2025 U.S. Tax Legislation Forecast: What to Expect

2025 U.S. Tax Legislation ForecastAs 2025 unfolds, U.S. tax policy is poised for significant shifts, particularly with a new Republican administration under President Donald Trump. The year ahead will likely see a range of tax reforms, largely driven by the GOP’s objectives and campaign promises. In this article, we’ll explore the major tax policy trends, legislative developments, and administration changes that may shape U.S. tax law in 2025.

The Impact of Supreme Court Decisions

2024 also saw two major Supreme Court decisions with significant tax implications. In the Moore case, the Court ruled narrowly on the issue of wealth taxation, leaving open the possibility of revisiting the question in the future. While wealth tax proposals had gained some traction among Democrats, the Court’s decision, combined with the political climate, suggests that such proposals are unlikely to gain much momentum under the new administration.

The Loper Bright decision, which questioned the deference given to government regulations, could have far-reaching effects on tax policy. The ruling makes it more difficult for agencies like the IRS to issue regulations without clear legislative guidance, potentially leading to more legal challenges to IRS regulations and shifting the balance of power between lawmakers and regulatory agencies.

2025: A New Republican Agenda

With a Republican administration taking office in 2025, tax policy is expected to shift dramatically. President Trump, along with a Republican-controlled Senate and House, will likely push for several key changes to tax law.

One of the primary objectives will be to extend provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire. This includes individual tax cuts, corporate rate reductions and changes to the state and local tax (SALT) deduction cap. The extension of other expiring provisions involving lifetime gift and estate tax exemptions, AMT, child tax credits, and the mortgage interest deduction may also be on the table. Additionally, the GOP is expected to explore new tax cuts, with some lawmakers proposing measures like eliminating taxes on tips, which was promoted during Trump’s election campaign.

On the corporate side, there may be discussions about lowering the effective tax rate through credits and incentives rather than direct reductions to the statutory corporate tax rate. There also could be movement on tax expensing for research and development, as well as other measures to incentivize business investment.

Potential Revenue-Raising Measures

Despite the tax cuts expected to dominate the agenda, there may be some revenue-raising measures included in the GOP’s tax proposals. The focus on reducing deficits could lead to efforts to cut some of the green credits in the Inflation Reduction Act, although these cuts are unlikely to raise significant revenue. There also may be attempts to tighten international tax rules from the TCJA to generate more revenue.

President Trump has also proposed replacing individual income taxes with increases in tariffs, implementing a universal 20 percent tariff across the board, and implementing an additional 50 percent tariff on imports from China.

IRS Funding and Administration Changes

Under the new administration, the IRS is expected to face significant cuts, particularly in its enforcement budget. The $80 billion allocated to the agency in recent years, which was intended to improve taxpayer services and combat tax evasion, is likely to be rolled back. Republicans have expressed strong opposition to the IRS’ expanded powers and are expected to push for a reallocation of those funds toward customer service rather than enforcement.

Additionally, the new administration may replace current IRS Commissioner Daniel Werfel, who was appointed during the Biden administration. Trump could nominate a new commissioner, and if this happens, it could spark further debates over the direction of the IRS in the coming years.

Conclusion

2025 promises to be a dynamic year for U.S. tax policy, with significant changes expected under the new Republican administration. Key issues to watch include the fate of the TCJA’s expiring provisions, potential new tax cuts, and ongoing debates over IRS funding and regulations. As the administration works to implement its agenda, there will likely be contentious discussions and compromises on Capitol Hill, setting the stage for a new era of tax policy in the United States.

What is Innocent Spouse Relief?

What is Innocent Spouse Relief?The word “innocent” in innocent spouse relief can be misleading. It doesn’t imply you’re perfect or blameless – it’s more about whether you knew or should have known about the tax issue. The IRS defines “innocence” in a specific way, and it hinges on the concept of reasonable ignorance. In short, the issue isn’t one of morality; it’s about whether you could have reasonably been unaware of a tax problem.

Innocent spouse relief allows you to avoid being held responsible for tax debts, penalties, and interest stemming from a joint tax filing. In the case that a spouse (or ex-spouse) made an error that led to a tax issue, regardless of intention, you may not have to shoulder the burden. Say your income wasn’t reported, excessive deductions were claimed, or tax fraud was committed. If you meet the IRS criteria, you can request relief by submitting Form 8857.

Qualifications for Innocent Spouse Relief

To qualify, you must meet several conditions.

