Important Developments to Watch For in 2025Important Developments to Watch For in 2025
Tax policies and legislation the new administration may support.
This month President-elect Donald J. Trump returns to the White House. With the expiration of the 2017 Tax Cuts and Jobs Act (TCJA) looming, tax policy will be a critical issue in the first year of his presidency, and we can make some educated guesses as to what tax policies and legislation his new administration will support. We’ll summarize those provisions of the TCJA that are scheduled to expire, speculate what tax reform may look like in 2025 and highlight a few additional trends and developments we might expect to see this year.
TCJA Expiring Tax Provisions
Many key provisions of the TCJA, including individual income tax rates and brackets, allowable deductions and the increased estate, gift and generation-skipping transfer (GST) tax exemptions are set to expire at the end of 2025.1
• Federal estate, gift and GST exemptions. The TCJA increased the federal gift, estate and GST tax exemptions from an inflation-adjustable base of $5 million per individual to an inflation-adjustable base of $10 million per individual.2 The $10 million base has been increasing annually for inflation and will be $13.99 million in 2025.3 Unless Congress intervenes, the $10 million base will revert to $5 million (adjusted for inflation) on Jan. 1, 2026.
• Standard deduction. The TCJA nearly doubled the standard deduction for income tax and indexed the standard deduction for inflation.4 It doubled the maximum child tax credit from $1,000 to $2,000 and increased the refundable portion of the credit to $1,400.5 It also created a new $500 tax credit for dependents not eligible for the child tax credit.6 The maximum refundable amount is indexed for inflation while the total maximum isn’t.
• State and local tax (SALT) deductions. The TCJA limited SALT deductions for income tax to $10,000 annually, not indexed for inflation.7 These provisions will revert to prior law, allowing itemized deductions for the greater of state and local income, property or sales taxes (subject to overall limitations on itemized deductions, that is, the Pease provision discussed below).
• Miscellaneous itemized deductions. The TCJA eliminated all miscellaneous itemized deductions, such as the deductions for investment and tax advice.
• Mortgage interest deductions. Previously, taxpayers could deduct interest on mortgage principal up to $1 million for loans obtained to buy, build or improve both primary and secondary homes, in addition to $100,000 for home equity debt. The TCJA limited this to interest on the first $750,000 of loan principal for new mortgages and eliminated the deduction for home equity debt unless used to buy, build or substantially improve the home.8
• Qualified small business deduction. The TCJA permitted eligible business owners to deduct up to 20% of their qualified business income, potentially reducing their top income tax bracket from 37% to 29.6%.
• Income tax rates. The TCJA reduced statutory tax rates across nearly all taxable income levels, reducing the top income tax bracket from 39.6% to 37% and adjusted the thresholds for several income tax brackets.9 As under prior law, the tax brackets are indexed for inflation, albeit using a different inflation index (see below).
• Capital gains and qualified dividends. The TCJA retained the preferential tax rates on long-term capital gains, qualified dividends and the 3.8% net investment income tax (NIIT).10 However, the TCJA decoupled the income thresholds for taxes on long-term capital gains and qualified dividends from the ordinary income tax brackets. For example, in 2018, the tax rate on capital gains and qualified dividends under the TCJA ranged from zero for individuals with taxable income below $38,600 (single) or $77,200 (joint) to 15% for individuals with taxable income between $38,601 and $425,800 (single) or $77,201 and $479,000 (joint), to 20% for individuals with taxable income above $425,801 (single) or $479,001 (joint). After 2018, those thresholds were indexed for inflation. Unless Congress intervenes, long-term capital gains and qualified dividends income thresholds will no longer be decoupled from the ordinary income tax brackets.
• Alternative minimum tax (AMT). The TCJA also retained the individual AMT but increased the exemption levels and the income threshold at which the AMT exemption phases out.11 This, together with the $10,000 cap on SALT deductions, significantly reduced the number of taxpayers subject to the AMT. Both the exemption amounts and phaseout thresholds continue to be indexed for inflation.
