Potential United States (US) tax reform on the horizon

The United States is on the cusp of significant tax reform in 2025, with major legislative proposals from both the Republican and Democratic parties. These reforms aim to address expiring provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and introduce new tax policies that could reshape the fiscal landscape for individuals, businesses, and institutions.

🔵 Republican Tax Reform: The “One Big Beautiful Bill”

The Republican-led House has passed the “One Big Beautiful Bill,” a comprehensive legislative package that seeks to extend and expand upon the TCJA provisions. This bill encompasses tax cuts, spending reductions, and immigration reforms.

Key Provisions:

• Permanent Extension of TCJA Tax Cuts: The bill aims to make the individual and estate tax cuts from the TCJA permanent, preventing their scheduled expiration after 2025.
• Exemptions for Tips and Overtime: Income from tips and overtime pay would be exempt from income taxation, providing relief to service industry workers.
• Child Tax Credit Enhancement: The child tax credit would temporarily increase from $2,000 to $2,500 between 2025 and 2028.
• State and Local Tax (SALT) Deduction Cap Adjustment: The SALT deduction cap would be raised to $40,000, with a gradual phase-out for incomes above $500,000.
• Business Tax Incentives: Businesses would benefit from enhanced write-offs for research and development and equipment purchases.
• Spending Cuts: The bill proposes over $1 trillion in reductions to social programs, including Medicaid and Medicare, potentially affecting millions of beneficiaries.
• Endowment Tax Increase: University endowments, particularly those of elite institutions, would face a tax rate increase from 1.4% to up to 21%, aligning with corporate tax rates.
• Environmental Policy Reversals: The bill seeks to eliminate clean energy tax credits established under the Inflation Reduction Act, potentially impacting climate change mitigation efforts.

🔴 Democratic Tax Reform: President Biden’s FY 2025 Budget Proposal

President Biden’s fiscal year 2025 budget proposal outlines a contrasting approach, focusing on increasing taxes for high-income earners and corporations to fund social programs and reduce the federal deficit.

Key Provisions:

• Corporate Tax Rate Increase: The proposal suggests raising the corporate income tax rate from 21% to 28%.
• Corporate Alternative Minimum Tax (CAMT) Adjustment: An increase in the CAMT rate from 15% to 21% is proposed to ensure that large corporations pay a minimum level of tax.
• Top Individual Tax Rate Increase: The top marginal income tax rate would rise from 37% to 39.6%, with additional taxes on investment income and high earners.
• Capital Gains Taxation Reform: Transfers of appreciated property by gift or at death would be treated as realization events, subjecting them to capital gains taxation.
• Stock Buyback Tax Increase: The excise tax on corporate stock repurchases would increase from 1% to 4%.
• Child Tax Credit Expansion: The child tax credit would increase to $3,000 per child aged six and above and $3,600 for children under six, with permanent refundability.
• IRS Funding Boost: An additional $104.3 billion in mandatory funding for the IRS over a decade is proposed to enhance tax enforcement and compliance.

⚖️ Comparative Analysis

🧭 Outlook and Considerations

The competing tax reform proposals reflect divergent philosophies on taxation and government spending. The Republican plan emphasizes tax cuts and reduced government spending, aiming to stimulate economic growth through lower taxes. In contrast, the Democratic proposal focuses on increasing revenue from higher-income individuals and corporations to fund social programs and reduce income inequality.

As both parties navigate the legislative process, including potential use of budget reconciliation to pass their respective agendas, taxpayers should stay informed about the developments. The outcome of these reforms will have significant implications for various stakeholders, including individuals, businesses, educational institutions, and the broader economy.

The landscape of U.S. tax policy is poised for significant changes on the horizon, particularly as many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025.¹ This “tax cliff” creates a critical window for potential reform, with the outcome heavily influenced by the 2024 presidential election and the composition of Congress.²

The Looming “Tax Cliff” of 2025

The TCJA, enacted under the Trump administration, introduced a sweeping overhaul of the U.S. tax code.³ While some of its provisions, like the corporate tax rate reduction, were made permanent, many others affecting individuals and pass-through businesses were temporary and are scheduled to expire on December 31, 2025.⁴ This expiration creates a unique political and economic challenge, necessitating legislative action to either extend, modify, or allow these provisions to revert to pre-TCJA law.

