Trump’s 2025 Tax Plan: Overview of Proposed Changes

Trump’s 2025 Tax Plan: Overview of Proposed Changes

The upcoming Trump administration has signaled a significant transformation of the American tax landscape. With the 2017 Tax Cuts and Jobs Act (TCJA) provisions set to expire at the end of 2025, Trump’s proposed tax changes represent a potential sweeping overhaul of how individuals and corporations are taxed in the United States.

The administration’s tax agenda encompasses everything from extending and modifying TCJA provisions to introducing novel approaches like exempting certain types of income from taxation and implementing substantial tariff increases. These proposals, if enacted, would reshape federal revenue collection and potentially influence economic growth, household finances, and America’s trade relationships in profound ways.

Extending the Tax Cuts and Jobs Act

The cornerstone of Trump’s tax proposal is making the expiring provisions of the 2017 Tax Cuts and Jobs Act permanent. These provisions, which are scheduled to sunset after 2025, include several key elements that affect both individuals and businesses.

Individual Tax Provisions

For individual taxpayers, making the TCJA permanent would maintain:

• Current Tax Rates and Brackets: Preserving the lower marginal tax rates established in 2017
• Enhanced Standard Deduction: Keeping the nearly doubled standard deduction that reduced the need for many taxpayers to itemize
• Child Tax Credit: Maintaining the expanded child tax credit and other dependent tax credit
• Alternative Minimum Tax (AMT) Changes: Continuing the higher AMT exemption thresholds that significantly reduced the number of taxpayers subject to AMT
• Section 199A Pass-Through Deduction: Extending the 20% qualified business income deduction for pass-through businesses that has benefited many small business owners

According to economic analysis, these provisions have contributed to increased take-home pay for many Americans. Making them permanent would prevent what would effectively be a significant tax increase when they expire.

Estate Tax Provisions

The Trump plan also proposes making the TCJA’s estate tax changes permanent. Under the TCJA, the estate tax exemption was doubled to over $12 million per individual (adjusted for inflation). Without action, this exemption would revert to approximately half that amount after 2025, subjecting many more estates to federal taxation.

Business Tax Provisions

For businesses, Trump proposes restoring several key TCJA provisions that have already begun to phase out or change:

• 100% Bonus Depreciation: Reinstating the ability for businesses to immediately deduct the full cost of qualified business investments, which began phasing out in 2023
• R&D Expensing: Restoring the ability to immediately deduct research and development costs, which changed to five-year amortization beginning in 2022
• Interest Deduction Limitation: Returning to the more generous EBITDA-based limitation for business interest deductions instead of the stricter EBIT-based limitation that took effect in 2022

These business provisions are especially significant for capital-intensive industries and businesses making substantial investments in innovation and growth. The expensing provisions, in particular, are considered by many economists to be among the most growth-friendly elements of the tax code, as they reduce the cost of capital and encourage business investment.

Removing the SALT Deduction Cap

A notable modification to the TCJA in Trump’s plan is the elimination of the $10,000 cap on state and local tax (SALT) deductions. This cap, which limited the amount of state and local taxes taxpayers could deduct on their federal returns, has been particularly impactful for residents of high-tax states like California, New York, and New Jersey.

Removing the SALT cap would provide significant tax relief to residents in these states, especially for higher-income households. Economic analysis suggests that eliminating the SALT cap would increase long-run economic output by approximately 0.7% by reducing the tax burden on labor income and housing investment.

However, the benefits of removing the SALT cap would not be distributed evenly across income groups or geographic regions. The largest benefits would accrue to high-income taxpayers in high-tax states, while taxpayers in lower-tax states or those who take the standard deduction would see minimal benefit.

Novel Income Tax Exemptions

Perhaps the most innovative aspects of Trump’s tax plan involve exempting specific types of income from federal taxation entirely. These proposals represent a significant departure from traditional tax reform approaches.

Exempting Social Security Benefits

Trump proposes eliminating income taxes on Social Security benefits for all recipients. Currently, Social Security benefits may be partially taxable depending on a recipient’s combined income (including half of Social Security benefits plus all other income). According to the Social Security Administration, about 40% of beneficiaries pay federal income taxes on their benefits.

