For five years, most Americans have seen lower income-tax rates and tapped a bigger standard deduction, but without congressional action before the end of 2025, the rules could still revert to levels set long before the pandemic blindsided households and inflation raged.
On Thursday, President Joe Biden is unveiling a budget that details his latest attempts to tax the top of the income ladder. That includes a plan to raise the rate on the taxes connected to Medicare among households making over $400,000. Other proposals include a billionaire minimum tax and quadrupling the current 1% stock-buyback tax — two ideas he’s touted.
There’s slim chance Biden’s tax-hike proposals become law anytime soon, considering the Republican majority in the House. It’s about political messages ahead of the 2024 presidential race, according to observers.
Tax cuts in Republican tax-code overhaul of 2017 will soon come to an end
But the sun will soon set on Trump-era tax rules related to marginal rates, standard deduction amounts, the child tax credit and other provisions. These rules were part of the Trump-era Tax Cuts and Jobs Act of 2017, a law overhauling income-tax rules for individuals, estates, small businesses and corporations.
“I view the 2025 expiring tax provisions as this hurricane we already see on the radar, and it’s slowly approaching,” said Jennifer Acuña of KPMG, the tax, advisory and accounting firm. Acuña is a principal at the firm’s federal legislative and regulatory services group in its Washington National Tax practice.
“ ‘I view the 2025 expiring tax provisions as this hurricane we already see on the radar, and it’s slowly approaching.’ ”
“We’re talking about middle-class taxpayers across the board who are going to be affected by this,” said Acuña who, as a top lawyer in the Senate Finance Committee, helped draft the 2017 law.
What happens when the TCJA provisions expire in 2025 will spark a new round of debates between the Republicans and Democrats on tax breaks for the rich, said Jorge Castro of the law firm Miller & Chevalier, and co-lead of the firm’s tax policy practice. “You are going to see a lot back and forth beginning this year,” he added.
Erica York, senior economist and research manager at the Tax Foundation, a right-leaning tax-policy think tank, added, “2025 is going to going down as a very messy year for tax policy.”
Republican lawmakers have been introducing laws in an attempt to make the Trump-era tax-law changes permanent. One bill, the TJCA Permanency Act, has over 70 co-sponsors in the House.
Portions of the Trump tax cuts have lightened the tax burden for broad arrays of households, said Steve Wamhoff, federal policy director at the left-leaning Institute on Taxation and Economic Policy. “The higher you go up the income ladder, the more you get from making these tax cuts permanent,” he said.
The White House and congressional budget proposals should all be talking about these expiring provisions and how to pay for them if they are being extended, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
“Budgets that ignore these expirations are likely to paint an overly rosy outlook, as extensions without offsets would dramatically worsen the fiscal outlook,” she said in a statement.
The Biden budget materials say the White House will work with Congress to address the 2025 expirations “and focus tax policy on rewarding work not wealth.”
On Thursday, Shalanda Young, director of the White House’s Office of Management and Budget, told reporters that the budget references the 2025 expirations in order for the administration to be “crystal clear about our principles here.”
Biden, she said, “will not support a penny of new taxes for those making under $400,000. Full stop. That includes ensuring that they don’t lose out when these tax cuts expire. But we do think there’s a way to do this in a fiscally responsible way.”
That happens by asking “the wealthiest to pay their fair share,” Young said.
What happens next will hinge on who becomes president in 2025, which party controls Congress, and how heavy a role the country’s debts will play, experts say. Some expiring provisions could offer paths for agreement. For others, it’s an open question.
Here’s a look:
The standard deduction nearly doubled under the 2017 law. In 2018, the standard deduction increased to $12,000 from $6,500 for individual filers and jumped to $24,000 from $13,000 for married couples filing jointly.
The deduction is updated for inflation annually. As a result, for the income-tax returns people are filing now, the standard deduction is worth $12,950 for individuals and $25,900 for joint filers.
As the standard deduction went up, more people used it. That’s because itemizing makes sense only when the sum of itemized deductions outweigh the standard deduction’s amount.
