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Pieces of the 2025 tax reform puzzle

Shaun Hunley  Executive Editor / Thomson Reuters

· 5 minute read

Shaun Hunley  Executive Editor / Thomson Reuters

· 5 minute read

I often tell others that tax reform is like assembling a complex jigsaw puzzle. Although you start with the final image in mind, you’re not sure how the various pieces fit together. Should you build the puzzle from the middle out, or is it better to focus on the edges and work toward the middle? And what if a piece is missing? Is an almost complete puzzle better than no puzzle at all?

Taking a closer look at the components of a potential tax reform plan

As you know, 2025 is a year of tax reform, and there are many moving pieces. Here’s a closer look at some of the key elements.

1. Tariff changes

The first piece is obviously President Trump, who took office on Monday, January 20. In his inauguration speech, President Trump promised to “tariff and tax foreign countries to enrich our citizens.” To accomplish this, the President will establish an External Revenue Service. I predict tariffs will play a major role this year to help pay for key tax reform provisions.

2. Extending the TCJA

President Trump also has expressed interest in extending the Tax Cuts and Jobs Act (TCJA), which is our second piece of the puzzle. Enacted on December 22, 2017, the TCJA was the largest piece of tax legislation since the Tax Reform Act of 1986. If you’re anything like me, you remember exactly where you were when that bill was passed.

Among other things, the TCJA introduced new individual income tax rates and brackets, increased the standard deduction, capped the state and local tax (SALT) deduction, and created the complicated qualified business income (QBI) deduction. The key is most of these tax breaks are scheduled to sunset soon, which has forced Congress to act this year.

3. Solutions from Congress

And that brings us to the third piece of the puzzle: Congress. The House Ways and Means Committee has already brainstormed solutions to the impending TCJA sunset. Generally, the Committee would like to extend the TCJA, but doing so would be costly. So, the Committee has floated the following ideas (among others):

Congress is also looking into bringing back full expensing of research and development costs and lowering the corporate tax rate from 21% to 15%. During his campaign, President Trump mentioned eliminating taxes on tip income, overtime pay, and Social Security benefits, so Congress will also consider those. Click here for a comprehensive list of the possible tax reform provisions being considered by the Committee.

4. Reconciliation bills

The fourth piece of the tax reform puzzle is the reconciliation process. This is where a budget-related bill can be passed by a simple majority in the Senate (rather than the usual 60 votes). There are strings attached, however. Under reconciliation, there’s no filibuster in the Senate and the proposed legislation can’t increase the deficit in years outside a 10-year window. To refresh your memory, both the Affordable Care Act (ACA) and the TCJA were passed through reconciliation. For major tax reform to happen this year, it’s almost certain that the reconciliation process will be needed.

There may be disagreement, however, among Republicans on whether to combine border legislation and extension of the TCJA into one reconciliation bill. It’s important to note that Congress has the option of passing two reconciliation bills this year under the FY2025 and FY2026 budgets. President Trump has suggested he prefers a one-bill approach, but we’ll have to see how this plays out.

5. Tax bill timelines

The fifth piece of our puzzle is timing. When will the bill be passed? This is always the million-dollar question for tax practitioners. It has been reported that House Speaker Mike Johnson (R-LA) wants the House to adopt a budget resolution by the end of February and a reconciliation package before Easter. This sounds like a pretty ambitious timeline, given the various pieces of the tax reform puzzle.

Although I don’t have a crystal ball, I believe the timing could be similar to the TCJA’s. For that bill, the budget resolution was passed in October 2017. The House passed its version of the TCJA in November 2017. In December, the Senate approved an amended version, and the final bill was enacted on December 22, 2017. In my opinion, we could see a similar timeline this year.

Tax reform will be an evolving process in 2025

As tax reform ramps up this year, it will be interesting to see how the pieces of our puzzle fit together. There are other pieces as well, such as lobbyists and special interest groups, but we will save those for another day.

Now more than ever, it’s important to keep up with regulatory developments in a timely manner. As these and other changes unfold, clients will have questions about how they might impact their businesses. Being ready to advise them on how to best navigate new policy changes will position your firm as a trusted partner that provides the meaningful guidance they need.

In addition, learn how having an AI-powered research solution can help your firm stay up to date on changes to the law and enhance your firm’s service to its clients.

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