The Tax Cuts and Jobs Act (TCJA) has been a cornerstone of tax legislation reform, significantly reshaping the American tax landscape since its enactment in 2017. With its slew of new regulations and changes to tax credits, deductions, and business taxes, the law has been a game-changer for individual taxpayers and business owners.
However, as the act was approved, it also carried an embedded countdown to its expiration. And that countdown steadily ticks away with the TCJA sunset provisions scheduled to take effect in 2025, reverting many tax-related aspects to their 2017 states. For taxpayers and small business owners, this means getting a grip on the impact these changes might have on their financial strategies.
Key Takeaways from TCJA Passage and Upcoming Sunset
When we talk about TCJA, the keywords are "simplification," "lower rates," and "pro-growth measures." The tax act was designed to streamline tax filing, decrease individual tax rates, and spur economic growth by providing broad tax relief for American families. It increased the standard deduction, child tax credit, and estate tax exemption, while reducing corporate tax rates and providing a qualified business income (QBI) deduction for pass-through entities.
As we look ahead to the sunset provisions, the narrative changes to "complexity," "restored rates," and "planning for change." Many of the provisions will end, and it is anticipated that some tax benefits may not be as generous as they have been since 2017. Now is the time to understand these changes and proactively plan your financial moves.
When Does TCJA Expire?
On December 31, 2025, the majority of TCJA changes will come to an end. While there may be discussions about extending specific provisions, such extensions could carry substantial costs. According to the Congressional Budget Office, extending TCJA's provisions would add $2.7 to $3.5 trillion to the national deficit over the next decade.
Provisions Sunsetting
If Congress does not extend TCJA provisions, several tax changes that have been in effect since the 2018 tax season will no longer be applicable in 2026. Here’s an overview of some notable changes likely to revert:
- Federal Standard Deduction: The TCJA almost doubled the standard deduction across nearly all individual tax brackets. In 2024, the standard deduction is projected to be $14,600 for single and $29,200 for married filing jointly, compared to pre-TCJA figures of $6,350 and $12,700, respectively. This change has had the most significant impact on American taxpayers.
According to the Congressional Budget Office, in 2017, approximately 47 million tax returns filed itemized deductions. In 2019, with the TCJA provision, fewer than 18 million tax returns had itemized deductions. A return to pre-TCJA levels could lead to more complex tax filings and a potential increase in itemized deductions. - State and Local Tax (SALT) Deduction Cap: The current $10,000 cap under TCJA will be lifted, allowing full deduction of state and local taxes from federal returns. This could prove highly beneficial for taxpayers in high-tax states such as California, New York, and New Jersey.
- Mortgage Interest Deduction: The mortgage interest deduction under TCJA is currently limited to interest on $775,000 of qualified financing. The deductibility of mortgage interest is set to revert to the previous $1 million limit, with an additional $100,000 for home equity loan interest. This could significantly impact homeowners who secured larger mortgages during the TCJA period.
- Child Tax Credit: The child tax credit was doubled to $2,000 per child aged 17 and under during the TCJA period. This provision is expected to revert to a pre-TCJA credit of $1,000, reintroducing income limitations and reducing benefits for many families. The phase-out for the credit will also be reduced, impacting more higher-earning taxpayers.
- Estate and Gift Tax Exemption: The TCJA raised the 2024 tax exemption to $13.61 million for individuals and $27.22 million for married couples. These limits will return to pre-TCJA levels of $5.49 million for individuals and $10.98 million for married couples (indexed for inflation), resulting in increased taxable estates.
For Businesses
Under TCJA, the flat corporate tax rate was reduced from 35% to 21%. This provision does not expire. However, the QBI deduction enjoyed by passthrough entities will expire.
The QBI deduction allows non-Corp businesses and sole proprietors to deduct 20% of their qualified business income, leading to significant tax savings. Beginning January 2026, QBI deductions will no longer be available.
Planning Ahead
Individual taxpayers and small business owners should start planning to mitigate the adverse effects of the forthcoming changes. Here are some strategies to take advantage of while the TCJA provisions are still in effect:
1. Itemizing Deductions: With the standard deduction set to decrease in 2026, many taxpayers could benefit from itemizing their deductions. A financial advisor can guide you through this transition.
2. Roth IRA Conversions: Considering Roth conversions now may prove advantageous, given the potential for increasing tax brackets post-2025. Having a mix of pre-tax and Roth IRAs in 2026 will provide better control of taxes in retirement.
3. Estate and Gift Giving: The current $14 million exemption for estate and gift taxes will drop to $7 million in 2026. Making significant gifts to your family before TCJA sunsets rather than in your will could help lessen estate tax.
4. Charitable Giving: Bunching your donations together for the next few years allows you to utilize the full 60% AGI limit under TCJA. Consider setting up a donor-advised fund you can contribute to during high-income years.
5. Maximize Retirement Contributions: Contributing to retirement accounts such as 401(k) plans, individual retirement accounts (IRA), and simplified employee pension plans (SEP-IRAs) can reduce taxable income and lower tax liabilities.
6. Health Savings Account (HSA) Contributions: If you qualify, consider contributing to an HSA plan to reduce taxable income and make tax-free withdrawals for medical expenses. Taxpayers who turn 55 this year can make an additional $1,000 catch-up contribution.
For Businesses
1. Maximize Business Deductions: Businesses should consider larger purchases and investments before 2026 to harness the benefits of the current enhanced bonus depreciation provisions.
2. Reassess Business Structure: It may be an opportune time to review your business structure. For many pass-through entities, converting to a C-corp could be advantageous to retain a lower tax rate post-TCJA.
3. Boost QBI Deduction: Consult with a tax advisor to structure your business optimally to maximize QBI before its expiration. You may have the opportunity to accelerate income into 2025 and postpone expenses until 2026.
Plan Ahead With a Tax Professional
As the TCJA sunset approaches, it’s imperative for taxpayers to prepare for potential changes come 2026. Being well-informed and preparing ahead of time will be crucial strategies for successfully navigating the post-TCJA tax landscape.
Engaging in proactive tax planning today can lead to substantial savings and a more confident financial future. Connect with an LTax tax advisor who understands the complexities of your financial situation. We will guide you through these imminent changes, ensuring you fully leverage existing tax provisions and pinpoint strategies that could reduce your overall tax liabilities.
Remember, the choices you make now will influence your tax liabilities in 2025 and beyond. Don’t hesitate to contact an LTax tax advisor today to help prepare for the TCJA sunset. For more information or to request a free tax planning consultation, contact us here or call us at 561.453.1441.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.