By Mark Sipos, Director of LFG Tax Services
The Tax Cuts and Jobs Act (TCJA) of 2017 is the signature tax legislation from Trump’s first term in office, and it cut income tax rates for many taxpayers. Some provisions — including the majority affecting individuals — are slated to expire at the end of 2025. The nonpartisan Congressional Budget Office estimates that extending the temporary TCJA provisions would cost $4.6 trillion over 10 years. For context, the federal debt currently rings in at more than $35 trillion, and the budget deficit is $711 billion.
Below is an overview of anticipated changes for both businesses and individuals:
Business
- Reduce the current 21% corporate tax rate to 20% or 15%, with the goal of generating growth.
- Eliminate the 15% corporate alternative minimum tax imposed by the Inflation Reduction Act (IRA).
Individuals
- Eliminate the estate tax (which currently applies only to estates worth more than $13.99 million).
- Repeal or raise the $10,000 cap on the deduction for state and local taxes.
- Create a deduction for auto loan interest.
- Eliminate income taxes on tips, overtime and Social Security benefits.
Possible Offsets
The House GOP document outlines numerous possibilities beyond just spending reductions to pay for these tax cuts. These include:
Tariffs
There is a proposed 10% across-the-board import tariff. President Trump, however, has discussed and imposed various tariff amounts, depending on the exporting country.
In addition, Trump said tariffs on goods from other countries, including the 27-member European Union, could happen soon. While he maintains that those countries will pay the tariffs, it’s generally the U.S. importer of record that’s responsible for paying tariffs. Economists generally agree that at least part of the cost would then be passed on to consumers.
Changes in Tax Breaks
To help generate savings, the GOP document proposes making changes to various tax breaks, such as:
- The mortgage interest deduction. Suggestions include eliminating the deduction or lowering the current $750,000 limit to $500,000.
- Head of household status. Possibly eliminating this status, which provides a higher standard deduction and certain other tax benefits to unmarried taxpayers with children compared to single filers.
- The child and dependent care tax credit. Considers eliminating the credit for qualified child and dependent care expenses.
- Renewable energy tax credits. The IRA created or expanded various tax credits encouraging renewable energy use, including tax credits for electric vehicles and residential clean energy improvements, such as solar panels and heat pumps. The GOP has proposed changes ranging from a full repeal of the IRA to more limited deductions.
- Employer-provided benefits. Revenue could be raised by eliminating taxable income exclusions for transportation benefits and on-site gyms.
- Health insurance subsidies. Premium tax credits are currently available for households with income above 400% of the federal poverty line (the amounts phase out as income increases). Revenue could be raised by limiting such subsidies to the “most needy Americans.”
Education-related breaks are also being assessed. The House GOP document looks at how much revenue could be generated by eliminating credits for qualified education expenses, the deduction for student loan interest and federal income-driven repayment plans. The GOP is also weighing the elimination of interest subsidies for federal loans while borrowers are still in school and imposing taxes on scholarships and fellowships, which currently are exempt.
We will keep an eye on all of these developments, and anything else that may impact your taxes.
