The year 2025 is poised to be a landmark year for tax legislation in the United States. With the White House, House, and Senate all under the control of the same party, the prospects for significant tax reforms are higher than ever. This scenario is reminiscent of the first year of Donald Trump’s initial term, during which the Tax Cuts and Jobs Act (TCJA) was passed. As we look ahead, it is crucial to understand the potential changes on the horizon and their implications for individuals and businesses alike.
Key Focus Areas for 2025 Tax Legislation
Extension of TCJA Provisions
One of the primary focuses of the 2025 tax legislation is likely to be the extension of several provisions from the TCJA, many of which are set to expire after 2025. These include:
· Maintaining the Current Tax Rate Brackets: The current brackets, with a top rate of 37%, are set to continue, providing consistency for taxpayers.
· Standard Deduction: The elevated standard deduction has led to around 80% of taxpayers opting for it over itemizing. Its continuation would simplify tax filing for many.
· Elimination of Personal Exemption and Miscellaneous Deductions: Provisions such as the personal exemption and deductions for unreimbursed employee business expenses and tax preparation fees are expected to remain eliminated.
· Charitable Contributions and Mortgage Interest: The current limits on charitable contributions (60% of AGI) and mortgage interest deductions ($750,000) are likely to continue.
· Child Tax Credit and AMT: The $2,000 Child Tax Credit and the more limited individual Alternative Minimum Tax are set to be maintained.
· Estate and Gift Tax Exclusion: The high exclusion amount, set at $13,990,000 for 2025, is expected to remain unchanged.
· State & Local Tax (SALT) Limit: The TCJA also included the $10,000 limit on the state and local tax deduction. Trump has mentioned perhaps letting that limit expire. Other proposals include at least doubling it for married filing jointly to $10,000 for each spouse or otherwise increasing the limit. This will be a contentious area of law that will be hard fought and negotiated.
· Qualified Business Income Deduction: The TCJA provided a provision that allows most flow through businesses (S Corps, partnerships and sole proprietorships) to exclude 20% of their income. This provision has grown in popularity and has helped many small businesses. This will be a high target to extend under the Trump administration.
Several business provisions are also already phasing down. Republicans included retroactively extending these provisions in the Tax Relief for American Families and Workers bill in 2024. However, that bill failed to pass the Senate. These include:
Restoration of 100% deduction for research and experimentation expenses;
Restoration of 100% bonus depreciation, currently phasing down to 60% in 2024 and 40% in 2025; and,
Restoration of the business interest deduction limitation to not include adjustments for depreciation, depletion and amortization.
Trump’s Campaign Proposals
President-elect Trump has introduced several tax-related proposals during his campaign. While many of them lack detailed implementation plans, they provide insight into potential changes:
· No Taxation on Tip Income: This proposal would favor workers receiving tips but could complicate tax administration. This proposal would be very expensive and complicate the passage of the TCJA extension.
· No Taxation on Overtime: Exempting overtime pay from taxation raises questions about its definition and potential economic impacts. This proposal would be very expensive and complicate the passage of the TCJA extension.
· No Taxation on Social Security Benefits: Simplifying the tax code for retirees, this proposal may accelerate the depletion of the Social Security Trust Fund. In addition to the cost, this provision will need the full support of the Senate to pass and is unlikely to have the necessary support in 2025.
· Deduction of Car Loan Interest: Similar to the home mortgage interest deduction, this would help more taxpayers qualify for itemized deductions. Although this provision will gain popularity, it is expensive and seems to unravel the tax policy in place for the past 40 years.
· Corporate Income Tax Reduction: Lowering the rate from 21% to potentially 18% or 15% for domestic manufacturers would be an expensive but potentially stimulating provision. This provision is expensive and will likely be dropped as Congress has to balance deficit concerns.
· Tariffs: Trumps has proposed a variety of tariffs to raise revenue. These tariffs can mostly be implemented through executive order which can expedite these efforts. Trump has also suggested that tariffs could at some point replace the U.S. income tax, although it is more likely that a border adjustment tax regime would be preferrable. Again, many commentators doubt that it could raise sufficient revenue. Tariffs are more regressive than the current income tax and most economists fear the inflationary impact of such a taxing policy.
Challenges and Considerations
While the potential for significant tax reforms is high, several challenges and considerations must be addressed:
· Budget Reconciliation: Republicans will need to agree on a budget resolution to use reconciliation, avoiding the Senate filibuster but requiring near-unanimous support within the party.
· Deficit Concerns: Many of the proposed tax cuts are costly, raising concerns about increasing the federal deficit.
· Legislative Complexity: Crafting the legislation will be challenging, with numerous provisions to balance and potential opposition from within the party.
Additional Insights
Economic Impact
Analysts suggest that while tax cuts can stimulate economic growth, they also risk increasing the national debt if not offset by spending cuts or increased revenue from other sources. The TCJA, passed in 2017, significantly altered the tax landscape, reducing corporate tax rates and changing individual tax brackets. Its long-term effects are still debated among economists.
Public Opinion
Tax policy remains a contentious issue, with varying opinions on the best approach to stimulate the economy and ensure fiscal responsibility. Public sentiment will play a crucial role in shaping the final legislation.
Conclusion
The discussion points around 2025 tax legislation are likely to revolve around extending the TCJA provisions and incorporating Trump’s campaign proposals. Although the negotiations will be challenging, the likelihood of significant tax legislation being enacted in 2025 is high. As we move forward, we will continue to monitor its progress along with the legislative process to understand the potential impacts on our financial landscape. We will continue to keep you apprised as the year develops.
