Brace for Major Tax Changes: What 2025 Could Mean for You

As we approach 2025, several tax factors are converging to create what could be a perfect storm. With the 2017 Trump tax cuts set to expire and an election on the horizon, the future of U.S. tax policy is uncertain. Whether you’re an individual taxpayer or a business owner, it’s crucial to understand what’s coming and how to prepare.

Expiration of the 2017 Trump Tax Cuts

At the end of 2025, many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) will automatically expire unless Congress steps in. If no action is taken, expect the following major changes:

• The top tax rate will rise from 37% to 39.6%.

• The estate tax exemption will drop significantly, from $28.6 million for married couples to approximately $14.3 million.

• Other key provisions, like the $10,000 cap on state and local tax (SALT) deductions, will also be affected.

These changes could impact your finances in a big way, especially if you live in high-tax states like New York or California. The return of full SALT deductions would be welcome news for many, but higher tax rates and reduced exemptions could increase the overall tax burden.

The 2024 Election and Its Impact on Tax Policy

The 2024 presidential election will play a crucial role in shaping the future of tax policy. The leading candidates, Donald Trump and Kamala Harris, have outlined very different approaches to taxes.

Donald Trump:

• Proposes making his 2017 tax cuts permanent.

• Plans to lower the corporate tax rate even further, down to 20% (with a potential 15% rate for U.S. manufacturers).

• Recently shifted his stance on SALT deductions, advocating for restoring the full deduction.

Kamala Harris:

• Proposes raising the corporate income tax rate to 28%.

• Aims to raise capital gains taxes for individuals earning $1 million or more, bringing the rate from 20% to 28%.

• Supports expanding tax credits for lower-income families and small businesses.

Each candidate’s plan will affect you differently, depending on your income, business interests, and financial situation. Let’s break down the key proposals that could impact your taxes.

Corporate Tax Rates: Competing Visions

The candidates’ corporate tax plans present stark contrasts. Harris supports increasing the corporate tax rate to 28%, reversing part of the 2017 tax cuts. Trump, on the other hand, wants to reduce the rate further to 20%, or even 15% for companies that manufacture in the U.S.

This difference is critical for business owners, especially in industries like manufacturing, where the potential tax break could significantly influence decisions on where to base operations.

Capital Gains Taxes: Harris’s Proposal vs. Trump’s Silence

While Trump hasn’t revealed specific plans for capital gains taxes, Harris proposes raising the long-term capital gains rate for top earners to 28%. Currently, the rate is 20% for individuals earning over $1 million.

Additionally, both candidates would maintain the 3.8% net investment income tax. However, Harris plans to increase it to 5% for high-income individuals, bringing the total capital gains tax rate for top earners to 33%.

For investors and high-net-worth individuals, this change could significantly impact tax planning strategies.

No Taxes on Tips: Support from Both Sides

Interestingly, both Trump and Harris support eliminating taxes on tips for service workers, including hospitality and restaurant employees. This policy could provide much-needed relief to workers who rely heavily on tips as part of their income.

Trump has also floated the idea of removing taxes on overtime pay, though details on how this would be implemented remain unclear.

Changes to Social Security Benefits

If Trump is re-elected, he has promised to eliminate taxes on Social Security benefits for retirees. This would provide significant relief to older Americans who depend on Social Security as a key source of income.

Stock Buybacks and Unrealized Gains

Harris’s tax plan includes a 4% excise tax on stock buybacks, quadrupling the current 1% tax rate. She also supports taxing unrealized capital gains, a controversial proposal that would tax investors on gains they haven’t yet realized, treating it similarly to a wealth tax.

Child Tax Credit: Competing Plans for Families

The child tax credit is another area where the two candidates differ. Harris proposes reinstating the $3,600 child tax credit that was part of the COVID-19 relief measures, with a new $6,000 credit for families with infants under one year old. These credits are aimed at reducing poverty among low- and middle-income families.

Trump is reportedly considering a universal $5,000 child tax credit, which would apply to all families, regardless of income.

Other Key Proposals

Harris also has ambitious plans to expand the Earned Income Tax Credit and introduce new housing tax credits. She proposes offering incentives for first-time homebuyers and builders of affordable starter homes, which could be a game-changer for many families struggling to enter the housing market.

Trump, meanwhile, is focused on making his 2017 individual income tax cuts permanent and revisiting the SALT deduction cap, which has been a pain point for many taxpayers in high-tax states.

The Clock is Ticking on 2025

If Congress doesn’t act by the end of 2025, major changes to the tax code will occur. Here’s what you can expect:

• The top income tax rate will rise to 39.6%.

• The $10,000 cap on SALT deductions will disappear, restoring the full deduction for state and local taxes.

• Estate tax exemptions will shrink dramatically, affecting wealth transfer strategies for high-net-worth individuals.

• The standard deduction for married couples will drop significantly, from approximately $30,725 to $16,525, with a return of personal exemptions.

What Should You Do Now?

The tax landscape is complex and rapidly evolving, especially with the 2024 election looming. Here’s how you can start preparing:

• Review your financial strategy: Assess how these potential changes could impact your personal or business finances.

• Speak with a tax advisor: Now is the time to evaluate potential tax-saving strategies, especially if you’re affected by capital gains, estate taxes, or corporate tax changes.

• Stay informed: Keep an eye on political developments and tax proposals to ensure you’re ready for any changes that may come in 2025.

Regardless of the election outcome, the expiration of the 2017 tax cuts and the resulting changes in 2025 will have a significant impact on U.S. taxpayers. By taking action now, you can stay ahead of these shifts and minimize their effect on your finances.

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