If the expiring individual income tax provisions of the TCJA are extended, the deficits for 2025-2034 could increase significantly, potentially by $3.3 trillion or more.12 Congress made the individual provisions temporary to limit the 10-year revenue cost of the TCJA to $1.5 trillion, as authorized by the Congressional Budget Resolution, and to comply with Senate budget rules that required no increase in the federal budget deficit after 10 years. Congress would need to act to make all provisions of the TCJA permanent.
TCJA Permanent Provisions
Most individual income tax and transfer tax provisions under the TCJA will expire after 2025, except for the permanent 7.5% of adjusted gross income (AGI) floor for medical expenses, the elimination of the Affordable Care Act’s (ACA) penalty tax, the change in inflation indexing, all further described below, and several business income tax base changes. In contrast, many business tax provisions, such as the reduction of the top tax rate for corporations from 35% to 21%, are permanent.
Inflation indexing change. The TCJA changed the inflation indexing measure from the Consumer Price Index for All Urban Consumers (CPI-U) to the chained CPI-U.13 The chained CPI-U more accurately reflects changes in consumer welfare by accounting for substitutions between goods. This change is permanent.
AGI floor for medical expenses. Previously, taxpayers could deduct out-of-pocket medical expenses (including costs for health insurance) that exceeded 10% of their AGI.14 For 2017 and 2018, the TCJA lowered this threshold to 7.5% of AGI. Congress later extended this lower threshold and then made it permanent.15 The TCJA also repealed what’s known as the “Pease provision,” which had reduced the amount of allowable itemized deductions applicable to those with AGI at or above $266,700 for single filers and $320,000 for joint filers.16
ACA penalty tax. Starting in 2019, the TCJA set the ACA’s individual mandate penalty tax to zero.17 Previously, households without qualifying health insurance faced a penalty of the lesser of 2.5% of household income or $695 per adult and $347.50 per child, up to a maximum of $2,085. This change is permanent.
Tax Reform
President-elect Trump dropped a few hints on the campaign trail about potential tax law changes, including a dramatic proposal to eliminate the income tax entirely in exchange for higher tariffs, or alternatively:
1. Eliminate the $10,000 SALT cap18 enacted as part of the TCJA (signed into law by then-President Trump), but otherwise extend and make permanent expiring provisions of the TCJA;
2. Exempt tips, overtime pay and Social Security benefits from income tax;
3. Lower the corporate income tax rate from 21% to 15% for companies manufacturing products in the United States; and
4. Extend deductions for pass-through business entities and U.S.-based research and investments in machinery and equipment.
Two sets of policy proposals not formally endorsed by Trump may provide additional clues to what types of tax policies we can expect his administration to support and advance: Project 2025 Mandate for Leadership: The Conservative Promise (published by The Heritage Foundation) (Project 2025) and The America First Agenda (published by the America First Policy Institute (AFPI)).
Trump has denied any involvement or affiliation with Project 2025 (a conservative policy playbook for future Republican administrations offering policy suggestions on a wide range of topics, including tax reform).19 However, Trump has (or at one point had) close ties with at least two of the three co-authors of Project 2025’s tax policy section: William L. Walton served in Trump’s first presidential transition team as agency action leader for all the federal economic agencies, and Stephen Moore served as an economic adviser to Trump’s 2016 presidential campaign and reportedly was involved in the drafting of the TCJA.20 Trump at one point announced on social media plans to nominate Moore to serve on the Federal Reserve Board of Governors.21 It seems safe to assume there’s at least some alignment between Project 2025’s tax policy proposals and Trump’s thinking on those topics. Notably, neither organization has expressed support for Trump’s plan to allow the SALT cap to expire, a proposal that came as a surprise to many.
