Could it be that President Trump will Revise the Federal Tax System by 2025?

What Could Happen Regarding Taxes in 2025?

Will President Trump Alter the Federal Tax System in 2025?

Taxes are a significant topic for discussion in 2025. With numerous provisions from the Tax Cuts and Jobs Act (TCJA) set to expire on December 31, 2025, both individuals and businesses are left wondering how this could affect them. At this point, no one has a definitive answer, but based on what the President-elect and Republican leaders have been saying, we can make some educated guesses.

How New Tax Laws Get Implemented

Before any new tax laws can become effective, they need to go through three essential stages:

The House of Representatives: Currently, the Republicans have a slight majority in the House, holding 221 seats to the Democrats' 213. However, this advantage will temporarily diminish when 3 members leave to join the Trump administration, making the passage of major legislation even more difficult until vacancies are filled.
The Senate: The Republicans control 52 of the 100 seats, giving them a narrow majority.

3. The President: Once a tax bill passes both the House and Senate, President-elect Trump must sign the bill into law.

The Challenges of Passing Tax Laws

The Republican Party has ambitious objectives for 2025, but their marginal majority in Congress means they have little room for error. Alongside this, lawmakers have numerous pressing concerns to deal with:

Confirmation Hearings: The Senate must approve President-elect Trump’s new administration appointments.
Federal Budget: Congress must approve a budget for the fiscal year, which began on October 1, 2024.
Debt Ceiling: Lawmakers must address the debt ceiling by March 2025 to avoid a government shutdown or default.

These pressing matters could postpone progress on major tax law changes.

To tackle these challenges, Republicans will employ a procedure called reconciliation, allowing certain bills to pass in the Senate with a simple majority of 51 votes instead of the typical 60. This faster method, however, is subject to strict guidelines regarding what can be included. The Republicans might choose to separate their efforts into two separate bills:

The first bill, primarily focusing on immigration and energy, is anticipated to be introduced during the first 100 days and should be more straightforward to pass.
The second bill, largely centering on taxes, will be more challenging and might not be finalized until late 2025.

Prospective Tax Changes

Several ideas are being discussed for the tax bill, although nothing is set in stone. Below are some main points being debated:

Extending or Modifying TCJA Provisions: Various parts of the TCJA are set to expire at the end of 2025. These provisions could be extended as they are, modified, or replaced.
State and Local Tax (SALT) Deduction: The TCJA capped the SALT deduction at $10,000, which is unpopular in high-tax states such as New York and California. Certain lawmakers are advocating for an increase or elimination of this cap.
Corporate Taxes: Some Republicans advocate for reducing the corporate tax rate even further to stimulate business growth, while others are worried about the effect on federal revenue.
Child Tax Credit: Expanding the child tax credit is appealing to many lawmakers who aim to offer more support to families.
Overtime and Social Security Income: President-elect Trump has suggested exempting overtime pay from income tax, and eliminating income taxes on Social Security benefits.
Green Energy Subsidies: Some Republicans want to reduce subsidies for green energy projects that were included in the 2022 Inflation Reduction Act.
Tariffs: There is discussion about implementing tariffs on goods from specific countries, which could affect trade policy.
Duration of Tax Exemptions: Some lawmakers are considering shorter tax exemptions, like five years instead of ten, to accommodate more provisions within the bill without surpassing budget limits.

The challenge is that not all Republicans share these ideas. A small revolt of dissenters could hinder the bill's passage. For instance, representatives from high-tax states have stated they will not support the bill unless the SALT cap is addressed.

Implications for You

For taxpayers, 2025 is expected to be a year of uncertainty. While disruptive debates and negotiations are likely to take place, the outcome will not be clear until the summer or fall of 2025. In the meantime, here's how you can prepare:

Remain Informed: Keep track of updates regarding tax law changes. Having accurate information will be crucial when making plans.
Work with a Professional: A CPA or tax advisor can guide you through potential alterations and devise strategies to minimize your tax burden. This is especially crucial for individuals with substantial income, business owners, or taxpayers heavily impacted by expiring TCJA provisions.
Patience is Key: The legislative process takes time, and tax laws are no exception. Even if modifications aren't finalized until late in the year, planning in advance will put you in a better position.

Closing Remarks

Though it's impossible to predict the exact tax changes for 2025 with certainty, one thing is certain – change is forthcoming, and President-elect Trump is likely to push for significant changes. The TCJA impacts nearly every taxpayer, so any extensions, modifications, or new provisions will have extensive consequences. By staying informed and working with a trustworthy tax professional, you can prepare for whatever lies ahead.

In light of the potential expiration of numerous TCJA provisions at the end of 2025, individuals and businesses may need to consider how they will be affected by changes in money-related matters, such as taxes. The Republicans' narrow majority in Congress and numerous pressing concerns, including confirmation hearings and federal budget approval, could delay the passage of new tax laws.

If new tax laws are enacted, they might be split into two separate bills, with the first focusing on immigration and energy and the second addressing taxes, which may not be finalized until late 2025. Discussions are underway regarding the extension, modification, or replacement of TCJA provisions, changes to the SALT deduction, corporate tax rates, and child tax credits, among other options.

However, it's essential to remain patient and prepared, as the legislative process takes time, and uncertainty surrounding taxes is likely to persist until the summer or fall of 2025. Staying informed and working with a professional, such as a CPA or tax advisor, can help minimize tax burdens and devise strategies for the unforeseen changes that may arise.