Tax policy: the implications of a Republican sweep for individual taxpayers

Republicans have swept the 2024 elections, providing a path to pursue their agenda of extending and potentially creating new tax cuts. The United States is in imminent need of tax reform, as many provisions from Republican’s landmark 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025.

The shape of potential tax reform

With unified control of the government, enacting Republican tax priorities may seem as though it should be simple; however, it’s anything but. There are three main challenges policymakers will face as they attempt to pass a major tax bill:

• Using reconciliation: Republicans will attempt to use the reconciliation process to pass tax reform, allowing them to avoid the 60-vote threshold required to break a filibuster in the Senate. Reconciliation bills are subject to the following limitations:
• They can only include provisions related to revenue and spending, and nothing with “merely incidental” budgetary effects can be included
• They can only increase or decrease the federal deficit by the amount dictated in the budget resolution
• They can’t increase the deficit outside of the budget window, which is usually 10 years
• They can’t make any changes to Social Security
• Influence of individual policymakers: Republicans captured both chambers in the 2024 election, but they won’t be governing with large margins. In the Senate, they’re likely to control with 53 of the 100 seats. Several races in the House of Representatives are yet to be decided, but they will have between 218 and 223 of the 435 seats.  When there are narrow majorities, individual policymakers can exert significant influence. We saw this in 2021 and 2022 with Senators Joe Manchin and Krysten Sinema putting the brakes on President Biden’s Build Back Better agenda and in 2023 when less than 10 House Republicans effectively removed their Speaker. We’re paying particular attention to the State and Local Tax (SALT) Caucus, which includes a of a number of “blue state” Republican representatives, as we head into the 2025 tax debate.
• Cost: A blanket extension of all TJCA’s policies would cost $4.6 trillion over the next 10 years, per the latest estimate by the nonpartisan Congressional Budget Office [1].  Repealing the SALT cap would likely cost another $1.2 trillion [2].  Additionally, President Trump made a number of tax campaign proposals [3], many of which would increase the cost of any tax bill. While the Republicans are generally aligned in their desire to extend the TCJA, some believe there is no need for the potential legislation to include offsets, such as revenue-raising provisions or decreases in spending. Others disagree, citing a swift and concerning increase in annual deficits and the national debt. 

Reconciliation bills are authorized when a budget resolution provides reconciliation instructions, which direct Congress to achieve a specific budget outcome, essentially authorizing a certain amount of spending or dictating a certain amount of revenue be raised. Given the significant concerns surrounding government deficits and the extensive cost of Republican priorities, building consensus based on the amount the reconciliation bill may cost could prove to be a challenge. If policymakers are limited in what they can enact via reconciliation by the amount authorized, there are several ways they could attempt to enact the majority of their priorities while controlling the net cost:

• Include revenue raising provisions: The Republicans went this route for the TJCA, which was originally scored as containing $5.5 trillion in tax cuts and $4 trillion in revenue raisers, to net to a total of $1.5 trillion in deficit creation allowed by the budget instructions. Several potential revenue raisers have been floated, including adopting the early termination of the Employee Retention Credit outlined in the stalled bipartisan budget bill, eliminating some Inflation Reduction Act energy credits and increasing tariffs. Policymakers could also look for spending cuts to help offset the cost of the bill.
• Reduce the length: While a budget window is typically 10 years, policies implemented via reconciliation aren’t required to last the full duration of the window.  The majority of the TJCA expiring provisions were only in effect for eight years, and several TCJA provisions have already changed, including the Sec.163(j) business interest limitation, the treatment of research and experimental expenditures and the phase-out of bonus depreciation. Republicans could shorten the window even further to accommodate their budget limitations.
• Reduce or change the provisions extended: This seems like the least likely offset, as several prominent Republicans, including Ways and Means Chair Jason Smith (R – MO) and Senate Finance Committee Chair Mike Crapo (R – ID), have stated they would like to seriously consider many of President Trump’s priorities, noting that the inclusion and structure of these provisions remain unknown and the devil is in the details.

