Keith Mack
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025, bringing about a great sunset of various tax laws. The TCJA remodeled several provisions of the U.S. tax code, including reducing the top marginal income tax rate from 39.6% to 37% and updating income tax thresholds. While the corporate tax rate cut from 35% to 21% is permanent, many other provisions are not, and their expiration will impact both individuals and businesses. This includes changes to itemized deductions, estate and gift tax exemptions, and income tax brackets. With potential tax increases on the horizon, taxpayers and businesses should understand the implications and consider strategies to optimize their tax positions.
| Characteristics | Values |
|---|---|
| Tax Law | Tax Cuts and Jobs Act (TCJA) |
| Year of Enactment | 2017 |
| Sunset Year | 2025 |
| Sunset Date | December 31, 2025 |
| Sunset Clause | The tax code will revert to its pre-2017 state, bringing back old rules and higher rates for many taxpayers. |
| Impact | More than $4 trillion in tax increases will take effect in 2026, including tax hikes on 62% of U.S. households. |
| Provisions Impacted | Estate and gift tax exemption limits, standard deduction, itemized deductions, tax brackets, child tax credit, corporate tax rate, pass-through business income deduction, bonus depreciation |
| Congressional Action | Congress may address the sunsetting provisions and extend or preserve certain provisions. |
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What You'll Learn
The top individual, estate and trust income tax bracket will increase from 37% to 39.6%
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025, which will result in the top individual, estate and trust income tax bracket increasing from 37% to 39.6%. This reversion to the pre-TCJA rate is due to the sunset clause in the legislation, which was set at 10 years. The TCJA provided a decade of estate and gift tax relief, with an elevated exemption of over $13 million per individual, but this will reset to an estimated $6 million in 2026.
The TCJA's impact on tax rates has been significant. It reduced the top marginal income tax rate from 39.6% to 37% and updated the income tax thresholds across several brackets. The corporate tax rate was also cut, from 35% to 21%, and this change was made permanent. However, the TCJA's expiration will still have a substantial impact on businesses, with changes to capital expensing, the pass-through income deduction, and international taxation.
The TCJA also brought changes to itemized deductions, limiting the itemized deduction for total state and local taxes to $10,000 annually for both single and joint filers, with no indexing for inflation. The mortgage interest deduction was altered, too, with the limit on interest deductions lowered. The standard deduction was nearly doubled under the TCJA, which made it more attractive to many taxpayers.
With the TCJA's sunset approaching, taxpayers may wish to explore ways to take advantage of the current lower tax brackets. For instance, accelerating income into 2024 or 2025, or investing in a Roth IRA, could help mitigate the risk of rising ordinary income tax rates in 2026. Additionally, the potential reversion to lower standard deduction levels may reduce the value of the MID and charity deductions for those earning over $400,000.
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The standard deduction will revert to pre-TCJA levels
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered the U.S. tax code for individuals and businesses. The Act introduced a range of provisions, many of which are temporary and set to expire at the end of 2025 or in the following years. One notable change that the TCJA implemented was nearly doubling the standard deduction. The standard deduction increased from \$6,500 to \$12,000 for individual filers, from \$13,000 to \$24,000 for joint returns, and from \$9,550 to \$18,000 for heads of households between 2017 and 2018. The standard deduction amount for tax year 2023 (filed in 2024) is \$13,850 for single filers, \$27,700 for married couples, and \$20,800 for heads of households.
However, the TCJA's impact on the standard deduction is not permanent. If the Act is not renewed or amended by Congress, the standard deduction will revert to pre-TCJA levels starting in 2026. This means that the standard deduction amounts will decrease, resulting in a lower threshold for taxable income. The specific amounts for the standard deduction in 2026 have not been confirmed and will likely be adjusted for inflation.
The reversion to pre-TCJA levels for the standard deduction is part of a broader set of changes affecting itemized deductions. The TCJA introduced limitations on itemized deductions, making the standard deduction more attractive to many taxpayers. Once the TCJA expires, these limitations will be removed, and itemized deductions will become more relevant again. This includes deductions for state and local taxes (SALT), mortgage interest, charitable contributions, and other miscellaneous deductions.
The potential decrease in the standard deduction and the changes to itemized deductions could have significant financial implications for Americans, particularly those with higher incomes. The interplay between the standard deduction and itemized deductions will shape taxpayers' strategies for claiming deductions and managing their tax liabilities. It is important for individuals and businesses to stay informed about the evolving tax landscape and consider seeking professional advice to navigate the potential impact of these changes on their financial planning.
