Some tax policies are set to expire in 2025

When Donald Trump first became president in 2017, one of his signature legislative victories came from passing the Tax Cuts and Jobs Act (TCJA). The law reoriented the tax code in many ways, such as by slashing tax rates, particularly for high-income earners and corporations.

Yet because the TCJA significantly reduced government revenue and therefore increased the federal deficit, many parts of the law were written to expire at the end of 2025 in order to satisfy congressional rules. Trump and a Republican-controlled Congress find themselves back in power as they decide the law's fate.

The situation is similar to when President Barack Obama faced the expiration of tax cuts passed under President George W. Bush. The Obama administration made most of the tax cuts permanent, while mostly letting those that affected wealthy individuals expire. 

Trump has stated his intentions to not only extend the TCJA but also introduce new cuts, which could reduce what many Americans owe in taxes each year while driving up the federal debt. 

While you might not have much direct say in what gets passed in 2025, being up to date on potential changes can go a long way toward optimizing your taxes.

Pump the brakes

It's important to realize that even if no new legislation comes about, there generally won't be any changes until 2026, as the TCJA runs through tax year 2025. So while you might be trying to cram in some last-minute tax planning moves for tax year 2024, there's not particularly anything TCJA-related to rush into now. 

Moreover, with Trump returning and Republicans in control of the House and Senate, there's arguably less urgency to do any tax planning moves before we see what legislation ends up passing.

"We were operating in an atmosphere of kind of a sense of urgency to do all these things before the end of 2025, and I think that landscape's changed, where most likely there's probably room to rethink and to take a longer time period" to make tax planning moves, said Kat Grier, wealth manager at Merit Financial Advisors.

For example, before the election many people were focused on moves like Roth conversions to try to get ahead of income tax brackets potentially going up, or moving assets out of estates due to the possibility of a lower estate tax exemption, Grier said.

Now, "I think we have an opportunity to see early on in 2025 what could come out of Congress with an extension of some of the major provisions that were in" the original TCJA, she added.

Taxes vs. debt

While the Trump administration is likely to try to extend many of the expiring TCJA provisions, some of the more ambitious plans to cut taxes may face pushback, even with Republican majorities. 

It's possible that some tax rates may lower, like the top tax bracket going from 37% to 35%, and maybe removing or raising the cap on state and local tax (SALT) deductions, said Edwin G. Oswald, a former legal advisor to the U.S. Treasury during the Clinton administration and co-author of "From Ronald to Donald: How the Myth of Reagan Became the Cult of Trump."

"Trump has also talked about perhaps exempting Social Security payments from tax, and no tax on tips, among other things," he added. Yet "butting against this is the national debt, which is now around $36 trillion."

The national debt has long been increasing, but the pace has picked up, with the total now about $10 trillion more on an inflation-adjusted basis compared to when Trump first took office.

"There's going to be just more fiscal pressure, I think, now than eight years ago in terms of how rich this tax bill can be," Oswald said.

To help partially offset some of the costs of Trump's proposed tax changes, there could be some reversals of tax policies established under President Joe Biden, particularly energy-related tax credits stemming from the Inflation Reduction Act. 

Generally speaking, tax law is forward-looking rather than retroactive, so even if things like tax credits for electric vehicles are removed, there could be "some latitude moving into 2025 in terms of tax credits still being available," Oswald said.

Still, consumers should be aware of any tax changes like this that could affect their spending in 2025.

"If someone's seriously thinking about an electric vehicle, now may be the time to purchase that as opposed to running into perhaps some jeopardy or uncertainty as we move into 2025," Oswald said. 

Don't fall asleep at the wheel

While there may be less sense of urgency from a tax planning perspective, that doesn't mean you should ignore what tax changes might come about in 2025. Although those effects generally wouldn't be felt until 2026 — or perhaps even 2027 when filing for tax year 2026 — there still might be moves to make during calendar year 2025.

"A lot of times people think about tax planning when they're in the midst of gathering all their documents when their tax return's being prepared, and it limits a lot of what the planning can be," Grier said. "And so I think proactive tax planning within the year" is important.

For example, tax-loss harvesting is an investment move that can help lower your taxes, but it needs to be done during the calendar year of the corresponding tax year. If you want to reduce what you owe when filing taxes this coming April, for example, then tax-loss harvesting before the end of 2024 may be useful for you, even though any changes to the TCJA aren't applicable to this situation. 

Some other proactive tax moves: If tax rates fall due to legislative changes in 2025, you might consider delaying the receipt of some income until 2026, such as if you're a small business owner with some flexibility, explained Grier. Investing in a pre-tax retirement account like a 401(k) could also lower your taxable income in a year where tax rates might be higher than they are the next, she said.

Still, you probably don't need to rush to do anything you wouldn't normally do just because of potential changes to the TCJA. If and when there are tax code changes, you would still likely have time in calendar year 2025 to adapt. And if all of these dates and possible changes are confusing to you, then you might be better off working with a tax professional who can help guide you through tax planning rather than making a misstep on your own.