Introduction

As we approach 2025, discussions around taxes are heating up. A staggering 56% of Americans believe they pay too much in federal income taxes, and only 22% feel they receive valuable services in return. Simultaneously, 57% of citizens want deficit reduction to be a top priority for the government. Taxes and government spending will be central issues in the 2024 elections, with both major parties proposing significant changes. For many, 2025 has been dubbed “Tax Armageddon,” as the sunsetting of the Tax Cuts and Jobs Act (TCJA), implemented in 2017, could lead to substantial changes in tax rates and benefits.

The outcome of the 2024 elections will largely determine whether the TCJA provisions are extended or allowed to expire, directly impacting American households and businesses.

Trump’s Plan: Extending the Tax Cuts and Jobs Act

Former President Donald Trump has centered his tax policy on extending the Tax Cuts and Jobs Act (TCJA) if he is re-elected. Here’s what his plan could mean for taxpayers:

• Extending the TCJA: If the TCJA is extended, most Americans will likely see little change in their tax liabilities, maintaining benefits such as the higher standard deduction and lower tax rates. However, the extension could lead to a $1.1 trillion increase in the federal deficit over the next decade, according to the Congressional Budget Office (CBO).
• New Proposals: Trump has also proposed eliminating Social Security taxes and taxes on tip income, which could provide relief to older people and service workers. However, exempting Social Security income from taxation could further strain the program, accelerating its insolvency by several years.

Trump’s tax approach focuses on maintaining lower taxes for individuals and businesses, but it raises concerns about the federal deficit and future program funding.

Harris’s Plan: Focusing on Social Programs and Targeting the Wealthy

Vice President Kamala Harris presents a contrasting tax plan, aiming to preserve lower tax rates for most Americans while increasing taxes on corporations and wealthy individuals to fund social programs. Here’s how her tax policy could unfold:

• Continuing Lower Rates for the Middle Class: Harris has indicated that her administration would maintain the current TCJA tax cuts for individuals earning under $400,000, which accounts for the majority of taxpayers.
• Expanding Tax Credits: Harris advocates for an expansion of the Child Tax Credit (CTC), making it fully refundable to help low-income families. She also supports introducing a $6,000 tax credit for families with newborns and a $25,000 tax credit for first-time homebuyers.
• Higher Taxes on Wealthy and Corporations: To fund these social programs, Harris has proposed a 25% minimum tax on households worth over $100 million and an increase in the corporate tax rate from 21% to 28%.

Harris’s plan focuses on tax fairness and expanding benefits for lower-income families, while raising taxes on corporations and the wealthy to pay for these programs.

What Happens If the Tax Cuts Expire?

If the Tax Cuts and Jobs Act (TCJA) is allowed to expire after 2025, many of the benefits Americans have come to expect will revert to previous standards. Here’s what may change:

• Higher Standard Deduction: The TCJA doubled the standard deduction to $12,550 for individuals and $25,100 for married couples. Without an extension, these numbers will shrink, likely forcing more taxpayers to itemize their deductions.
• Child Tax Credit: The Child Tax Credit, which doubled under the TCJA to $2,000 per child, could revert to its previous level of $1,000. The income thresholds allowing families to qualify for this credit may also narrow, reducing its reach.
• SALT Deduction Cap: The $10,000 cap on state and local tax (SALT) deductions will expire if the TCJA sunsets. While this change could benefit taxpayers in high-tax states, such as New York and California, it may result in larger deductions for these taxpayers while others might experience minimal impact.

For many middle- and low-income households, the expiration of these provisions would likely result in higher tax bills, making planning crucial.

Impact on Different Tax Brackets After 2025

The potential expiration of the Tax Cuts and Jobs Act could have varied effects depending on your income bracket:

• Low-Income Earners: Low-income households might lose key benefits if the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) revert to pre-2017 levels. Refundable credits designed to provide tax relief to lower-income earners could also be scaled back.
• Middle-Income Earners: Middle-income earners may face higher tax bills as lower marginal tax rates from the TCJA return to higher, pre-2017 levels. The potential reduction of the standard deduction may also increase their tax liabilities.
• High-Income Earners: Wealthier taxpayers, especially the top 1%, are likely to see the biggest tax hikes. Their marginal tax rates could rise, and they may lose key deductions, such as the Qualified Business Income (QBI) deduction for pass-through businesses.

Understanding the potential changes for each income group will help you plan for the future tax landscape.

What Small and Medium-Sized Businesses Should Expect

Small and medium-sized businesses also face uncertainty in the post-2025 tax landscape. Here’s what to expect if the TCJA is not extended:

• Loss of the Qualified Business Income (QBI) Deduction: The 20% QBI deduction for pass-through businesses is set to expire. Without it, small business owners could face significantly higher taxes, cutting into their profits and potentially reducing hiring and expansion opportunities.
• Corporate Tax Rate Changes: Under the TCJA, the corporate tax rate was reduced from 35% to 21%, benefiting businesses of all sizes. Harris plans to raise this rate to 28%, which could reduce corporate profits and limit investments in growth. In contrast, Trump has proposed lowering it even further to 15%, which could increase business profits but exacerbate the national debt.

Business owners should prepare for possible changes in the tax landscape, as the outcomes of these policies will directly affect their bottom lines.

Conclusion

The 2024 elections will be critical in determining the future of U.S. tax policy. Whether the Tax Cuts and Jobs Act is extended or allowed to expire, taxpayers and businesses alike will feel the impact. While Trump aims to extend tax cuts and potentially lower corporate rates further, Harris is pushing for expanded tax credits and higher taxes on the wealthy to fund social programs. Understanding these potential changes can help you prepare and adjust your financial strategies.

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