Keith Mack
The phase-out of tax laws refers to the expiration of temporary provisions in tax legislation, which can result in tax hikes for individuals and businesses. One notable example is the Tax Cuts and Jobs Act (TCJA) of 2017, which included significant changes to the tax code that were set to expire at the end of 2025, potentially impacting tax brackets, deductions, and credits. The phase-out of TCJA provisions has been a topic of political debate, with some favouring extensions to prevent tax increases. Additionally, annual inflation adjustments by the IRS can also affect phase-out thresholds for various tax credits and deductions, such as the Earned Income Tax Credit and IRA contributions. Understanding the timing and specifics of tax law phase-outs is crucial for effective tax planning and financial decision-making.
| Characteristics | Values |
|---|---|
| Tax Cuts and Jobs Act (TCJA) | Temporary tax cuts |
| One Big Beautiful Bill (OBBB) | Stopped most tax laws from reverting to 2017 levels |
| Tax Brackets | 7 federal tax brackets ranging from 10% to 37% |
| Standard Deduction | Increased for single, married, and head of household filers |
| Child Tax Credit | Increased to $2,000 per child, with a refundable amount of $1,700 |
| Alternative Minimum Tax (AMT) | Increased exemption amounts and income phase-out thresholds |
| Earned Income Tax Credit | Maximum credit for married couples with 3+ qualifying dependents is $8,046 |
| Lifetime Learning Credit | Phased out for single filers with MAGI above $80,000 and married couples above $160,000 |
| Medical Savings Accounts | Annual deductible and out-of-pocket expense limits increased for self-only and family coverage |
| Foreign Earned Income Exclusion | Increased to $130,000 for tax year 2025 |
| IRA Contributions | Phase-out levels for taking deductions increased for single, married, and head of household filers |
| Corporate Tax Rate | Proposed reduction from 21% to 20%, or 15% for manufacturing companies |
| Bonus Depreciation | Began phasing out in 2023 and will be fully phased out by 2026/2027 |
| Gift and Estate Tax Exemption | Expected drop in 2026 to near-2017 levels of $7 million |
| Impact | Higher taxes for 62% of filers, disproportionately affecting the rich |
| Political Stance | Trump: Extend/make permanent; Harris: Oppose tax increases for those earning < $400,000 |
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What You'll Learn
Child tax credit
The Child Tax Credit (CTC) is a tax incentive for people with children. It helps families with qualifying children get a tax break. The CTC is partially refundable, meaning some families can receive a refund even if their tax bill is low or zero. The refundable portion of the CTC is $1,700 for the 2025 tax year. This amount is indexed to inflation, meaning it may increase slightly each year.
The Child Tax Credit phases out in two steps based on your modified adjusted gross income (MAGI or AGI). The first phaseout can reduce the Child Tax Credit to $2,000 per child. The second phaseout can reduce the remaining Child Tax Credit below $2,000 per child. The credit amount will be reduced by $50 for every $1,000 above your income cap. For instance, your child tax credit will begin to phase out once your MAGI exceeds $200,000 for a single filer, head of household, or qualifying widower, and $400,000 for joint filers.
To be a qualifying child for the 2024 tax year, your dependent must be under 17 at the end of the tax year, be your son, daughter, stepchild, eligible foster child, brother, sister, half-sibling, or a descendant of one of these (e.g. grandchild, niece, or nephew), not provide more than half of their own financial support for the tax year, have lived with you for more than half the tax year, be claimed as a dependent on your return, and not file a joint return for the year.
To claim the Child Tax Credit, you can enter your children and other dependents on Form 1040, U.S. Individual Income Tax Return, and attach a completed Schedule 8812, Credits for Qualifying Children and Other Dependents. Most quality tax software will guide you through claiming the child tax credit with a series of interview questions, simplifying the process and even auto-filling the forms on your behalf.
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Corporate provisions
The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the tax code, many of which were temporary and set to expire at the end of 2025. While most of the provisions affecting corporations are permanent, there are some notable exceptions and debates surrounding certain corporate provisions.
One key corporate provision that is set to expire is the 100% bonus depreciation deduction, which began phasing out in 2023 and will be fully phased out by the end of 2026. This provision allowed businesses to deduct a larger portion of certain "short-lived" investments in new or improved technology, equipment, or buildings in the first year. The deduction percentage will decrease by 20% yearly until it is completely expired.
Another corporate provision that is expiring is the look-through treatment of payments between related controlled foreign corporations (CFCs), which required corporations to file assets and income of certain subsidiaries as their own. This provision will also expire at the end of 2025.
The TCJA's pass-through business provisions are also set to expire on January 1, 2026. These provisions provided a 20% deduction for qualified pass-through income for sole proprietorships, partnerships, and S-corporations. The deduction phases out for certain high-income businesses, such as health, law, accounting, athletics, and financial services, once income surpasses a certain threshold.
While the reduction in the corporate income tax rate from 35% to 21% is permanent law, there are debates and deliberations among lawmakers, experts, and the business community regarding other business provisions in the TCJA. For example, the tax treatment of R&D expenses and bonus depreciation has been a subject of discussion. Some policymakers and business groups are pushing for certain provisions to be made permanent or comprehensively reformed.
Overall, while most corporate provisions under the TCJA are permanent, there are a few notable exceptions that are set to expire or have already begun phasing out. These changes will have significant implications for businesses and taxpayers alike.