  • Joint Tax Return: The tax liability must arise from a joint return. When you file together, both spouses are equally responsible for any tax issues that arise.
  • Tax Underreporting: The tax issue must stem from underreported income or an incorrect claim for deductions or credits. This could involve unreported income (like from offshore accounts) or fraudulent deductions made by your spouse.
  • Lack of Knowledge: You must show that, at the time of filing, you were unaware of the problem and had no reason to suspect it.
  • Unfair Responsibility: Lastly, it must be deemed unjust to hold you liable. The IRS looks at factors such as whether you benefited from the underreported taxes (e.g., through extravagant spending) or if you’ve divorced.

What Doesn’t Qualify for Innocent Spouse Relief?

Not all cases involving a spouse’s financial mismanagement qualify for relief. The IRS may reject your claim in the following situations:

  • Awareness of the Mistake: If you knew about the issue or should have known, you won’t be eligible for relief. Simply stating that you didn’t read the return won’t suffice. The IRS expects you to recognize obvious errors if you had access to the relevant information.
  • Divorce Doesn’t Automatically Provide Relief: Divorce alone doesn’t eliminate your liability for tax debt. Joint returns create shared responsibility, and being separated or divorced doesn’t mean the IRS will automatically release you from this obligation. You must prove your innocence through the relief process.
  • Disagreements Over Personal Spending: If your spouse’s spending decisions are something you disagree with, the IRS will not consider it a tax issue unless it involves unreported income or fraudulent deductions. The IRS focuses on tax matters, not marital conflicts over financial choices.

Pros and Cons of Filing

Advantages include:

  • Avoid Financial Hardship: Tax liabilities, along with interest and penalties, can be overwhelming. Innocent spouse relief can protect you from these financial burdens.
  • Clear Your Name: If you’ve been unfairly tied to a tax issue you didn’t cause, the relief process can help remove you from the responsibility.
  • Peace of Mind: Successfully claiming relief can bring emotional relief, especially if you’ve gone through a challenging marriage.

Potential drawbacks are:

  • No Guarantee of Approval: The IRS does not grant relief easily. You’ll need to provide strong evidence, and the process can be lengthy and difficult.
  • Time Limitations: You generally must apply for relief within two years of the IRS starting collection efforts. Missing this deadline could result in losing the opportunity for relief.
  • Invasive Process: The IRS will closely examine your financial and personal life, including details about your marriage and finances, which could feel intrusive if you value your privacy.
  • Possible Strain on Relationships: If you’re still married, filing for relief could cause tension, as it might be seen as blaming your spouse for the tax issue.

Conclusion

To request innocent spouse relief, you’ll need to file Form 8857. Be prepared to provide details about the tax years involved, an explanation of why you didn’t know about the issue, and any supporting documents (like bank statements, emails, or divorce decrees). After submitting the form, the IRS will notify your spouse or ex-spouse, who will have a chance to respond.

Tax Planning 2024

Tax Planning 2024Personal Income Tax Planning Strategies for Year-End 2024

As 2024 draws to a close, it’s the perfect time to review your personal income tax situation and implement strategies to minimize your tax liability for the year. Proactive year-end tax planning can lead to significant savings, as well as ensure that you take full advantage of tax credits, deductions and other opportunities available to you.

1. Maximize Contributions to Retirement Accounts

One of the most effective ways to reduce your taxable income is by contributing to tax-advantaged retirement accounts. In 2024, you may contribute up to $23,000 to a 401(k) or similar employer-sponsored plan, with an additional $7,500 catch-up contribution if you’re over age 50. These contributions are made pre-tax, meaning they reduce your taxable income for the year, potentially lowering your tax bill.

Similarly, if you’re eligible, consider contributing to an IRA. For 2024, the maximum contribution limit for a traditional IRA and/or Roth IRA is $7,000 ($8,000 if you’re 50 or older). Contributions to a traditional IRA may be tax-deductible depending on your income and whether you or your spouse are covered by an employer-sponsored retirement plan. If you’re not eligible for deductions due to income limits, consider a Roth IRA, where contributions are made after-tax, but qualified withdrawals in retirement are tax-free.

2. Take Advantage of Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs)

If your employer offers a Flexible Spending Account (FSA), use the remainder of your FSA funds before they expire. FSAs allow you to put away pre-tax money to cover medical expenses, and the limit for 2024 is $3,200. Depending on your employer’s plan, unused funds may be forfeited after the year-end, although some plans may offer a grace period or carryover option for a small portion of the balance.

For those eligible for a Health Savings Account (HSA), contributing the maximum allowable amount can provide immediate tax savings. For 2024, the HSA contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for individuals age 55 or older.

