The coming year will see significant discussions around individual tax legislation, influenced by various factors. While the future remains uncertain, recent election outcomes and upcoming expirations of key provisions will be pivotal in shaping the tax landscape. Our tax specialists have analyzed the major issues expected to influence individual tax rules in 2025.
Key Dynamics Impacting Tax Legislation
The 2024 election results have clarified a major piece of the puzzle—Republicans will hold the White House and majorities in both chambers of Congress starting in January 2025. With President-elect Donald Trump returning for a second term, the Republican Party is set to drive tax legislation discussions. However, the small Republican majorities in Congress suggest that the legislative path will be complex.
The most pressing driver for new tax legislation is the upcoming expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. Enacted in 2017, the TCJA broadly lowered taxes for both businesses and individuals. Due to the budget reconciliation process used to pass it, many provisions were designed to be temporary, with most individual tax changes set to expire by the end of 2025.
A key question as Congress begins deliberations is the overall cost that will be acceptable for extending the TCJA. Budget estimates suggest that extending these tax cuts could reduce federal revenues by several trillion dollars over the next decade. Once Congress establishes an acceptable cost threshold, decisions can be made about which TCJA provisions to extend, the length of extensions and the inclusion of non-TCJA tax initiatives.
Estate and Gift Tax Exemption
The estate and gift tax has been a focal point for Republican leaders. During the 2017 TCJA debates, Trump advocated for a complete repeal of the tax, but it was ultimately retained with the exemption doubled to $11.18 million in 2018 (now indexed to $13.99 million for 2025). This increased exemption is scheduled to expire at the end of 2025. Given Republican control, it is likely that an extension of the increased exemption will be pursued. However, as with other provisions, its fate will depend on broader budgetary considerations.
Tax Brackets and Pass-Through Business Income
The TCJA significantly altered individual tax brackets, including the elimination of the "marriage penalty" and a reduction of the top tax rate from 39.6% to 37%. Additionally, the qualified business income deduction (QBID) was introduced to reduce the effective tax rate on pass-through business income. Both the individual tax bracket changes and QBID are scheduled to expire at the end of 2025, potentially leading to higher tax rates for individuals and pass-through businesses if Congress does not act. An extension of these provisions is widely expected, but the details of such an extension remain uncertain.
Child Tax Credit
The child tax credit (CTC) is anticipated to be a central focus of individual tax legislation. The TCJA expanded the credit, increasing it from $1,000 to $2,000 and enhancing its refundability. Further temporary expansions occurred in 2021 under the American Rescue Plan Act (ARPA). Without intervention, the CTC will revert to its pre-TCJA form at the end of 2025. While there is bipartisan support for expanding the CTC, any changes will need to be balanced against budget constraints, given the significant cost of prior expansions.
Taxable Income Exemptions
During the 2024 election campaign, President-elect Trump proposed various income exclusions, including exemptions for tips, Social Security benefits and overtime pay. He also suggested exempting all U.S. citizens abroad, police officers, firefighters, veterans and active-duty military from income tax. However, the high cost of implementing these exclusions means they may face challenges in gaining full support from Congress without modifications to reduce their impact on federal revenues.
Standard Deduction, Itemized Deductions and Personal Exemptions
The TCJA nearly doubled the standard deduction while limiting certain itemized deductions, such as capping state and local taxes (SALT) at $10,000 and eliminating personal exemptions. These changes simplified individual income taxation for many. As these provisions are set to expire at the end of 2025, it is highly likely that Congress will look to extend them to avoid increasing the tax burden on individuals. However, any extension will need to align with overall budget considerations.
SALT Cap and Alternative Minimum Tax (AMT)
The $10,000 cap on SALT deductions has been one of the most contentious aspects of the TCJA. The cap is scheduled to expire at the end of 2025, which would be favorable for many taxpayers. However, the SALT cap generates significant federal revenue, making its removal a costly proposition. The interaction between SALT deductions and the alternative minimum tax (AMT), which is also scheduled to revert to pre-TCJA rules, further complicates the issue. The fate of the SALT cap will be a major point of debate in Congress.
Deductions Related to Natural Disasters
Congress is also expected to address disaster-related tax provisions. Currently, personal casualty losses are deductible only if they occur in a presidentially declared disaster area. Past legislation has provided broader relief, and there may be efforts in 2025 to reintroduce such measures. Additionally, President-elect Trump has suggested allowing taxpayers to deduct the cost of home generators to alleviate the impact of natural disasters, though no specific details have been provided.
Looking Ahead
The upcoming expiration of key TCJA provisions and the return of Republican control in Washington have set the stage for significant changes to individual tax legislation in 2025. While many aspects of the tax landscape remain uncertain, taxpayers can start preparing by:
1. Reviewing Estate and Gift Tax Plans: Given potential changes to exemptions, individuals should consider revisiting their estate planning strategies.
2. Modeling Potential Impacts: Understanding how the expiration of TCJA provisions could affect your tax situation will help you plan more effectively.
3. Staying Informed: Monitor developments as tax policy discussions progress. Being aware of upcoming changes will be critical in making timely financial decisions.
If you need help understanding how potential changes may affect your tax strategy, our team is here to provide guidance and tailored advice.
