The new year has arrived, and it will shortly bring a new presidential administration. Some taxpayers may wonder whether this means a new tax landscape is imminent.
It is unlikely that any changes will be immediate. Tax reform generally remains a task for legislators, even if a president can express enthusiasm for the project. This means cooperation will be necessary, especially with a very slim Republican majority in the House of Representatives. It is common for major tax laws to pass near the end of the calendar year, as was the case not only for 2017’s Tax Cuts and Jobs Act, but also 2019’s SECURE Act and 2022’s SECURE 2.0.
Some Republicans have suggested using the budget reconciliation process to speed tax changes through early in 2025. At this writing, however, incoming Senate Majority Leader John Thune has expressed interest in breaking the reconciliation package in two. This strategy would include provisions about border security and energy in part one, and save tax for the second half. Thune has said tax reform will arrive by summer. This strategy has received some pushback from other Republican lawmakers, so the final approach may look different.
Regardless of how Congress opts to handle its tax changes, President-elect Donald Trump made clear during his campaign that tax relief is a major priority, and many Republican lawmakers have concurred. While we cannot know the details at this point, I do expect we will see some sort of tax legislation within the next year. This is partly because the Tax Cuts and Jobs Act includes many provisions set to expire at the end of 2025. This puts legislators on the clock. It also means the TCJA is the likely starting point for tax reform.
What’s Probable
Trump has expressed enthusiasm for lawmakers making many, if not most, of the Tax Cuts and Jobs Act’s provisions permanent. Even if lawmakers ultimately think it is more prudent to pursue something like a 10-year extension for these provisions, it seems likely that these portions of the TCJA won’t vanish into thin air next January.
Congress is especially likely to extend certain portions of the law. These include the current, relatively high standard deduction; the revised rules governing alternative minimum tax; and the current high exemption for federal gift and estate tax. The capital gains tax rates are also likely to stay put, or even decrease. Some commentators have speculated that reform could move the top capital gains rate from 20% down to 15%, though this was not a proposal the Trump campaign mentioned.
One provision of the Tax Cuts and Jobs Act has a particularly murky future. While campaigning, Trump made clear that he supports raising or eliminating the $10,000 cap ($5,000 for married taxpayers filing separately) on state and local tax, or SALT, deductions. Some lawmakers have proposed raising the cap to $20,000, which would have a relatively modest effect on most taxpayers. Others have expressed enthusiasm for doing away with the cap altogether, in which case more taxpayers may find it worthwhile to itemize deductions. Taxpayers in high-tax states especially will want to keep an eye on the future of the SALT deduction.
Trump’s running mate, J.D. Vance, highlighted potential changes to the Child Tax Credit on the campaign trail. Vance suggested increasing this credit from $2,000 per child to $5,000 per child. While Vance’s proposal is not an extension of the Tax Cuts and Jobs Act per se, it is still among the more likely tax proposals to come out of campaign season, given the credit’s popularity.
In general, taxpayers are likely safe to assume that most federal tax rates will stay the same or drop in the short term. Trump has expressed support for both leaving the top income tax bracket at 37% and lowering it, though he did not suggest any particular level. I would not be shocked to see the top rate cut to 36%, or even 35%. While this would not affect most American taxpayers, it could be significant for those who reach the top bracket.
When rates are likely to stay the same or decrease, deferring income may be a good idea for those who can do so. Taxpayers whose income mainly comes in the form of wages may not have much control over when their income arrives, but workers who can control when they bill their work or otherwise time their income may benefit from delaying while tax changes are still underway. Self-employed individuals should stay mindful, however, of “constructive receipt.” If a check arrives in a certain year, you must report it as income for that year, even if you wait to deposit it until the next year. (Constructive receipt also applies to traditional employees, but the prevalence of direct deposit means it applies less frequently.)
What’s Possible
In addition to extending provisions of the TCJA, lawmakers may take up a host of new proposals in their forthcoming tax reform package. Some of these ideas came from the president-elect on the campaign trail. Trump has made many informal comments about tax policy, and it is not yet clear how much of an appetite lawmakers will have for seriously considering them. In the meantime, we can consider a few.
Tips
One of the more headline-grabbing suggestions of the presidential campaign was exempting tips from tax. Not only Trump, but also Vice President Kamala Harris, endorsed the concept in the lead-up to the presidential election. However, there are a lot of potential complications lawmakers would need to address if they took on this idea.
The first order of business would be to determine whether tips would be exempt from income tax only, or also from payroll taxes. As several commentators have noted, many workers who rely principally on tips already earn too little overall to owe much, if any, federal income tax. According to NPR, more than a third of tipped workers fall below the threshold for owing any federal income tax. Exempting tips from payroll taxes would offer these workers more immediate tax relief. However, this approach could create additional consequences for workers earning less toward future Social Security benefits.
