What is the Outlook for Tax Laws in 2025?

I am again both proud and honored to be co-author with Richard Wise on this article, which first appears in the St. Louis Law Journal Blog. Any errors are mine alone. Readers who want the full version, complete with footnotes, should check out the original.

During President Donald Trump’s first administration, Congress passed the Tax Cuts and Job Act of 2017 (TCJA). It is scheduled to sunset on December 31, 2025. If the TCJA sunsets, the relevant tax provisions will expire and the Internal Revenue Code will revert to its pre-2018 status.

If that were to happen, the following changes would occur:

Individual Income Taxes  

• The individual income tax rates would increase. Notably, the top tax rate would increase from 37% to 39.6%.
• Individual Standard Deduction: In the calculation of taxable income,  taxpayers subtract the standard deduction from their Adjusted Gross Income (AGI). In 2024, the standard deduction was $29,200 for married couples; the pre-2018 standard deduction was $13,000 for married couples.
• Personal Exemption: In calculation of taxable income, taxpayers subtract the number of personal exemptions for themselves, their spouse and dependents from their AGI.  The personal exemption under TCJA was reduced to zero; the personal exemption pre-TCJA was $4,150 per person.
• Child Tax Credit: The child tax credit allows taxpayers to reduce their federal income tax liability for each qualifying child. The TCJA set the amount at $2,000. The pre-2018 tax credit was $1,000 per child. Note: this is a dollar-for-dollar tax credit on an individual’s tax return.
• State and Local Tax Deduction (SALT): Currently, taxpayers who itemize their deductions are limited to claiming $10,000 in state and local income and property taxes under the TCJA. Under pre-TCJA provisions, the $10,000 cap did not apply and, hence, taxpayers will be able to deduct all eligible state and local income, sales, and property taxes. Note: the current administration is interested in removing the cap regardless of whether the TCJA is allowed to sunset.
• Mortgage Interest Deduction: Under TCJA, married taxpayers can deduct mortgage interest paid on the first $750,000 of mortgage debt. Returning to pre-TCJA status will increase the $750,000 to $1,000,000.
• Deduction for Pass-Through Business Income: Ordinarily, pass-through business owners are taxed at their ordinary income tax rates on such pass-through income. The TCJA created a deduction equal to 20% of qualified business income. This deduction will expire upon the expiration of the TCJA.
• Capitalization of Costs in a Trade or Business: A business generally must capitalize the cost of property used in a trade or business or held for the production of income and recover such costs through deductions for depreciation. For example, a business acquires a bulldozer for $500,000 with a depreciable life of 10 years. For 10 years, the business can deduct a depreciation expense of $50,000 per year. Under TCJA, a business was eligible to fully expense the purchase in the year the property was placed in service.  Accordingly, in year 1, the business could tax a business expense deduction of $500,000. This provision was phased down from 2022 to 2026.
• Estate and Gift Taxation: Estate and gift taxes are levied at a rate of 40% after excluding the applicable exclusion from taxation. For decedents who died in 2024, the exclusion amount was $13,610,000. This exclusion amount was set at $10,000,000 and adjusted annually for inflation. Pre – TCJA, the exclusion amount was $5,000,000, adjusted for inflation, which again will take effect upon the expiration of the TCJA.

What Proposed Tax Changes Are Under Discussion Now?

The new administration has announced that it is looking at some new proposals for changes to tax law.

• Social Security Tax: There are discussions about exempting Social Security benefits from income tax. In fact, at least one member of the U.S. House of Representatives has proposed such legislation.
• Tips: There is talk that the administration wants to exempt from taxation tips paid to retail service providers, although we have not seen any specific details. The consensus is that it would apply to restaurant waiters and waitresses.  A sidebar on this topic is how or if this would affect the base compensation paid to such workers. Would management pay the service workers less of a base pay (which is fully taxable) on the prospect that service workers would be able to keep more of their compensation derived from tips? It’s anyone’s guess until the administration issues specific proposed revisions to existing law.
• Overtime: There have been discussions that overtime compensation paid to hourly workers would be exempt from tax. Again, we are short on specifics. Might such an overtime exemption apply only to the 50% overtime payment, or if it would apply to the entire overtime compensation? Would such a change distort the labor market? For instance, would the labor market move to more hourly and non-exempt jobs if an adjustment is not made for salaried employees that are exempt from the Fair Labor Standards Act (FLSA) overtime rules? Would such a tax provision distort the labor market by employers relying more on overtime compensation than by hiring new workers?

In addition to the above considerations, Congress has to consider the estimated revenue effects of each provision under analysis and determine whether there should be corresponding provisions enacted to counter any projected revenue loss.

One takeaway from this article is that the reader should note how a change in tax policy may have a significant impact on the behavior of consumers and businesses. In some instances, tax policy is specifically designed to encourage a change in behavior.

 

This piece originally appeared in the St. Louis Law Journal blog.

Photo credit: Photo by Nataliya Vaitkevich, via Pexels.com