The Tax Cuts and Jobs Act (“TCJA”) of 2017, signed into law by Donald Trump in his first term, brought substantial and wide-reaching tax changes to the United States Internal Revenue Code. Although many of its provisions are set to expire (or change) in 2025/2026, it remains to be seen as to whether Trump will focus on tax law changes in his second term.
Several major TCJA provisions are scheduled to expire at the end of 2025, including the reduction to individual income tax rates, the increase in the standard deduction, the increase in child tax credits, the 20% qualified business income deduction, the individual state income tax deduction limitations, the nondeducibility of miscellaneous itemized deductions, the overall 3% limitation on itemized deductions (“Pease”) and the estate tax increased exemption amounts. These changes will likely have extensive effects on consumer and business spending. Specifically, the increase in individual income tax rates will likely reduce household savings, which then could negatively affect financial stability and economic spending.
| Topic | Current Law | Trump Proposals |
|---|---|---|
| Corporate taxes | Corporate income tax is subject to a flat 21% rate. | Reduce the corporate tax rate to 15% for companies making products in the U.S. and 20% for all other corporations. |
| Capital gains | The top long-term capital gains rate is 20% for 2024 income over $518,901 for Single ($583,751 for MFJ). | No specific plan to change but favors lowered rates. |
| Taxation of endowments | Most university endowments are tax exempt, with a small number subject to a 1.4% tax on investment income imposed by the TCJA. | Proposes to tax large, private university endowments. |
| Certain income may be exempt from payroll tax | The 12.4% Social Security tax is paid evenly by an employer and employee and applies to the first $168,600 of an individual’s wages in 2024. | Proposes to exempt income from overtime pay and tips from employee part of payroll tax. |
| State and local tax (SALT) cap | The Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000. This cap expires in 2025. | Generally, favors the restoration of a full SALT deduction; although, this is still unclear. |
| Estate taxes | The 2024 estate tax exemption is currently $13.6M. The TCJA increased exemption expires at the end of 2025, at which time the exemption will revert back to a lower amount. | Favors making permanent the expiring estate tax reductions in the TCJA, including the increased exemption. |
| Certain income may be exempt from income tax | Social Security benefits and income from tips and overtime pay are subject to federal income tax. | Proposes to exempt tip income, overtime pay and Social Security benefits from income taxation. |
| Individual tax rates | The top marginal rate is 37% for income over $609,350 for Single/HOH and $731,200 for MFJ. These rates expire in 2025, increasing the top rate to 39.6% in 2026. | Favors making permanent the expiring TCJA individual income tax cuts. Top rate would remain at 37%. |
| Bonus depreciation | 100% bonus rate phased out in increments of 20% beginning in 2023; therefore, 60% rate in effect for 2024, 40% for 2025 and 20% for 2026. | Favors a return to 100% bonus depreciation for qualified property. |
| Treatment of R&D expenditures (Section 174) | R&D expenditures, paid or incurred in years after 2021, are subject to capitalization and amortization over 5 years for research conducted within the U.S. and 15 years for research conducted outside the U.S. This provision does not expire. | Favors “expanded R&D tax credits.” TBD if that refers to Section 41 credits or a reversal of Section 174 capitalization. |
| Certain interest expense deductions | No deduction for interest paid on a loan to buy a car for personal use. | Proposes to make interest on automobile loans fully deductible for vehicles that are “manufactured in the United States.” |
| Inflation Reduction Act | Enacted in 2022 under Biden. | Trump proposes modifications and/or repeal. |
Changing the corporate tax rate
The current corporate tax rate of 21% could be in for a change under the new Trump administration. He has discussed reducing the rate to 20% for all corporations, and even lower to 15% if the corporation produces products in the U.S. Much like the tax policies in his first term, he seems likely to drive toward incentivizing businesses to increase jobs in the U.S. Studies have shown that increasing the corporate income tax rate is considered to have a negative effect on economic growth. This is likely due to less corporate cash available to invest in R&D, employee training and other important areas that generate growth in our economy. Recent analyses are now finding that the TCJA’s corporate tax reforms helped boost U.S. domestic investment. In general, raising the corporate tax rate can shrink the U.S. economy and jobs, making the opposite true as well — lowering the corporate tax rate would grow the U.S. economy.
Business deductions
Whereas certain TCJA tax changes are set to expire, as discussed above, others are permanently in the Tax Code, unless adjusted by future legislation. These include the corporate income tax rate at a flat rate of 21%, business interest expense limitations, certain international provisions (which are permanent but scheduled to incur a rate change) and the capitalization and amortization of Research and Development (“R&D”) costs. Although the requirement to capitalize and amortize R&D costs was enacted as part of TCJA, its effective date was delayed until the 2022 tax year. Multiple Congressional attempts were made to reverse the provision or delay its date of implementation, but none of those attempts prevailed, and its effective date remained as enacted. This provision continues to attract attention, and the arguments over capitalization and amortization versus current deduction continue.
State and local tax cap
TCJA imposed a cap of $10,000 on the amount of state and local taxes that an individual can claim on a tax return effective for the 2018 tax year. This generated quite a lot of concern in high-tax states, such as New York and California, leading to extensive analysis and attempts to find a “workaround.” The initial attempts were rejected by the IRS, including the characterization of state payments as “charitable contributions.” However, beginning in 2020, the Internal Revenue Service (“IRS”) approved the suggested workaround of a pass-through entity (PTE) tax. This is state tax incurred and paid at the pass-through entity level, which is then deducted on the pass-through federal return against business income and claimed as a state income tax credit on the state income tax return of the PTE owner(s). Each state allowing this treatment has adopted its own methodology on how to report the PTE, the timing of the PTE elections and payments and the like.
Trump does favor restoring the SALT deduction without a cap, although this is not entirely clear. Even with a full state deduction restored, the state PTE elections could still be beneficial, considering the existence of the federal individual alternative minimum tax. Could the PTE continue to exist even with an unlimited SALT deduction? On the other hand, if the administration extends the cap on state tax deductions for federal purposes, and the state tax PTE elections begin to expire (for example, the PTE election in California is only effective for years beginning on or before 1/1/26), taxpayers could be back in the same position before the workaround — no individual state tax deduction and no PTE election.
Tariffs
Donald Trump has proposed imposing a universal baseline tariff of 10% on all U.S. imports, a higher 60% tariff on all U.S. imports from China and even tariffs on U.S.-based businesses that outsource offshore or replace American workers.
Much of the framework of Trump’s tax proposals for his second administration is pulled from the campaign trail, so there is no telling what he actually might accomplish. But one thing we can bet on is the desire to create U.S. jobs and the potential use of the tax regime to do it.
