or sales taxes.
• A 100% depreciation allowance for qualified production property acquired on or after January 20, 2025 and before January 1, 2030. Covers buildings that manufacture, produce, or refine tangible personal property.
• The ability of businesses to immediately deduct domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030.
• An increase in the qualified business income deduction rate from 20% to 23%.
• Termination or phasing out certain energy-related tax provisions, including tax credits for purchases of new and used electric vehicles for both individual and commercial use, home improvements and residential clean energy expenses, clean energy production and investment, carbon dioxide sequestration, clean hydrogen production, advanced manufacturing, and hydrogen storage and capture.

Overall, the net effect of the changes to the individual income tax under the bill is to reduce average tax rates on individual income relative to the present law by about 2.0 percentage points beginning in 2026. Effective marginal tax rates on wage and pass-through business income are also reduced by about 2.0 and 5.1 percentage points on average, respectively, over the 2026-2029 period, and reduced by about 1.5 and 4.0 percentage points on average, respectively over the 2030-2034 period. Increased business deductions generally decrease the effective marginal and average tax rates on business income; however, the repeal of clean electricity production and investment credits will increase effective marginal and average tax rates for some corporate and noncorporate firms.