The Future of the TCJA: What Taxpayers Can Expect Starting in 2025
The Tax Cuts and Jobs Act (TCJA) of 2017 brought sweeping changes to the U.S. tax system, benefiting both individuals and businesses with lower tax rates and enhanced deductions. According to the Tax Policy Center, approximately 65% of American households saw their taxes decrease in 2018, the first year the law took full effect. The largest benefits were seen among higher-income earners, but middle-income households also received an average tax cut of about $930. However, many of these provisions were designed to be temporary, and their expiration at the end of 2025 is now on the horizon.
With President Donald Trump’s re-election and the Republican Party holding a majority in Congress, there is renewed attention on the future of the TCJA. Will these provisions be extended or made permanent?
Key Provisions of the TCJA Set to Expire in 2025
Several individual tax provisions are scheduled to sunset after December 31, 2025, including:
- Individual Tax Rates: The TCJA lowered individual tax rates across income brackets, with the top rate reduced from 39.6% to 37%. Absent legislative action, these rates will revert to pre-TCJA levels.
- Standard Deduction and Personal Exemptions: The standard deduction was nearly doubled under the TCJA, while personal exemptions were eliminated. Post-2025, the standard deduction is set to decrease, and personal exemptions may return. Itemized deductions will be more relevant after TCJA.
- Child Tax Credit: The TCJA increased the child tax credit from $1,000 to $2,000 per qualifying child and raised the income thresholds for phase-out. These enhancements are slated to expire, reducing the credit amount and lowering the income thresholds.
- State and Local Tax (SALT) Deduction: The TCJA capped the SALT deduction at $10,000. This cap is set to expire, potentially restoring the full deduction. While many taxpayers, particularly in high-tax states, would welcome the removal of the cap, it has become a divisive issue.
- Estate Tax Lifetime Exemption Limit: The TCJA significantly increased the estate tax exemption, doubling it from $5.49 million to $11.18 million per individual, with annual adjustments for inflation. This higher exemption has allowed wealthy families to transfer significantly more wealth without incurring federal estate taxes. For 2025, the exemption will be $13.99 million per individual, providing a substantial opportunity for estate planning before the exemption sunsets at the end of the year. Anything over the current estate tax exemption would be taxed at 40% and this rate would not change with the expiration of the TCJA.
TCJA also introduced changes that complicated the tax code further for many. For example, while it reduced the impact of the Alternative Minimum Tax (AMT) by raising income thresholds and exemptions, it did not eliminate it entirely. High-income earners still face the complexity of calculating taxes under both the regular tax system and the AMT to determine their liability, adding layers of complication to a law that was intended to streamline the process.
Which Parts of the TCJA are Permanent?
Individuals: Most changes for individuals and estates will expire, but one rule is here to stay. The IRS now uses a slower method (called “chained CPI-U”) to adjust tax brackets and the standard deduction for inflation. This means these amounts will usually grow more slowly and it will take longer to push more income into higher tax brackets.
Corporations: Most changes for businesses, like the corporate tax rate cut from 35% to 21%, are permanent. However, one key rule isn’t: the 100% bonus depreciation (letting businesses deduct the full cost of certain assets upfront) started phasing out in 2023 and will disappear by 2027.
President Trump’s Tax Policy Agenda
President Trump has expressed intentions to extend the expiring provisions of the TCJA and introduce additional tax reforms:
- Permanent Extension of TCJA Provisions: The administration aims to make the individual tax cuts permanent, preventing the reversion to higher tax rates and less favorable deductions.
- Corporate Tax Rate Reduction: Proposals include further reducing the corporate tax rate from the current 21% to 20%, with considerations for a 15% rate for manufacturing companies to boost domestic production.
- Elimination of Taxes on Tips and Overtime: Plans are underway to exempt income from tips and overtime from taxation, aiming to increase take-home pay for workers in service industries.
With Republicans controlling Congress, the administration is likely to use a process called budget reconciliation. This allows tax laws to pass with a simple majority, avoiding the need for broader Senate approval. However, the challenge lies in balancing these tax cuts with the growing national debt, which raises concerns about fiscal responsibility. Congressional Budget Office estimated that the expiration of TCJA would raise government revenue by $4.6 trillion from fiscal year 2025 to 2034.
Implications for Taxpayers if the TCJA Provisions are Extended or Made Permanent:
Individual Taxpayers: Would continue to benefit from lower tax rates, an increased standard deduction, and an enhanced child tax credit.
Corporations: Could see sustained lower tax rates and potential additional reductions, encouraging investment and growth.
The re-election of President Trump and the Republican majority in Congress point to a strong likelihood of extending or solidifying key provisions of the TCJA. Many of these changes are anticipated to start taking shape as early as 2025.
Source:
https://crsreports.congress.gov/product/pdf/R/R47846
https://pro.bloombergtax.com/insights/federal-tax/what-is-the-future-of-the-tcja
https://www.cbo.gov/publication/59710
Ritu Jain
Financial Advisor
CEP®, EA