Complex questions about individual tax rules are currently being considered as Republican leadership begins planning for tax legislation in 2025. The primary driver of those questions is the expiration of the Tax Cuts and Jobs Act (TCJA), which will occur at the end of 2025. The recent Republican sweep in the 2024 election suggests that an extension of many aspects of the TCJA is likely to occur. However, multiple factors will influence tax legislation over the coming year. While the ultimate conclusions are unknown, our tax specialists have reviewed the key issues that will shape the evolution of tax rules applicable to individual taxpayers.
Key dynamics impacting tax legislation
For most of 2024, the future of tax legislation was clouded by uncertainty about which presidential candidate would be in office beginning in January 2025. With the conclusion of the November election, that aspect has been clarified. The Republican Party will hold majorities in both the House and Senate beginning in January, and President-elect Trump will return to the White House. The congressional majorities are small, which presage a complex legislative path to come.
The main factor driving the need for federal tax legislation is the looming expiration of the TCJA. That legislation was enacted in 2017 under the first Trump administration and broadly provided tax cuts to both businesses and individual taxpayers. The procedural vehicle used to advance that legislation meant that many provisions were temporary. This specifically applied to most rules impacting individual taxpayers, which have a common expiration date of Dec. 31, 2025.
Congress faces many questions as it begins the legislative process in January. The most critical question relates to the overall cost that’s acceptable for an extension of the TCJA. Budget estimates indicate that a full extension of the tax cuts over the coming 10 years would reduce federal revenues by at least several trillion dollars, while other tax policy priorities could cost several trillion more. Once the total amount that Congress is willing to spend on tax legislation is determined, then policy choices can be negotiated about which TCJA items to extend, the duration of such extension, and which non-TCJA tax priorities to include.
The rest of this article examines several key individual tax rules that are expected to be considered in this process. Additional discussion of the business tax programs that may be balanced with these changes may be found in the companion article.
Estate and gift tax exemption
The estate and gift tax has long been a focus of Republican leaders. During 2017, Trump advocated for a full elimination of the estate and gift tax during the TCJA legislative debate. Senator John Thune (R-SD), the soon-to-be Senate majority leader has also maintained a similar view. Ultimately, that tax was retained, but the exemption was essentially doubled from $5.49 million in 2017 to $11.18 million in 2018. That exemption has been indexed for inflation, and the 2025 is scheduled to be $13.99 million. However, the doubled exemption is scheduled to expire at the end of 2025.
Under Republican control, it’s expected that the increased exemption will be extended in some form beyond 2025. That said, this provision will be subject to the same overall dynamics relating to budgetary costs as the rest of the tax legislation. Accordingly, taxpayers may wish to continue with their estate and gift tax planning efforts now to avoid surprises if there are modifications to any provisions that reduce the ability to transfer wealth in the future.
Tax brackets and pass-through business income
One of the most broadly applicable aspects of the TCJA was the widening of individual tax brackets, including the elimination of the marriage penalty, and the reduction in the tax rates applicable to most brackets. Those changes included a reduction in the top rate from 39.6 to 37.0%. Taken together, such changes provided broad-based tax cuts to individuals across all levels of income. Those changes are all set to expire at the end of 2025.
The TCJA also reduced the effective tax rate on certain pass-through income from partnerships, S corporations, and sole proprietors through the qualified business income deduction (QBID). By providing a 20% deduction against qualified business income, the effective tax rate on business income was further reduced. QBID has some complicated aspects and is discussed in depth in the business-focused article. That deduction is also scheduled to expire at the end of 2025. Elimination of QBID combined with an increase in the top tax rate bracket would increase the maximum tax rate on pass-through business income from 29.6% (80% of the 37% bracket) to 39.6%.
An extension of the TCJA tax brackets is generally expected to occur, but it’s currently unknown whether they will be able to be fully maintained in their current form. It’s also anticipated that QBID will be extended in at least some form to retain relative parity in business taxation between C corporations and pass-through entities.
