The economic uncertainty that characterized much of our post-pandemic landscape continued into 2023, with elevated inflation and interest rates, supply chain issues, labor shortages and stock market volatility sparking fears of a recession. As job growth and consumer spending increased into 2024, most voters reported in one survey that strengthening the economy was their top priority.
Many taxpayers focused on key provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that will expire at the end of 2025 if no action is taken.
The tax code statutes that have expired or are set to expire include:
- Bonus depreciation.
- Full deduction of research and experimentation expenses.
- Relaxed limitations on the deduction of interest expense.
- Reductions of the alternative minimum tax.
- 20% qualified business income (QBI) deduction for pass-through business income.
- $10,000 state and local tax (SALT) deduction cap.
- Lower tax rates and adjusted tax brackets for individuals.
- Increased standard deductions.
- Limitations on itemized deductions that include mortgage interest deductions.
- Elimination of the personal exemption.
- Increased child tax credits.
- Higher estate and gift tax exemptions.
Congress must address the looming fiscal cliff resulting from these expiring and recently expired TCJA provisions in the next year. They remain a high priority for both political parties. Notwithstanding these priorities, with narrow margins in each chamber of Congress, passing tax legislation addressing the expiring provisions could remain elusive.
Legislative Challenges
Recent tax legislation history illustrates the challenge of passing reforms. For example, HR 7024, the “Tax Relief for American Families and Workers Act of 2024,” addressed the Republican “Big 3” expiring provisions, including business interest expense limitations, domestic research and experimentation (R&E) expenses, and bonus depreciation.
The bill received overwhelming bipartisan support in the House, passing 357-70. The vote included 169 Republican and 188 Democrat votes in favor. However, the Senate struck down the legislation as only three Republicans voted for it.
Based on this recent legislative history, and with slim Republican margins in the House and Senate,
a small group of lawmakers could impede President-Elect Trump’s legislative agenda. Assuming the new administration can overcome legislative obstacles, preparations are in place to implement tax policies reflecting the priorities outlined during his campaign. The result could be another major tax bill similar to the TCJA.
Business Taxes
Business entities of all sizes will be impacted if the TCJA business tax cut provisions expire. The business community supported H.R. 7024. The bill included, among other measures, restoration of the full deduction for R&D expenses, 100% bonus depreciation and the EBITDA standard for deducting business interest expenses. Although this legislation failed in the Senate in 2024, it illustrates the legislative complexities and potential areas of agreement in any 2025 tax bill.
In addition to the provisions of the 2024 tax bill, Trump outlined several additional tax law changes he would submit to Congress related to business tax provisions. The campaign promises included extending the TCJA provisions and making them permanent. He also proposed further decreasing the corporate tax rate from 21% to 20%.
One way to pay for these tax reductions was to eliminate the green energy subsidies from the Inflation Reduction Act. The subsidies included numerous tax credits such as the electric vehicle credit and the investment in renewable entry projects tax credit.
Individual Taxes
The candidate’s tax policy proposals included several key measures related to individual income taxes.
Trump proposed permanently extending the lower individual income tax rates under the TCJA that are set to expire after 2025. The $10,000 cap on the SALT deduction would also be permanently eliminated. Income earned by individuals on tips, particularly those working in the hospitality industry, would be exempt from taxation. Social Security benefits and overtime pay would be exempt from income taxes as well.
Although both candidates agreed on preserving the TCJA tax cuts for individuals with an adjusted gross income (AGI) or taxable income below $400,000 per year, they differed on other key tax policies. Trump advocated for government spending reductions coupled with the TCJA tax cuts, believing they would benefit taxpayers, reduce the deficit and promote economic growth.
Furthermore, both candidates supported permanently extending the expiring income tax credits. The tax credits include doubling the child tax credit to $2,000 (from the pre-TCJA level of $1,000) and other TCJA deductions. Vice-President-Elect J.D. Vance has proposed increasing the child tax credit to $5,000.
H.R. 7024 provided insights into other individual tax provisions that could be added to any 2025 tax bill. The bill included a measure to temporarily expand the child tax credit, the Earned Income Tax Credit (EITC) and credits for health insurance premiums.
Additionally, both candidates supported permanently extending certain provisions from the TCJA, such as maintaining the 0%, 15%, and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. The TCJA tied long-term capital gains rates to separate brackets indexed for inflation rather than ordinary income brackets. With the 3.8% net investment income tax (NIIT) rate preserved, Trump’s plan to fully extend the TCJA provisions would maintain the status quo. That keeps the top marginal rate on long-term capital gains at 23.8%, with no new exclusions for eligibility.
Trade-Related Taxes
Following his re-election, Trump reinforced his commitment to reshaping U.S. trade policy through aggressive tariff measures to protect domestic industries and offset the revenue impacts of proposed tax cuts.
Although the president needs Congress to amend the tax code, he may impose tariffs under several circumstances using previously passed legislation. These trade-related tax policies are expected to be an economic strategy cornerstone.
A major component of Trump’s trade policy is a 60% tariff on all Chinese imports. The tariffs would address longstanding trade imbalances, reduce U.S. reliance on Chinese goods and counter concerns over intellectual property theft.
In addition, Trump has stated
he will introduce a 10% universal baseline tariff on all imported goods, with higher rates applied to goods originating from China. This baseline tariff would generate significant revenue to offset reductions in individual income tax rates and other tax cuts.
Although these tariffs can potentially raise substantial revenue, they also present notable risks and challenges.
For consumers, higher import tariffs could increase everyday product prices. Businesses that rely heavily on imported materials, such as the RV industry, may experience elevated production costs, potentially reducing profitability
or necessitating price hikes.
Industries dependent on international supply chains could face disruptions and job losses. Furthermore, rising prices and supply chain adjustments could contribute to inflation.
Despite these concerns, the tariff revenue is projected to play a crucial role in funding Trump’s tax and economic initiatives. The increased tariff revenue would maintain lower individual income tax rates, expand child tax credits and other tax incentives, and support domestic infrastructure and economic development. By prioritizing tariffs, the administration seeks to balance tax reductions by reducing foreign goods.
Trump’s trade-related tax policies reflect a bold approach to achieving fiscal balance while stimulating domestic production. However, the success of these measures will largely depend on how effectively the administration mitigates the potential negative impacts. As these policies take effect, stakeholders should prepare for potential price increases and supply chain challenges while monitoring global trade developments.
Key Takeaways
The results of the 2024 federal elections have set the stage for significant tax policy debates, with expiring TCJA provisions at the forefront. Trump’s administration faces the dual challenge of navigating legislative gridlock and addressing these pressing fiscal issues.
On the business side, the focus will be on extending or making permanent key TCJA provisions while potentially reducing the corporate tax rate. For individuals, the focus will be on eliminating the SALT deduction cap and expanding credits such as the child tax credit.
Trump’s trade-related tax policies, centered on tariffs, are designed to generate revenue for these initiatives while promoting domestic production.
As Congress grapples with these issues, stakeholders should prepare for a shifting tax landscape in 2025. The administration’s ability to pass comprehensive tax reform will determine whether the fiscal cliff created by expiring TCJA provisions can be averted and whether Trump’s broader economic vision will come to fruition.
Steve Blake is the Tax Managing Director of the CBIZ Somerset Dealership Team, where he focuses his time on mergers and acquisitions, tax strategic planning and tax compliance.
