Gavin Howe
With Donald Trump's return to the White House in 2025, the potential for significant changes to US tax law has emerged. Trump's tax agenda includes extending the 2017 Tax Cuts and Jobs Act (TCJA) and creating new tax breaks, such as eliminating taxes on tips, overtime pay, and Social Security benefits. Trump has also proposed ending the taxation of Americans living abroad and increasing tariffs, which could further reduce revenue. The House and Senate have passed budget resolutions to start the reconciliation process, which could lead to reductions in taxes and spending over the next decade. While Trump's tax plans may reduce revenue, they could also provide tax breaks and simplify the tax filing process for Americans across the income spectrum.
| Characteristics | Values |
|---|---|
| Tax laws changed in 2017 | Reduced average tax burdens for taxpayers across the income spectrum and temporarily simplified the tax filing process through structural reforms |
| Tax laws that can be changed in 2025 | Ending taxes on tips, overtime pay, and Social Security benefits |
| Tax laws that can be changed in 2026 | The lifetime gift and estate tax exemption will revert to near-2017 levels of roughly $7 million |
| Tax laws that Trump wants to change | Permanent extension of the 2017 tax cuts, no taxes on tips, overtime pay, and Social Security benefits for retirees, and higher taxes on US imports through a series of new tariffs |
| Tax laws that Trump might change | Remove the SALT limit, eliminate the taxation of Americans abroad, and restore the state and local tax (SALT) deduction |
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What You'll Learn
Tax Cuts and Jobs Act (TCJA) extensions
The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the federal tax code, signed into law by President Donald Trump in 2018. The Act cut taxes for individuals and businesses, with many of its reforms expiring in 2025.
The TCJA lowered most individual income tax rates, including the top marginal rate from 39.6% to 37%. It also increased the standard deduction for single and married filers. Additionally, the Act eliminated or curtailed various business taxes, including the corporate income tax rate, which was reduced from 35% to 21%.
Many of the tax benefits for individuals and families under the TCJA will expire in 2025 unless the Act is extended. This includes the qualified business income deduction, which small business owners would like to see extended. The TCJA also permanently removed the mandate requiring individuals to purchase health insurance, a key provision of the Affordable Care Act.
President Trump has called for a permanent extension of the 2017 tax cuts, along with additional policies such as eliminating taxes on tips, overtime pay, and Social Security benefits for retirees. Republican lawmakers are hoping to make these extensions a reality, along with creating new tax breaks.
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Removing state and local tax (SALT) deductions cap
The State and Local Tax (SALT) deduction was the fifth-largest tax expenditure in 2017, the year before the cap was implemented. The SALT deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. In 2017, the federal government lost nearly $70 million in tax revenues.
The SALT deduction cap was established with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA lowered the corporate tax rate for businesses to a flat 21%, down from a graduated system with a top rate of 35%. The SALT cap limits the federal itemized deduction for state and local taxes to $10,000 for all filers. Previously, there was no cap on the SALT deduction, so taxpayers could deduct 100% of their state and local taxes paid. The SALT cap has stirred much debate, especially within high-tax states, and opponents have argued that it is unconstitutional.
The SALT deduction can be especially attractive for taxpayers in high-tax states and high-income earners as it avoids double taxation. Before the $10,000 SALT cap under the TCJA, taxpayers with income greater than $100,000 accounted for 91% of those claiming SALT deductions. These taxpayers were concentrated in six states: New York, Pennsylvania, New Jersey, California, Texas, and Illinois.
On the campaign trail, President Trump suggested he wanted to remove the SALT limit. The House of Representatives is considering legislation that would retroactively double the cap on SALT deductions for married filers for 2023. The additional cost would vary from $22 billion to $197 billion over ten years, depending on the policy design. If other provisions of the TCJA were also extended permanently, the SALT-related costs alone would increase to between $107 billion and $1,116 billion.
