With Donald Trump’s return to the White House and Republicans gaining control of Congress, significant tax cuts and economic changes appear to be on the horizon for 2025. Let’s look at what we might expect based on Trump’s campaign promises and expert analysis.
Tax Cuts on the Table
Several provisions from Trump’s first-term 2017 Tax Cuts and Jobs Act (TCJA) are set to expire in 2025, including an improved standard deduction, child tax credit, alternative minimum tax (AMT) exemption, marginal income tax rates, estate tax exemptions, and deductions for qualified pass-through entities. Trump has made it clear that extending and expanding the TCJA is a top priority. An exception welcomed by many is the potential elimination of the cap on state and local tax (SALT) deductions that the act introduced.
Other key tax cuts being considered:
- Lowering the corporate tax rate from 21% to 15% for domestic production.
- Exempting Social Security benefits, tips, and overtime pay from income taxes.
- Creating new deductions for auto loan interest.
- Permanent allowances for machinery, equipment, and research and development (R&D).
The Tariff Effect
Many experts suggest that Trump’s tax plans could increase the federal deficit by as much as $7.5 trillion over a decade. His plan to offset this while further spurring domestic production is to impose significant tariffs on imports, particularly from China. It’s been a key talking point of his for months.
But will it help?
Barron’s reports that Trump’s combination of tax cuts and increased tariffs could push inflation up by as much as 1 percentage point. This could potentially lead to higher interest rates and prices, offsetting some of the benefits of tax cuts for consumers and businesses. The combination of tax cuts and tariffs could create a complex economic landscape that small business owners should navigate carefully.
Uncertainty Still Reigns
Many believe that with fully Republican-controlled executive and legislative branches in place, Trump’s ideas have a smooth path to fruition. That’s not entirely true. Despite his “super clear mandate” on taxes, for instance, passing sweeping tax legislation may not be a straightforward process. Budget concerns and disagreements within the party could complicate matters. For example, the potential ballooning of the federal deficit could cause pushback from fiscal conservatives within the Republican party.
As we move into 2025, small business owners should prepare for these potential tax code changes but also consider how economic factors may impact those changes. (Additional factors like immigration policies may also play a role by affecting the job market.) While significant tax cuts seem likely, the full economic impact of Trump’s policies and how they might offset those tax cuts remains uncertain. Feel free to contact us with questions.