Navigating the tax landscape over the past decade can indeed be perplexing. Here's a simplified overview to help clear the fog:
In President Trump's second term, lawmakers have approximately 11 months to decide the fate of several provisions from the 2017 Tax Cuts and Jobs Act (TCJA), which saw significant tax reforms. With numerous TCJA provisions set to expire on December 31, 2025, taxpayers will find themselves navigating a complex web of proposals, amendments, and political battles, all while waiting to learn which provisions will endure, which will disappear, and how these changes will impact their financial situation.
During the 2017 tier of tax reform debates, many tax professionals, such as enrolled agent Karla Dennis, expressed feeling overwhelmed by the overwhelming wave of changes. The TCJA brought a flurry of modifications and new regulations, leaving many provisions filled with ambiguity and open for interpretation, especially with regards to a 20% deduction for businesses and partnerships filing under the individual income tax code. This confusion continues today with the IRS still finalizing some guidance.
Meanwhile, some filers are still grappling with questions regarding the TCJA's impact, a quarter of a century after incorporating certain practices into their tax preparation. Moreover, the outbreak of the pandemic has further complicated matters by giving rise to high-impact, short-term tax provisions such as the temporary substantial increase in the child tax credit, which single-handedly slashed the poverty rate in half for many families.
Among the 34 TCJA provisions set to expire in 2025 are key provisions impacting individual income tax rates, personal exemptions, the standard deduction, the child tax credit, and the state and local tax deduction (SALT). These changes have far-reaching implications for taxpayers as they could face higher tax rates, reduced deductions, and potentially increased taxable income.
Going forward, extending the TCJA in its entirety has been estimated to amount to $4.6 trillion over the next decade. To avoid busting the budget, legislators may modify the size or eligibility rules for certain provisions, choose not to extend others, or discover alternative methods to offset some or all the costs associated with extending the vast majority of the expiring provisions.
Consequently, taxpayers must refrain from making any presumptions about tax legislation until such time as it becomes law. Renowned tax professionals will be able to more efficiently and rapidly identify the taxpayers that will be affected by discretionary propositions and explain the advantages or difficulties of the prospective tax law adjustments to affected parties.
It is essential for taxpayers not to alter their withholdings based on any assumptions for the current tax year. They should maintain thorough financial records for all transactions, even if, under the TCJA, they no longer needed documentation for itemizing. The potential for tax reforms to alter significantly, positively or negatively, by year's end continues to be a major consideration.
Businesses and partnerships are closely watching the 11-month window for lawmakers to decide the fate of TCJA provisions, as the 20% deduction for such entities under the individual income tax code could be significantly impacted.
With several TCJA provisions set to expire in 2025, many businesses are uncertain about their future tax liabilities, as key provisions affecting individual income tax rates, personal exemptions, and the state and local tax deduction could impact their financial situation.
