In 2017, the Tax Cuts and Jobs Act (the “TCJA”) was passed into law and it drastically amended the Internal Revenue Code for individuals and businesses alike. As enacted, many of the TCJA tax cuts are scheduled to expire in 2025. These expiring provisions will likely be a focus of the new Congress and president in 2025. This article will discuss some of the provisions set to expire.
INDIVIDUAL PROVISIONS
While the TCJA affected many tax law aspects, the most obvious change was a reduction in income tax brackets for individuals to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. If the TCJA provisions are permitted to expire, the individual brackets will revert to 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.
In addition to reducing tax brackets, the TCJA sought to simplify income tax returns for individuals. To accomplish this goal, the TCJA nearly doubled the Standard Deduction.
These changes were intended to reduce the time and effort of tracking expenses throughout the year. In 2024, single taxpayers are entitled to a $14,600 deduction ($29,200 for Married Filing Jointly) from their taxable income. If this provision expires, it is expected that the standard deduction will be reduced to around $8,300 for single taxpayers ($16,600 for Married Filing Jointly).
If the TCJA expires, Individual Taxpayers would again be permitted to deduct state and local taxes (SALT) in excess of $10,000, mortgage interest on the first $1 million in home mortgage debt and $100,000 in a home equity loan, and most other miscellaneous itemized deductions to the extent they exceed 2 percent of adjusted gross income. These changes will cause many taxpayers to track, report and claim itemized deductions again as opposed to claiming the reduced standard deduction.
Finally, the TCJA also doubled the child tax credit that taxpayers were entitled to claim (from $1,000 to $2,000 per child). Absent changes in the law, the Child Tax Credit would revert to $1,000 per child in 2026.
In addition to the income tax provisions discussed above, the TCJA greatly increased exemptions from the Federal Estate and Gift Taxes. The exemption amount is the amount that can pass free of Federal Estate and/or Gift Tax to individuals other than a spouse. In 2017, pre-TCJA, the Lifetime Gift and Estate Tax Exemption was $5.49 million. In 2018, that amount increased to $11.180 million (which has increased to $13.610 million in 2024). When portability is utilized, married individuals have a combined exemption in excess of $27 million in 2024. If the TCJA expires, the exemption is scheduled to revert to $5 million, indexed for inflation. This reduction will cause many taxpayers to become subject to the Federal Estate and/or Gift Taxes.
If you are one of these individuals, you should begin potential planning now to utilize exemption amount before it potentially sunsets at the end of 2025.
BUSINESS PROVISIONS
While many changes made by the TCJA will sunset at the end of 2025, the flat 21-percent tax rate on corporate taxable income is scheduled to remain in place. The business provisions that are scheduled to sunset will affect owners of closely held businesses that are taxed individually on their company’s income.
The TCJA first introduced the Qualified Business Income (QBI) deduction in 2017. The QBI deduction allows a business owner to deduct from their individual income up to 20 percent of their business’s QBI (subject to various calculations outside the scope of this article). Absent a change in law, the QBI deduction will expire after 2025.
Another TCJA benefit to business owners was permitting bonus depreciation on Qualified Property. The term Qualified Property was expanded to include used assets, unless such asset was purchased from a related party. The TCJA provides that bonus depreciation begins to phase out in 2023, with a complete phase out for assets placed in service after December 31, 2025.
The TCJA was a drastic change with many benefits that are scheduled to expire in 2026. Each individual and entity will be affected differently and you should create a plan for the potential of the 2026 sunset with your financial, tax and legal advisers.
Craig Shamburg is a partner at MacDonald Illig. He counsels clients on estate planning and administration, tax, business transactions, and succession planning matters.
For more information, contact MacDonald Illig’s Business Transactions practice group at 814/870-7600 or info@mijb.com.
