December 2, 2024

Navigating the Sunsetting Provisions of the TCJA: A Guide for Taxpayers and Business Owners

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about sweeping changes to the U.S. tax code, aiming to lower tax rates, simplify filing processes, and spur economic growth. However, many of these provisions are set to expire after December 31, 2025. As we approach this sunset date, understanding these changes and preparing accordingly is crucial for both individuals and businesses.

 

Overview of Sunsetting Provisions

The TCJA included several key changes that significantly impacted taxpayers. These provisions, unless extended by Congress, will revert to pre-2017 laws. This includes adjustments to individual tax rates, the standard deduction, child tax credits, and itemized deductions.

 

Individual Tax Rate Changes

One of the most impactful changes under the TCJA was the reduction of individual tax rates. These lower rates, however, are set to expire at the end of 2025. Starting in 2026, tax rates will revert to their pre-TCJA levels, with the top tax rate increasing from 37% to 39.6%. Additionally, tax brackets will be adjusted, potentially increasing the tax burden for many taxpayers. This underscores the importance of strategic tax planning to mitigate the impact of these changes.

 

Standard Deduction and Personal Exemption

The TCJA nearly doubled the standard deduction, simplifying filings for many taxpayers by reducing the need to itemize deductions. However, this provision will also expire at the end of 2025, with the standard deduction reverting to its pre-2017 levels. For single filers, this means a reduction from $13,850 to approximately $6,900. Simultaneously, the personal exemption, which was eliminated under the TCJA, will be reinstated in 2026, allowing taxpayers to deduct a set amount for themselves and each dependent.

 

Child Tax Credit

The TCJA significantly enhanced the child tax credit, increasing it from $1,000 to $2,000 per qualifying child and raising the income thresholds for phase-out. These enhancements will expire in 2026, reverting the credit to $1,000 per qualifying child. Additionally, the $500 credit for dependents other than children, such as elderly parents or older children, will be eliminated. These changes will impact family tax planning, as the reduced credits and lower phase-out thresholds will result in higher tax liabilities for many families.

 

Itemized Deductions

The TCJA introduced a $10,000 cap on the state and local taxes (SALT) deduction, which is set to expire at the end of 2025. This cap’s expiration will potentially allow taxpayers to deduct higher amounts based on their state and local tax payments. Additionally, the mortgage interest deduction cap for new loans will increase from $750,000 to $1 million, and the deduction for interest on home equity loans will be reinstated. The return of these deductions will provide significant tax relief for eligible taxpayers.

 

Estate Tax Exemption

Under the TCJA, the estate tax exemption was doubled, allowing individuals to transfer up to $12.92 million without incurring federal estate taxes. This provision will expire at the end of 2025, reducing the exemption to approximately $6.4 million, adjusted for inflation. This reduction will increase the number of estates subject to federal estate tax, necessitating advanced planning for high-net-worth individuals.

 

Corporate Tax Rate

The TCJA permanently reduced the corporate tax rate from 35% to 21%. This change aimed to make U.S. corporations more competitive globally and remains in effect beyond 2025. However, discussions about revisiting the corporate tax rate to address budget deficits continue, adding uncertainty to corporate tax planning.

 

Qualified Business Income (QBI) Deduction

The TCJA introduced a 20% deduction for Qualified Business Income (QBI) from certain pass-through entities. This deduction will expire at the end of 2025, resulting in higher taxable income for many business owners, especially those in service industries. Strategic tax planning, including accelerating income and deferring expenses, can help maximize the benefits of the QBI deduction before it expires.

The sunsetting of TCJA provisions presents both challenges and opportunities for taxpayers and businesses. Proactive planning and staying informed about potential legislative changes are essential to navigate these changes successfully. By understanding the implications and preparing accordingly, individuals and businesses can mitigate potential tax increases and maintain financial stability.