Extending the TCJA in 2025: Examining Potential Avenues to Renewal

With the sunsetting of the Tax Cuts and Jobs Act (TCJA) and the November victories of Donald Trump and the Republican Party, what exactly is going to change remains up in the air, but changes to tax laws and policies are all but certain in 2026. Many portions of the TCJA are scheduled to revert to their 2017 amounts unless Congress passes new laws extending them. Given the slim majority in the House of Representatives, the Republican party will struggle to enact everything they want to achieve. Their limited majority in the Senate also means that any bills are likely to come in the form of a budget reconciliation act.

Budget Reconciliation and the (Slim) Republican Majority

The TCJA and Biden’s 2022 Inflation Reduction Act (IRA) both passed through Congress as budget reconciliation acts. While there are many nuances to a budget reconciliation act, a few major points include: (i) a reconciliation bill only needs a simple majority to pass, (ii) debate and amendments are limited, (iii) generally its duration is limited to a maximum of 10 years, and (iv) it is not subject to filibuster in the Senate. Because there are only 53 Republican senators, any tax legislation put forward not as a reconciliation is all but certain to encounter a Democratic filibuster. Another quirk of reconciliation acts is that only one is permitted per fiscal year. Since the federal fiscal budget runs from October 1st through September 30th and a budget has not been passed for 2024, there is a possibility of two reconciliation acts this calendar year: one before September 30th for fiscal year 2024 and another after October 1st for 2025. This unique circumstance is enabling the current split seen between Senate and House leadership. The Senate prefers to use two separate acts – the first to quickly address border security, energy, and defense and a second bill to extend the TCJA. A two-bill approach allows an early win to address campaign promises while preserving time for the significant debates and negotiations expected around extending the TCJA. President Trump has stated his preference for one ‘big, beautiful bill’ which aligns with House leadership’s stated preference. Regardless of how many acts are introduced, there will be major points of contention and horse trading in both legislative branches regarding any increase to the deficit. Given the slim majority in the House, Speaker Mike Johnson will be constrained significantly more than Paul Ryan was when the TCJA was passed in 2017. Given the majority in the house at that time, the TCJA legislation could afford to lose 23 Republican votes and still have the required votes to pass. In fact, 13 Republicans voted against the TCJA in 2017, three of which still serve in the House. A fourth, Elise Stefanik (R-NY) has been nominated by President Trump to be the Ambassador to the United Nations which, if confirmed by the Senate, will prompt her resignation and a special election for her House seat. Assuming all the currently vacant House seats are won by Republicans and filled prior to a reconciliation vote, Mr. Johnson will be able to lose at most 3 members of his conference. In addition to the current House members who voted against the TCJA in 2017, there are several new fiscal deficit hawks in the House who have publicly voiced strong opposition to continued increases of the federal deficit. As negotiations continue to heat up, anticipate hearing more about and from House members Chip Roy (R-TX), Mike Lawler (R-NY), and Byron Donalds (R-FL) as well as other Representatives from high tax states that have been impacted by the $10,000 SALT cap.

Wish Lists

In late January, the House Ways and Means Committee released a 50-page list of potential tax changes, providing insight into some of the possible tax and spending cuts under consideration. Speaker Johnson will have to enact some significant spending cuts or tax revenue increases to offset the costs of renewing any provisions of the TCJA to secure the majority he needs. A few of the more sizeable and surprising possibilities are listed below. All numbers unless otherwise stated are based on the maximum budget window of 10 years. *

Working the Numbers on the Deficit Impact

One of the top tax policy goals of President Trump is extending and expanding the TCJA. For the reasons discussed above and the estimated $4+ trillion increase to the deficit, a complete extension of the TCJA is unlikely to occur. Republicans have three primary means to reduce a bill’s deficit impact and make it easier to pass: (i) make any cuts shorter, (ii) make the bill skinnier by reducing the tax cuts, and (iii) include pay-fors. Of these options, pundits feel that curtailing the duration and including pay-fors are the most likely approaches to be taken.

Shortening the Effective Period

Reducing the duration of the bill decreases the deficit impact and would make the bill more palatable to deficit hawks and the American public. While a short-term extension is the likely outcome, this too presents heartburn for Republican leadership. For example, passing a more deficit-friendly two-year extension would allow President Trump to claim a victory, but Congress has the possibility of looking very different in 2 years. Since 1934, the President’s party has lost an average of 28 House seats in every midterm election. If history holds true, the Republicans will lose their already slim majority in the House in 2026 and thus any subsequent extension of the TCJA in 2027 would likely be off the table. Additionally, given the significant hurdles presented by a TCJA extension, the current expectation put forward by pundits and commentators is that ultimately TCJA 2.0 will last between 3 and 5 years.

Limiting the Cuts

Removing any of the current deficit increasing provisions in the TCJA provides another way to reduce the deficit impact of an extension. For example, removing the increased estate tax exemption from an extension, would reduce TCJA 2.0’s deficit impact by an estimated $200 billion. The popularity of the current TCJA provisions makes this method of deficit reduction less appealing to legislators.

Making New Cuts

An individual who lives in California earned $1 million. Their state income taxes could be over $100,000. Under pre-TCJA rules, because this $100,000 of state taxes could be used as a deduction from taxable income, the taxpayer could potentially save roughly $40,000 from federal income taxes owed. Barring any potential state rules, under the TCJA, the amount currently deductible from taxable income in this example would be limited to $10,000, resulting in a roughly $4,000 reduction in federal income taxes owed.

Timeline

After the November elections, Republicans called for enacting a TCJA extension in the spring of 2025, with Speaker Johnson going as far to say he will have it on President Trump’s desk by Memorial Day. As it was before, that goal is proving elusive. In 2017, Congressional leadership hoped to initiate the first step in the reconciliation process – introducing a budget resolution by June. Ultimately, the House passed its budget resolution on October 5th, after negotiations over the deficit amount stalled progress. The final bill was introduced in the House on November 2nd, passing through the Senate on December 2nd and signed by President Trump on December 22nd, 2017. With an even slimmer majority in the House this time around, it is unlikely that a TCJA 2.0 bill will receive President Trump’s signature significantly earlier than the original TCJA.

Conclusion

An extension of the TJCA, in some form, feels like an inevitability since President Trump and the Republican party swept into power the 2024 elections. What that extension looks like and when it becomes law remain amorphous. Horse trading will occur, pay-fors will be included, and ultimately the deficit will likely increase. The toughest and most public negotiations will likely play out around the SALT cap as the $10,000 limit has proven to be an expensive provision for taxpayers in high tax states like New York, an expense that has proven to be a significant revenue generator and deficit reducer for the federal government. Expect both Democrats and Republicans to make noise about the estate tax and the sunsetting of the increased exemptions under the TCJA, but unlike the SALT cap, there are fewer differing opinions and outliers in Speaker Johnson’s conference when it comes to the estate tax. While Republican control of the legislature and presidency has eased anxieties around estate tax changes, married couples with a net worth over $15 million can still benefit from touching base with their estate planning attorney to review their planning or put planning in place. As tax laws continue to evolve, working with a trusted advisor to maintain a long-term perspective is essential. Partnering with your team at Crewe Advisors can help you stay informed and prepared for how both current and proposed tax law changes might affect your financial plan.