2025 Federal Tax Legislation Status Update: A Complex Path Through Reconciliation

On Saturday, April 5, the Senate adopted a fiscal framework (mostly along party lines) for its vision of the 2025 tax and spending bill by a vote of 51-48. However, the Senate version did not agree with the House version passed in late February, which then required a second vote by the House.

This version was narrowly approved by House Republicans (216-214, mostly along party lines, but with not all Republicans voting yes) on Thursday, April 10, ending a stalemate between the two chambers. However, there is still much challenging work ahead before federal tax legislation is drafted, let alone passed by Congress and signed into law by President Trump.

Republicans (in this instance, since they control both House and Senate) are using a fast-track process that allows them to avoid the Senate’s 60-vote filibuster threshold necessary to pass a bill on simple-majority votes (both parties have used this process). To get the legislation to the President’s desk, Republicans in the House and Senate needed to pass identical versions of a budget resolution to get access to a process known as “reconciliation.” Reconciliation is a two-stage process, starting with reconciliation instructions being included in a budget resolution directing the appropriate committees to develop legislation achieving the desired budgetary outcomes; this stage was completed Thursday with the House’s approval.

Now that both chambers have agreed on the framework, next comes writing a draft bill that attempts to encompass an agenda that not all Republicans may be on board with yet. The proposed legislation (usually incorporated into an omnibus bill) will be considered under expedited procedures, as the reconciliation process allows Senate Republicans to avoid a filibuster by Senate Democrats (the process works the same way when Democrats are in control).

There is no guarantee that the House and Senate will agree on an ultimate bill, though it is generally believed an agreement will be reached, as there is too much political risk in allowing tax increases across the entire taxpayer spectrum. The timing of this agreement is unknown; however, House Budget Committee Chairman Jodey Arrington (R-Texas) has stated that Congress is planning to deliver a reconciliation bill to President Trump by Memorial Day. It may take continued cajoling from President Trump for Republicans to reach a final agreement. Some House conservatives appear hesitant to support the Senate’s minimal spending cuts and higher debt limit. Republicans currently have a 220-213 House majority (there are two open seats previously held by Democrats) and a 53-47 Senate majority (including two independents) edge, meaning they can lose only three votes in each chamber (assuming all Democrats are opposed) to come to a joint agreement on a bill.

House Republicans agreed to vote affirmatively after assurances that spending differences will be reconciled during negotiations on the bill. A summary of the differences between the initial Senate and House versions is summarized as follows (values are in trillions):

Political posturing and negotiating are still ahead among Republicans to move the entire process forward. Using the reconciliation process means that a bill’s provisions cannot increase federal deficits outside of a 10-year window (one major reason that TCJA provisions are set to expire at the end of 2025).

Note that the Senate budget called for using a different method of measuring the cost of extending the TCJA than was used in the past; this new method — estimated to cost $3.8 – $4 trillion (or more depending upon who is measuring and why) — results in $0 for official scoring purposes.

• Under a current law baseline, the Congressional Budget Office (CBO) estimates spending and revenue trends “based on laws enacted through the applicable date.” This is the baseline that CBO is required to use when presenting budget projections to Congress or when estimating the cost of new legislation. Current law is set to expire, so using this method would result in higher revenue, which would be reduced (a cost) if legislation is passed extending the tax cuts).
• Under a current policy baseline, the CBO estimates spending and revenue trends from the assumption that certain laws are extended—even if the letter of the law says they expire on a certain date. Under TCJA, if current law is considered to be extended, the cost of the legislation will be less.

The baseline is a set of budgetary and economic projections against which Congress measures the impact of new legislation. The Congressional Budget Office (CBO) sets the standard baseline annually. The CBO is a congressionally established, nonpartisan agency that serves lawmakers and staff of both parties. The baseline is a forecast rather than a crystal ball; their projections and estimates are not always correct. This measurement issue also needs to be resolved.

