During the first Trump presidency there was a major change in how businesses and individuals were taxed, but that was not a permanent change. The Tax Cuts and Jobs Act of 2017 (TCJA) is scheduled to sunset in 2025 and, if it does, the regulatory framework will revert, for the most part, to those provisions that existed before its passage. Why the sunset? The “reconciliation” process was used in the Senate to enact the law, so it had to adhere to strict budgetary limitations to be passed.
How likely is this sunset to happen? With the Republican party in control of the legislature and the White House and more united philosophically than during the first Trump term, the Republican platform and the candidates’ proposals the recent presidential campaign are likely to be an indication of what can be expected when TCJA expires. Throughout his campaign, President Trump pledged to make the provisions of the TCJA permanent. That means, among the many proposals, retaining the more favorable tax brackets, the higher standard deduction, the child tax credit, the $10,000 deduction cap for itemizing state and local income taxes, a reduced number of taxpayers subject to the AMT, the Qualified Business Deduction, and doubled estate tax exemption. The TCJA permanently lowered the corporate tax rate, and on the campaign trail there were indications that it could lowered further still. In addition, the campaign addressed:
- Tariffs: the President-elect intends to increase tariffs on all imports, imposing them as both a political and revenue-raising tool. If it could be fiscally responsible, he would like to scrap individual taxation altogether in favor of funding the government through tariffs.
- Tips: during the campaign, Mr. Trump proposed making tip income tax-free. It’s unclear whether that includes both income taxes and social security taxes and how that would affect employers who share the burden of social security taxes on tips with employees. If tips are not taxed for social security purposes, how that would affect the health of the funds used to pay for social security and Medicare for our aging population is likely to become a major issue. Also, the loss of these tax revenues would need to be replaced by other sources.
- Overtime: As with tips, the proposal is to make overtime pay tax-free. The proposal would raise similar questions as when exempting tip income from taxes.
- Social Security– an estimated 40% of recipients pay some federal taxes on the Social Security they collect. Those taxes go back to funding Social Security. President Trump proposes eliminating those taxes, which again could end up underfunding the Social Security Trust Fund.
- Housing– The Republican party platform promised tax incentives for first-time home purchasers, but no specific proposals have been floated to date in this regard.
- EV Credits– Credits for purchasing electric vehicles would be eliminated.
- Inflation Reduction Act of 2022– This Act was expected to be a revenue raiser even though it provided green energy incentives. This was to be accomplished by increasing funding for the IRS which was to be dedicated, in large part, to enforcement. Some of that funding has already been cut and many of the green energy incentives seem headed for the chopping block. The fate of the additional funding for the IRS remains up in the air.
Fiscal management is crucial for the health of our economy as deficits soar and the population ages. As lawmakers debate which portions of the TCJA to keep and any new provisions to enact, they must weigh the effect on the projected budget, not just in 2025 but for many years to come. That reality could make any or all of the tax proposals floated to date untenable. The debate is sure to be interesting.
Contributed by Lois S. Fried, CPA, CFE, CVA, ABV
