Congress is weighing a landmark bill that would extend and expand many provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire December 31, 2025. Although Republican lawmakers are currently debating the finer points of the so-called “Big Beautiful Bill,” Congress is likely to pass some form of the bill into law this year. Below is a breakdown of how certain key tax provisions currently in the bill would impact Connecticut estates, individuals, and businesses.
Estate Tax Exemption
The proposed bill would increase the estate tax exemption to $15 million, or $30 million for a married couple, indexed for inflation. That means a married couple could pass $30 million to their heirs without any federal estate taxes. This heightened threshold would make a large majority of Connecticut estates untaxable. As Connecticut’s state law typically mirrors federal law, the same threshold would likely apply to state taxes, as well. Currently, the threshold is $13.9 million for an individual, or $27.8 million for a married couple. However, should the bill fail and the exemption return to pre-2017 levels, individual estates above $7 million ($14 million for a married couple) would be subject to taxation, thus rendering a considerable number of Connecticut estates taxable.
But even if the overall bill stalls, a separate bill could be introduced and passed to extend and/or increase the estate tax exemption from the TCJA. Also called the “death tax,” the estate tax is universally unpopular across various income groups. Taxpayers loathe the concept of being taxed upon death after paying taxes their whole lives.
State and Local Tax (SALT) Deduction Cap
With respect to the bill’s income tax provisions, one of the most controversial points is the state and local tax (SALT) deduction cap. In 2017, the federal deduction for taxes paid to state and local governments was capped at $10,000. This mollified representatives from the red states, who complained they were subsidizing the prolific spending of higher-tax states, which are disproportionately blue. Needless to say, blue state representatives have been trying to reverse the SALT cap ever since.
The proposed bill would make the SALT deduction cap permanent, but it would offer a compromise of sorts by upping the cap from $10,000 to $40,000. However, beginning at an income of $250,000 for single filers or $500,000 for joint filers, the exemption would be reduced by 20%, with higher reductions phased in until the cap drops back to $10,000 for very high-income earners – who, incidentally, are essentially the only taxpayers whose SALT taxes would exceed $40,000. Many individuals in this ultra-high-income group make generous contributions to politicians, and blue state Republicans in the House dug in their heels, refusing to vote for the bill until the cap and phase-out threshold were increased to their current high levels.
Congressmembers are incentivized to reach an agreement, however, because if the bill fails, income tax rates will revert to pre-TCJA rates, which would increase the highest income tax rate from 37% to 39.6%. Plus, factoring in the pre-TCJA net investment income tax would push the highest tax rate to about 43%.
Increase to Standard Deduction
Many of the other income tax provisions are relatively noncontroversial and benefit middle-income people more than the wealthy. Notably, the bill proposes making the standard deduction increase from the TCJA permanent and upping it temporarily to $16,000 (through 2028) for individual filers or to $32,000 for joint filers. Many seniors, ages 65 and older, would be able to tack on an additional $4,000. As most people take the standard deduction, the increase would have broad appeal.
Other income tax provisions call for limiting itemized deductions to 35%, thus decreasing their value, and making the $750,000 limitation and the exclusion of interest on home equity loans for the home mortgage interest deduction permanent.
Small Business Owners
The bill would offer many tax benefits for small business owners. Importantly, it would make Section 199A permanent, allowing pass-through entities to deduct up to 20% of their income, while raising the 20% limit to 23%. This provision would permit business owners to pay their taxes on the entity level as opposed to the individual level, thus allowing them to sidestep SALT deduction limits.
The new bill also proposes restoring 100% depreciation in the first year for certain qualified property acquired during years 2025 through 2029 – as opposed to depreciating these assets over their useful life. The TCJA provided for 100% bonus depreciation, but it had phased down to 40% for property placed in service in 2025. The new bill also calls for temporarily extending 100% bonus depreciation to certain nonresidential real property used in activities such as manufacturing or production. The bill would further allow businesses to temporarily take an immediate deduction of domestic research and development (R&D) expenses, rather than amortizing them over five years.
While some iteration of the bill is likely to become law, there is certainly no guarantee. If Congress fails to reach an agreement and the TCJA is allowed to expire, there would be major tax implications for Connecticut estates, individuals, and businesses.
