With President Donald Trump returning to the White House for a second term, significant tax law changes are expected. After his first term, Trump enacted the Tax Cuts and Jobs Act (TCJA) in 2017, which overhauled the tax code. However, many provisions of the TCJA are set to expire at the end of 2025, offering Trump the opportunity to extend, adjust, and possibly expand his tax policies. Here’s a breakdown of how taxes may change under his administration in 2025 and beyond.
Tax Changes in 2025 and Beyond
Tax Cuts and Jobs Act: The Key Provisions
The TCJA brought about notable changes, such as nearly doubling the standard deduction, increasing the child tax credit to $2,000, and reducing the top tax rate for high earners from 39.6% to 37%. It also introduced a 20% deduction for certain types of business income. Many of these provisions are set to expire, raising the possibility that Trump may seek to extend or enhance them.
Tax Benefits for Small Businesses: What’s at Stake?
Small businesses benefited from the TCJA’s flat 21% corporate tax rate. However, a key provision that allowed pass-through businesses (like partnerships, sole proprietors, and S-corporations) to deduct 20% of their qualified business income (QBI) is set to expire in 2025. Trump’s plans may include extending or modifying this deduction, providing crucial tax relief for small business owners.
The SALT Deduction: Will the Cap Be Lifted?
The TCJA capped the state and local tax (SALT) deduction at $10,000. Trump has hinted at lifting this cap, or at least increasing it, to $20,000, which would benefit taxpayers in high-tax states. However, removing the cap would reduce revenue for other TCJA reforms, creating a potential challenge for lawmakers.
Eliminating Taxes on Social Security Benefits
Trump has expressed support for removing taxes on Social Security benefits, which could relieve many retirees who currently pay taxes on their benefits if their income exceeds certain thresholds. This proposal aims to help seniors by reducing their tax burden on their Social Security income.
No Taxes on Overtime Pay and Tip Income
On the campaign trail, Trump proposed eliminating taxes on overtime pay and tip income. While details remain unclear, this could benefit workers by making overtime jobs and tip-based income more attractive and financially rewarding.
Tax Breaks for U.S. Expatriates
Trump has promised to reduce taxes for U.S. citizens living abroad, who are currently taxed on their worldwide income. Expats may benefit from exemptions and a lower tax burden on income earned outside the U.S., which could encourage American citizens to live and work abroad.
The External Revenue Service: A New Approach to Tariffs
In a bid to collect tariffs on foreign goods, Trump announced plans to create an External Revenue Service (ERS). This new agency would oversee tariffs, which are effectively taxes on imported goods. Trump has proposed tariffs of up to 20%, and even 60% on goods from China. This could increase costs for U.S. consumers and businesses relying on imported products.
Impact of Tariffs on Small Businesses and Consumers
The proposed tariffs could place a strain on small businesses, many of which rely on imported goods. U.S. businesses that buy products from abroad, especially China, would likely face higher costs. These increased expenses may be passed on to consumers, leading to higher prices on everyday goods and services. Business owners may need to adapt by negotiating better deals with suppliers and adjusting their pricing strategies to stay competitive.
Trump’s second term could usher in significant tax changes that impact individuals, businesses, and the economy at large. Whether these changes come to fruition will depend on legislative negotiations, but taxpayers can expect potential shifts in tax policies starting in 2025.
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