Prepare for Tax Changes in 2025

As we approach 2025, there are several potential tax changes that individuals and businesses may need to prepare for, based on current proposals, expiring provisions, and trends in tax policy. Here’s a rundown of key areas where changes are likely, though some are still under discussion or subject to political action.

With a new president and Congress taking office in January, the stage is set for legislative changes that could reshape the U.S. tax system. Over 30 provisions and numerous other tax policies from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire or subject to revision at the end of 2025.

1. Individual Income Tax Changes

Expiration of 2017 Tax Cuts and Jobs Act (TCJA) Provisions

The TCJA, passed in December 2017, made several temporary changes to the tax code that are set to expire at the end of 2025 unless extended by Congress. These include:

• Individual Income Tax Brackets: The tax brackets for individuals were lowered under the TCJA, but these rates are set to revert to pre-TCJA levels starting in 2026. This could result in higher tax rates for many people, especially those in the middle-income and high-income brackets.

• Standard Deduction: The standard deduction was nearly doubled under the TCJA, which reduced the number of people who itemized their deductions. This increase will expire, meaning the standard deduction could decrease, potentially raising the taxable income for many people.

• Child Tax Credit: The TCJA temporarily expanded the child tax credit to $2,000 per child, with $1,400 of it being refundable. This expansion is scheduled to revert to $1,000 per child starting in 2026, unless extended or modified.

• State and Local Tax (SALT) Deduction Limit: The TCJA capped the SALT deduction at $10,000, which may affect taxpayers in high-tax states. This cap is set to expire in 2025, but discussions around its future could lead to changes, either to increase or remove the cap.

Potential Tax Rate Increases

• Wealthier Individuals: Proposals have been floated by some lawmakers to increase the top individual tax rates for high-income earners (currently 37%) or impose new taxes on high net-worth individuals, such as a wealth tax or higher capital gains taxes.

• Capital Gains Tax: There's ongoing debate about raising the capital gains tax rate for individuals earning above a certain threshold, which could impact investment strategies for wealthier individuals.

Expanded Tax Credits

There is also potential for new or expanded tax credits targeted at various demographic groups or sectors. For example, environmental incentives for electric vehicles (EVs) and clean energy technologies might continue to evolve, especially as the Biden administration has pushed for green energy investments.

2. Corporate Tax Changes

Minimum Tax on Large Corporations

Under the Inflation Reduction Act (IRA) passed in 2022, a new 15% minimum tax on corporations making over $1 billion in income is in effect. This provision is set to stay in place, and future tax reform may include expanding such taxes or addressing loopholes.

Global Intangible Low-Taxed Income (GILTI) Changes

Changes to international taxation, particularly around the GILTI tax (which taxes income earned by foreign subsidiaries of U.S. corporations), may see updates. The Biden administration proposed increasing the rate for GILTI in the past, and if enacted, this could have an impact on how U.S. multinationals structure their operations abroad.

Expiration of Bonus Depreciation

Currently, businesses can deduct 100% of the cost of qualifying property under the bonus depreciation rules. However, this provision is scheduled to phase down starting in 2023, with a full phase-out by 2027. This could change depending on legislative action, but businesses should plan for a potential reduction in available depreciation benefits starting in 2025.

3. Changes to Retirement Accounts and Savings Plans

RMD (Required Minimum Distributions) Changes

Under the SECURE Act 2.0, RMDs (Required Minimum Distributions) from retirement accounts like 401(k)s and IRAs were pushed back to age 73 starting in 2023, with the age increasing to 75 by 2033. Watch for any potential changes in this area, especially if Congress revisits tax incentives for retirement savings.

Roth Accounts and High-Income Earners

There have been proposals to limit the ability of high-income earners to contribute to Roth IRAs or 401(k)s, especially through backdoor Roth conversions. While such provisions haven’t been enacted yet, they remain a possibility for future tax reform.

4. Estate and Gift Tax Changes

Increased Exemption Limits

Under the TCJA, the estate tax exemption was temporarily increased to $12.92 million per individual for 2023. However, this is set to revert to approximately $6 million in 2026. If you are considering estate planning, it's essential to act before these changes take effect, as gifts and estates over the exemption limit are subject to the estate tax.

5. IRS Modernization and Compliance Changes

• Increased IRS Funding: The Inflation Reduction Act provided the IRS with substantial funding to modernize its operations and improve tax compliance. As a result, taxpayers can expect more audits, stricter enforcement of tax laws, and more emphasis on closing the tax gap, particularly among high earners and large corporations.

• Digital Assets: There are likely to be new tax reporting requirements related to cryptocurrencies and digital assets, as the IRS continues to crack down on underreported income and transactions in the digital space.

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6. State-Level Tax Changes

State and local tax changes will also be important to monitor. States that rely heavily on income taxes, such as California, New York, and New Jersey, may adjust tax rates or reform deductions. On the other hand, some states may reduce income taxes in favor of raising sales or property taxes.

7. Potential Areas for Tax Reform

While tax reform is often debated in Congress, there are some common proposals that could impact your taxes in 2025, including:

• Carbon Tax: The introduction of a carbon tax or expanded tax incentives for businesses and individuals who reduce their carbon footprint, as climate change continues to be a major issue.

• Corporate Tax Reform: A potential overhaul of the corporate tax code, with proposals ranging from a global minimum tax to changes in how U.S. companies report income from international operations.

Key Takeaways for Preparing for 2025

1. Plan for Higher Taxes: If you are in a higher tax bracket, be prepared for potential tax rate increases after 2025. Consider tax-deferred or tax-advantaged accounts and strategies now to reduce your taxable income.

2. Monitor Estate Planning: The estate tax exemption is set to decrease after 2025. If you have significant wealth, consider making gifts or adjusting your estate plan ahead of these changes.

3. Consult Your Financial Advisor: With potential changes on the horizon, it's a good idea to regularly consult with tax professionals to stay up-to-date on the latest tax laws and plan accordingly.

While the future of tax policy is uncertain, staying ahead of these changes and adjusting your strategy in 2025 will help you minimize tax liability and take advantage of available benefits.