Turning to taxes: The outlook for new policies in 2025

Now that Election Season has passed, our clients’ attention has turned to what the incoming administration and new Congress will do with respect to numerous areas of public policy.

Easily the question we are asked most often is what Congress will do next year with respect to taxes. That’s because it is well known that many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire (or “sunset”) at midnight on December 31, 2025.

It is difficult to speculate on what Congress is going to do. We are confident, however, that Congress will do something. Indeed, even before Election Day, Democrats and Republicans in both the House and Senate made it clear that passing tax legislation would be a top priority in 2025. And President-elect Trump campaigned on a permanent extension of the TCJA, so addressing this law will certainly be a top priority for the new administration as well.

With Republicans gaining control of the White House and both chambers of Congress, they will have the ability to address the TCJA and other tax policies through the “budget reconciliation process” with mere majorities in the House and the Senate, instead of requiring a “super-majority” of 60 votes to pass legislation in the Senate.

Making all of the TCJA’s expiring provisions permanent might be difficult, given Republicans’ slim majority control in the House of Representatives and high projected deficits that are expected to require a measured approach to tax policy. Nevertheless, the extension of many, if not most, of the expiring TCJA provisions are expected to be the cornerstone of any new law.

Despite ongoing uncertainty about which TCJA provisions might be extended, and when, one suggestion we have made all along to our clients, and continue to make regardless of what may be enacted next year, is to give wealth to future generations, whether outright or in trust, as long as you can afford to and you think it’s a good idea to do so. This is principally because all future appreciation on those assets would not be subject to future U.S. estate tax on your (or your spouse’s) death.

In the meantime, here are key provisions, set to expire December 31, 2025, that you will hear a lot about if you choose to follow the machinations in Washington, DC over the next year:

1. State and local tax (SALT) deduction cap

One provision of the TCJA provides that taxpayers may not deduct more than $10,000 for state and local taxes paid. This deductibility cap effectively increased taxes for many taxpayers in high-tax states, such as California, Minnesota, New York, New Jersey and Connecticut—as well as for owners of real estate subject to significant local property taxes. Many representatives in those states—both Republican and Democrat—have proposed raising the SALT deduction cap, if not abolishing it altogether. President-elect Trump has also expressed support for eliminating the SALT deduction cap. The cap is scheduled to expire after 2025, and its future remains uncertain, as Congress will need to negotiate the extension of various other TCJA provisions. 

2. Alternative Minimum Tax exemption increase

In 2017, the Alternative Minimum Tax (AMT) system—a separate tax system that subjects taxpayers to income tax at a lower rate, but broadens the income base and disallows many deductions—was changed to apply to far fewer taxpayers. If this change were to expire in 2026, it is estimated that more than seven million taxpayers who have been out of the AMT system for the past six years would be back in it.¹ Two things to remember about the AMT: (1) It can increase taxes calculated as due under the “regular” tax system (which has higher rates, with more deductions), but can never decrease them; and (2) many taxpayers monitoring the possibilities around the potential full restoration of the SALT deduction should be mindful that the SALT deduction is fully disallowed under the AMT system.

The interaction between those two tax provisions illustrates a larger point: Legislators will not consider the economic, fiscal, political or other ramifications of those or other laws in isolation. In other words, one should assume that if the SALT deduction cap were repealed, the tax revenue projected to be lost by repeal would be made up for in some other way.

3. Miscellaneous itemized deductions and the Pease limitation

The allowance of miscellaneous itemized deductions (provided they exceed 2% of adjusted gross income), as well as the overall limitation on itemized deductions (also known as the “Pease limitation”), are scheduled to return in 2026. The Pease limitation reduces the allowable itemized deductions a high-income taxpayer may claim on his or her U.S. income tax return.² This law has been suspended since 2018. If restored, it would limit deductions for high-income taxpayers that might otherwise reduce taxable income.

4. Mortgage interest deduction

Under current law, the interest paid on $750,000 of mortgage debt is deductible. In 2026, this amount is scheduled to revert to $1 million. 

5. Qualified business interest (QBI) deduction

Right now, 20% of the income earned by certain “pass-through” businesses (such as partnerships, S corporations and sole proprietorships) is deductible, making the top effective rate on that income 29.6%. If this deduction goes away as scheduled, that income would be subject to tax at a rate of 37% (or perhaps more).

6. Top income tax rate

The top ordinary income tax rate is 37%. On January 1, 2026, that rate is scheduled to go up to 39.6%.

7. Estate and gift tax exclusion amounts

The maximum that a taxpayer generally can transfer to recipients in 2024 (such as children) without paying estate or gift tax is $13.61 million. In 2025, it will be $13.99 million. Unless the law changes, that number would drop to an estimated $7.25 million in 2026.

Although it is impossible to predict what Congress will do, we have a decent idea of when it will do it. In a nutshell: not that quickly. Historically, in the first year of a new president’s first term, major tax legislation takes months to pass even if both chambers of Congress are in the control of the president’s party. That was the case in both 2017, when major tax legislation was not enacted until December, and 2021, when major tax legislation was not enacted until the summer of 2022.

Based on this history, and with the shadows of large annual federal deficits and a large debt (over 100% of GDP) looming, we think it’s unlikely any legislation will be enacted sooner than late spring (and not become effective until January 1, 2026)—and Congress will carefully consider the fiscal implications of any tax legislation that does get enacted.

All of which suggests to us that clients should monitor developments in Congress carefully, stay in regular touch with their J.P. Morgan advisors, and make sure their financial and estate plans are up-to-date and account for the impact, on them, of any tax law changes that may be enacted.