The Republicans will soon control all three branches of the federal government. What does that mean for taxes on individuals? Here's an overview of potential tax law changes the new Congress could bring to the table in 2025.
Many provisions of the Tax Cuts and Jobs Act (TCJA) that affect individual taxpayers are scheduled to expire after 2025, including:
Tax rates for ordinary income and short-term capital gains. The TCJA retained the seven tax rate brackets that existed under pre-TCJA law, but five rates are lower than before the law became effective in 2018. The favorable TCJA rates will probably be extended — and the top rate will likely stay at the current 37%.
Tax rates for LTCGs and qualified dividends. The TCJA retained the 0%, 15%, and 20% tax rates on net long-term capital gains (LTCGs) and qualified dividends. These rates aren't expected to change. However, some Republican lawmakers have proposed a 15% LTCG rate and indexing the tax basis of investments for inflation, which would reduce taxable gains.
AMT. The TCJA greatly reduced the odds that individual taxpayers will owe the alternative minimum tax (AMT). The law increased the AMT exemption and significantly increased the income levels at which the exemption begins to phase out. The favorable AMT provisions will probably be extended.
Standard deductions and personal and dependent exemptions. The TCJA dramatically increased standard deduction amounts. The increased amounts, with annual inflation adjustments, will probably be extended. However, the law also suspended personal and dependent exemption deductions. This unfavorable provision will also probably be extended.
SALT deductions. The TCJA limits itemized deductions for personal state and local income and property taxes (SALT) to a combined total of $10,000 ($5,000 for married couples who file separately). This provision is unpopular with politicians and constituents from high-tax states. It's possible that increasing the SALT deduction limits — or eliminating them — could draw bipartisan support. Another possibility is increasing the SALT deduction limit to $20,000 for married joint-filing couples. President-Elect Trump has expressed support for increasing (or eliminating) the SALT limit.
Deductions for home mortgage interest. The TCJA allows you to claim itemized deductions on up to $750,000 of mortgage debt incurred to buy or improve a first or second residence ($375,000 for married couples who file separately). Under prior law, the mortgage debt limit was $1 million ($500,000 for married couples who file separately). The TCJA also suspended previously allowed interest deductions on up to $100,000 of home equity loan balances. These unfavorable provisions will probably be extended.
Miscellaneous itemized deductions. The TCJA suspended write-offs for miscellaneous itemized expenses previously subject to the 2%-of-AGI deduction threshold. Examples include investment expenses and unreimbursed employee business expenses. This unfavorable provision will likely be extended.
Deductions for personal casualty and theft losses. The TCJA generally suspended itemized deductions for personal casualty and theft losses, except for losses due to federally declared disasters. It's currently unclear whether Congress supports extending this provision or allowing it to expire.
Deductions for moving expenses. The TCJA suspended deductions for moving expenses except for certain Armed Forces members. Before the TCJA, many taxpayers qualified to deduct allowable moving expenses "above the line," meaning they didn't have to itemize to claim the write-off. This unfavorable provision will probably be extended.
Employer-paid moving expenses. Before the TCJA, employer payments and reimbursements for eligible moving expenses were tax-free. The TCJA suspended this favorable treatment, except for certain Armed Forces members. Under current law, employer payments and reimbursements must be included in the recipient employee's taxable income and reported on Form W-2. This unfavorable TCJA provision is expected to be extended.
Limit on charitable deductions. Before the TCJA, the itemized deduction for cash contributions to public charities and certain private foundations was limited to 50% of adjusted gross income (AGI). The TCJA increased the limit to 60% of AGI. This favorable provision will probably be extended.
Child and dependent tax credits. The TCJA increased the maximum child credit to $2,000 per qualifying child (up from $1,000 under pre-TCJA law). Under the current rules, up to $1,700 can be refundable. That means taxpayers can collect it even when they don't owe any federal income tax. The income levels at which the child credit is phased out were significantly increased, allowing many more families with under-age-17 children to qualify for the credit. In addition, the TCJA established a new $500 credit for eligible dependents who aren't qualified children. These favorable provisions are likely to be extended. There's bipartisan support for potentially increasing the child credit, but any increase would likely come with eliminating the credit's refundability.
Estate and gift taxes. The TCJA retained the flat 40% tax rate on estates and gifts above the unified federal estate and gift tax exemption, but the exemption was increased significantly. The inflation-adjusted exemption is $13.61 million for 2024 and $13.99 million for 2025 (compared to $5.49 million for 2017). The higher unified federal exemption, with annual inflation adjustments, is likely to be extended — and there's even talk of making it permanent.
On the campaign trail, President-Elect Trump proposed various taxpayer-friendly changes without providing much detail on the rules and restrictions. Examples include:
Trump has also promised to dismantle the Inflation Reduction Act (IRA), including the consumer tax credit of up to $7,500 for electric vehicle purchases. He has vowed to cut unspent funds allocated for the IRA's tax incentives for clean energy projects. However, Republicans from districts and states with significant clean energy projects planned or underway may push back on a full repeal of the IRA. As a compromise, Congress might propose retaining some of the IRA tax credits or restricting them through tighter eligibility requirements.
Finally, the president-elect has repeatedly pledged to impose tariffs on imported goods. In his latest proposal, he stated that he would impose a 25% tariff on products from Canada and Mexico and additional tariffs on imports from China. During the campaign, he made several other proposals.
Can Republicans deliver on their campaign promises? It's currently unclear whether there will be enough consensus among members in the new Congress to enact all the changes that have been proposed. And Republicans could be forced to propose offsetting sources of tax revenue and/or reductions in government spending to rein in the mounting $36 trillion national debt. However, one thing is certain: 2025 will be a pivotal year for federal tax legislation. Contact your tax advisor to stay atop the latest developments and adjust your tax planning strategies as needed.
© 2024