Exempting all Social Security benefits from taxation would provide tax relief primarily to middle-income retirees, as very low-income recipients generally do not pay taxes on their benefits already, and the exemption would be more valuable to those in higher tax brackets. This change would reduce federal revenue by an estimated $1.2 trillion over ten years.

While this exemption would increase the after-tax income of many retirees, it could potentially accelerate funding challenges for the Social Security trust funds if not paired with other measures to ensure the program’s long-term sustainability.

Exempting Overtime Pay

Another novel proposal is exempting overtime pay from income taxation. This would make any wages earned from working beyond standard hours tax-free at the federal level. This proposal is targeted at providing tax relief to hourly workers across various industries who rely on overtime to supplement their income.

The overtime exemption would likely benefit manufacturing, healthcare, transportation, and service industry workers who regularly work overtime hours. According to economic modeling, this exemption would increase long-run economic output by approximately 0.3% and create an estimated 405,000 full-time equivalent jobs by increasing labor supply incentives. The revenue cost is projected at approximately $748 billion over ten years.

Exempting Tips

The third major income exemption would eliminate federal income taxes on tip income. This would primarily benefit workers in the service industry, particularly in food service, hospitality, and personal services. Currently, the IRS expects all tip income to be reported and taxed as regular income.

The tip exemption would provide targeted tax relief to service workers, many of whom rely heavily on tips as a substantial portion of their compensation. While representing a smaller revenue impact than the other exemptions (approximately $118 billion over ten years), this change could significantly increase after-tax income for workers in tipping industries.

Corporate Tax Reform for Domestic Production

Trump’s plan proposes a significant reduction in the effective corporate tax rate for domestic manufacturing and production activities. Rather than lowering the overall corporate rate from its current 21%, the plan would implement a 28.5% domestic production activities deduction, effectively lowering the rate to 15% for qualifying domestic activities.

This approach represents a revival and expansion of the previous Domestic Production Activities Deduction (DPAD) that existed from 2004 until 2017, when it was eliminated by the TCJA. The proposed deduction would be substantially larger than the previous incarnation, which provided a 9% deduction at its peak.

The domestic production preference is designed to:

1. Encourage reshoring of manufacturing and production activities to the United States
2. Increase the global competitiveness of American manufacturing
3. Create incentives for capital investment in domestic production facilities

Economic analysis suggests this provision would increase long-run economic output by approximately 0.2% and create an estimated 38,000 jobs by reducing the cost of capital for domestic production. The revenue cost is estimated at $361 billion over ten years.

However, defining what qualifies as “domestic production activities” would present significant implementation challenges. Previous iterations of the DPAD faced complexity issues in determining which activities qualified, and the proposed expansion would likely encounter similar challenges.

Creating an Auto Loan Interest Deduction

A smaller but notable proposal is the creation of a new itemized deduction for interest paid on auto loans. This would function similarly to the mortgage interest deduction, allowing taxpayers who itemize to deduct the interest portion of their car payments from their taxable income.

This deduction would benefit taxpayers with auto loans who itemize their deductions rather than taking the standard deduction. However, given the significantly increased standard deduction under the TCJA, which Trump proposes to make permanent, the number of taxpayers who itemize has decreased substantially, potentially limiting the impact of this new deduction.

The economic effects of this provision would likely be modest, with minimal impact on GDP and job creation. The revenue cost is estimated at approximately $61 billion over ten years.

Eliminating Green Energy Tax Credits

Trump has proposed repealing the green energy tax credits established by the Inflation Reduction Act (IRA) of 2022. These credits currently subsidize various clean energy investments, including:

• Electric vehicle purchases
• Residential energy efficiency improvements
• Solar and wind energy production
• Clean energy manufacturing
• Carbon capture and sequestration

Eliminating these credits would offset some of the revenue losses from the proposed tax cuts, raising an estimated $921 billion over ten years. However, this change would likely affect the trajectory of clean energy development and deployment in the United States, potentially slowing the transition to renewable energy sources.

Because the IRA tax credits are temporary expansions, their elimination is not projected to have a significant long-term impact on economic growth beyond the baseline.

