Now that the November election is over and Trump and the Republicans will have control of the White House and Congress in 2025, what can we expect will happen with taxes? It is important to know that many of the Trump tax cuts from The Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to expire on January 1, 2026, reverting to the tax law before 2018. The expiration of TCJA may result in significantly higher taxes for many.
We expect Trump to push to extend many of the TCJA tax cuts beyond 2025. But first, let’s see how the legislation works. In order for legislation to be approved in the House, a simple majority vote is required. Republicans won 220 of the 435 House seats, but with certain House members being nominated to Trump administration positions, the number of Republican-held seats may be reduced. A majority vote requires 218 votes to approve any tax legislation.
The Senate is more complicated. Republicans hold 53 of the 100 Senate seats. While a majority vote in the Senate can approve legislation, most Senate decisions require 60 votes to avoid a filibuster. The filibuster is a Senator or group of senators exercising their right to unlimited debate. If pursued in earnest, it can keep a piece of Senate business off the floor indefinitely.
However, tax legislation can avoid a filibuster if it is part of a budget reconciliation bill. Budget reconciliation is a special procedure to expedite the passage of certain federal budget legislation in the Senate. The procedure overrides the Senate’s filibuster rules, limiting debate to 20 hours. Thereafter a simple majority of 51 or 50 votes plus the Vice President’s as the tiebreaker, can pass tax legislation. A reconciliation bill that increases the Federal deficit cannot extend past 10 years. TCJA was passed as a budget reconciliation bill, limited to 10 years.
We expect Trump will attempt to extend many of the TCJA tax cut provisions through a new budget reconciliation bill, though there may be some changes introduced as part of the negotiation process.
Individual Tax Provisions
- Individual tax rates and brackets: The current top tax rate is 37% for income over $609,350 for single persons and $731,200 for married individuals filing jointly. When TCJA expires in 2026, the top tax rate would be 39.6%. Trump proposes to extend the lower tax rates and make them permanent.
- Gift and estate tax exemption: For 2024 the gift and estate tax exemption is $13,610,000 and will increase to $13,990,000 in 2025. In 2026 the exemption is scheduled to be cut in half to about $7,200,000. Trump proposes to permanently retain the higher exemptions.
- Standard deduction: The standard deduction for single persons is $14,600 and $29,200 for married individuals filing jointly. When TCJA expires, the standard deduction would be cut in half. Trump proposes to continue the higher standard deduction.
- SALT deduction: The $10,000 deduction cap for state and local taxes would be eliminated by the Trump proposal.
- Interest itemized deductions: Personal interest deductions have been eliminated by TCJA other than home mortgage interest for mortgages up to $750,000. Trump proposes to retain the same mortgage interest deduction and allow interest deductions for loans on cars built in the U.S.
- Personal exemptions: The personal exemption was eliminated by TCJA. When TCJA expires personal exemptions would be back. If TCJA is extended, the personal exemptions would not be allowed.
- Child Tax Credit: Today the maximum child credit is $2,000 and part of the credit is refundable. In 2026, the credit would go back to $1,000. Trump proposes to increase the child tax credit to $5,000 with no income limit.
- 529 Tuition Savings Accounts: Trump proposes to expand qualified education expenses to homeschooling.
- Social Security: Trump proposes to eliminate income taxes on social security.
- Tips: Trump proposes to eliminate income tax and social security tax on tips.
- Overtime pay: Trump proposes to eliminate income tax on overtime pay.
Business Tax Provisions
- Bonus depreciation: TCJA allowed a 100% deduction for capital investments in new or used qualified property, including machinery, equipment, furnishings, and certain improvements to buildings. The 100% deduction has been phased down each year by 20 percentage points since 2022 and will be zero in 2027. Trump proposes to restore the 100% deduction.
- Research and development costs: Beginning in 2022, TCJA required R&D expenses to be capitalized and amortized over 5 years. Trump proposes to allow R&D expenses to be fully deductible in the year incurred.
- Tax on passthrough business income: Under TCJA, individuals, estates, and trusts can deduct up to 20% of qualified business income from passthrough businesses such as partnerships, LLCs S corporations, and proprietorships. Certain limitations apply. The deduction is set to expire in 2026 resulting in a significant increase in the tax on pass-through business income. Trump proposes to make the deduction permanent.
- Corporate tax rate: TCJA permanently decreased the corporate income tax rate to 21%. Trump proposes to lower the corporate tax rate to 15% for companies that manufacture their products in the U.S.
How Trump plans on paying for these tax cuts will be the subject of much debate. Trump has talked about using tariffs on imported goods to cover the cost of his tax proposals. It will be interesting to see how the politics plays out.
We will keep you informed of developments. Stay tuned!
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