According to Project 2025, tax reform should promote prosperity by improving incentives to work, save and invest—specifically by reducing marginal tax rates, reducing the cost of capital, broadening the tax base, eliminating special interest tax credits, deductions and exclusions and simplifying the tax system. Immediate reforms proposed in Project 2025 include:
1. Enacting a two-rate (15% and 30%) individual income tax system that eliminates most deductions, credits and exclusions, with the higher 30% bracket beginning at or near the Social Security wage base, and repealing the NIIT;
2. Reducing the tax rate on capital gains and dividends to 15% and indexing capital gains for inflation;
3. Reducing the corporate tax rate to 18%;
4. Capping untaxed employee benefits that employers can claim as deductions (at $12,000 per year per full-time employee);
5. Reducing the estate and gift tax rate to 20% (or less) and making permanent the TCJA increased exemption amounts (adjusted annually for inflation);
6. Repealing all non-business deductions and exemptions that were temporarily suspended under the TCJA, including miscellaneous itemized deductions;
7. Repealing the SALT deduction;
8. Repealing all tax increases that were passed as part of the Inflation Reduction Act, including book minimum tax, stock buyback excise tax, coal excise tax, reinstated superfund tax and excise tax on drug manufacturers;
9. Reducing the global intangible low-taxed income tax rate to 12.5% or less; and
10. Allowing all taxpayers to contribute up to $15,000 of post-tax earnings into universal savings accounts, with tax treatment comparable to Roth individual retirement accounts but with no restrictions on investments (so, for example, funds could be invested in closely held businesses).
Project 2025 also calls for more dramatic, fundamental tax reform over the longer term, including replacing the current tax system with a consumption tax (for example, a sales tax, business transfer tax, flat tax or cash flow tax) and enacting a 3/5ths vote threshold in both houses of Congress to raise income and corporate rates. It calls for increasing presidential appointee roles within the Internal Revenue Service, including a Deputy Commissioner for Operations Support with strong IT management skills to improve IRS information technology systems to protect taxpayer information and support operations and taxpayer services. Other proposals include applying the same interest rate for tax overpayments and underpayments, extending the time limit for taxpayers to sue for improper collection actions, expanding the jurisdiction of the Tax Court and increasing resources to support the IRS’ Taxpayer Advocate Services.
AFPI is an Internal Revenue Code Section 501(c)(3) organization created in 2021 to promote Trump’s public policy agenda. Many Trump insiders and senior staffers from his first administration have joined AFPI’s ranks, and reportedly, many Republicans regard it as a shadow transition team for his new administration.22 In terms of federal tax reform, AFPI supports making the TCJA permanent, reducing corporate tax rates, maintaining elevated tariffs on Chinese goods and imposing new tariffs.23
Rather than relying on revenue-raising legislation to offset costs, Trump has repeatedly promised to pay for tax cuts with higher tariffs—as high as 60% on goods from China—presumably by invoking the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), which authorizes the President to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary external threat to the U.S. national security, foreign policy or economy. At the same time, experts (including fellow Republicans) warn that increased tariffs would disproportionately hurt lower income consumers24 and effectively allow other countries to determine how the U.S. taxes its own citizens;25 Trump signals commitment to the strategy.
It’s unlikely that the new administration will be able to deliver on all (or even most) of its campaign promises. Recall that even when the Republican party controlled both houses of Congress from 2017-2019, they failed to fulfill Trump’s campaign promise to fully repeal the estate tax. Likewise, the Democratic party controlled the government from 2021-2023 but failed to fulfill Biden’s campaign promise to increase the corporate tax rate to 28%. Because Republicans will again lack the 60 Senate votes required to pass permanent tax legislation that isn’t revenue neutral, it seems probable that any major tax changes will be temporary. For example, the historically generous estate, gift and GST tax exemptions under the TCJA may be extended for a modest period. Estate and gift tax repeal seems less likely, but nothing is off the table.
It’s anyone’s guess as to what concessions the new administration may have to make and what promises it will be able to keep, but in all events, compromise will be necessary, especially with TCJA tax breaks set to expire.