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The estate and gift tax exemption will be reduced
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025, which will result in the sunset of several tax provisions. One notable change is the reduction of the estate and gift tax exemption.
The TCJA provided a 10-year period of estate and gift tax relief through an elevated exemption. For 2025, the lifetime exemption from estate and gift taxes is $13.99 million per individual and $27.98 million for a married couple. This means that a married couple can give away up to $27.98 million without having to pay any federal estate or gift tax. Additionally, the annual exclusion for gifts has increased to $19,000 for the calendar year 2025.
However, starting in 2026, the estate and gift tax exemption amounts are set to revert to pre-TCJA levels. The exemption amount for individuals is expected to be around $6 million to $7.25 million, while for married couples, it will be approximately $14.5 million. This reduction will significantly impact high-net-worth individuals and families with larger estates, as they will face increased tax liability.
The potential sunset of the estate and gift tax exemption highlights the importance of proactive tax planning. Individuals and families should consider seeking professional advice to understand the implications of these changes and explore strategies to optimise their tax positions. This may include making use of the higher exemption levels in 2025 or exploring alternative wealth transfer methods to minimise tax exposure.
While there is a possibility that Congress may act to extend or amend certain provisions of the TCJA, it is uncertain whether this will occur. As a result, taxpayers should be prepared for the potential reduction in the estate and gift tax exemption in 2026 and take appropriate steps to manage their financial affairs effectively.
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The qualified business income deduction may sunset
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025, and with it, several tax provisions that benefit individuals and businesses. One of these provisions is the qualified business income (QBI) deduction, also known as the Section 199A deduction. This deduction allows eligible business owners, including those with sole proprietorships, partnerships, and S corporations, to deduct up to 20% of their QBI. It also includes 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
The QBI deduction was introduced as part of the TCJA to reduce taxes for businesses and their owners. While the corporate rate reduction was made permanent, the QBI deduction is temporary and set to sunset after 2025. This means that unless Congress takes action to extend or make it permanent, millions of self-employed individuals and business owners will lose this tax benefit.
The potential loss of the QBI deduction could significantly impact businesses, especially those that are privately held. For example, consider a business owner with $1 million in QBI. If the QBI deduction expires, they will no longer be able to deduct 20% of their QBI, resulting in a higher taxable income. Additionally, with the planned tax rate changes, their marginal federal income tax rate could increase from 29.6% to 39.6%, causing a substantial jump in their tax bill.
As the sunset of the QBI deduction approaches, business owners should seek advice from tax professionals to understand the potential impact on their businesses. They may need to reassess their tax planning strategies and explore other tax savings opportunities to mitigate the effects of higher taxes. It is crucial for businesses to stay informed and proactive in managing potential tax increases and considering whether their current business structure remains the most tax-efficient option.
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The corporate tax rate will remain at 21%
However, despite the corporate tax rate being made permanent, lawmakers are reopening the tax code to address all of the TCJA's expiring provisions. This means that while the corporate tax rate will remain at 21%, other aspects of the corporate tax landscape could change. For example, the qualified business income (QBI) deduction, also known as the Section 199A deduction, which was introduced by the TCJA, is set to expire at the end of 2025. This deduction allows qualifying business owners to deduct up to 20% of their qualified business income. If this deduction sunsets, business owners may lose this tax break, increasing their taxable income.
Additionally, the TCJA allowed businesses to use 100% "bonus depreciation" to deduct 100% of the cost of certain qualified property in the year the property is placed in service. This 100% bonus depreciation is set to revert to 0% starting in January 2027. As a result, businesses may wish to accelerate their capital expenditures before 2027 to take advantage of the favourable 100% bonus depreciation rule while it is still available.
The potential expiration of the TCJA's corporate tax provisions has significant implications for US businesses, including changes to capital expensing, the pass-through income deduction, and international taxation. The impact of the sunset of the TCJA is expected to be felt across the innovation ecosystem, affecting founders, startups, and businesses.
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Frequently asked questions
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 and introduced sweeping changes to the U.S. tax code, including reducing tax burdens for individuals and businesses.
If the TCJA expires, more than $4 trillion in tax increases will take effect in 2026, including tax hikes on 62% of U.S. households. The tax code will revert to its pre-2017 state, bringing back old rules and higher rates for many taxpayers.
Some specific changes that will occur if the TCJA expires include:
- The top individual, estate, and trust income tax bracket will increase from 37% to 39.6%.
- The standard deduction will revert to pre-TCJA levels.
- The estate and gift tax exemption limits will be reduced.
- The qualified business income deduction may no longer be available, increasing taxable income for business owners.
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