3. Harvest Capital Losses

If you’ve realized capital gains in 2024, it may be beneficial to offset those gains with capital losses. Known as tax-loss harvesting, this strategy involves selling investments that have declined in value to realize losses, which can be used to offset your capital gains. If your capital losses exceed your gains, you can use the remaining losses to offset up to $3,000 of ordinary income ($1,500 if married and filing separately).

Make sure to consider the “wash sale” rule, which disallows a deduction if you buy the same or substantially identical security within 30 days of selling at a loss. This rule is meant to prevent taxpayers from selling assets for tax benefits and then repurchasing the same assets immediately.

4. Bunch Charitable Contributions

If you’re planning to make charitable donations, consider bunching your contributions into one year to exceed the standard deduction threshold. This strategy allows you to itemize deductions for one year by making larger charitable contributions in a single year while taking the standard deduction in the following year. The standard deduction for 2024 is $29,200 for married couples filing jointly and $14,600 for single filers, which means if your itemized deductions do not exceed these amounts, you may benefit from grouping two or more years’ worth of charitable donations into one year.

5. Review Your Tax Withholding

As the year ends, review your tax withholding to ensure you’re not over- or under-paying throughout the year. If you’ve had a major life change in 2024, such as marriage, divorce, a child or a new job, adjusting your withholding can prevent underpayment penalties or a large tax bill. You can use the IRS Tax Withholding Estimator tool to assess whether your withholding is on track or, if necessary, submit a new Form W-4 to adjust your withholding for the final paychecks of the year.

6. Plan for Estimated Taxes if Self-Employed

For self-employed individuals, it’s important to ensure you’ve made sufficient estimated tax payments throughout the year. If you expect to owe additional taxes for 2024, you may want to increase your final estimated payment by Jan. 15, 2025, to avoid penalties. You can calculate your estimated tax liability using Form 1040-ES.

Conclusion

Tax planning is an essential part of personal finance. With 2024 coming to an end, it’s the right time to review your finances and take advantage of available tax-saving opportunities. By maximizing retirement account contributions, considering tax-loss harvesting and utilizing other year-end strategies, you can minimize your tax burden and keep more of your hard-earned income. Be sure to consult with a tax professional to tailor these strategies to your unique financial situation and ensure you’re in the best possible position for the year ahead.

2025 Projected Tax Brackets

2025 Projected Tax BracketsAccording to estimates, inflation adjustments to the internal revenue code are expected to yield increases of 2.8 percent compared to 2024 amounts. This means wider tax brackets and increased exemptions, among other things. With the U.S. Bureau of Labor Statistics consumer price index (CPI) moderating, this increase is about 50 percent less than 2024’s inflation adjustment. Below, we’ll look at what the projected 2025 inflation adjustment means in terms of dollars and cents for you and your taxes.

Individual Income Tax Brackets

The tables below illustrate what the individual income tax rates and brackets are projected to be for 2025.

Projected Individual Income Tax Brackets & Rates: Tax Year 2025

Single Taxpayers
10% 0 – $11,925
12% $11,926 – $48,475
22% $48,476 – $103,350
24% $103,351 – $197,300
32% $197,301 – $250,525
35% $250,526 – $626,350
37% $626,351 and Over

 

Married Filing Jointly
10% 0 – $23,850
12% $23,851 – $96,950
22% $96,951 – $206,700
24% $206,701 – $394,600
32% $394,601 – $501,050
35% $501,051 – $751,600
37% $751,601 and Over

 

Married Filing Separately
10% 0 – $11,925
12% $11,926 – $48,475
22% $48,476 – $103,350
24% $103,351 – $197,300
32% $197,301 – $250,525
35% $250,526 – $375,800
37% $375,801 and Over

 

Heads of Household
10% 0 – $17,000
12% $17,001- $64,850
22% $64,851 – $103,350
24% $103,351 – $197,300
32% $197,301 – $250,500
35% $250,501 – $626,350
37% $626,351 and Over

 

Trusts & Estates Tax Brackets

The table below illustrates what the income rates and brackets are expected to look like for Trusts and Estates in 2025.

Projected Trusts and Estates Tax Brackets & Rates: Tax Year 2025
10% 0 – $3,150
24% $3,151- $11,450
35% $11,451 – $15,650
37% $15,651 and Over

 

Standard Deduction Amounts

The table below illustrates what the projected standard deduction amounts will be for 2025, with a comparison to 2024.

