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With a president-elect bullish on lower taxes, and many federal tax provisions ending after 2025, the odds for a big tax package couldn’t be better. Donald Trump will move fast on tax changes. It’s a top priority on his legislative agenda, and he believes he has a mandate from the voters who elected him as the next president.
Negotiating federal tax overhaul is even more crucial than in past years because many of the provisions affecting individuals in the 2017 Tax Cuts and Jobs Act are slated to expire after 2025. They include lower individual income tax rates and wider tax brackets, larger child credit, higher standard deductions, the $10,000 limitation on deducting state and local taxes, and the bigger lifetime estate and gift tax exemption.
Absent legislative intervention, the expiring tax changes will revert to the rules that were in effect in 2017. Some politicians, tax lobbying groups and tax think tanks refer to these soon-to-expire tax changes by such colorful names as “Taxmageddon,” “The Super Bowl of Tax,” “2025 Tax Cliff,” “Tax Sunset” and more.
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Trump has lots of ideas for taxes. Among them:
- Making the 2017 tax cuts permanent, possibly with even lower rates
- Hiking the child tax credit
- Dropping the corporate tax rate to 15% for many C corporations
- Imposing high across-the-board tariffs on imported goods
- Axing many of the green-energy tax breaks in the 2022 Inflation Reduction Act
- Ending the 2021 and 2022 expansions to the Obamacare subsidies, which now allow more people without affordable workplace health coverage to qualify for the premium tax credit, for buying health insurance through the marketplace
- Making tips nontaxable
A trifecta win by Republicans (the presidency, House and Senate) would empower them to achieve Trump's tax agenda, although not everything on Trump's tax wish list will get Congress's approval.
It’s looking like Republicans will end up winning the House. If the results hold, and Republicans keep the House, they’ll have a fair amount of leeway to do what they want. If Democrats somehow end up switching control of the lower chamber to their side, then the two parties will have to negotiate to come up with a compromise tax package.
Trump will have the support of a Republican-controlled Senate, but getting Senate Democrats to go along won’t be easy. If they balk, Republicans can try to use budget reconciliation to circumvent the 60-vote filibuster rule in the upper chamber. The budget reconciliation procedures require a simple majority, not 60 votes. This tactic has been used by both parties, for example, to pass the 2017 Tax Cuts and Jobs Act and 2022’s Inflation Reduction Act. If Democrats end up taking control of the House, this move may not be needed, since a compromise tax bill would stand a decent chance of getting the necessary 60 votes in the upper chamber.
Look for Congress to pass a big tax bill sometime next year, maybe in the fall or winter of 2025, with most tax changes taking place on a prospective basis, starting in 2026. This timing makes the most sense, given the 2025 expiration of the 2017 tax law.
There are a couple possible exceptions to this timing. One involves IRS funding, specifically, the extra money that the IRS got in the Inflation Reduction Act for enforcement and collection. After the 2022 midterm elections, one of the first bills passed by the Republican-controlled House was to repeal most of the IRS’s funding windfall.
The second involves the IRS's Direct File program that allows some taxpayers to electronically file returns for free using a smartphone, laptop or other device, with the help of online support from the IRS. The IRS piloted this program in 2024, and it is planning to expand it in 2025 to more eligible filers. Republican lawmakers have promised to quash Direct File.
If Republicans again control the House in January, as expected, ending the IRS's enforcement windfall and Direct File could be on the GOPs early to-do list .
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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