What Might Happen with Taxes in 2025?
Taxes are a major topic for 2025. With many provisions from the Tax Cuts and Jobs Act (TCJA) set to expire on December 31, 2025, individuals and businesses alike are wondering how this will impact them. The truth is, no one knows for sure yet, but based on what President-elect Trump and Republican leaders are saying, we have clues about what to expect.
How New Tax Laws Get Passed
Before any new tax laws can take effect, they must go through three critical steps:
1. The House of Representatives: Republicans currently hold a very slim majority in the House, with just 5 extra seats. This majority will shrink temporarily when 3 members leave to join the Trump administration, making the passage of any major legislation even more challenging until those seats are filled.
2. The Senate: Republicans hold 53 of the 100 seats, which gives them a slight majority.
3. The President: Once a tax bill passes both the House and Senate, President-elect Trump must sign the bill.
Why Passing Tax Laws Will Be Hard
The Republican Party has ambitious plans for 2025, but their slim majority in Congress means they have little room for error. On top of this, lawmakers are already dealing with a crowded schedule:
- Confirmation Hearings: The Senate must confirm President-elect Trump’s new administration picks.
- Federal Budget: Congress must pass a budget for the fiscal year which started on October 1, 2024.
- Debt Ceiling: Lawmakers must address the debt ceiling by March 2025 to avoid a government shutdown or default.
These pressing issues could delay progress on any major tax law changes.
To navigate these challenges, Republicans will use a process called reconciliation, which allows certain bills to pass in the Senate with a simple majority (51 votes) instead of the usual 60. This process is faster but has strict rules about what can be included. Republicans may choose to split their efforts into two separate bills:
- The first bill, focused on immigration and energy, is likely to be introduced in the first one hundred days and should be easier to pass.
- The second bill, focusing on taxes, will be much harder and could take until late 2025 to finalize.
What Might Be in the Tax Bill
Many ideas are being discussed for the tax bill. While nothing is set in stone, here are a few of the main points being debated:
- Extending or Changing TCJA Provisions: Many parts of the TCJA are set to expire at the end of 2025. Some of these provisions could be extended as they are, while others might be modified or replaced.
- SALT Deduction: The TCJA capped the deduction for state and local taxes (SALT) at $10,000. This is unpopular in high-tax states like New York and California, and some lawmakers are pushing to raise or remove the cap.
- Corporate Taxes: Some Republicans want to lower the corporate tax rate even further to encourage business growth, while others are concerned about the impact on federal revenue.
- Child Tax Credit: Expanding the child tax credit is popular with many lawmakers who want to provide more support for families.
- Overtime and Social Security Income: President-elect Trump has proposed exempting overtime pay from income tax. Additionally he has proposed eliminating income taxes on Social Security benefits.
- Green Energy Subsidies: Some Republicans want to roll back subsidies for green energy projects that were included in the 2022 Inflation Reduction Act.
- Tariffs: There is discussion about mandating tariffs on goods from certain countries, which could affect trade policy.
- Length of Tax Breaks: Some lawmakers are considering shorter tax breaks, such as five years instead of the usual ten, to fit more provisions into the bill without exceeding budget limits.
The challenge is that not all Republicans agree on these ideas. A small group of dissenters could block the bill. For example, representatives from high-tax states have said they won’t support the bill unless the SALT cap is addressed.
What Does This Mean for You?
For taxpayers, 2025 will be a year of uncertainty. While we can expect months of debate and negotiation, the outcome will not be clear until the summer or fall of 2025. Here is how you can prepare in the meantime:
1. Stay Informed: Pay attention to updates about tax law changes. Knowledge is power when it comes to planning.
2. Work with a Professional: A CPA or tax advisor can help you navigate potential changes and create strategies to minimize your tax burden. This is especially important if you have significant income, own a business, or are significantly impacted by expiring TCJA provisions.
3. Be Patient: Congress has a lot of competing priorities, and tax laws take time to develop. Even if changes aren’t finalized until late in the year, planning ahead will put you in a better position.
Final Thoughts
While no one can predict exactly what will happen with taxes in 2025, one thing is certain: Change is coming and President-elect Trump is going to push hard for change. The TCJA affects nearly every taxpayer, so any extensions, modifications, or new provisions will have widespread impacts. By staying informed and working with a trusted tax professional, you can prepare for whatever comes next.
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