2025: The Year Ahead

By: Shelby Follis, CPA, and Emily Cokeley, Ph.D., CPA

The curtains have closed on 2024 with the election completed, Tennessee Schedule G refund claims filed, and engagement letters for 2024 tax returns underway. Tax practitioners are gearing up for the busy season ahead. Many clients will be asking how to plan for tax changes affecting 2025 and beyond as we move into the new year. How do we answer them? The answer may be the always favorite, “It depends,” with everything settling from the election and the swearing-in of the next president. Here we will give a brief description of both expiring and new policies that may begin in 2025.

Sunsetting TCJA

The Tax Cuts and Jobs Act (TCJA) passed in 2017 was the largest tax code overhaul since the Tax Reform Act of 1986, yet many of the tax provisions are set to sunset at the end of 2025. The tax provisions will revert to previous law without an act of Congress; however, President Donald Trump adamantly voiced making most of the provisions with the TCJA permanent. Outlined below are provisions that will likely have the greatest impact on the greatest number of taxpayers if they sunset after 2025. The plans for these provisions have been gleaned from the discussions around them during the presidential campaign in 2024.

• Individual Provisions

The following tax modifications will affect all individual taxpayers, so it may be beneficial to remind clients of these potential adjustments when planning for 2025 and 2026. In 2018, the standard deduction nearly doubled to $12,000 from $6,500 in 2017 for single taxpayers, and the standard deduction similarly increased for other filing statuses as well. Now, the 2025 standard deduction is $15,000 for single taxpayers ($30,000 MFJ). If the provision sunsets, the standard deduction could potentially be reduced to $8,350 for single taxpayers ($16,750 MFJ) in 2026, according to the Congressional Budget Office’s June 2024 publication of “Tax Parameters,” rather than the estimated $15,450 for single taxpayers ($30,850 MFJ). We have not had personal exemptions, a below-the-line deduction, since 2017, but if the TCJA sunsets, the expected personal exemption will be $5,300. Additionally, the child tax credit will be reduced by 50% to $1,000 in 2026, with a decrease in the AGI phaseout resulting in fewer taxpayers eligible to take the credit.¹

For those taxpayers who itemize, the calculation had several changes as a result of the TCJA that have affected tax years 2018-2025. Notably, the state and local tax (SALT) deduction was capped at $10,000, where it previously had no limit. To ease the tax burden many felt, states began allowing pass-through entities the option to pay their state and local taxes at the entity-level by paying pass-through entity (PTE) tax, which varies by state. These provisions allow for specified income tax payments paid to a state or local government to be deducted as a non-separately stated expense passed through to the individual in box 1 of Form K-1.² The SALT cap is one of the few TCJA reforms that President Trump has stated that he does not wish to extend. If that is the case, after tax year 2025, there will no longer be a $10,000 limit on state and local taxes claimed when calculating a taxpayer’s itemized deductions.

Two other components of the itemized deduction calculation were altered by the TCJA: the elimination of miscellaneous itemized deductions subject to a 2% AGI threshold and the mortgage interest principal limitation. Some of the 2% miscellaneous itemized deductions included items like tax preparation fees, safe deposit box rent, unreimbursed employee business expenses, investment management expenses and other expenses incurred to produce income. These miscellaneous deductions that exceed 2% of a taxpayer’s AGI will be included in itemized deductions once again if the TCJA sunsets. Additionally, mortgage interest included as an itemized deduction remains limited by the principal left on the mortgage; however, the TCJA reduced the principal limit to $750,000 if acquired after Dec. 15, 2017. If the TCJA sunsets, the limit will revert to the 2017 amount of $1 million. The limitation is calculated by dividing the $750,000 threshold by the average balance of outstanding principal over the year. This factor is then multiplied by the total mortgage interest to determine the deduction allowed. Except for the SALT limitation, the president proposed to make these TCJA items permanent, resulting in no decrease in the standard deduction, no 2% miscellaneous deductions allowed, and the mortgage interest limit would remain at $750,000.³

• Estate and Gift Lifetime Exemption

As discussed in greater detail in the September/October 2024 issue, the estate and gift lifetime exemption doubled in 2018 with an increased base of $10 million from $5 million, adjusted annually for inflation. The estate and gift tax affects only high net-worth individuals, but it can have a great impact on the value of their estate. In short, the lifetime exemption is the value of the total of lifetime gifts and the estate of a decedent that will not be subject to the gift or estate tax. If a gift is under the annual exclusion ($19,000 per recipient for 2025), then it will not reduce the remaining lifetime exemption, and a gift tax return is not required for that year.

