As we approach 2025, significant changes in the U.S. tax system are on the horizon, particularly concerning the Child Tax Credit and other tax provisions introduced by the Tax Cuts and Jobs Act (TCJA) of 2017.
Understanding these potential changes is crucial for taxpayers, especially those benefiting from tax credits and deductions.
Overview of Tax Collection and Standard Deductions
Before diving into specific changes, it’s important to understand how the IRS collects taxes. When you file your federal tax return, the IRS calculates your taxable income by subtracting deductions, like the standard deduction, from your gross income.
For example, if you earn $50,000 in 2024 and file as an individual, you can claim a standard deduction of $14,600, reducing your taxable income to $35,400.
Your tax liability is then calculated based on tax brackets. For the first $11,600 of taxable income, you would pay 10%, and for the income from $11,601 to $35,400, you would pay 12%.
This method ensures that higher incomes are taxed at higher rates, while the standard deduction helps lower your taxable income, reducing your overall tax burden.
Potential Increases in Tax Brackets
One of the most significant changes after 2025 could be the expiration of the tax bracket reductions introduced by the TCJA.
If Congress does not act to extend these provisions, tax rates will revert to their pre-2017 levels. Here’s a comparison of the current and potential future tax brackets:
- 10% bracket: Will remain at 10%
- 12% bracket: Will increase to 15%
- 22% bracket: Will increase to 25%
- 24% bracket: Will increase to 28%
- 32% bracket: Will increase to 33%
- 35% bracket: Will remain at 35%
- 37% bracket: Will increase to 40%
These increases could result in higher taxes for many Americans, making it essential to stay informed and plan accordingly.
Changes to the Child Tax Credit
The Child Tax Credit (CTC) has been a significant benefit for families with children, providing up to $2,000 per child under the TCJA. A portion of this credit, up to $1,600 per eligible child, is refundable, meaning it can result in a tax refund even if your tax liability is zero.
However, after 2025, the CTC is set to revert to its pre-TCJA level of $1,000 per child, with a much lower refundable portion. This reduction could substantially impact families that rely on this credit to reduce their tax burden or boost their refund.
Impact on Families with ITIN Holders
Another potential change involves the $500 non-refundable credit introduced in 2017 for dependents who do not qualify for the CTC, including those with an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number.
This credit may also be reduced or eliminated if the TCJA provisions expire, further limiting the tax relief available to families with children who do not have valid Social Security Numbers.
Reduction of the Standard Deduction
The TCJA nearly doubled the standard deduction, increasing it to $14,600 for individual filers and $29,200 for joint filers in 2024. After 2025, these amounts are expected to decrease to $6,350 for individuals and $12,700 for joint filers, reverting to pre-2017 levels.
A lower standard deduction means more of your income will be subject to taxation, potentially increasing your overall tax liability.
This change underscores the importance of understanding your taxable income and staying informed about how future tax laws could affect your finances.
Potential Credit Enhancements and Legislative Proposals
While these changes could result in higher taxes and reduced credits, there is also the possibility of new legislation that could enhance or make permanent some of the benefits introduced by the TCJA.
For example, Vice President Kamala Harris has proposed making the pandemic-era enhancements to the CTC permanent and increasing the credit to $6,000 for children under the age of one.
Both major political parties have shown interest in further improving tax credits, which means the landscape could change again, depending on future legislative actions.
Preparing for 2025 and Beyond
As we near 2025, it’s crucial to stay informed about potential changes to tax rates, credits, and deductions. These changes could significantly impact your tax liability and financial planning.
By understanding how the expiration of the TCJA provisions might affect you, you can take steps to adjust your finances, ensuring you’re prepared for whatever changes come your way.
FAQs
What happens if the TCJA provisions expire?
Tax brackets will increase, and credits like the Child Tax Credit will be reduced.
How will the standard deduction change after 2025?
It will decrease to $6,350 for individuals and $12,700 for joint filers.
What is the current maximum Child Tax Credit?
The maximum is $2,000 per child, but it may drop to $1,000 after 2025.
Will all tax brackets increase?
Most brackets will increase, but the 10% and 35% brackets will remain unchanged.
Can Congress extend the TCJA provisions?
Yes, Congress can pass legislation to extend or modify the provisions before they expire.
