The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the United States tax system, impacting individuals, families, and businesses alike. However, it’s crucial to recognize that many of the provisions within the TCJA are expiring on December 31, 2025. As we approach the sunset provisions of the TCJA, it’s essential to understand how these changes might affect you and to plan accordingly.
What is the TCJA?
The Tax Cuts and Jobs Act (TCJA) is a significant piece of tax legislation that was signed into law by President Donald Trump in December 2017. It represents one of the most substantial overhauls of the United States tax code in decades.
The TCJA introduced various provisions that were designed to stimulate economic growth, simplify the tax code, and provide relief for taxpayers. However, many of these provisions were temporary and are set to expire unless Congress takes action to extend them.
What expires with the TCJA sunset?
- Income tax:
The expiration of income tax reductions implemented by the TCJA could have a direct impact on numerous Americans. The tax brackets will return to their pre-TCJA levels, resulting in increased tax rates for many taxpayers. For instance, many of our 30s and 40s clients will likely see their federal income tax bracket jump from 24% to 28%.Given the prospect of a potentially higher tax landscape in the future, you may want to investigate avenues to capitalize on the current lower brackets. This could involve considering strategies like accelerating income when feasible, such as through a Roth IRA conversion or making Roth 401(k) contributions. - Deductions:
The standard deduction was nearly doubled under the TCJA, providing tax relief for millions of taxpayers. In 2024 this stands at $24,000 for joint filers and $12,000 for single taxpayers. This will revert to pre-TCJA levels for 2026. This will make itemizing, rather than taking the standard deduction, more appealing for many.The TCJA expanded the child tax credit, doubling the maximum per-child credit amount, and made it available to more families.The TCJA also eliminated the phase-out for overall allowable itemized deductions affecting filers above certain AGI thresholds. However, it also restructured several major itemized deductions. Previously, itemizers could claim deductions for all state and local property taxes (SALT), as well as the greater of income or sales taxes. The TCJA imposed a cap on the itemized deduction for total state and local taxes, limiting it to $10,000 annually for both single and joint filers.The mortgage interest deduction changed as well. Before the TCJA, taxpayers could deduct interest on mortgage payments on the first $1 million of indebtedness acquired to purchase (or substantially renovate) a primary and secondary residence, in addition to the first $100,000 in home equity debt.
However, for taxpayers obtaining new mortgages post-TCJA, deductibility was limited to interest on the first $750,000 of home mortgage debt.
All of these deductions are set to revert to pre-TCJA levels for 2026.
- Estate and gift tax:
Under the TCJA, the estate and gift tax exemption was doubled from $5 million in 2011 to over $11 million for single filers and $22 million for couples. Today, the federal estate and gift tax threshold stands at $13.61 million per individual and $27.22 million for couples.In 2026, this exemption is slated to revert to pre-TCJA levels, essentially halving it. It is anticipated to hover around $7 million per individual and close to $14 million for married couples.For individuals or families with taxable estates exceeding $13 million or $24 million respectively, it’s important to solidify estate plans and capitalize on the current high exemption amount through estate and gifting strategies where feasible. For instance, gifting $11 million now, with the exemption expected to drop to $6.8 million in 2026, enables moving an additional $4.2 million out of the estate tax-free. However, such maneuvers are intricate and should only be undertaken under the guidance of estate attorneys, financial advisors, or tax advisors.
- Qualified business income deduction:
The QBI deduction, or qualified business income deduction, allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from their taxes. In general, the total taxable income in 2024 must be under $191,950 for single filers and $383,900 for joint filers. - The purpose of the QBI deduction was to assist non-C corporation businesses to compete with the reduced 21% tax rate for C corporations.Beginning in 2026, the QBI deduction will no longer be available. The QBI deduction has resulted in significant tax savings for both large and small pass-through entities. Approximately 95% of American businesses fall under this category. Thus, we expect considerable pressure on Congress to keep the QBI deduction.
When does the TCJA sunset?
The majority of the TCJA’s alterations are set to expire on December 31, 2025. These changes were designed to be temporary, facilitating quicker approval and mitigating impacts on the federal deficit. While there’s a chance that Congress might extend TCJA provisions beyond 2025, this prospect remains unresolved.
What should I do to plan for the TCJA sunset?
- You may want to consider a Roth conversion:
If you have a non-deductible traditional IRA then you may want to consider converting it to a Roth IRA before 2026. With a non-deductible traditional IRA, you contribute after-tax funds. If you invested the money and have earnings, the earnings are taxable upon withdrawal or conversion to a Roth. Once in a Roth IRA, it will grow tax-free.If you anticipate facing a higher marginal tax rate post-TCJA sunset, it could be advantageous to pay taxes on your IRA funds sooner—while TCJA rates are still applicable—rather than waiting until rates revert to pre-TCJA levels. - You may want to consider passing down money early:
When the TCJA sunsets, the individual lifetime estate and gift tax exemption is set to decrease from approximately $14 million to $7 million. This means that if you have a large estate it may be advantageous to transfer assets early before the TCJA sunsets.For example, you may have an estate worth $11 million. If you decide to gift this in 2026 approximately $7 million would be exempt from federal estate taxes, leaving the remaining $4 million subject to taxation. However, if you were to gift $11 million before the conclusion of 2025, all of it might qualify for exemption from gift and estate taxes.
However, it’s crucial to recognize that the most effective strategy will vary depending on your unique circumstances. Therefore, it’s highly advisable to seek guidance from a financial advisor before committing to any significant financial choices.