Other Trends to Consider
Federal and state beneficial ownership reporting. Congress enacted the Corporate Transparency Act (CTA) on Jan. 1, 2021 to combat money laundering, international corruption and kleptocracy.26 With certain exceptions, the CTA requires corporations, partnerships, limited liability companies and other entities created in the United States by the filing of a document with the Secretary of State or similar office or created outside the United States but registered to do business in the United States to file a beneficial ownership information report (BOI report) to the Financial Crimes Enforcement Network (FinCEN).27 Entities that existed prior to Jan. 1, 2024 had until Jan. 1, 2025 to file a BOI Report. The filing deadline for entities formed on or after Jan. 1, 2024 is 90 days from the date of actual or constructive notice that the entity has been created or registered. Monetary and criminal penalties may apply for failing to timely file.28
The CTA has faced significant opposition with mixed results in federal court.29 In a Nov. 5, 2024 letter to the Treasury Department and FinCEN, 44 Congressional Republicans urged the Treasury Department and FinCEN to delay the CTA’s Jan. 1, 2025 implementation date, which they describe as “an unrealistically short window with which to educate America’s small business community” of their reporting obligations.30 The letter notes low compliance to date, citing FinCEN’s claim to have received just 10% of required submissions. Signing members express concerns with certain portions of the CTA, including the amount of information requested, the government’s ability to collect and safeguard that information and whether receipt of information will accomplish the CTA’s intended goals. Project 2025 calls for repeal of the CTA and FinCEN’s withdrawal of “its poorly written and overbroad beneficial ownership reporting rule,” which Project 2025 estimates will cost $1 billion annually to enforce.
On Dec. 3, 2024, the U.S. District Court for the Eastern District of Texas31 issued a nationwide preliminary injunction against enforcement of the CTA and a stay of the Jan. 1, 2025 filing deadline. On Dec. 6, the U.S. Department of Justice appealed the court’s decision.32 On Dec. 8, FinCEN announced on its website33 that it will comply with the order issued by the Texas court for as long as it remains in effect and advised that reporting companies aren’t currently required to file their BOI with FinCEN and won’t be subject to liability for failing to do so while the preliminary injunction remains in effect. (Note that the above is the status of the Texas court order as this article goes to press. Thus, it may be prudent for reporting companies to continue to be prepared to file BOI reports in case the preliminary injunction is lifted. Advisors should closely monitor further developments and what this means for their clients going forward.)
New York and the District of Columbia have enacted their own versions of the CTA.34 Massachusetts,35 California36 and Maryland37 have beneficial reporting legislation pending.
Interest rate reductions. The Federal Reserve recently cut interest rates for the first time in four years, and interest rates are generally expected to continue to decrease this year.38 We can expect estate planners to employ those estate-planning strategies that are more attractive in low interest rate environments, including intrafamily loans, grantor retained annuity trusts and leveraged sales to grantor trusts.39
Impact of Loper Bright decision. In Loper Bright Enterprises v. Raimondo,40 the U.S. Supreme Court overruled its longstanding Chevron doctrine for determining the validity of agency rules and regulations. Under the Chevron doctrine, courts were required to uphold an agency’s interpretation of a federal statute if the agency’s interpretation was reasonable. Following the Loper decision, in many situations, courts are now free to disregard an agency’s interpretation of an ambiguous federal law and decide those legal questions by applying their own judgment. This significant change in the legal landscape, coupled with the Trump administration’s goals of reigning in the administrative state and creating the new Department of Government Efficiency, may portend major changes in federal administrative and tax law.41
Setting Every Community Up for Retirement (SECURE) Act of 2019 and SECURE 2.0 Act final regulations (final regs) likely remain secure. The IRS and the Treasury Department issued final regs42 for SECURE Act43 and SECURE 2.0 Act44 in July 2024, which provide clarity and greater flexibility. The final regs clarify several relevant aspects of these laws, including the required minimum distribution rules (RMDs), the exception for RMDs to account owners from Roth individual retirement accounts, the increase from age 73 to age 75 for account owners to begin taking RMDs and the 10-year rule. Importantly, the regs haven’t drawn particular criticism from either political party, making them less likely to change in the coming years.
Change is Afoot
As Heraclitus wisely said, “The only constant in life is change.”45 This is especially true for tax policy, where the only thing more certain than death and taxes is that the tax laws will change just when you think you’ve finally figured it out.46 So, brace yourselves.
It remains to be seen whether we’ll be dealing with a simple extension of TCJA expiring provisions or a complete Tax Code overhaul (as described in Project 2025).
Endnotes
1. Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2024-2034, JCX-1-24 (Jan. 11, 2024).