For 2025, the lifetime exemption is $13.99 million. However, on Jan. 1, 2026, it will be reduced to approximately $7 million unless the provision is extended. A lot of estate planning has taken place during this period of increased exemption and could be significantly affected if the provision is not extended; however, the IRS released final regulations in 2019 stating those who take advantage of the increased lifetime exemption before it sunsets in 2026 would not be penalized if the exemption were to decrease in the future. Instead, a special rule allows the use of the higher of the lifetime exemption applicable to gifts made during life or the lifetime exemption on the date of death. President Trump intends to extend this provision as well. The value of estate planning completed was not all lost as many of the assets transferred by gifting would have likely appreciated in value, having less of an impact on the value of an estate by removing it sooner.

• Business Provisions

Bonus depreciation started at 100% in 2018, the year the TCJA went into effect. Taxpayers enjoyed this deduction up until 2023 when it began the phase-out process by reducing to 80%. For 2024, the percentage decreased to 60% and will further decrease to 40% in 2025. It will decrease to 20% in 2026 and no longer be available in 2027 if no further legislation is enacted. While there have been attempts to restore bonus depreciation to 100% in the past year, they have been unsuccessful thus far. Trump intends to restore bonus back to 100%, which would ideally be effective retroactively to Jan. 1, 2025. The goal of this accelerated depreciation is to encourage capital investment as a way to strengthen the economy.

Research and development expenditures covered under Section 174 were previously expensed up until 2022. Currently, businesses capitalize and amortize these expenditures over five years beginning with the mid-point of the year in which they were incurred. If the costs were related to research outside the U.S., then it would be amortized over 15 years. This was a significant shift in the law considering these costs had been expensed since 1954.⁴ President Trump has revealed he would prefer R&D expenses no longer be capitalized.

The corporate tax rate was permanently reduced to a flat 21% when the TCJA was enacted. Section 199A (qualified business income deduction) was introduced to bridge the tax gap between corporations and other entity forms, such as pass-throughs or businesses filed on Form 1040. This 20% deduction of qualified business income is subject to two limits: a specified service trade or business and a wage and capital asset limit, both centered around the taxpayer’s taxable income. Unlike the reduced corporate rate of 21%, the qualified business income deduction is not permanent. While it is set to expire in 2026, there has been bipartisan support in Congress for extending the deduction. Additionally, President Trump has proposed it be made permanent.⁵

New Tax Policies

In addition to the policies President Trump signed into law during his first term, many new tax considerations were revealed during the election. Most of the new provisions are further tax cuts estimated to decrease the federal tax revenue by $7.8 trillion over the next 10 years. The offsetting revenue resulting from the expected increase in tariffs would raise federal tax revenue by approximately $4.7 trillion for a net estimated decrease of $3 trillion over the next 10 years. Note, these numbers do not consider some of the tax changes mentioned later in the campaign, such as the family caregiver credit and ending taxation for citizens living abroad.¹ Currently, these tax provisions are only campaign promises and would still require support from Congress. However, these are not to be taken lightly as they have the potential to make major changes to the tax law.

• Exempting tips, Social Security and overtime pay from income taxes: Many taxpayers would receive a large reduction in taxes, which would alleviate some of the tax burden for lower- and middle-class taxpayers. One may wonder how these provisions would be implemented in the filing process. Will the W-2 reporting requirements change? Will there be an income limitation? Will companies shift their employees from salary-based compensation to pay on an hourly basis so their employees can take advantage of the tax cut?
• Interest deduction for auto loans: Trump intends to enact a deduction for interest expense related to auto loans. He then followed up this proposal clarifying the automobile will need to be built in the U.S.⁶ One may anticipate this would be an itemized deduction similar to mortgage interest.
• Family caregiver credit: Trump confirmed during his campaign that he would support a caregiver credit. No further detail was provided;⁷ however, a bipartisan bill known as the Credit for Caring Act of 2024 would provide up to $5,000 per tax year to help caregivers cover long-term care costs. The Credit for Caring Act was introduced in the Senate on Jan. 31, 2024, and was referred to the Committee on Finance.⁸ No further information has been disclosed on this bill and no further action has been taken as of the time of this writing.
• Ending taxation of Americans living abroad: Currently, the U.S. tax code is known as a hybrid system with a mixture of worldwide and territorial features. A worldwide system generally encompasses all income earned regardless of its source. To mitigate double taxation, various mechanisms have been included, such as the foreign income exclusion and tax credits. A strict territorial system only taxes income derived from that country. The TCJA shifted the U.S. more towards a territorial tax system for businesses by exempting foreign profits.⁹

President Trump intends to move the U.S. tax system even further toward a territorial system by addressing U.S. citizens living abroad. In a campaign video to Americans living abroad, Trump vowed to “end double taxation on our overseas citizens.”¹⁰ While no further detail on how this would be accomplished was provided, many who had pushed for a move to a territorial- based tax system cheered, hoping citizens living abroad would no longer be required to report income derived outside of the U.S.