Tariff Increases as Revenue Sources

A distinctive feature of Trump’s tax plan is its reliance on significantly increased import tariffs to offset revenue losses from tax reductions. The administration proposes two major tariff changes:

1. Raising Existing China Tariffs: Increasing the current Section 301 tariffs on Chinese imports from their current weighted average of approximately 10% to 60%
2. Universal Base Tariff: Implementing a new 20% tariff on all U.S. imports from all countries

These tariff increases would generate substantial revenue—estimated at approximately $3.8 trillion over a ten-year period—helping to partially offset the cost of the proposed tax cuts. This represents the largest revenue component of the plan’s offsetting provisions.

However, economic analysis suggests these tariffs would come with significant economic costs. The Tax Foundation’s General Equilibrium Model estimates that the proposed tariffs would reduce long-run economic output by approximately 1.3% and eliminate about 1,073,000 full-time equivalent jobs. These negative effects occur because tariffs effectively act as taxes on both consumers and businesses that rely on imports, raising prices throughout the economy.

Additionally, the economic analysis assumes that trading partners would likely respond with retaliatory tariffs on U.S. exports. Even partial retaliation could further reduce U.S. GDP by an additional 0.4% and eliminate another 362,000 jobs without raising any additional revenue for the U.S. government.

The proposed tariffs illustrate a key tension in the overall plan: while the tax cuts are projected to boost economic growth, the tariffs used to partially offset their cost would substantially reduce those growth benefits. The Tax Foundation estimates that Trump’s proposed tariffs and partial retaliation from trading partners would together offset more than two-thirds of the long-run economic benefit of his proposed tax cuts.

Additional Potential Proposals

Beyond the formally modeled provisions discussed above, Trump and his campaign have floated several additional tax ideas that could be incorporated into a final tax plan:

Potential Expanded Child Tax Credit

Vice presidential candidate Senator JD Vance has suggested increasing the child tax credit to $5,000, a substantial increase from its current level of $2,000 per child. While the Trump campaign has not formally endorsed this proposal, if implemented, it could reduce federal revenue by an estimated $2.4 trillion over ten years.

End to Taxation of Americans Abroad

Trump has recently proposed moving the U.S. to a residence-based tax system for individuals living abroad, allowing American expatriates to forgo filing and paying U.S. income tax. The United States is currently one of only a few countries that taxes citizens on their worldwide income regardless of where they live.

This change would eliminate the burden of double taxation and complex compliance requirements for Americans living overseas. The revenue impact would likely be between $50 billion and $100 billion over ten years, though this could potentially be offset through transition taxes or fees.

Tax Credit for Family Caregivers

The 2024 Republican Party platform mentions creating a tax credit for family caregivers, though specific details have not been provided. A similar proposal, the Credit for Caring Act, which has had bipartisan support in Congress, would provide a tax credit of up to $5,000 for eligible caregivers.

Economic and Fiscal Impacts

The comprehensive economic analysis of Trump’s tax proposals reveals a complex picture of both potential benefits and drawbacks.

Growth and Employment Effects

Using the Tax Foundation’s General Equilibrium Model, the combined tax proposals (excluding potential retaliation to tariffs) would increase long-run GDP by 0.8%, the capital stock by 1.7%, wages by 0.8%, and employment by 597,000 full-time equivalent jobs.

However, these positive economic effects are the net result of opposing forces within the plan:

• The tax cuts (TCJA permanence, income exemptions, and domestic production deduction) would increase GDP by approximately 2.4% in isolation
• The proposed tariffs would reduce GDP by approximately 1.7% (including potential foreign retaliation)

This trade-off illustrates that while many of the tax provisions are pro-growth, their economic benefits are substantially offset by the negative effects of the proposed tariffs.

Revenue and Deficit Effects

On a conventional basis, the proposed changes would reduce federal tax revenue by approximately $3 trillion from 2025 through 2034. This falls to $2.5 trillion when accounting for the economic growth effects of the policy changes.

When broken down by major component, the revenue effects over ten years include:

• TCJA individual provisions permanence: -$3.4 trillion
• Restoring full SALT deduction: -$1.0 trillion
• TCJA estate tax permanence: -$0.2 trillion
• TCJA business provisions permanence: -$0.6 trillion
• Income exemptions (Social Security, overtime, tips): -$2.1 trillion
• Auto loan interest deduction: -$0.1 trillion
• Domestic production deduction: -$0.4 trillion
• Eliminating green energy credits: +$0.9 trillion
• Import tariffs: +$3.8 trillion

If additional proposals such as expanding the child tax credit to $5,000 and exempting Americans abroad from income tax were included, the total revenue impact could increase to approximately $6 trillion over ten years.