While the ultimate shape of the potential tax reform bill is still unclear, we expect the majority of the TJCA will be extended for several years. Other Republican priorities and/or President Trump campaign proposals may also be included. 

The timing of potential tax reform

Republican policymakers have been preparing for a potential tax reconciliation bill for months. We expect this will be an early priority once the new Congress convenes on Jan. 3, 2025 and the president is inaugurated on Jan. 20, 2025. Smith and Crapo are likely to continue preparations throughout the lame-duck session. However, as we noted in our November Policy Pulse, it will be a busy session with a number of must-pass bills.

Speaker Mike Johnson (R – LA) has stated he would like to have a bill pass through the House in the first 100 days of Trump’s presidency, which would be before May. This is an ambitious goal, but not necessarily unachievable.  

Implications for individual taxpayers

Leading into the election, most individual taxpayers were facing the potential sunsetting of temporary TCJA provisions, which include the following:

• Higher ordinary income tax rates that will change from 37% to 39.6%
• Reduction of the current lifetime estate exemption by half
• Elimination of the Qualified Business Income Deduction (QBI)
• Reduction of the AMT phase-out limit
• And other changes to individual deductions and credits

Should these provisions expire, most taxpayers would see a significant increase in their tax liabilities beginning Jan. 1, 2026. However, one provision that most taxpayers would welcome to expire is the SALT cap, which limits the deduction to $10,000 per taxpayer.

The TCJA was a landmark Republican tax bill signed by President Trump, which he and other Republicans campaigned on a full extension. However, as noted above, it will be extremely costly to extend and will require policymakers to craft a bill virtually all Republicans are willing to vote for. While we believe the majority of provisions are likely to be extended (until any legislation is passed) taxpayers should still prepare as if the TCJA will statutorily expire on the first day of 2026.

What should you do?

Estate planning: Continue with your plans to use your remaining lifetime exemption before the TCJA expires. The current exemption is the highest it has ever been, just under $28 million through the end of 2025, and is set to return to $14 million on Jan. 1, 2026. This represents a "use it or lose it" situation. Locking in any low asset values, coupled with valuation discounts, allows you to transfer more of your legacy to the next generation now. Future rules may not allow for the valuation discounts we currently have, so taking advantage of the current discounts will help facilitate value shifting to the next generation(s).

Income tax planning: Typically, at year-end, most taxpayers seek to delay recognition of income and accelerate deductible items into the current tax year to push tax bills further into the future. However, with the possibility of ordinary income tax rates increasing in 2026, taxpayers may need to consider an opposite approach at the end of 2025. While the normal process for the end of 2024 will still apply, in 2025 it would be prudent to consider ways to accelerate income at a lower rate and delay expenses or deductions to 2026 and beyond. When you are afforded a deduction through our tax code, the IRS is essentially subsidizing your deduction. At a 39.6% rate in the future, they are providing a larger subsidy or after-tax savings on the money spent.

Stay tuned

How Congress will address the upcoming fiscal cliff should take shape over the coming weeks and months. Baker Tilly will continue to provide updates and insights to help you navigate upcoming tax policy changes. 

Look for our monthly policy pulse, and please join us on Dec. 5 for our Tax Trends: Year-end planning series individual tax update webinar.

Questions?

If you have questions, please reach out to your Baker Tilly advisor to discuss the impact of our tax policy updates.

[1] Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues | Congressional Budget Office

[2] Per estimates by nonpartisan Committee for a Responsible Budget, SALT Cap Expiration Could Be Costly Mistake-2024-08-28

[3] Campaign proposals include: exempting social security, gratuity income, overtime and military and first responder pay from income tax, reducing the corporate income tax rate to 15% for domestic producers, creating a credit for family caregivers, making domestic automobile loan interest deductible, creating a temporary deduction for home generators, and reforming the tax regime for Americans abroad, among others

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.