With former President Trump reentering the White House and Republicans holding majorities in both the House and Senate, tax policy is poised to become a focal point in the coming year. This article will explore the various perspectives and potential outcomes being discussed by many pundits.
The Tax Cuts and Jobs Act of 2017 (TCJA), signed into law by then-president Trump, marked the most significant overhaul of the U.S. tax code in decades. While the act introduced sweeping changes, one of its primary focuses was individual income taxes. These changes were passed under a process known as reconciliation, which required many of the provisions to “sunset,” or end, after 2025.
The most anticipated change is an extension of the TCJA. The duration of the extension is unknown, but many expect it to be between five and eight years, allowing most taxpayers to continue paying lower taxes.
1. Changes to tax rates and brackets
The TCJA maintained the seven-bracket system but adjusted tax rates as follows:
| Bracket | Pre-TCJA Rate | Current TCJA Rate |
| 1 | 10% | 10% |
| 2 | 15% | 12% |
| 3 | 25% | 22% |
| 4 | 28% | 24% |
| 5 | 33% | 32% |
| 6 | 35% | 35% |
| 7 | 39.6% | 37% |
Source: “26 CFR 601.602: Tax forms and instructions,” IRS, 2024.
The revised brackets aimed to provide tax relief to a broad spectrum of taxpayers, though the extent varied based on income levels. For many middle-income taxpayers, the adjustments meant a decrease in their marginal tax rates, which translated to lower tax bills.
With tax rates likely staying lower for longer, it generally makes sense to defer income to future years. If rates were anticipated to increase, which they are not, we would need to weigh the benefit of paying taxes at a lower rate against the time value lost for paying earlier.
2. Standard deduction and personal exemptions
One of the most notable changes under the TCJA was the near doubling of the standard deduction. For single filers, the standard deduction increased from $6,350 in 2017 to $12,000 in 2018, while married couples filing jointly saw an increase from $12,700 to $24,000. This change simplified the filing process for many individuals by reducing the need to itemize deductions. However, the act also eliminated personal exemptions, which had allowed taxpayers to deduct a set amount for each dependent, partially offsetting the benefit of the higher standard deduction.
With the standard deduction likely to remain at higher levels, consider utilizing itemized deduction strategies such as lumping to maximize your expenses.
3. Changes to itemized deductions
The most controversial change made by the TCJA is the overall limit placed on the deduction for state and local taxes (SALT). This provision capped state and local income taxes, sales taxes, real estate, and property taxes at a cumulative $10,000, drastically reducing deductions for higher-income taxpayers and those living in high-tax states.
There is much discussion on Capitol Hill about eliminating or increasing the SALT cap. Democrats generally favor removing the cap since constituents in their states, such as California and New York, are greatly impacted by it. Other Democrats support keeping the cap, arguing that state income tax deductions primarily benefit wealthy taxpayers. Republicans are also divided, with deficit hawks concerned about the approximately $1.2 trillion cost over a decade if the cap is repealed.1 There is very little clarity about the direction this will take in final legislation.
The mortgage interest deduction was also restricted, now applying only to interest on mortgage debt up to $750,000, down from the previous cap of $1 million. The extension of this provision is our base case assumption currently.
Miscellaneous itemized deductions were almost entirely repealed under the TCJA. It is likely these will remain repealed with an extension of the law. However, there are discussions within special interest groups about allowing the itemized deduction for certain items, but we will have to wait and see what makes it into the final legislation.
Lastly, Trump has discussed making interest on auto loans tax-deductible. If this comes to pass, the most logical place for it would be under itemized deductions for interest.
4. Child tax credit
To offset the impact of the loss of personal exemptions, the TCJA doubled the child tax credit from $1,000 to $2,000 per qualifying child. Additionally, the phase-out threshold was increased from $75,000 for single filers and $110,000 for married couples to $200,000 and $400,000, respectively. It also introduced a new $500 credit for other dependents who don’t qualify for the full credit. These changes aimed to provide additional support to families, particularly those with lower and middle incomes.
There is wide appeal for retaining a higher child tax credit or even increasing it further. J.D. Vance mentioned he “would like to see” a $5,000 credit on the campaign trail. Managing the cost of an expanded child tax credit along with other revenue-reducing changes makes it unlikely we will see a boost beyond the current $2,000 credit.
5. Alternative Minimum Tax (AMT)
The TCJA made the AMT less burdensome for individual taxpayers by increasing the exemption amounts and raising the phase-out thresholds. This change meant that fewer taxpayers were subject to the AMT, a parallel tax system designed to ensure high-income earners pay a minimum amount of tax.
According to the Tax Policy Center, the number of taxpayers subject to AMT in 2017 was 5.2 million. This number was estimated to drop to just 200,000 in 2018, where it has remained since.2 Without an extension of the TCJA, the AMT is projected ensnare 7.6 million taxpayers and continue climbing.
Congress could eliminate the AMT altogether, which would be harder to muster support for than just extending current provisions. However, the Tax Foundation estimates the static revenue loss from AMT repeal at only $395 billion over 10 years.3 Additionally, Congress could adjust itemized deduction caps to make the repeal revenue neutral.
6. Qualified Business Income deduction
Qualified Business Income deduction, instituted under the new code section 199A, is often referred to as the “one ninety-nine cap A” deduction. The purpose of this provision was to reduce the effective tax rate on pass-through business owners to roughly equate to those for C corporations, whose top rate was reduced from 35% to 21%.
While the C corporation tax rates are permanent, the Qualified Business Income deduction is not. This provision is very likely to be extended along with the tax rates, enhanced standard deduction, and other measures. If Trump succeeds in further reducing corporate taxes, we may see an increase in the Qualified Business Income deduction to maintain parity.
7. Estate tax exemption
The estate tax exemption was doubled under the TCJA, increasing from $5.6 million to $11.2 million per person. With inflation adjustments over the years, each person can now gift or bequeath $13.61 million, or $27.22 million for a couple. The IRS issued regulations stating there would be no claw back if the exemption fell in the future, meaning a gift of $13.61 million would be transfer tax-free now, and if the exemption fell to $6 million, the extra $7.61 million would remain tax-free.
Democrats generally favor reducing the exemption back to prior levels, while some have proposed reducing it even further. However, with Republican control, it is most probable that the exemptions will remain.
The bottom line
Overall, the TCJA aimed to stimulate economic growth by increasing disposable income for individuals and reducing tax burdens. While some praised the act for providing tax relief and simplifying the tax code, critics argued that it disproportionately benefited higher-income earners and added to the national deficit.
Based on the outcome of the recent elections, the future of individual income taxes is more certain, but we anticipate surprises will be included. As always, we will continue to monitor legislative progress and provide swift commentary to keep everyone abreast of our latest thinking.
If you’re not a Mercer Advisors client and want to know more about our tax optimization strategies and how they can help now and in the future, let’s talk.
1 “SALT Cap Expiration Could Be Costly Mistake,” Committee for a Responsible Federal Budget, 2024.
2 “What is the AMT?” TPC Briefing Book, 2024.
3 “A Closer Look at Eliminating the AMT,” Tax Foundation, 2024.