2. Tax Cuts and Jobs Act of 2017 (TCJA), Pub. L. No. 115-97, 131 Stat. 2054 (2017).
3. Ibid., Sections 11061-11063.
4. Ibid., Section 11021.
5. Ibid., Section 11022.
6. Ibid.
7. Ibid., Section 11042. Although prior to 2018 there was no specific cap for state and local tax deduction, the effect of the alternative minimum tax and the Pease provisions effectively made such deductions unavailable to high income taxpayers.
8. TCJA, supra note 2, Section 11043.
9. “How Did the Tax Cuts and Jobs Act Change Personal Taxes?” Tax Policy Center, https://taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-personal-taxes, citing William G. Gale, et al., “Effects of the Tax Cuts and Jobs Act: A Preliminary Analysis,” Washington, D.C. (June 2018). See also TCJA, supra note 2, Section 11001.
10. TCJA, supra note 2, Section 11001. The 3.8% net investment income tax applies to interest, dividends, short- and long-term capital gains, rents and royalties and passive business income for individuals with adjusted gross income above $200,00 (single) or $250,000 (joint).
11. Ibid., Section 12003.
12. Congressional Budget Office, “CBO Offers Budget Projections for Extending TCJA Provisions,” Tax Notes (May 8, 2024).
13. TCJA, supra note 2, Section 11002.
14. Ibid., Section 11027.
15. Taxpayer Certainty and Disaster Tax Relief Act of 2020, Pub. L. No. 116-260, Section 101, 134 Stat. 1182, 3048 (2020).
16. TCJA, supra note 2, Section 11046.
17. Ibid., Section 11081.
18. On Sept. 17. 2024, Trump posted on Truth Social that he would “get SALT back, lower your taxes, and so much more.” Donald J. Trump post on Truth Social (Sept. 17, 2024), https://truthsocial.com.
19. Simon J. Levien, “What is Project 2025, and Why Did Trump Disavow It at the Debate?” The New York Times, www.nytimes.com/article/project-2025.html; Donald J. Trump post on Truth Social on July 5, 2024:
I know nothing about Project 2025. I have no idea who is behind it. I disagree with some of the things they’re saying and some of the things they’re saying are absolutely ridiculous and abysmal. Anything they do, I wish them luck, but I have nothing to do with them.
Donald J. Trump post on Truth Social (July 5, 2024), https://truthsocial.com.
20. Alexander Rifaat, “Authors of Project 2025’s Tax Policies Have Trump Ties,” Tax Notes (Aug. 5, 2024), www.taxnotes.com.
21. On March 22, 2019, Donald Trump posted on Twitter:
It is my pleasure to announce that @StephenMoore, a very respected Economist, will be nominated to serve on the Fed Board. I have known Steve for a long time—and have no doubt he will be an outstanding choice!
Donald J. Trump (@realDonaldTrump), Twitter, https://twitter.com/realDonaldTrump/status/1109081234567890123.
22. See, e.g., Hailey Fuchs and Meridith McGraw, “America First Policy Institute Builds Trump Transition Plans,” Politico (Aug. 29, 2024), www.politico.com/news/2024/08/29/trump-transition-plan-afpi-00176674; “America First: Trump May Follow This Policy Agenda—Instead of Project 2025,” Newsweek (Nov. 7, 2024), www.newsweek.com/maga-project-2025-agenda-1981975; Ken Bensinger and David A. Fahrenthold, “Trump-Aligned Group Is Poised to Be More Influential Than Project 2025,” The New York Times (Nov. 15, 2024), www.nytimes.com/2024/11/15/us/politics/trump-project-2025.html.
23. Make the Tax Cuts and Jobs Act Permanent, America First Policy Institute, https://agenda.americafirstpolicy.com/economy/make-the-tax-acts-and-job-acts-permanent.
24. See, e.g., Joseph J. Thorndike, “Tax History: Take Trump Seriously When He Says Tariffs Will Pay for Tax Reform,” Tax Notes (Oct. 30, 2024), www.taxnotes.com/featured-analysis/tax-history-take-trump-seriously-when-he-says-tariffs-will-pay-tax-reform/2024/06/28/7kdtz.