• Universal tariff of 10% on all U.S. imports: To mitigate the loss of income the U.S. government will face from the tax cuts described, President Trump intends to implement a universal tariff of at least 10% on imports. When considering interview responses supporting tariffs of 60% or more on imports from China specifically, many are concerned about the potential increase in prices expected from such a measure. The National Retail Foundation conducted a study with results showing $78 billion in annual spending power lost if President Trump’s proposals become law.¹¹ According to his campaign platform, the increase in tariffs on foreign products is justified by the decreased income tax burden on American taxpayers. The aim is to “rebalance trade.”¹²

2024: What We Do Know

With the uncertainty of numerous potential tax law changes, tax practitioners may wonder what is certain about upcoming tax law modifications (at least for now). Fear not! Here are a few known tax changes to consider when filing 2024 tax returns.

• 1099-K reporting: 2024 will be a transition year for 1099-K reporting for third-party settlement organizations (TPSO). Therefore, the reporting threshold for 2024 is total payments of $5,000. For further information on the transition period, please refer to IRS Notice 2024-85. If the taxpayer receives the 1099-K in error and is not able to obtain a corrected form, then the best practice is to report the income on Schedule 1, Part I, Line 8z as other income and then back it out on Part II, Line 24z as other adjustments. Both lines should be labeled “Form 1099-K Received in Error.”¹³
• Bonus depreciation reduced to 60%: As previously discussed, bonus depreciation is phasing out by 20% per year until it is no longer applicable in 2027. For 2024, bonus depreciation is 60%. Tax practitioners will need to stay vigilant in the event of any retroactive tax reform reinstating 100% bonus depreciation.
• SECURE 2.0 Act: Contribution limits to retirement accounts have increased since the SECURE 2.0 Act of 2022. For 2025, 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan contributions increased to $23,500 from $23,000 for employees, with a catch-up contribution of $7,500 for individuals over age 50. With adjustments from the SECURE 2.0 Act, the catch-up contributions for those ages 60-63 increased to $11,500, meaning a 61-year-old taxpayer participating in a 401(k) could contribute up to $35,000 to a 401(k) in 2025. The annual IRA contribution limit remains $7,000, with a catch-up contribution of an additional $1,000 for taxpayers over age 50. SIMPLE contribution limits increased to $16,500 in 2025 from $16,000.¹⁴

While it is not customary practice for the president to introduce tax bills to Congress, it is necessary for tax practitioners to remain current on the tax proposals discussed by President Trump, both during his campaign and during his presidency. With the House and the Senate weighted slightly more Republican, these proposed policies may be quickly implemented. As trusted advisors, we must have our finger on the pulse of tax reform to assist our clients with proper planning and implementation.

About the Authors

Shelby Follis, CPA, is a tax manager at LBMC. She can be reached at shelby.follis@lbmc.com.

Emily Cokeley, Ph.D., CPA, is an assistant professor at East Tennessee State University. She can be reached at cokeley@etsu.edu.

References

¹ York, E. (2024, October 24). How 2026 Tax Brackets Would Change if the TCJA Expires. Retrieved from taxfoundation.org/blog: https://bit.ly/26tcjaexpires

² IRS. (2020). IRS Notice 2020-75. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes.

³ York, E., et al. (2024, October 14). Donald Trump Tax Plan Ideas: Details and Analysis. Tax Foundation.

⁴ Bloomberg Industry Group, Inc. (2024, January 26). R&D Tax Credits and Deductions. Bloomberg Tax.

⁵ Guenther, G. (2024, January 22). The Debate over Extending the Section 199A. Congressional Research Service.

⁶ Singh, J. O. (2024, October 22). Trump says he’ll make interest on car loans tax deductible if domestically built. Thomson Reuters.

⁷ Konish, L. (2024, November 13). Trump wants to provide a tax credit for caregivers. Here’s what experts say about the proposal. CNBC: Personal Finance.

⁸ S.3702 - 118th Congress. (2024, January 31). Credit for Caring Act of 2024. Retrieved from https://bit.ly/creditforcaring24

⁹ Pomerleau, K. (2018, May 3). A Hybrid Approach: The Treatment of Foreign Profits under the Tax Cuts and Jobs Act. Retrieved from TaxFoundation.org: https://bit.ly/foreignprofitstcja

¹⁰ Rifaat, A. (2024, October 11). Trump Vows to End ‘Double Taxation’ of Overseas Citizens. Retrieved from TaxNotes: https://bit.ly/doubletaxoverseas

¹¹ Reuters. (2024, November 4). Trump’s tariff plan could cost Americans $78 billion in annual spending, NRF study shows. Retrieved from Reuters: Wealth: https://reut.rs/3DWlj1Y

¹² 43rd Republican National Convention. (2024, July 10). The 2024 Republican Platform. Republican National Committee. Retrieved from https://bit.ly/aboutgop

¹³ IRS. (2024, February 23). Actions to take if a Form 1099-K is received in error or with incorrect information. Retrieved from IRS Newsroom: https://bit.ly/incorrect1099k

¹⁴ IRS. (2024). IRS Notice 2024-80. 2025 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of- Living.

This article was originally published in the January/February 2025 Tennessee CPA Journal.