How Long Are The Tax Plan’s Changes In Effect?

The tax cuts for corporations are permanent, but the tax changes for individuals generally expire after 2025, except for two provisions that remain. Those two changes actually raise taxes on individuals. As a result, most individuals and families will face tax increases after 2025 and beyond, especially low- and middle-income families.

Tax Cuts for Individuals are Temporary; Corporate Tax Cuts are Permanent

The plan’s modest tax cuts for most individuals and families are temporary. They generally expire after 2025, meaning that the tax system will revert back to the old tax system at that time. The same is true for the tax cuts affecting S-corporations and other pass-through entities, which also expire after 2025. Having the tax system scheduled to change significantly may create uncertainty and complications for families and small business owners as they plan for the future.

In contrast, the tax plan’s major tax cuts for corporations – including cutting the corporate tax rate from 35 percent to 21 percent – were made permanent, meaning they will stay in effect forever unless Congress affirmatively passes a new law that changes them in the future.

Most Households Will Eventually Face a Tax Increase

The tax cuts for individuals and families generally expire after 2025, but two important changes affecting these households were made permanent, and they will likely increase your taxes. The first of the permanent tax code changes is that the tax plan modifies the inflation measure that is used to automatically adjust the income levels for the tax brackets each year.

Every year, the tax brackets – as well as several other elements of the tax code – get adjusted for inflation, so that the income thresholds of those tax brackets hold relatively constant even as the purchasing power of the dollar declines due to inflation. The new tax law switched how inflation is measured and the new measurement – referred to as “chained CPI” – means it will increase more slowly than the prior inflation measure. That means the income levels for the tax brackets will increase more slowly, causing more people to move into higher tax brackets sooner, and face somewhat higher taxes over time. Although the change may appear technical, its impact compounds over time, and because it is made permanent, it will significantly raise taxes on many families, especially when the other changes to the tax code expire in 2025.

Second, the tax plan eliminates the Affordable Care Act’s mandate for individuals to have health insurance. The mandate ensured that the overall “risk pool” for health insurance was robust enough to keep health insurance premiums from spiking. Its elimination will mean that 13 million more people will be uninsured, and overall premiums will go up, acting as a new “health tax” for millions. The elimination of the mandate also directly raises taxes on millions of people, relative to the old law, since they will no longer receive tax credits to help them pay for their health insurance premiums, which can be worth several thousand dollars.

As a result of these changes and the expiration of the tax cuts for individuals, most households will face higher taxes after 2025 than they would have without the tax plan. This is especially true for households with incomes below $75,000, who will be most affected by the slower inflation measure and individual mandate changes.

There’s one big exception to this: the highest-income households will, on average, continue to receive large tax cuts even after the individual tax cuts expire. For example, households with incomes above $1 million will still receive more than $10,000 a year in tax cuts, on average. That’s because the chained CPI and individual mandate changes will have a smaller effect on them – because, on a whole, they are already in the highest bracket, and because they were generally not receiving tax credits to help pay for health insurance premiums. They will also benefit the most from the permanent corporate tax cuts, since those tend to benefit high-income shareholders and investors.

Why Was The Tax Plan Designed This Way? 

This new tax law was passed under a special budget process known as “reconciliation” which allowed the Senate to pass the bill with only 51 votes, rather than the usual 60 votes. However, that same process prohibits any changes that would increase the federal deficit after the first ten years. That means that any permanent tax cuts would need to be matched by permanent tax increases. In crafting the law, Congress chose to prioritize the tax cuts for corporations, making those permanent, instead of the cuts aimed at individuals and families. Lowering the corporate tax rate from 35 percent to 21 percent – one of many changes to the corporate system – alone cost $1.3 trillion. Having that cut expire after eight years – instead of a cut aimed at individuals – would mean that there would be leeway to give individuals permanent tax cuts. Instead, the tax cuts for individuals expire after 2025, and the individual tax increases continue, in order to generate enough revenue within the tax law to keep the corporate tax cuts on the books after the first ten years.

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