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As 2025 is officially underway, there are significant unknowns regarding the future of the U.S. tax landscape. The current tax system, largely shaped by the Tax Cuts and Jobs Act (TCJA) of 2017, is set to undergo substantial modifications due to the scheduled expiration of several key provisions by the end of 2025. This impending shift has sparked discussion among policymakers, economists, and taxpayers alike, as the potential impacts could be far-reaching for both individuals and businesses.

The TCJA, signed into law by President Donald Trump during his first term, introduced sweeping changes to the tax code, including lower individual tax rates, an increased standard deduction, and a reduced corporate tax rate. However, many of these changes were designed to be temporary, with a sunset clause set for December 31, 2025. As this deadline approaches, there is growing uncertainty about the future of these tax provisions and what the post-2025 tax environment might look like.

Adding to this complexity is the re-election of Donald Trump in November for a second term. His presidency could significantly influence the direction of tax policy, potentially leading to efforts to extend or make permanent some of the TCJA provisions. All of this has created a dynamic and unpredictable tax policy landscape, with various stakeholders advocating for different approaches to address the looming changes.

The broader economic and political context also plays a crucial role in shaping these tax policy shifts. Factors such as the national debt, economic growth projections, and ongoing debates about income inequality and fiscal responsibility all contribute to the discussions surrounding tax reform. As we navigate this uncertainty, it’s clear that the decisions made in the coming years will have profound implications for taxpayers across the income spectrum, as well as for the U.S. economy overall.

Key Proposed Tax Changes for 2025

One of the key areas likely to see changes is individual income tax rates. Under Trump’s previous administration, the TCJA implemented lower tax rates across most brackets. President Trump may push to extend or make permanent these lower rates, which are currently set to expire at the end of 2025. This could mean continued tax relief for many Americans, particularly those in middle-income brackets. President Trump has also called for no tax on tips and overtime income, which could also significantly change the tax picture for millions of American workers.

The standard deduction, which nearly doubled under the TCJA, is another area that could see changes. President Trump’s policies have historically favored a higher standard deduction as a means of simplifying tax filing for many Americans. We might expect efforts to maintain or even increase the current standard deduction levels, which could benefit a significant portion of taxpayers who don’t itemize their deductions. Similarly, the child tax credit, which was expanded under the TCJA, might be a focus of Trump’s tax policy. Given his past support for family-friendly tax measures, we could see proposals to extend or enhance this credit beyond 2025. More specifically, President Trump has called for increased the child tax credit to $5,000 per child with no income limits (currently, it is $2,000 and only partially refundable and is scheduled to revert down to $1,000 after 2025).

For those who itemize deductions, one of the big changes from TCJA was capping the deduction for state and local taxes (SALT) at $10,000. While this was a compromise the first time around to pass the tax law in 2017, President Trump is now proposing that this cap be removed.

On the business front, Donald Trump could lead efforts to maintain or further reduce the corporate tax rate. The TCJA lowered the corporate rate from 35% to 21%, and Trump has previously indicated a desire to keep corporate taxes low to encourage business growth and investment. More specifically, he proposed cutting the corporate tax rate from 21% to 20% (and possibly15% for domestic manufacturing). We might also see attempts to preserve or expand business-friendly provisions such as full expensing of capital investments, which began phasing out in 2022 and ultimately expires at the end of 2026. These measures could have significant implications for business planning and investment strategies in the coming years.

Estate tax exemptions, which were substantially increased under the TCJA, are another area that could see attention from the Trump administration. For 2024, the estate and gift tax exemption is $13.61 million, and this amount is scheduled to revert back to the pre-TCJA amount of $5 million (and indexed for inflation) after 2025. This would effectively lower the threshold at which estates become taxable. Trump’s previous tax policies favored reducing the impact of estate taxes, so we might anticipate proposals to extend the higher exemption levels or potentially push for further reductions in estate tax burdens.

As we consider these potential changes, it’s important to note that any tax policy shifts would require congressional approval. Nonetheless, understanding these potential shifts is important for individuals and businesses alike as they plan for the future and navigate the evolving tax landscape.

Analysis of Potential Impact on Individuals and Businesses

The potential tax changes for 2025 could have far-reaching implications for both individuals and businesses. For individuals, the impact will likely vary across different income brackets. Those in middle to upper-middle income ranges might see the most significant changes, as the potential extension of lower tax rates and increased standard deductions could provide continued tax relief. For instance, a married couple filing jointly with an annual income of $100,000 might benefit from a lower effective tax rate and a higher standard deduction, potentially reducing their overall tax burden.

Changes to deductions and credits could also significantly affect individual taxpayers. The possible preservation or enhancement of the child tax credit could be particularly beneficial for families. Consider a family with two children under 17: under current TCJA provisions, they can claim up to $2,000 per child. If these credits are extended or expanded, it could mean thousands of dollars in tax savings for such families. However, the potential continuation of caps on state and local tax (SALT) deductions might negatively impact taxpayers in high-tax states, potentially offsetting some of the benefits from other tax reductions.

For businesses, the tax landscape could see equally significant shifts. The potential maintenance of the 21% corporate tax rate (or lowering to 20% as proposed) would be a boon for C corporations, allowing them to retain more earnings for reinvestment or shareholder distributions. Pass-through entities, such as S corporations and partnerships, might continue to benefit from the qualified business income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of their qualified business income. This could be particularly impactful for small to medium-sized businesses that make up a significant portion of the U.S. economy.

Retirement savings and investment strategies may also need to be reevaluated in light of these potential changes. The preservation of lower individual tax rates could change the attractiveness of traditional IRA and 401(k) contributions.  For Roth contributions specifically, these may become more appealing if taxpayers anticipate higher tax rates in retirement yet can contribute after-tax dollars now at a continued lower rate. Investors should also remain mindful of their approach to capital gains.  While it has been proposed that the current long-term capital gains rates remain from TCJA, any unexpected changes to this preferential treatment could impact investment holding periods and overall portfolio strategy.

Guidance for Preparing for Tax Changes

As we approach the potential tax changes, it’s crucial for both individuals and businesses to prepare strategically. One key approach is to consider accelerating income into years with potentially lower tax rates, while deferring deductions to years when they might be more valuable. For instance, business owners could consider accelerating revenue recognition or deferring certain expenses. Individuals could explore converting traditional IRAs to Roth IRAs, taking advantage of current lower tax rates before potential increases.

These impending changes bring both potential benefits and criticisms. Proponents argue that extending the TCJA provisions could stimulate economic growth by leaving more money in the hands of consumers and businesses. They contend that lower corporate tax rates encourage business investment and job creation, which could boost GDP growth and increase tax revenues through expanded economic activity. However, critics express concerns about the long-term impact on the national debt and argue that the benefits disproportionately favor higher-income individuals and large corporations. They worry that reduced government revenue could lead to cuts in essential services or increased borrowing. The expanded use of tariffs is also of concern amongst some critics who believe significant use of tariffs could lead to a re-emergence of high inflation.

In this evolving tax landscape, staying informed and adaptable is paramount. We recommend working closely with a tax professional and a qualified financial advisor, like our team at Tenet, to navigate these changes effectively as part of your comprehensive financial plan. Remember, while tax considerations are important, they should be part of a broader financial planning approach that aligns with your long-term goals and risk tolerance. As we move closer to 2025, remaining flexible and proactive in your financial planning will be key to optimizing your position in the face of any potential tax policy shifts.

 

 

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.  The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request.