Trump Tax Agenda Faces Uncertain Future Despite Republican Control of Congress

President-elect Donald J. Trump is likely to enter office Jan. 20, 2025, with both chambers of the United States Congress under Republican majorities. However, the majorities are very slim, and budget constraints will put pressure on the White House and Congress to narrow the scope of many tax proposals. The actual outcome of the legislative process will be unknown for many months, but several high-level themes should be considered while Congress begins its legislative work.

TCJA Sunsetting Provisions

The first Trump administration was able to pass significant tax reform legislation in 2017 known as the Tax Cuts and Jobs Act (TCJA). Many provisions within TCJA are scheduled to expire at the end of 2025, a few of which include:

• Expiration of the 20% deduction on qualified business income (QBI)
• Reduction of the estate tax exemption
• $10,000 maximum deduction cap lifted on state and local taxes paid by individuals
• Highest individual marginal tax rate to increase from 37% to 39.6%
• Availability of child tax credits to be narrowed
• Bonus depreciation phases down to 0% by 2027

Trump has signaled a desire to extend TCJA’s tax benefits. The outcome of the 2024 election makes it more likely that many, if not all, of the above tax provisions will be extended. However, the estimated cost of a straight extension of TCJA’s tax provisions is $4 trillion over a 10-year period, depending on how the budget scoring is determined. Thus, a straight extension may be difficult to pass through the legislative process.

Although the outcome is unknown at this time, the historical position of Republican majorities indicates they may push to retain the 20% QBI deduction, provide for some form of bonus depreciation, and retain the increased estate tax exemption. These are important considerations for taxpayers making structuring decisions for their business ventures and engaging in estate planning discussions with their advisors.

The budget constraints could mean the $10,000 cap on individuals’ deductions for state and local taxes remains in place. There have been mixed messages from Trump and other Republicans about their desire to allow this limitation to expire. Instead, they could look to simply increase the deduction cap rather than eliminating it all together. Similarly, it is unclear how the Republican-controlled government will view expansion of the child tax credit.

Corporate Income Tax Rate

Trump has signaled a desire to reduce the corporate income tax rate from 21% to 15%. It isn’t clear how hard Trump and congressional leaders will push for this as part of any tax reform package. However, another reduction of the corporate income tax rate could signal a need to restructure certain flow-through business structures into C corporation structures. Thus, taxpayers must closely monitor this aspect of the legislative process.

Campaign Promises

Trump has mentioned several tax proposals on the campaign trail that are dramatic departures from historical income tax norms. This includes:

• Exempting tips and overtime pay from income tax
• Allowing a deduction for interest on personal auto loans
• Exempting social security benefits from income tax

These provisions are unlikely to fit within the budget constraints imposed on the new legislation. Instead, a more limited version of some of these proposals could come to pass. For example, legislators could look to increase the income threshold for when social security benefits become taxable rather than eliminating it all together. Also, the ultimate budget score of these proposals could impact the likelihood they pass. For example, the impact on the budget from exempting tips is much smaller than the impact from exempting overtime compensation. Thus, the chances of some sort of exemption on tips is greater than an exemption of overtime compensation.

Green Energy Tax Credits

President Biden signed the Inflation Reduction Act of 2022 (IRA) in August 2022. The IRA contains a plethora of energy-related tax credits and other green energy incentives. This includes credits for the purchase of electric vehicles, for the production of green energy components (solar, wind, qualified battery components, etc.), expansion of deductions for energy efficient building components, and more. The IRA passed through Congress on party lines without a single Republican vote in favor of the legislation. Thus, taxpayers that are relying on any of the green energy incentives within the IRA must monitor the upcoming legislative process closely given the lack of Republican support when the IRA was passed.

IRS Funding

The IRA also provided $80 billion in additional funding to the IRS. The portion of this additional funding dedicated to IRS enforcement efforts has been criticized by many within the Republican caucus. It’s possible the IRS budget will be cut under the new Republican-led government. However, cutting funding for IRS enforcement scores in the budget as a net reduction to revenue, so budget constraints will be a consideration in determining funding for the IRS.

Tariffs

Trump has repeatedly promised to aggressively increase tariffs with an across-the-board 10%-20% tariff on all imports and up to 60% on all imports from China. Trump will likely have broad authority to impose new tariffs with minimal involvement from Congress. Given Trump’s use of tariff’s during his first term in office, businesses and consumers alike will want to keep a close eye on whether or not Trump follows through on this campaign promise.

As we await the new legislative agenda under President-elect Trump and a Republican-led Congress, taxpayers and businesses should stay attentive to upcoming developments in tax policy and economic regulation. Although the likelihood and scope of changes to tax rates, deductions, green energy incentives, and tariffs are still uncertain, early preparation can provide strategic advantages.

KSM closely follows tax and legislative activity across the country. Thus, if you have questions about how these changes might impact your business, please contact your KSM advisor or fill out this form.