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Ending taxes on tips, overtime pay, and Social Security benefits
In 2025, President Trump proposed exempting taxes on tips, overtime pay, and Social Security benefits. The No Tax on Tips Act, which Trump supported, aimed to provide tax relief for employees in the hospitality industry and their families, potentially putting more money in their pockets. However, experts argue that it might not significantly benefit lower-wage workers and could lead to lower base wages offered by employers.
Regarding overtime pay, Trump's proposal included exempting certain workers, such as firefighters and police officers, from paying taxes on their overtime income. This could lower their taxable income since overtime pay would not be included in their taxable income calculations.
Trump also called for exempting Social Security benefits from taxation. While Social Security income is generally not taxed, other income streams like retirement income can make a portion of Social Security benefits taxable, depending on the taxpayer's income and filing status. Trump's proposal aimed to eliminate taxes on Social Security benefits entirely.
It is important to note that these proposals are part of Trump's 2025 tax plans, which also include extending the 2017 tax cuts and implementing new tariffs on US imports. The potential impact of these proposals is a subject of debate, with some critics arguing that they primarily benefit the wealthy and corporations.
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Creating new tax breaks
Tax Deductions
Also known as a tax write-off, a tax deduction allows taxpayers to subtract a certain amount from their taxable income. This, in turn, lowers the amount of income that is subject to tax. For example, the US government has long allowed taxpayers to claim a wide range of itemized deductions, which offer greater tax savings than the standard deduction.
Tax Credits
A tax credit provides a dollar-for-dollar reduction in the amount of tax owed. In other words, it directly reduces a person's tax bill, rather than their taxable income. An example of a tax credit is the Child Tax Credit (CTC), which is a tax break for families with children under the age of 17.
In 2025, President Trump proposed creating new tax breaks by extending the 2017 tax cuts, eliminating taxes on tips, overtime pay, and Social Security benefits for retirees, and introducing higher taxes on US imports through new tariffs. Trump also called for a permanent reduction in the corporate tax rate for domestic production and the removal of the cap on the state and local tax (SALT) deduction, which allows taxpayers to write off their property taxes, as well as their state and local income or sales taxes.
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Ending the taxation of Americans abroad
In 2024, Congressman Darin LaHood introduced a bill to modernize the tax system for Americans living overseas. This bill would permit Americans living overseas to elect to be treated as non-resident Americans, making them subject to US tax only on US-sourced income and gains. This would include income from ownership in a US business, distributions from US retirement and deferred compensation plans, and income from assets physically located in the US. The bill also requires that the non-resident American has lived abroad for at least three years from the election date, or the election would be reversed entirely.
This issue has received more attention in recent years, and was a priority for President-elect Trump during the campaign trail in 2024. In an exclusive interview with The Wall Street Journal, Trump stated, "I support ending the double taxation of overseas Americans. This is a non-partisan issue that impacts US citizens."
The bill is intended to reduce the onerous tax and compliance burdens on Americans living and working abroad, which can include high accounting fees, difficulties in accessing free IRS return preparation assistance, and complex eligibility rules for claiming tax benefits.
It is hoped that the bill can be considered in a reconciliation package, allowing Americans abroad to see an end to the "long, dark tunnel" of punitive taxation.
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Frequently asked questions
The 2017 Trump Tax Cuts, known as the Tax Cuts and Jobs Act (TCJA), reduced average tax burdens for taxpayers across the income spectrum and temporarily simplified the tax filing process through structural reforms.
Trump has proposed a permanent extension of the 2017 tax cuts, no taxes on tips, overtime pay, and Social Security benefits for retirees, and higher taxes on US imports through a series of new tariffs. He has also proposed ending the taxation of Americans living abroad and eliminating the $10,000 cap on state and local tax deductions (SALT).
Trump's tax policies are estimated to reduce federal tax revenue by $3 trillion from 2025 through 2034. His policies have also been criticised for benefiting high-income households far more than low- and moderate-income households.
Tax laws can be changed through the budget reconciliation process, which allows lawmakers to bypass the filibuster in the Senate and make changes to tax, spending, and debt limits outlined in a budget resolution. However, any proposed tax changes would have to pass through Congress to be enacted.
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