Americans may soon be dealing with a massive tax-related surprise when Trump-era tax cuts expire in the upcoming year.
Millions of Americans May Soon Be Affected by Increasingly Steep Tax Bills
With the imminent expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025, millions of Americans may soon have to deal with drastically increased tax bills. Former President Trump enacted these tax cuts into law in 2017. The law made staggering changes to the nation’s tax code, which included reducing the top individual tax bracket from 39.6% to around 37%. He also nearly doubled the size of the standard tax deduction, which decreased the tax burden for millions of Americans who are now facing a surprising increase.
The changes to the section of the tax code that affects individuals are slated for retirement in 2025, which means that many taxpayers will face a sudden, shocking increase if the law is not extended. If lawmakers choose to allow the full expiration of these tax laws, a majority of Americans will see increased personal tax bills. They may also face worsening incentives for working hard and investing well.
In addition to lowering the highest tax bracket for the wealthiest Americans, the Trump-era tax cuts also raised the thresholds for several taxable income brackets. This was able to reduce the tax liability for many American households.
Let’s Take a Look at the Differences in Tax Brackets for Individuals Pre- and Post-the Tax Cuts and Jobs Act
In 2017, prior to the TCJA taking effect, the individual tax brackets for income were as follows:
10%: This applied to people making a taxable income up to $9,525
15%: This applied to people making a taxable income over $9,525
25%: This applied to people making a taxable income over $38,700
28%: This applied to people making a taxable income over $93,700
33%: This applied to people making a taxable income over $195,450
35%: This applied to people making a taxable income over $424,950
38%: This applied to people making a taxable income over $426,700
Post-TCJA taking effect, as of 2024, the individual tax brackets for income were adjusted to stand as follows:
10%: This applies to people making a taxable income up to $11,600
12%: This applies to people making a taxable income over $11,600
22%: This applies to people making a taxable income over $47,150
24%: This applies to people making a taxable income over $100,525
32%: This applies to people making a taxable income over $191,950
35%: This applies to people making a taxable income over $243,725
37%: This applies to people making a taxable income over $609,350
What Happens When the Law Expires?
With the upcoming expiration of the expansive tax law on December 31, 2025, Americans will be forced to pay anywhere between 1% and 4% more in taxes unless the law’s lifespan is extended or hopefully made permanent.
In addition, we will be seeing the end of the SALT (state and local taxes) deduction cap at the end of 2025, which works to limit the total amount of state and local taxes that taxpaying individuals can deduct from their federal taxes (with a maximum of $10,000 per household).
Taxpaying individuals who typically itemize their deductions may deduct up to $10,000 relating to property, sales, or income taxes previously paid to state and local governments. Prior to the advent of the Tax Cuts and Jobs Act, there was no cap on the value of the SALT deduction. Theoretically, the deduction exists with the purpose of offsetting some federal taxpayer liability by excluding some of their income, which has already been taken by taxes for state and local government services.
Statistically speaking, more taxpayers from states with higher-tax regimes that provide more government services, such as New York, New Jersey, and Connecticut, are likely to claim this deduction. The SALT deduction tends to disproportionately benefit higher-income individuals, which essentially violates the principle of tax neutrality.
The SALT deduction cap has lost some of its efficacy as a revenue generator since 2017, thanks to several new workarounds.
How the Tax Cuts and Jobs Act Plays into the Upcoming Election
With the impending election this fall, the tax landscape could change drastically in the near future as the Democrat and Republican sides of the House duke it out to see which proposals can be moved forward to further impact investors.
When former President Trump signed the expansive Tax Cuts and Jobs Act into law in December 2017, the bill represented sweeping changes in the tax realm. The Tax Cuts and Jobs Act reduced the high corporate tax rates from 35% to a significantly lower 21%. It also lowered individual income tax rates and decreased taxation on inherited income.
While the TCJA made most of the corporate tax-related changes permanent, many personal income tax enhancements were temporary, only scheduled to last until the end of next year. With the election on the horizon, Trump’s camp is looking to extend some of the tax cuts that are slated to expire at the end of 2025 and make others permanent in order to garner more support for his run for the presidency.
President Biden may even choose to retain the tax reductions for those Americans earning less than $400,000 if he is elected again for a second term in office. The issue at hand, though, is that the Congressional Budget Office has stated that extending the term of the TCJA would add upwards of $3.7 trillion in debt to the federal budget deficit.
Regardless of whether all or parts of the TCJA are extended or made permanent, lawmakers should consider the pros and cons of each change that the 2017 tax law made to figure out a plan for the future. Ideally, they will craft a plan to solidify the tax code in a way that fosters growth and opportunity for all without plaguing the United States with worsening the national debt.