Child tax credit
The child tax credit (CTC) has evolved continuously in recent years and is expected to be the primary focus of the tax credit discussion related to individual taxpayers. This was initially expanded and modified by the TCJA to make it more accessible to taxpayers, increase the maximum credit from $1,000 to $2,000, and increase its refundability. In early 2021, the American Rescue Plan Act (ARPA) further expanded the CTC on a temporary basis. The stalled Tax Relief for American Families and Workers Act (TRAFWA) would also have expanded the refundability of the CTC and extended the increased credit amount for both 2024 and 2025. At the conclusion of 2025, the CTC will revert to its pre-TCJA form. While there is bipartisan support for various expansions of the child tax credit even beyond its TCJA levels, the cost of those changes is substantial. For example, when the ARPA increased the child tax credit from $2,000 to $3,000 ($3,600 for children under age 6), the one-year cost was almost $110 billion.
Taxable income exemptions
While the TCJA didn’t create any significant exclusions of income from taxation, that hasn’t stopped this subject from being a key discussion point during the 2024 election cycle. As a candidate, Trump suggested an array of income exclusions such as tips, Social Security benefits, and overtime pay. He then went further to advocate fully exempting all U.S. citizens abroad, police officers, firefighters, veterans, and active-duty military from tax.
Any of the proposed exclusions from income would inflate the cost of tax legislation by a considerable degree, given the number of taxpayers with these types of income. It’s possible that these income exclusions could rival the cost of the entire extension of TCJA all by themselves. That likely creates an uphill battle for their enactment without significantly paring back the overall policy (e.g., a $10,000 exclusion from income rather than an unlimited exclusion). The discussion about tax brackets may also be implicated on this front. Modifying income thresholds at which tax brackets apply would have the effect of reducing the tax on those income sources even if the income isn’t fully excluded.
Standard deduction, itemized deductions, and personal exemptions
The TCJA also simplified certain aspects of individual income taxation. As a starting point, the standard deduction was almost doubled while the state and local tax deduction (SALT cap), discussed below, was limited, the maximum loan balance on the mortgage interest deduction was reduced, and miscellaneous itemized deductions were eliminated. These changes had the effect of reducing the volume of taxpayers that itemize deductions. Additionally, personal exemptions were eliminated, but the phase-out of overall deductions was eliminated. Taken together, these changes decreased total deductions available to higher-income taxpayers while increasing deductions available to most other taxpayers. Such changes are all set to expire at the end of 2025.
Extension of these changes beyond 2025 is highly likely to occur. Similar to the tax bracket discussion above, failure to extend these rules would increase the tax burden on many individuals across income levels. The reintroduction of things like personal exemptions could also add confusion as taxpayers grapple with rules that haven’t applied since the 2017 tax year. However, the key questions relate to the length of an extension and whether any additional modifications are implemented given the budget implications.
Trump has also proposed a deduction for interest on car loans, but no details of the proposal have been released.
SALT cap and alternative minimum tax (AMT)
The SALT cap is one of the more complicated aspects of the TCJA expiration. Beginning in 2018, the TCJA imposed a $10,000 annual limitation on the ability of individuals to deduct state and local tax payments. This was a revenue-raising aspect of the TCJA that has generated considerable attention across the country. At lower-income levels, the increased standard deduction typically offsets the impact of this limitation. At higher-income levels, the impact varies depending on the state of residence of a taxpayer and the tax burden imposed by the state and local taxing jurisdictions. The SALT cap is currently scheduled to expire at the end of 2025, which would be a taxpayer-favorable change.
Since enactment, various proposals to modify or eliminate the SALT cap have been contemplated by Congress. However, those proposals have consistently faced headwinds preventing their adoption. The first issue is that there are significant geographic disparities between taxpayers with respect to the SALT cap. That has reduced the number of members of Congress that are focused on the policy. The second issue is that the SALT cap raises a significant amount of tax revenue, likely more than $1 trillion over a 10-year budget window in its current form. That aspect is particularly important when looking ahead to the extension of the TCJA since the SALT cap could offset other tax cuts. Finally, the landscape has been complicated by pass-through entity (PTE) tax regimes adopted by the majority of states.