Lawmakers would also need to decide whether to include limits or guardrails of some kind. Depending on the details of how this change is structured, it could incentivize more industries to move toward a system reliant on tips, with commensurately lower base wages. That said, those in favor of this proposal have pointed out that exempting tips from tax would bring their tax treatment in line with gifts, which may make more sense in a variety of ways. (For more on why the Internal Revenue Service currently treats tips as income, see this blog post from Palisades Hudson president Larry Elkin.)
Overtime
Like tips, overtime wages featured heavily in Trump’s rhetoric on the campaign trail. Also like tips, it is not clear whether Trump supports exempting overtime from income tax alone or from payroll taxes as well. Exempting overtime from payroll taxes would affect more workers, but would carry broader implications for the government’s ongoing ability to finance Social Security and Medicare. It might also affect the particular benefits workers earn during the course of their careers.
In addition, exempting overtime from tax would necessitate a large, complicated administrative burden to allow companies and workers to track the portions of their income that are and are not taxable. This does not mean the change is impossible, but the complexity may give some lawmakers pause.
Social Security
Yet another form of income that could become exempt from income taxes is Social Security benefits. This would only represent a change for about 40% of current Social Security recipients, but would obviously represent a benefit for those individuals. The upside for younger taxpayers is less obvious, as it will inevitably increase the federal budget deficit and increase government borrowing.
It is possible that lawmakers may take a middle path and raise the income threshold for tax-free benefits. This would reduce the number of Social Security recipients who pay income tax on their benefits, without taking it all the way to 0%. Regardless, this proposal cannot be addressed via budget reconciliation. If legislators want to attempt to make this change, it will need to secure at least 60 votes in the Senate and would be vulnerable to filibuster. This may be beyond legislators’ reach on a practical level, even if some of them support the idea in theory.
Expatriates
Another Trump campaign talking point was eliminating double taxation for U.S. citizens overseas. My colleagues and I have written before about America’s unique position on taxing its citizens’ worldwide income, so on its face, the idea of adopting an approach more in line with other nations is not absurd.
That said, Trump’s proposal was light on detail, and the details will make a significant difference in the proposal’s impact on national tax revenue. Without knowing more about how this change might look, it is hard to predict whether it could happen and the long-term effects if it did.
Capital Gains
In his first term, Trump considered a proposal that would periodically adjust the cost basis on capital gains to reflect inflation. This change would, in general, reduce capital gains subject to tax. Trump ultimately dropped the idea, in part because of opposition from then-Treasury Secretary Steven Mnuchin.
Some commentators have suggested that Trump’s second-term administration may have an appetite to return to this proposal. The high inflation the country experienced in 2021 and 2022 could make this idea even more appealing than it was in Trump’s first term, especially for taxpayers who have held positions over many years. The previous approach had included issuing an executive order, seeking to bypass Congress entirely to make the change. While this tactic is still potentially on the table, modern presidential administrations generally have been reluctant to use the executive branch’s “power to tax” unilaterally. It remains to be seen whether Trump’s administration will push the envelope in this area.
Estate Tax
While the federal gift and estate tax has not taken the rhetorical spotlight recently, I would not be shocked if lawmakers pushed to raise the lifetime exemption even higher (the basic exclusion amount is $13.99 million for 2025), or potentially eliminate the tax altogether. Revenue from this tax is already limited at the current exemption level; the Congressional Budget Office reported that in 2020, the federal gift and estate tax raised roughly 0.1% of the country’s gross domestic product ($17.6 billion). The tax seems to have largely disappeared from the national conversation, and if lawmakers have an appetite to get rid of it outright, this may be an opportune time to make the attempt.
Other Proposals
A few other proposals could make it into the eventual tax package, though they would likely need some development. These include:
- Excluding the income of certain professionals from federal income tax, including paid firefighters, police officers, military personnel and veterans
- Expanding 529 accounts’ qualified expenses to include homeschool expenses
- Cutting existing green energy credits, such as the consumer credit available on the purchase of electric vehicles, and
- Creating an itemized deduction for auto loan interest, similar to the mortgage interest deduction.
It is hard to guess how likely any of these items are without more details. For example, would the auto loan deduction apply to all cars, or only those built in the United States? Would it be a so-called “below-the-line” deduction? If so, and if the standard deduction remains relatively high, the change may affect a limited pool of taxpayers. Any of these proposals could turn up in a broader tax package, but for now taxpayers will need to wait and see.
On the “extreme and probably unlikely” end of the scale, Trump has mentioned jettisoning the federal income tax outright. Taxpayers should not expect federal income tax to go away entirely, since this extreme approach has limited congressional support. However, this position does signal the overall approach the administration is inclined to favor, at least at its inception: pro tariff and anti income tax.
By necessity, this article is largely speculative, but there is no need for taxpayers to try to take wild guesses about upcoming tax policy. For now, tax planning is mostly business as usual. Keep an eye out for upcoming changes, but in the meantime, stay the course and work with what’s in front of you, not what you imagine might arrive in the future.
