President Donald J. Trump is now the 47th president of the United States, and with his inauguration comes an expected new wave of tax policy changes. President Trump and the Republican-controlled Congress have committed to swift and sweeping action on a “must-pass” tax bill before the end of 2025. While work on new legislative actions is still in its infancy, it is important to be well-informed about potential tax policy changes and well-prepared to adapt to those changes this year.
The central focus of tax policy changes for this year’s legislative session is the fate of the Tax Cuts and Jobs Act (TCJA). It was a major overhaul to the tax code signed into law during Trump’s first term that was effective on January 1, 2018. The reform was the largest tax code overhaul in over three decades, and its provisions impacted individual taxpayers and small business owners alike. Its provisions are set to expire at the end of 2025 if Congress does not pass legislation to extend or amend the tax law changes established by the TCJA. Here are the top five tax policy changes that may impact you and your small business if the TCJA provisions expire this year and recommendations on how you can prepare to adapt to the changes if needed.
Key Individual Taxpayer Changes
Increase in individual tax rates
The marginal tax rates for individuals will revert to pre-TCJA levels. This will result in an increase in the highest bracket rate to 39.6% up from the current top rate of 37%.
Marginal tax rates are applied to your taxable income. Individuals can reduce their taxable income by increasing their pre-tax deductions. Consider elective deferrals to your 401K up to the new maximum amount of $23,500 for 2025 to lessen the impact of an increase in marginal tax rates on income.
Decrease in the standard deduction for individuals
Both single and joint filers received a standard deduction that was nearly double the pre-TCJA levels when the Act was implemented. If these provisions expire in 2025, the standard deduction will revert to pre-TCJA levels, with an adjustment for inflation.
Here is a look at the new standard deductions if the provisions of the TCJA expire:
The decrease in the standard deduction makes itemizing deductions more attractive for many filers. Itemized deductions include amounts you paid for state and local income or sales taxes, real property taxes, personal property taxes, mortgage interest, disaster losses, gifts to charities, and medical and dental expenses. Optimizing your spending in these categories can lessen the impact of the decreased standard deduction in 2026.
Reduction in the child tax credit
The maximum child tax credit (CTC) under TCJA was raised to $2,000, and the qualifying household income threshold was increased to $200,000 for individuals ($400,00 if filing a joint return). Upon expiration of TCJA, the CTC will revert back to a maximum of $1,000 and income thresholds will reduce to $75,000 for individuals ($110,000 if filing a joint return).
There are no alternatives to offset the reduction in the child tax credit if this provision expires. However, this is one matter on which both sides of the aisle agree that an extension of the provision is needed, so it is not expected to expire at year-end.
Key Business Tax Changes
Loss of the pass-through income deduction
According to the most recent filing statistics from the IRS, over 4 million small businesses in the US are taxed as S Corporations, which equates to more than 60% of all businesses in the country. These businesses are classified as pass-through entities, and their annual business profits flow through to the individual owners. The resulting taxes are calculated using their personal income tax rate and are reported on their personal return. When calculating annual taxes for S corporations, the TCJA provided a deduction equal to 20% of qualified business income (QBI) for pass-through entities. This deduction lowered the tax burden for small business owners taxed as S Corporations. The expiration of this provision will result in an increase in the tax burden for pass-through entities.
Here’s an example of the impact on a business owner who has $1M in QBI:
The expiration of the QBI deduction will require pass-through business owners to implement strategic tax planning to offset the increased tax burden in 2026. Connect with your CPA or tax advisor to build a tax minimization plan for next year to offset the expiration of this provision.
Reduction in depreciation deduction for businesses
Generally, when a business purchases long-lived assets including equipment, vehicles, or technology, the expense for this capital investment can be deducted for tax purposes over several years. The provisions of TCJA allowed for the deduction of 100% of certain capital investments in the year purchased by recognizing bonus depreciation for the entire value. This allowed business owners to accelerate recognition of the expense and reduce their taxable income. If no actions are taken by Congress, the allowable bonus deprecation deduction will be reduced to 50% for 2025 and completely phased out by 2027.
Business owners should accelerate their capital investments when practical to take advantage of the allowable bonus depreciation in 2025 and before the full phase-out in 2027.
What’s next for the provisions of the TCJA?
One of the primary challenges to the TCJA’s fate is the projected cost of extending its provisions. The Congressional Budget Office (CBO) projects that extending TCJA provisions would add about $4.6 trillion to the federal debt over the following 10 years. House Ways and Means Committee Chair Jason Smith, R-Mo., Acknowledged the need to properly address this hurdle, noting, “American families and small businesses need certainty that they will not be hit with a $4.6 trillion tax increase at the end of this year.”
Legislators from both sides of the aisle recognize the importance of addressing the expiring provisions of the TCJA, but have varying opinions for the best approach. Congressman Smith has openly discussed how his members are interested in using the opportunity to revisit tax policy more broadly. Smith announced earlier this year that the Committee would hold a hearing on the significance of making the Trump tax cuts permanent. Senate Finance Committee member Elizabeth Warren, D-Mass., advocated for lawmakers to let the TCJAt’s provisions sunset as scheduled in 2025, arguing that the positive impacts for low- and middle-income Americans from the law are not good enough. It will require significant negotiations to bridge the gap between each party’s position on the TCJA and find common ground that supports individual taxpayers and small businesses.
On the road ahead, while uncertainty remains on the fate of the TCJA, all taxpayers can endeavor to remain engaged on this topic and proactive to ensure they are well-prepared for potential changes.
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