Key TCJA Provisions Set to Expire:

1. Individual Income Tax Rates and Brackets: The TCJA significantly lowered individual income tax rates across most brackets and adjusted the income thresholds for each bracket. Without legislative action, these rates will revert to higher, pre-TCJA levels, and the brackets will shift, potentially leading to higher tax burdens for many taxpayers. The top marginal rate, for instance, would revert from 37% to 39.6%.
2. Standard Deduction: The TCJA nearly doubled the standard deduction, reducing the number of taxpayers who itemize deductions.⁵ If allowed to expire, the standard deduction amounts would be cut almost in half (adjusted for inflation), potentially pushing more taxpayers back into itemizing.⁶
3. Personal Exemptions: The TCJA eliminated personal exemptions. If the TCJA provisions expire, personal exemptions, which functioned as an additional deduction based on family size, would return.
4. State and Local Tax (SALT) Deduction Cap: The TCJA imposed a $10,000 cap on the deduction for state and local taxes paid (SALT cap), which disproportionately impacted taxpayers in high-tax states.⁷ This cap is set to expire, which would effectively reinstate an unlimited itemized deduction for SALT.⁸ This is a highly contentious issue, with calls from both sides of the aisle for reform.
5. Child Tax Credit (CTC): The TCJA significantly enhanced the Child Tax Credit, increasing its maximum amount and the refundable portion.⁹ Upon expiration, the CTC would be reduced, and certain eligibility rules would revert to pre-TCJA law.¹⁰
6. Qualified Business Income (QBI) Deduction (Section 199A): This 20% deduction for pass-through business income (from sole proprietorships, partnerships, and S corporations) was a major benefit for many small and medium-sized businesses. Its expiration would remove this significant tax break.
7. Alternative Minimum Tax (AMT) Exemption: The TCJA increased the AMT exemption amounts and their phase-out thresholds, reducing the number of taxpayers subject to the AMT. If allowed to expire, lower exemption amounts would mean more taxpayers fall into the AMT.
8. Estate and Gift Tax Exemption: The TCJA dramatically increased the lifetime estate and gift tax exemption.¹¹ Currently, for 2025, it’s $13.99 million per individual. Without extension, this exemption would revert to approximately half its current level (around $7 million, adjusted for inflation), impacting high-net-worth individuals and their estate planning.

Political Landscape and Competing Agendas

The outcome of the 2024 elections will be the primary determinant of the direction of tax reform.

If Republicans Gain Control (or Maintain Strength):

• Extension of TCJA Provisions: A Republican-controlled Congress, particularly with a Republican president, would likely prioritize extending most, if not all, of the expiring TCJA provisions. They generally advocate for lower tax rates, reduced government spending, and policies that encourage business investment.¹²
• Further Corporate Tax Cuts: President Donald Trump has expressed interest in lowering the corporate tax rate further, potentially to 15% from its current 21%.¹³ Republicans argue that a lower corporate tax rate makes the U.S. more competitive globally and encourages domestic investment.¹⁴
• SALT Cap Elimination (or significant increase): While the TCJA included the SALT cap, many Republicans from high-tax states have been vocal about its negative impact and would likely push for its repeal or a substantial increase.
• Permanent Estate Tax Exemption: Republicans generally favor a high estate tax exemption, aligning with the TCJA’s increase, to minimize the “death tax” on inherited wealth.
• Other Potential Proposals: Discussions could include new tax credits for caregivers, potentially eliminating taxes on Social Security benefits, and further deregulation of tax credits.

If Democrats Gain Control (or Maintain Strength):

• Higher Taxes on Corporations and High-Income Earners: A Democratic-controlled Congress and presidency would likely seek to increase taxes on corporations and wealthy individuals to fund social programs, infrastructure, and reduce the national debt.
• Corporate Tax Rate Increase: President Biden’s proposals have included raising the corporate income tax rate to 28% from 21%. They argue that corporations should pay a fairer share and that the TCJA’s rate cut primarily benefited shareholders and executives.¹⁵
• Increased Top Individual Income Tax Rate: Democrats have proposed raising the top individual income tax rate back to 39.6% (from 37%) and applying it to lower income thresholds.¹⁶
• Higher Capital Gains and Dividends Taxes: Proposals often include taxing long-term capital gains and qualified dividends at ordinary income tax rates for high-income earners (e.g., those with income over $1 million) and increasing the net investment income tax (NIIT).
• Changes to Estate Tax: Democrats generally favor lowering the estate tax exemption (closer to pre-TCJA levels) and potentially taxing unrealized capital gains at death.¹⁷
• SALT Cap Reform (but potentially different approach): While some Democrats support eliminating the SALT cap, others may seek to modify it in a way that primarily benefits middle-class taxpayers rather than the wealthiest.
• Expansion of Tax Credits for Families and Workers: Democrats typically advocate for expanding and making fully refundable credits like the Child Tax Credit and the Earned Income Tax Credit.
• International Tax Reform: The Biden administration has pushed for aligning U.S. international tax rules more closely with global minimum tax efforts (Pillar Two), potentially increasing the global intangible low-taxed income (GILTI) rate and repealing certain benefits for foreign-derived intangible income (FDII).¹⁸