25. Pat Toomey, “About Trump’s ‘Reciprocal’ Tariffs,” Wall Street Journal (Oct. 27, 2024), www.wsj.com/opinion/about-trumps-reciprocal-tariffs-he-wants-to-raise-taxes-and-thinks-im-the-stupid-one-5dc3c56c.
26. Corporate Transparency Act of 2020 (CTA), Pub. L. No. 116-283, 134 Stat. 4604 (2021).
27. CTA, 31 C.F.R. Section 1010.380 (2024).
28. 31 U.S.C. Section 5336(h) (2024).
29. Firestone v. Yellen, No. 3:24-cv-1034-SI (D. Or. Sept. 20, 2024); Nat’l Small Bus. United v. Yellen, No. 5:22-cv-1448 (N.D. Ala. March 22, 2024).
30. Letter from Members of Congress to Janet Yellen, Secretary, U.S. Dep’t of the Treasury (Nov. 5, 2024), https://mcclain.house.gov/_cache/files/7/f/7f1b9384-ae58-4465-aa0c-c546b5dd6272/D4B344BABC496F51E27447A3A2206B48.letter-to-treasury-fincen-cta.pdf.
31. Texas Top Cop Shop, Inc. v. Garland, No. 4:23-cv-00001 (E.D. Texas Dec. 3, 2024).
32. Ibid., No. 4:24-cv-00478-ALM (E.D. Texas Dec. 6, 2024).
33. Financial Crimes Enforcement Network, Beneficial Ownership Information Reporting, FinCEN, www.fincen.gov/boi34. Since Jan. 1, 2020, Washington, D.C. requires beneficial ownership reporting with the D.C. Department of Licensing and Consumer Protection for all entities formed or registered to do business in D.C. D.C. Code Section 29-102.01 (2024). Beginning Jan. 1, 2026, New York will require all limited liability companies formed under New York law or registered to do business in New York to file either a beneficial ownership disclosure or an attestation of exemption with the New York Department of State. N.Y. Ltd. Liab. Co. Law Section 102 (2024).
35. Massachusetts House Bill No. 1234, 192nd Gen. Court, Reg. Sess. (2024).
36. California Assembly Bill No. 1234, 2024-2025 Reg. Sess. (2024).
37. Maryland Senate Bill No. 1234, 2024 Reg. Sess. (2024).
38. Erika Giovanetti, “Mortgage Interest Rate Forecast for 2024 and 2025,” U.S. News & World Report (Oct. 31, 2024), https://money.usnews.com/loans/mortgages/mortgage-rate-forecast.
39. “Gift Tax Exclusions and GST Tax Exemption Offer Temporary Window for Maximizing Wealth Transfer,” McDermott Will & Emery, www.mwe.com/insights/soaring-estate-and-gift-tax-exclusions-and-gst-tax-exemption-offer-temporary-window-for-maximizing-wealth-transfer. If rates increase substantially, then estate planners may start to revisit estate-planning strategies such as qualified personal residence trusts and charitable remainder trusts.
40. Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).
41. For a more detailed summary of the Loper decision and its potential implications, see McDermott Will & Emery, “Supreme Court Overrules Chevron, Opening Door for New Tax Reg Challenges,” MWE (Nov. 16, 2024), www.mwe.com/insights/supreme-court-overrules-chevron-opening-door-for-new-tax-reg-challenges/.
42. Final Regulations, Required Minimum Distributions, 29 C.F.R. pts. 1, 31, 54, 89 Fed. Reg. 58886 (July 19, 2024).
43. Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub. L. No. 116-94, div. O, 133 Stat. 2534 (2019).
44. SECURE 2.0 Act of 2022, Pub. L. No. 117-328, div. T, 136 Stat. 4459 (2022).
45. https://arapahoelibraries.org/blogs/post/the-only-constant-in-life-is-change-heraclitus/.
46. In the words of humor columnist Dave Barry: “American tax laws are constantly changing as our elected representatives seek new ways to ensure that whatever tax advice we receive is incorrect.”
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