Around two-thirds of individual returns took the standard deduction in the year before the boost, IRS statistics show. Approximately 90% of individual returns took it last filing season, IRS numbers show.
A standard deduction that remains larger could be low-hanging fruit with bipartisan appeal, Acuña said. “It’s worked pretty well. It has really simplified the filing process and it’s been less polarizing.”
The TCJA lowered five of the seven income-tax rates and shifted the income levels on when households bump up to the next bracket. Only the 10% rate at the bottom end and the 35% rate near the top were unchanged.
The top rate decreased to 37% from 39.6%. Biden pressed for a return to the 39.6% rate as both a candidate and as president. “The biggest fights are going be about provisions that affect the wealthy,” York said.
Biden’s budget proposal Thursday seeks to put the top rate back at 39.6%. For households making $1 million a year and over, the proposal would increase the capital gains rate to 39.6% from 20%.
As for lower-rung tax rates? “I can see there being political will from both political parties to extend that,” Castro said. “No one wants to raise taxes on lower- and middle-class families.”
But even if there’s agreement to keep taxes lower for low- and moderate-income families, the details will get complicated quickly considering the tax revenue at stake, Acuña said. “Any slight modification, it just costs a lot of money,” she noted.
Child tax credit
Before the TCJA, the child tax credit paid $1,000 per child, with a phase-out kicking in at $75,000 for individuals and $110,000 for married couples. The law doubled the amount and pushed the income eligibility phase-out back much farther. But the credit is partially refundable, meaning taxpayers needed earned income and tax liability to unlock the full payment.
The American Rescue Plan of 2021 changed that for a year. Payouts jumped to $3,600 per child under age 6 and $3,000 for ages 6 to 17. Half of the amount was paid in monthly installments and the rest in the tax-year 2021 refund. The credit became fully refundable, pausing an earned income requirement.
The credit is already the subject of debate — particularly the earned income requirements. The enhanced credit’s supporters have already tried several times to revive it, most recently at the end of 2022. “The appetite for lawmakers to come together on that is uncertain,” York said.
Broadly speaking, both sides of the aisle want to extend tax relief to families raising kids, Castro said. Yet agreeing to the mix of eligibility rules and payment amounts will be the open question, he noted.
Biden’s budget proposal Thursday would bring the credit back to its boosted 2021 levels. The expanded credit would be in place through 2025, and it would permanently become fully refundable, according to Treasury Department materials.
State and local tax deductions
While the TCJA increased the standard deduction, it curbed some itemized deductions and the limited the state and local tax deduction to $10,000. The deduction was previously unlimited and if tax rules went back to where they were, the cap would come back off.
The $10,000 cap was controversial from the start, prompting lawsuits from several Democratic-led states. (The litigation was unsuccessful, and the Supreme Court last year refused to take the case.)
There is a bipartisan band of lawmakers in states with higher state and local taxes, notably property taxes, known as the SALT caucus. But will the SALT cap come back off? “That’s probably a jump ball right now,” Castro said.
Tax rules for small-business owners
While the TCJA permanently cut the corporate income-tax rate to 21% from 35%, the law also allowed eligible taxpayers a 20% deduction on qualified business income.
As corporations received a permanent tax cut, the idea was giving pass-through businesses, including small businesses, tax relief as well, York said.
For example, around 75% of the members in the National Federation of Independent Business, a small-business trade and advocacy organization, organize their business as entities that pass income through to its owners or partners.
The deduction applies to businesses formed as limited liability companies, partnerships, sole proprietors and S corporations. If tax rules lapse back, the 20% deduction would go away and the business owners’ income-tax rate would also go back up, York said.
Critics, like Wamhoff, are quick to note that there’s a wide range of very well-off taxpayers who can benefit from tax rules billed as a benefit to small business. The rules are complicated and “a lot of this tax break is designed for when someone is successful, it makes things easier for them.”
One possible outcome could be a narrower version of the tax rules tucked in Section 199A, said Acuña. But nothing’s for sure. Compared to the prospect of a standard deduction that stays larger, “that one is a lot more polarizing,” she said.
Victor Reklaitis contributed to this report