Projected Standard Deduction Amounts
  2024 2025
Single $14,000 $15,000
Married Filing Jointly $29,200 $30,000
Married Filing Separately $14,000 $15,000
Head of Household $21,900 $22,500

 

Alternative Minimum Tax (AMT)

The table below illustrates the anticipated AMT exemptions for 2025.

AMT Exemption Amounts
Tax Year 2025
Single $88,100
Married Filing Jointly $137,000
Married Filing Separately $68,500
Trust & Estates $30,700

 

Capital Gains

The rates applied to long-term capital gains are not expected to change for 2025; however, the brackets that apply to different rates will expand. Note that, in considering the table below, a 20 percent tax rate applies to capital gains that are over the 37 percent ordinary tax rate threshold. Furthermore, capital gains on art and collectibles are subject to other exceptions.

Maximum Capital Gains Rates for 2025
  Zero Rate 15% Rate
Single $48,350 $53,340
Married Filing Jointly $96,700 $600,050
Married Filing Separately $48,350 $300,000
Head of Household $64,750 $566,700
Trusts & Estates $3,250 $15,900

 

Conclusion

First, it’s important to remember that all the figures above are only projections. The IRS will not publish the official numbers until later this year. Moreover, as these rates and brackets have increased, they have done so significantly less than in 2024 and 2023, largely driven by lower inflation.

The New Era of “No Tax” Policies: Selective Tax Exemptions and Their Side Effects

No Tax on Tips, No Tax on Over TimeFormer President and current candidate Donald Trump introduced a new policy of his in a recent Arizona rally: No more income tax on overtime pay. This follows both Trump and Vice President Harris’ proposal for a no income tax on tips policy, as well.

Below we will look at the two recent proposals and what they could mean for both taxpayers and businesses.

No Tax on Tips

The no tax on tips policy looks to lighten the tax burden on service industry workers. According to the Fair Labor and Standards Act, anyone who “customarily and regularly” receives $30 or more in tips per month is considered a tipped worker. The mechanism to exempt tip income could possibly come through three different mechanisms.

One option would be to categorize tips as gifts. Service employees are often paid wages lower than the minimum wage (as low as $2.31 per hour), with employers required to “top-up” an employee to the federal minimum wage of $7.25 if tips don’t at least make up the difference themselves. As a result, considering tips as gifts may not legally work.

A second option is to treat a specified amount of tips as non-taxable income. Consider a policy, for example, in which up to $25,000 in tips is treated as non-taxable income. Legally, this is straightforward, but it could have various knock-off effects on those it is intended to help. For example, a taxpayer’s gross income could fall so low they no longer qualify for the earned income tax credit and end up being a net negative.

Finally, there is a third option of creating a new deduction; allowing taxpayers to first claim the income and then take a deduction to offset it. The issue here is that given the claimed income level of most tipped workers, an additional deduction may not be one-for-one incrementally beneficial to the standard deduction. In other words, so much of their income is already non-taxable, this wouldn’t make much of a difference.

Side-Effects

Depending on how the policy is structured, there are negative side effects that could accompany the policy change. Compliance with reporting tip income is already spotty at best. It’s not uncommon for tipped workers to underreport their tip income, especially for cash tips. The main concern is that employers and employees may try to game the system. There is a real chance that who is tipped changes and people may try to change compensation schemes so that other types of income are then changed to tip income to take advantage of the changes; especially for taxpayers for whom the law was never intended to help.

Non-Taxable Overtime

The second proposal is to exempt overtime wages from income taxation. The idea is that it would help workers who get to keep more of their money; and at the same time helping businesses, since employees would be incentivized to work more hours, thereby negating the need to hire more employees. While on the surface it seems like a policy to help the hardest working, there are potential problems.

Unfair to Regular Wage Earners

There are two possible issues. First, it leaves behind hourly workers who cannot work overtime due to other responsibilities, health or their job’s duties. It also disadvantages those who have to work multiple jobs (because their job doesn’t offer overtime, but they need the money).

Second, it doesn’t consider salaried positions. There are many salaried positions, where workers are exempt from overtime laws – and a large swath of these are not highly paid positions.

Administrative Complications

Employers and the IRS would need to deal with distinguishing between regular wages and overtime earnings. What is considered overtime is not always clear when there are pay concepts such as bonuses, shift differentials, commissions or other alternative payment arrangements. It would also add significant complexity to payroll systems.

Conclusion

While both policies are well intended, the devil is in the details. Implementation would need to be carefully considered; the intended taxpayers might not be the main beneficiaries; and there is room for fraud.