Tax reform in 2025 and the expiration of TCJA will present challenges
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The tangled process to a 3-month stopgap for avoiding a shutdown at the eleventh hour on December 20th, 2024 may be a sign of the future challenges Congress will face in the New Year regarding tax reform. Many provisions of the Tax Cuts and Jobs Act will expire by the end 2025. Although Republicans will control both the House and Senate, the margins are razor thin, leaving little room for division.
Already, there has been push-back from some House Republicans during the continuing resolution process after the bill was sliced from more than 1,500 pages to a mere 116 pages, with the final version coming in at a lean 118 pages.
Reform possible, but tight margins
Kasey Pittman, who leads Baker Tilly’s tax policy practice, explained that the Republican election victory on November 5, 2024, increased the likelihood of a Republican tax bill passing without Democratic support. However, she said that the narrow margin means individual lawmakers will have notable influence over any tax reform legislation, as losing even a few votes could be critical.
Pittman noted that in 2017, the TCJA was passed with a larger Republican majority in the House, which allowed for more internal dissent, as reflected by the 227 to 205 vote where 13 Republicans opposed the legislation.
Legislative dynamics
Certain procedural processes in the Senate may play to the advantage of Republicans next year when it comes to tax reform. Pittman noted that Republicans can bypass filibustering, which usually requires 60 votes, in order to pass budget-related legislation with a simple majority of 51 votes. However, she cautioned that this process has strict limitations, which can lead to bills with expiring provisions, such as those in the TCJA and the Inflation Reduction Act.
Potential for costly extensions
When it comes to extending many of the TCJA provisions, a big hurdle is the associated cost. A November 13, 2024 updated Congressional Budget Office (CBO) report estimates extending all expiring or less generous TCJA provisions would cost $4.0 trillion from fiscal year (FY) 2025 to 2034, with most impacts starting in FY 2026.
However, extending some provisions would ultimately be a positive revenue generator. For example, extending the elimination of personal exemptions, which significantly impacted Form W-4 and the federal income tax withholding process, is projected to generate over $1.7 trillion in additional revenue through FY 2034.
Moreover, maintaining the elimination of the moving expense deduction, with exceptions for Armed Forces members in specific circumstances, is expected to increase revenue by over $10 billion if extended through FY 2034.
Campaign promises and group influence
Pittman noted that despite a unified Republican push to extend the various tax provisions of the TCJA, other challenges may arise, particularly regarding tax-related campaign promises and demands from influential groups like the SALT Caucus. This bipartisan group has advocated repealing the $10,000 limit on State and Local Taxes (SALT) deductions set by the TCJA. Additionally, President-elect Donald Trump pledged to eliminate taxes on tips and overtime pay during his campaign.
Sonja Valter, a senior manager with Baker Tilly’s human resources consulting team, remarked on other campaign promises regarding tax reform that could also come into play next year.
“I think there’s also some rumblings about expat taxation,” she said, explaining that discussions have suggested restructuring the system so expatriates pay taxes only in their country of residence, rather than on worldwide income, which is currently required for U.S. citizens abroad.
Specific obstacles for payroll professionals
Valter recalled the obstacles payroll professionals faced in implementing IRS guidance and adjusting to changes in forms and publications following the passage of the TCJA in late 2017. She noted that these developments have affected payroll operations considerably, and reverting to prior tax rules could impact payroll further in 2026.
“It will be interesting to see
we are getting…another revision to the W-4 [if] are we reverting back to the old one prior to the TCJA,” she wondered, adding that the rate on supplemental wages will be another change from 22% to 25% to consider should related provisions of the TCJA sunset.[or]Preparation for multiple scenarios
Pittman and Valter both advise employers and tax practitioners to prepare for the potential expiration of TCJA provisions. These changes could substantially affect new tax policies, necessitating strategic actions to build confidence and adapt to the evolving circumstances.
“We have to stay informed and stay nimble and be prepared,” Pittman said regarding the multiple scenarios that may play out for tax reform next year.
Valter advised to “stay in close contact with your payroll software provider” for employers using a third-party solution.
She also stressed the importance of monitoring how payroll providers adapt to other changes in overtime and tax-exempt codes to ensure compliance with any new laws and regulations and advised signing up for compliance updates from trusted resources to obtain both federal and state-level changes that could impact payroll.
Potential for retroactive implementation
Pittman explained that the passage of the TCJA led to immediate taxation changes without a Form W-4 ready, for example, which highlights a potential risk of last-minute implementation if future tax reforms occur in 2025.
“We could see a tax reform bill in 2026 that is retroactive to the beginning of the year 2026 if, for some reason, Republicans can’t pass a bill in 2025,” she said. Pittman noted that legislative changes could also face delays in government implementation, followed by system updates from software providers, ultimately affecting taxpayers, including employers and payroll professionals, as they work to adapt to new requirements.
Prepare for what is known and what might be
Pittman again emphasized the complexity of tax reform legislation, noting that various factors influence its final composition, making it crucial to stay informed for effective planning.
She suggested preparing for the expiration of the TCJA, as it is the current certainty, and also modeling potential outcomes of future tax reform as other scenarios begin to play out next year.
Limited legislative days