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$32.45
Individual provisions
The 2017 Tax Cuts and Jobs Act (TCJA) included significant changes to the tax code, many of which were temporary and set to expire at the end of 2025. These temporary provisions include:
- The standard deduction, which nearly doubled under the TCJA, will shrink in 2026. For single filers, the standard deduction will be $8,350, compared to $15,450 if the TCJA is extended.
- The personal exemption, which was eliminated under the TCJA, will return in 2026 and be valued at $5,300.
- The maximum child tax credit will revert to $1,000 from $2,000 under the TCJA and begin phasing out at $75,000 in adjusted gross income.
- The deduction for small business income will no longer be available if the TCJA expires. This includes the 20% deduction for qualified pass-through income for sole proprietorships, partnerships, and S-corporations.
- The alternative minimum tax (AMT) exemption amounts will be reduced, resulting in more taxpayers being liable for the AMT.
- The income phase-out range for taxpayers with Roth IRA contributions will increase. For singles and heads of household, the range will be between $150,000 and $165,000, up from $146,000 and $161,000.
- Bonus depreciation for businesses will be reduced to 40% in 2025 and will fully phase out beginning in 2027.
The expiration of these provisions will disproportionately affect high-income taxpayers, with households in the top 1% paying an additional 3.1% of their income in taxes.
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Alternative minimum tax
The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice: first, under ordinary income tax rules, and then under the AMT. Taxpayers must then pay the higher of the two amounts. The AMT was enacted in 1969 to prevent wealthy taxpayers from using too many tax preferences to reduce their taxable income.
The AMT is imposed on a more comprehensive measure of income than the regular federal income tax. It is calculated by taking the taxpayer's regular income and adding disallowed credits and deductions, such as the bargain element from incentive stock options, state and local tax deductions, foreign tax credits, and passive activity losses. This results in the Alternative Minimum Taxable Income (AMTI). The AMT exemption amount is then subtracted from the AMTI. The AMT exemption amounts and tax rates are set by law and vary by type of taxpayer. For example, in 2024, the exemption amount for single filers was $85,700, and the exemption began to phase out once AMTI hit $609,350. For married couples filing jointly, the exemption amount was $133,300, and the exemption began to phase out at $1,218,700.
After calculating their AMTI and applying the exemption, taxpayers are taxed at a rate of 26% or 28% on the resulting income. It is important to note that some tax credits that reduce regular tax liability do not reduce AMT tax liability. Additionally, while individuals, estates, and trusts are subject to AMT, partnerships and S corporations generally are not.
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Retirement contributions
For 2025, the Internal Revenue Service (IRS) has announced adjusted contribution limits, phase-out ranges, and income limits for various retirement accounts. Here are the key points regarding retirement contributions and their phase-out ranges:
- 401(k), 403(b), and 457 Plans: The contribution limit for these plans has increased to $23,500, up from $23,000 in 2024. The catch-up contribution amount for employees aged 50 and older remains at $7,500. SECURE 2.0 introduces a higher catch-up contribution limit of $11,250 for employees aged 60 to 63.
- Traditional IRA and Roth IRA: The maximum contribution limit remains unchanged at $7,000. The phase-out ranges for 2025 are:
- Single taxpayers with a workplace retirement plan: Phase-out range starts from $79,000 and ends at $89,000 (up from $77,000 to $87,000 in 2024).
- Married couples filing jointly with one spouse contributing to IRA and covered by a workplace retirement plan: Phase-out range is between $126,000 and $146,000 (up from $123,000 to $143,000 in 2024).
- Married individuals filing separately and covered by a workplace retirement plan: Phase-out range remains unchanged at $0 to $10,000.
- IRA contributor not covered by a workplace retirement plan but married to someone who is: Phase-out range is between $236,000 and $246,000 (up from $230,000 to $240,000 in 2024).
- SIMPLE Retirement Accounts: The contribution limit has increased to $16,500, with a higher limit of $17,600 for certain applicable SIMPLE retirement accounts under SECURE 2.0. The catch-up contribution limit for employees aged 50 and over remains at $3,500, while a higher limit of $5,250 applies for those aged 60 to 63.
- Deductions for Older Taxpayers: A temporary bonus deduction is available from 2025 through 2028 for taxpayers aged 65 or older. The deduction is $6,000 for individuals and $12,000 for married couples filing jointly, both aged 65 or older. The income eligibility is set at $75,000 for single filers and $150,000 for couples, with a gradual phaseout for higher incomes.
- Saver's Credit: The income limit for the Saver's Credit, also known as the Retirement Savings Contributions Credit, has increased. For married couples filing jointly, the limit is now $79,000, up from $76,500. For heads of household, the limit is $59,250, up from $57,375.
It's important to stay informed about tax law updates, as they can significantly impact retirement planning. Consulting a tax professional can help individuals make informed decisions regarding their retirement contributions and tax strategies.
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Frequently asked questions
The Child Tax Credit will begin phasing out at $75,000 in adjusted gross income for individuals.
The TCJA is set to expire at the end of 2025.
The standard deduction for single filers will be valued at $8,350, compared to $15,450 if the TCJA is extended.
The phase-out range for taxpayers making Roth IRA contributions in 2025 is between $150,000 and $165,000 for singles and heads of households.
The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
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