Debt and Long-Term Fiscal Effects

The increased deficits resulting from the tax plan would increase the nation’s debt-to-GDP ratio. According to economic modeling, the debt-to-GDP ratio would increase from its long-run projected level of 201.2% to 223.1% on a conventional basis and 217% on a dynamic basis.

This increased debt load would require higher interest payments that would reduce American incomes as measured by GNP by almost 0.8%. This effect creates a notable difference between the long-run impact on GDP (+0.8%) and the long-run impact on GNP (-0.1%), with the latter providing a more complete picture of Americans’ economic well-being by accounting for payments to foreign lenders.

Distributional Effects

Trump’s proposed tax changes would not affect all Americans equally. According to distributional analysis, the plan would:

• Decrease after-tax income on average by 1.4% in 2025 due to the immediate implementation of tariffs
• Increase after-tax income by 2.2% in 2034 after the TCJA provisions are extended
• On a long-run dynamic basis, increase after-tax incomes by 2.8% on average

However, these averages mask significant differences across income groups. In 2034, the distributional impacts would include:

• The bottom 40% of households would see tax increases, with after-tax income falling by 0.6% for the bottom quintile and 0.4% for the second quintile
• Middle-income taxpayers would see slight tax cuts, with after-tax income increasing by 0.3% for the middle quintile
• The top two quintiles would see the largest increases in after-tax income, ranging from 1.4% for the fourth quintile to 4.1% for the top 1% of earners

This uneven distribution occurs because the proposed tax cuts provide proportionally larger benefits to higher-income taxpayers, while the burden of tariffs falls more heavily on lower- and middle-income households who spend a larger share of their income on goods that would be affected by tariff-induced price increases.

Implementation Challenges and Considerations

While Trump’s tax proposals represent a comprehensive vision for reshaping the federal tax code, several practical and political considerations would affect their implementation.

Legislative Pathways

With a closely divided Congress, passing the complete package of tax changes would face significant hurdles. Budget reconciliation rules, which allow certain tax and spending legislation to pass with a simple majority in the Senate, impose constraints including:

• Ten-year budget windows that often necessitate sunsetting provisions
• Prohibitions on increasing long-term deficits beyond the budget window
• Limitations on provisions that have merely incidental budgetary impacts

These constraints may require compromises on the scope, permanence, or design of various provisions.

Implementation Complexity

Several of the proposed tax changes would present significant implementation challenges:

• Defining “domestic production activities” for the proposed 15% corporate rate
• Creating systems to track and exempt overtime pay and tips from taxation
• Implementing and enforcing new tariff regimes across thousands of product categories
• Managing potential retaliatory measures from trading partners

These challenges would require substantial administrative resources and could create compliance burdens for taxpayers and businesses.

Economic Uncertainty

The economic effects of the plan depend significantly on how businesses, consumers, and trading partners respond to the changes. Key areas of uncertainty include:

• The degree and nature of foreign retaliation to increased tariffs
• Changes in business investment behavior in response to tax incentives
• Labor supply responses to income exemptions
• The impact of increased debt on interest rates and capital formation

These uncertainties make precise predictions of economic outcomes difficult, with actual results potentially varying significantly from model-based projections.

Work With Us

Understanding Trump’s proposed tax changes is essential for individuals, businesses, and investors as they prepare for potential shifts in the tax landscape. While the exact form of any enacted tax legislation will depend on political negotiations and economic conditions, the broad contours of Trump’s plan provide important signals about the direction of tax policy in the coming years.

At Avior, we recognize that tax policy changes can significantly impact your financial strategy. Our team closely monitors tax policy developments and helps clients adapt their financial plans to changing tax environments. We provide comprehensive financial planning that considers how potential tax changes might affect your specific situation, from investment strategies to retirement planning and estate considerations.

By working with Avior Wealth Management, you gain access to advisors who understand both the technical aspects of tax policy and the practical implications for your financial well-being. We help you position your finances to adapt to policy changes while maintaining focus on your long-term goals.

Contact Avior today to schedule a consultation and explore how potential tax changes might influence your financial future. Together, we can develop strategies that navigate evolving tax policies while keeping your financial plan on track.