As 2025 approaches, a major shift in U.S. tax policy looms over millions of American households. The Tax Cuts and Jobs Act (TCJA) of 2017, one of the hallmark achievements of former Trump’s administration, is set to expire. This expiration will significantly alter the tax landscape, raising questions about how taxpayers will be affected and what Congress plans to do in response.
Approximately 62% of U.S. taxpayers will see an increase in their federal income taxes if Congress does not act to extend or modify the expiring provisions. This includes middle-income families who benefited from reduced tax rates, expanded standard deductions, and enhanced child tax credits under the TCJA. The potential tax hike has sparked widespread debate among policymakers, economists, and citizens alike.
Incumbent US President Joe Biden and his administration have been vocal about the need for targeted changes rather than a blanket extension of all the TCJA provisions. Meanwhile, prominent Republican figures, including President-elect Trump himself, are calling for the tax cuts to be made permanent, arguing that they have driven economic growth and benefitted households across income levels.
Treasury Secretary Janet Yellen, however, has cautioned against the fiscal risks associated with extending these cuts without offsetting measures to control the growing national deficit.
Key Takeaways
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire in 2025, potentially leading to significant tax increases for millions of American households.
- Approximately 62% of U.S. taxpayers will see an increase in their federal income taxes if Congress does not act to extend or modify the expiring provisions.
- The TCJA’s expiration could lead to higher tax bills for middle-income families, particularly those with multiple dependents who benefited from the expanded child tax credits.
- Policymakers must balance supporting middle-income families, managing the budget, and fostering growth as they consider extending or modifying the TCJA provisions.
Changes in US tax rates
One of the most significant aspects of the TCJA was the reduction in individual income tax rates. The top marginal rate was lowered from 39.6% to 37%, with decreases across other brackets as well. These cuts provided immediate relief for many taxpayers, particularly those in higher income brackets.
Without congressional intervention, these rates will revert to their pre-2017 levels in 2026, affecting individuals earning over $400,000 annually and middle-income taxpayers. This reversal could lead to higher tax bills for families already grappling with rising costs of living.
Vice President Kamala Harris has advocated for maintaining tax relief for households earning less than $400,000 while allowing rates for higher earners to increase. Her position aligns with Biden’s broader tax policy goals of promoting fairness and reducing income inequality. Critics, however, argue that failing to extend all provisions could stifle economic growth and discourage investment.
Standard deduction and exemptions
The TCJA nearly doubled the standard deduction, which simplified filing for millions of Americans and reduced taxable income for many middle-class families. For the 2023 tax year, the standard deduction stands at $13,850 for single filers and $27,700 for married couples filing jointly. These amounts will decrease significantly if the TCJA provisions expire, leading to higher taxable income and larger tax bills.
At the same time, the return of personal exemptions, which were eliminated under the TCJA, could complicate matters further. While these exemptions provide deductions based on the number of dependents in a household, their reintroduction may not fully offset the loss of the expanded standard deduction for many families.
Economists warn that these changes could disproportionately impact middle-income households, particularly those with multiple dependents who previously benefited from the TCJA’s higher child tax credits. Reverting to the older system would require families to navigate a more complex tax code, potentially increasing the likelihood of errors and compliance costs.
Child tax credit and family benefits
One of the most popular features of the TCJA was the expansion of the Child Tax Credit. The act increased the credit to $2,000 per qualifying child and raised the income thresholds for eligibility, allowing more families to benefit. It also made up to $1,400 of the credit refundable, meaning families could receive a portion of it even if they owed no federal income taxes.
When the TCJA provisions expire, the Child Tax Credit will shrink back to $1,000 per child, and stricter income limits will apply. This reduction could place a financial strain on millions of families, particularly those in lower and middle-income brackets.
During his presidency, Biden temporarily increased the credit to $3,600 per child as part of pandemic relief efforts, but those enhancements have since expired. Democrats continue to push for a permanent expansion of the credit, citing its role in reducing child poverty and supporting working families.
Corporate taxes and economic implications
The TCJA also included significant changes to corporate taxation, cutting the corporate tax rate from 35% to 21%. Proponents argue that this reduction spurred job creation, increased wages, and attracted investment to the U.S. economy. However, critics contend that much of the benefit went to shareholders and high-income executives rather than the average worker.
If the corporate tax cuts expire, businesses will face higher tax liabilities, which could lead to reduced investment and slower economic growth. Some economists believe that higher corporate taxes could also be passed on to consumers in the form of increased prices, exacerbating inflationary pressures. Treasury Secretary Yellen has expressed concerns about the potential economic fallout, emphasizing the need for balanced fiscal policies that address both growth and sustainability.
Political divisions and congressional action
The debate over the TCJA’s expiration reflects deep divisions between Republicans and Democrats on tax policy. Republicans argue that the tax cuts have been a cornerstone of economic growth and should be made permanent. Incoming President Donald Trump has pledged to extend and expand the cuts if reelected, including proposals to eliminate taxes on tips and Social Security benefits.
On the other hand, Democrats emphasize the need for a more equitable tax system. They propose extending relief for middle and lower-income families while allowing tax rates for the wealthiest Americans to rise. This approach aims to generate additional revenue to fund social programs and reduce the national deficit.
The looming expiration of the TCJA places significant pressure on Congress to act. Bipartisan support will be essential for any legislative solution, but finding common ground may prove challenging given the stark ideological differences. Delays in addressing the issue could create uncertainty for taxpayers and businesses alike, potentially dampening economic activity in the years ahead.
What’s at stake
For many Americans, the expiration of the TCJA provisions represents a potential financial setback. Families with children, homeowners, and small business owners stand to lose some of the benefits they have relied on for the past several years. The increased complexity of the tax code could also lead to confusion and frustration during the filing process.
While extending the TCJA provisions would prevent immediate tax hikes, it comes with long-term fiscal implications. The Joint Committee on Taxation estimates that making the cuts permanent could add $4.6 trillion to the national deficit over the next decade. This raises questions about how to balance short-term relief with long-term economic stability.
Conclusion
As the TCJA nears expiration, taxpayers and the economy face critical challenges. Policymakers must balance supporting middle-income families, managing the budget, and fostering growth. Republican decisions will impact millions and shape the nation’s economy.
However, Republicans can more easily extend tax cuts (with the potential exemption of SALT) now with Democrats losing control of Congress and the presidency next year. Experts predict they will focus on popular changes like lower tax rates and a higher standard deduction. According to Carolyn Yun, client advisor at Hollow Brook Wealth Management, the focus will likely be on key provisions.