NOTE: Tariff revenue may only count in reconciliation if it is legislated. Since Congress has not legislated the current tariff increases – and does not appear that it will – any revenue that the U.S. may see from increased tariffs may not help Republicans.

The decision to measure the cost of proposed legislation using a “current policy” baseline methodology (rather than a “current law” baseline) generally needs the approval of the Senate parliamentarian before the legislation goes for a final vote. However, it is not clear at this time whether this approval is still required or even whether all Republicans would agree to move forward without this approval. Something more to watch out for in the coming weeks.

Now that the House and Senate have essentially agreed on the general framework of the spending and revenue impact of the proposed legislation, writing of tax legislation can begin. Both the House Ways and Means Committee and the Senate Finance Committee will be drafting their versions of the bill, which will need to be reconciled and finalized into one final piece of legislation.

There Are Over 30 Expiring TCJA Provisions Affecting Numerous Areas of Tax Law

• Increased tax rates at all levels, including lower tax bracket levels at lower tiers (not considering inflation).
• Reinstatement of personal exemptions.
• Elimination of higher standard deduction.
• Reinstatement of miscellaneous itemized deductions.
• Increased mortgage interest deduction: home equity interest deduction will be allowed.
• Reinstatement of SALT deduction (some states’ PTET provisions will automatically expire).
• Charitable contributions AGI limit decreases from 60% to 50%.
• Elimination of 199A qualified business income deduction.
• Elimination of §461 excess business loss deduction (not until after 12/31/2028).
• Bonus depreciation will be eliminated.
• Casualty losses will not be limited to federally declared disasters but will be subject to AGI limitations.
• Reduced child tax credits (unless tax law changes provide for increases).
• AMT provisions will revert, potentially exposing more taxpayers to AMT.
• Decrease in estate and gift tax exemption.

In addition to extending much of the expiring TCJA provisions, we briefly discussed in the last OTO on tax legislation that President Trump campaigned on certain positions that would also reduce taxes in some areas.

Campaign Tax Reduction Positions

• Reducing taxes on tips.
• Reducing taxes on social security benefits.
• Reducing taxes on overtime payments.

However, there could be some new increases for certain taxpayers, as a number of proposals are being floated to help pay for the cost of the legislation. The Trump administration appears to be considering some tax increases to offset the costs.

Measures Under Consideration

• Introducing a new income tax bracket for those earning $1 million or more.
• Creating a SALT deduction limitation for C corporations.
• Repealing the carried interest break used by the hedge fund and private equity industries (a provision that has been considered in the past).
• Repealing the tax-free treatment of interest earned on state and local municipal bonds.
• Repealing Inflation Reduction Act green energy subsidies.

Additionally, it is possible we could see additional tweaks to existing law such as, for example, the permanent inclusion of the §461 excess business loss deduction. However, without an extension of the TCJA provisions passed in 2017, the overall impact on taxpayers if the TCJA were to expire would likely be an increase in taxes paid by most taxpayers.

A big question remaining is when can a bill be expected. Some believe legislation could be passed as early as sometime this summer. Alternatively, the process could drag on into autumn or even early winter. Many tax policy experts believe at this time that legislation will most likely be completed sometime in the second half of 2025, though, as noted above, House Budget Committee Chairman Jodey Arrington (R-Texas) has stated that Congress is planning to deliver a reconciliation bill to President Trump by Memorial Day.

The Senate and House return April 28 from a two-week recess. Their top priority is likely the development of the spending and tax bills. It is hoped that we will soon see some of the details that will impact federal taxes over the next three to five years.

So, what should you do now to prepare for the 2026 tax law? It is much too early to talk about specific provisions; no one knows with any degree of certainty what the final legislation will look like or what its impact will be on specific individuals. Stay alert to what is happening in Washington, contact your representatives and express your views. Finally, stay in contact with your Schneider Downs tax advisors as we continue to monitor progress and consider the ramifications.

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