Allowing the SALT cap to simply expire wouldn’t necessarily reinstate such deductions for all taxpayers. The TCJA also made significant changes to the AMT by increasing the AMT exemption and substantially increasing the income thresholds at which the exemption phase-out began. When combined with the reduction of several itemized deductions, including the SALT cap, that were generally not deductible for AMT purposes anyway, this largely reduced the impact of AMT in the intervening years. After 2025, AMT and the itemized deduction rules are scheduled to revert to their pre-TCJA status. Those rules would conspire to subject higher-income taxpayers to the full AMT, thus eliminating the benefit of an expired SALT cap for such taxpayers.
Looking ahead, here are the key issues that we are monitoring:
- Is the SALT cap a red line? Republican members of Congress from higher-taxed states have clearly articulated their opposition to tax legislation that doesn’t fully eliminate the SALT cap. Such position is firmly held and reflects the impact of the cap on their constituents. What’s unknown is the extent to which such position will remain firm in the face of consensus about a broader tax bill that contains many other provisions that might be favorable to their constituents.
- Will the expiration be temporary? Concerns about the overall cost of tax legislation could easily result in only a temporary reprieve from the SALT cap.
- How will the AMT be addressed, and how will that interact with other rules? The AMT is complicated, so it isn’t always clear how a particular change in tax law impacts taxpayers when it gets intertwined in AMT calculations. The combination of changes to the AMT, deductions that get adjusted in AMT calculations, and to the regular tax that the AMT is compared to could result in hidden surprises that aren’t always clear on the surface of any particular proposal.
- What about state PTE regimes? In the four years that have elapsed since publication of Notice 2020-75, 36 states have enacted PTE tax regimes. Such taxes allow pass-through business entities to elect to pay state income taxes at the entity level. The notice allows such entities to pass through a federal deduction to the partners and shareholders for qualifying PTE taxes. The proliferation of these regimes could reduce the amount of revenue generated by extending the SALT cap, but an attempt at limiting PTE tax deductions could raise additional revenue.
- What about corporate SALT deductions? The TCJA made an attempt at creating more parity between corporations and PTEs by creating QBID. That parity didn’t extend to the SALT cap since corporations are still permitted to fully deduct all SALT. Proposals have been suggested that would create a SALT cap for corporations, which could provide more room to increase the individual SALT cap even if it wasn’t eliminated entirely.
While we don’t yet know what Congress will do with the SALT cap, it’s a near certainty that there will be considerable debate about this topic.
Deductions related to natural disasters
When Congress begins discussions about tax legislation either in the remaining 2024 session or the new Congress in 2025, it’s expected that disaster-related matters will be included. Taxpayers experiencing a personal casualty loss, such as the loss of a home, may be eligible for a tax deduction related to portions of such loss that aren’t reimbursed by insurance. Currently, such losses are only deductible to the extent that they are the result of a presidentially declared disaster and exceed 10% of the taxpayer’s adjusted gross income (AGI) for the year. However, Congress has previously designated certain losses as qualified disaster losses, which weren’t subject to the 10% of AGI limitation. The stalled TRAFWA, which failed to be enacted during 2023, would have provided tax relief, including extending qualified disaster loss treatment to disasters occurring from late 2019 through the date of enactment. While that bill wasn’t enacted, it did receive strong bipartisan support in the House and could readily serve as the template for legislation in 2025. President Biden and leaders in Congress have also signaled support for similar legislation being revived in the lame-duck session of Congress in the remaining weeks of 2024.
Beyond the disaster loss deductions, Trump did suggest that taxpayers should be eligible to deduct the cost of home generators to alleviate the impact felt in disaster areas. No further details of such proposal have been released. It would be possible to create a new standalone deduction for generators, but this proposal will likely be integrated into discussions about the standard deduction and other itemized deductions.
