The Tax Stakes for 2025: Planning for All Possibilities

Wooden blocks spell out "tax 2025" on top of a calculator, surrounded by small stacks of coins.

(Image credit: Getty Images)

published 16 January 2025

When President-elect Donald Trump takes office on January 20, Republicans will control the White House and both houses of Congress. This should make it easier for the party to pursue its legislative agenda, and news from Washington indicates that taxes are at or near the top of their priority list.

What is likely on the legislative front?

During the campaign, a notable plank of the Republican platform was to make the tax cuts enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017 permanent. This would keep individual income tax rates at their current, historically low levels and maintain the estate, gift and GST tax exemption at its current, historically high level. It would also extend popular provisions such as the 199A deduction for certain pass-through business income and the increased child tax credit. Absent new legislation, these tax cuts and popular provisions of the TCJA are scheduled to sunset on December 31, 2025.

However, despite a Republican majority in the House and Senate, it is not clear that extending/making permanent the TCJA provisions is even possible, let alone likely. There is not currently an obvious bipartisan path to the 60 Senate votes necessary to pass tax legislation in the traditional manner.

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Republicans can likely pass tax legislation only by using the budget reconciliation process, which would require a simple majority of 51 votes in the Senate to pass. However, as we saw with the bill to avoid the government shutdown in December and the election for Speaker of the House in early January, it can be very difficult to secure a consensus around fiscal matters. It will take near unanimity from Republican members of Congress to pass legislation even through budget reconciliation.

Furthermore, the Byrd Rule prevents Congress from using the reconciliation process to pass bills that raise the federal deficit over a period exceeding 10 years. This is why the original TCJA — itself passed using budget reconciliation — included sunset provisions and why new legislation may as well. According to the Joint Committee on Taxation, extending the TCJA would add $4 trillion to the deficit over 10 years. Increasing the deficit would also require raising the debt ceiling and the cost of borrowing, leaving even less of the fiscal pie for discretionary spending or tax cuts. This means that it is likely that tax rates will eventually rise, even if it takes one or more election cycles to bear out.

What other types of tax changes could we see?

In addition to their plans to extend the TCJA provisions, Republicans have proposed raising or eliminating the cap on deductions for state and local taxes (SALT), eliminating federal tax on certain types of income like tips and overtime and reviving bonus depreciation and the expensing of certain R&D costs. The SALT deduction cap was one of the revenue raisers in the TCJA, so while a revision to that policy is popular — particularly in higher-tax jurisdictions — it, like other tax cut proposals, would require revenue offsets to pass muster under the budget reconciliation process.

To cover the costs of extending the TCJA tax rates and other tax-cutting plans, the president-elect and Republicans have proposed several potential revenue-raising and spending-cut offsets. On the tax side, these include increasing tariffs on imported goods, eliminating the clean energy tax credits passed by the Biden administration and disallowing the child tax credit to non-citizens for their U.S. citizen minor children.

The biggest revenue generators listed here are the proposed tariffs. However, projecting tariff income is challenging because part of the expense is typically passed on to consumers via higher prices, which can reduce demand, and because there are likely to be reciprocal tariffs imposed by other governments that could reduce the taxable income of U.S. producers and, therefore, the tax revenues generated by the U.S. Treasury.

What does this mean for taxpayers?

If Congress extends the current income tax rates, even for a few years, active bracket management can be key to reducing your overall tax bill. Here are a few potential strategies:

Accelerate income into the low-rate years. Options could include a Roth conversion for a traditional IRA or retirement plan, a section 83(b) election for restricted stock awards, electing out of installment treatment for an asset sale with payments over a period of years, selling capital assets for a gain or not electing to defer bonus compensation.
Defer deductions until the rates rise and leave tax-loss harvesting and large charitable contributions for future years (with presumably higher rates) when they will be more valuable.

On the estate, gift and GST tax front, making use of the bonus exemption can be tax-effective, even if the exemption rate remains at current levels after 2025. For those who are hesitant to make a large gift, they should plan for it now in case the sunset materializes but wait to implement it until we see what the legislation brings. However, now is not the time to make a gift that generates a current gift tax, as there have been various Republican proposals to modify or repeal the tax entirely.

In the short term, both corporate and individual taxpayers may also wish to acquire imported assets that could be subject to proposed tariffs as soon as possible to avoid cost increases. In addition, taxpayers considering investments qualifying for clean energy tax credits available currently under the Inflation Reduction Act will want to act both expeditiously and with the knowledge that those credits may be repealed at some unknown effective date.

Positioning yourself for change

While awaiting the uncertain outcome of legislation, there are proactive steps that taxpayers can take to reduce anxiety and drive better decision-making. These steps include:

Engage with your income tax preparer in the first quarter of the year to prepare your 2024 return and project your 2025 tax profile so you are equipped with information about discretionary transactions. This way, you can identify whether you will have opportunities to accelerate or defer income and/or deductions in response to legislative changes and understand how those will impact your projected tax bill.
Discuss with your estate planning counsel how either a sunset or an extension of the TCJA would impact your plan. For those with estates of more than $7 million (the expected inflation-adjusted threshold for the estate tax if the provisions sunset), you should evaluate potential lifetime gifts now, even if the final implementation will not take place until the fate of the sunset is finalized legislatively.
For business owners, consider how tax law changes, government spending and other policy initiatives will impact your operations and your bottom line. You should identify opportunities to minimize the impact, whether that includes revamping your supply chain or taking advantage of anticipated regulatory revisions under a new administration.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jane Ditelberg is responsible for developing Northern Trust’s perspective and insights on tax issues, including individual and entity income taxation, employee benefits and executive compensation, estate, GST and gift taxation and fiduciary income taxation. She publishes Northern Trust’s weekly newsletter, Tax News You Can Use. Between private practice and leadership roles at Northern Trust, Ditelberg has 30 years of experience in tax planning, estate and trust law. Her background makes her a highly sought-after speaker on topics such as estate and gift taxation, fiduciary income taxation and much more. Ditelberg is a fellow of the American College of Trust and Estate Counsel, where she helped prepare comments to the U.S. Treasury Department on tax statutes and proposed regulations, as well as draft influential briefs amicus curiae to the U.S. Supreme Court on tax issues.