Can Republicans Find Common Ground in 2025? Tax Legislation Update

By David Darby , Herbert Kyles, CFP? , and Kevin Roche, CFP?

January 15, 2025

Key Takeaways

• The 2017 income tax cuts expire at the end of 2025.? They need to be proactively extended by Congressional legislation or income taxes will rise for nearly all taxpayers in 2026.
• Passage of a tax bill will not be straightforward, even with Republican control of the Presidency, Senate and House of Representatives.
• We intend to write pieces throughout the year updating clients on the status of tax legislation, as well as financial planning and investment strategies around policies which may be extended, added or dropped from any tax legislation.

?

Introduction

After a Republican sweep in the November elections, a new Congress was sworn in on January 3, 2025.? Republicans gained control of the Senate with a 53-47 majority.? Their control of the House of Representatives shrunk from the last Congress to a narrow majority of 219-215.? Republicans may have only two years to accomplish their legislative priorities; there is no guarantee they will maintain control of both houses of Congress in the 2026 elections.??? This narrow control of Congress has major implications for Republicans’ ability to pass laws in 2025 and 2026.

?

Tax Policy Implications

The Tax Cut and Jobs Act (TCJA) of 2017 was President Trump’s signature economic act which lowered personal income and corporate taxes.? It is set to expire, or “sunset”, at the end of 2025.? If the terms of the TCJA are not proactively extended by Congress, income taxes will rise for nearly all taxpayers in 2026.

Major tax provisions of the TCJA which sunset at the end of 2025 include:

Income Taxes:???

• All tax rates but the lowest are increasing (to a maximum of 39.6% from 37%), and the tax bracket levels will revert to lower amounts.

Deductions:???????

• Taxpayers will receive a lower standard deduction.?
• The $10,000 cap on State and Local Taxes (SALT) deductions will expire.?
• Interest on $1 million of mortgage debt will be deductible, from $750,000 currently.

AMT Taxes:?

• Lower thresholds for AMT mean more taxpayers are likely to be subject to AMT tax.

Gift and Estate Taxes

• Lifetime gift and estate exemption set to fall from nearly $14 million to $7 million per person.

President Trump indicated on the campaign trail that he is in favor of making permanent the major terms of the TCJA but also eliminating the cap SALT deductions, which was a major revenue raiser in the original bill.

President Trump proposed other tax cuts on the campaign trail including:

• Lowering corporate taxes on goods manufactured in the United States to 15%.
• Exempting Social Security benefits from income taxes.
• Exempting tipped wages and overtime from income taxes.

We should not automatically assume that all the TCJA’s major terms will be extended as-is, even with Republican control of the House and Senate.? A Wall Street Journal poll taken in September showed that President Trump’s two most popular campaign proposals were exempting Social Security benefits and tipped wages from income taxes.??

It is best to think of the above polices as the Republican party’s tax wish list. The budgetary cost of these new proposals, along with removing the cap on SALT deductions may cause Republicans to reprioritize among these items before passing their next tax bill.?? Some of the TCJA’s original tax cut provisions may get dropped in favor of a new proposal for example.? Concern about the budget deficit and pressure from high interest rates may further limit Congress’ ability to pass tax legislation.

?

Budget Reconciliation Overview

Republicans are planning on passing their tax legislation through a process called budget reconciliation.? The reconciliation process allows Congress to pass budget legislation without the risk of a Senate filibuster (i.e. the need to have more than 60 votes in the Senate).?? Reconciliation is generally available once per fiscal year, which ends in September, meaning that Congress can use the reconciliation process twice before the TCJA expires on December 31, 2025.

Budget reconciliation is generally used when one political party controls the Presidency and both houses of Congress.? By avoiding a Senate filibuster, it gives the party the best chance to pass its legislative priorities for the year.? According to data from the Peter G. Peterson Foundation, reconciliation has been used only 9 times this century, and only once on a bipartisan basis.? Single party control of Congress has not guaranteed successful passage of all reconciliation bills.? In 2017 Republicans failed in their attempt repeal the Affordable Care Act.? In 2022, President Biden’s Build Back Better bill failed in the Senate, although a scaled-down Inflation Reduction Act passed later that year.

Will There be One Reconciliation Bill or Two in 2025?

Republicans have two chances this calendar year to try to pass budget reconciliation bills.? In theory, tax cuts could be addressed in one bill, other legislative priorities in a second, or all of their priorities could be combined into one large bill.? House and Senate leaders prefer different approaches.

Recent reports in the Washington Post indicate that Senate Majority Leader John Thune intends to use the first reconciliation bill to address immigration, energy production and the defense budget, leaving extending the TCJA and other tax cuts until later in the year.? The Wall Street Journal reported that after the narrow one-vote reelection of House Speaker Mike Johnson, House Republicans prefer the single, large bill approach.?

This reason for the one versus two bill preference is clear.? In the Senate, Republicans can afford to have 3 Senators vote against a bill, and still pass the legislation with the tie-breaking vote of the Vice President.? House Republicans have very limited flexibility to lose votes.? Speaker Johnson narrowly won re-election, and two Congressmen have been nominated to President Trump’s Cabinet, which will narrow the Republican majority in the House.? Speaker Johnson may only get one attempt to hold House members together to pass Republican legislative priorities.

Possible Outcomes for Tax Cuts in 2025

We see several possible outcomes for the fate of the 2017 TCJA and the additional policies favored by President Trump on the campaign trail.

• Combination of campaign proposals and TCJA provisions:? If Congress has more time to work on this, Republicans may extend some of the TCJA provisions, modify or eliminate others, and add in some of the popular proposals from the campaign.?? Tax provisions that are being removed could be just as important as any that are added (e.g. if the current gift and estate tax exemptions are not extended, that would be a very significant item to plan for this year).
• TCJA extended, as is:? This result may occur if Republicans find their back against the wall late in the calendar year and decide that making no changes to the existing law is better than not passing a bill at all.
• Compromise law between Republicans and Democrats:? Given the narrow majority of House Republicans, if Republicans lose just a few members’ votes, they will not be able to pass a reconciliation bill on their own.? Democrats and Vice President Harris had supported extending tax cuts for people making less than $400,000, so there exists room for a more limited compromise plan if both parties were willing to agree to one.
• Nothing happens: As seen in recent history, control of both Houses of Congress has not guaranteed the ability to pass a reconciliation bill.? If Republicans cannot find common ground within their own party, Democrats may see no reason to work with Republicans and let them own the political fallout from tax increases in 2026.

?

What to Look Forward to this Year

We intend to keep you informed in several ways on the fate of the TCJA this year.

• We will have more pieces about what is being discussed in Congress, where the legislative process stands, and what ultimately gets passed, or left out of any tax bill.
• We plan to discuss the financial market implications of the tax legislation and its effects on our clients’ investment portfolios.
• We will highlight both financial planning and investment planning strategies based on possible legislative outcomes.? For example, whether items are extended or not could have a major impact on whether you implement plans in 2025 or defer them until 2026.

Please reach out to Herbert Kyles, CFP? , Kevin Roche, CFP? or David Darby if you have any questions on these topics.