Key Areas of Potential Reform and Debate

1. Individual Income Taxes:
   • Tax Rates and Brackets: The most immediate impact of the TCJA expiration would be on individual tax rates. The debate will center on whether to extend the current rates, revert to pre-TCJA rates, or introduce a new rate structure.
   • Standard Deduction vs. Itemized Deductions: The future of the standard deduction and the SALT cap will be a major battleground. The SALT cap issue often pits states with high property and income taxes against those with lower tax burdens.
   • Child Tax Credit and Family Tax Benefits: Both parties express support for family tax benefits, but their approaches differ on the size, refundability, and eligibility criteria of credits like the CTC.
   • Personal Exemptions and AMT: The return of personal exemptions and changes to the AMT are less prominent in the public debate but would significantly impact certain taxpayers.
2. Corporate Taxation:
   • Corporate Tax Rate: The 21% corporate tax rate, a permanent change from the TCJA, is a key point of divergence.¹⁹ Republicans may push for lower rates, while Democrats seek to increase them.
   • International Taxation (GILTI, FDII, BEAT): The U.S. international tax regime, significantly altered by the TCJA with the introduction of GILTI, FDII, and BEAT (Base Erosion and Anti-abuse Tax), remains a subject of ongoing debate, especially in the context of global tax harmonization efforts like Pillar Two.²⁰ The House has recently passed a bill aiming to increase taxes on foreign persons from “discriminatory foreign countries” that impose certain “unfair foreign taxes” (like UTPR or digital services taxes), indicating a willingness to use tax policy to address perceived foreign tax unfairness.²¹
3. Capital Gains and Estate Taxes:
   • Capital Gains Rates: The preferential rates for long-term capital gains and qualified dividends are a frequent target for Democrats, who argue for taxing investment income at ordinary rates for high earners.
   • Estate Tax: The significant increase in the estate tax exemption under the TCJA is slated to expire.²² The debate will involve whether to maintain a high exemption, revert to lower levels, or even introduce new wealth transfer taxes.
4. Tax Credits and Incentives:
   • Energy and Climate Tax Credits: The Inflation Reduction Act (IRA) introduced numerous clean energy and climate-related tax credits.²³ While generally permanent, there may be efforts to modify, expand, or even repeal some of these depending on the political landscape and economic priorities. There has been recent legislative activity in the House to make changes to IRA tax credits, including potential terminations or modifications.²⁴
   • Business Expensing and Deductions: Provisions like full expensing for R&D costs and bonus depreciation (which allows businesses to immediately deduct the full cost of certain investments) are also set to expire. The extension or modification of these will be critical for business investment decisions.

Factors Influencing the Outcome

• Economic Conditions: The state of the economy (inflation, recession concerns, federal debt levels) will heavily influence tax policy decisions. High national debt could pressure policymakers to seek revenue-generating measures, while economic slowdowns might prompt calls for tax cuts to stimulate growth.
• Political Will and Bipartisanship: Tax reform is inherently difficult, requiring significant political will and, often, bipartisan cooperation. A divided government could lead to stalemates or limited, temporary extensions, kicking the can down the road.
• Budget Reconciliation: The budget reconciliation process allows certain legislation to pass the Senate with a simple majority (51 votes) rather than the usual 60 votes, making it a potential vehicle for tax reform.²⁵ However, reconciliation bills are subject to strict rules (like the Byrd Rule) that prevent extraneous provisions and prohibit increasing the federal deficit beyond a 10-year budget window, which could limit the scope or permanence of tax cuts.²⁶
• Public Opinion: Public sentiment on tax fairness, who should bear the tax burden, and the role of government spending will also play a role in shaping legislative outcomes.

Implications for Taxpayers

The uncertainty surrounding tax reform creates challenges for individuals and businesses in their financial planning. Depending on the ultimate outcome, taxpayers could face:

• Higher or Lower Individual Tax Bills: Changes to rates, deductions, and credits will directly impact disposable income.
• Changes in Investment Strategies: Modifications to capital gains taxes could alter investment decisions.²⁷
• Business Planning Adjustments: Corporations and pass-through entities will need to adapt to new corporate rates, deductions, and international tax rules.
• Estate Planning Revisions: The estate tax exemption changes could necessitate significant revisions to wills, trusts, and wealth transfer strategies for high-net-worth individuals.

In conclusion, the period from late 2024 through 2025 is set to be a pivotal time for U.S. tax policy. The expiration of the TCJA’s individual provisions, coupled with the outcomes of the 2024 elections, will force Congress to confront critical choices about the future of the tax code. The debates will be intense, reflecting deep ideological divisions on economic policy, and the resulting reforms will have far-reaching implications for all U.S. taxpayers.