Preparing for the TCJA Sunset
Enacted in 2017, the Tax Cuts and Jobs Act (TCJA) was one of the most extensive tax law reforms in over 30 years. Changes under the TCJA were wide-ranging and impacted individuals, estates, and businesses. The legislation is set to “sunset” on December 31, 2025, reverting back to the rules in effect pre-2018.
The law, as it is written now, has several TCJA tax provisions expiring after 2025. However, Congress can act to extend the provisions or make them permanent. It is also possible that new tax provisions could be implemented in place of or alongside the TCJA. It is also important to note that the fate of the TCJA is highly dependent on the upcoming presidential and congressional elections.
Individual Tax Provisions in the TCJA
Marginal Tax Rates: Starting on January 1, 2026, marginal tax rates will revert to the previous rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Under the TCJA, marginal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The TCJA did not change the rates for capital gains so those will remain the same.
Personal Exemptions: Personal exemptions were eliminated under the TCJA and will return after the sunset. The personal exemption was $4,050 per person in 2017 and will be adjusted for inflation when it returns.
Standard Deduction: The standard deduction, which is used when taxpayers do not itemize deductions, nearly doubled under the TCJA. It will be lowered to pre-2018 levels and adjusted for inflation.
Itemized Deductions:
- State and Local Taxes (SALT): The SALT deduction, which includes real estate taxes, personal property taxes, and state and local income taxes, was capped at $10,000 under the TCJA. After 2025, the cap will expire, and the deduction will no longer be limited.
- Mortgage interest deduction: The TCJA reduced the level of total mortgage debt that the mortgage interest deduction can be taken on to $750,000 for mortgages originated at the end of 2017. After 2025, interest can be deducted on mortgages up to $1 million and up to $100,000 on home equity loans.
- Miscellaneous itemized deductions: The itemized deduction for miscellaneous expenses was removed under the TCJA. Beginning in 2026, miscellaneous itemized deductions, such as investment advisory fees, tax preparation fees, and certain legal fees, will be deductible again to the extent that these expenses exceed 2% of the taxpayer’s adjusted gross income (AGI).
Qualified Business Income (QBI) Deduction: The 20% deduction for QBI, used by sole proprietors and owners of certain passthrough entities, was created under the TCJA and will be eliminated in 2026.
Child Tax Credit (CTC): The CTC was doubled to $2,000 and income thresholds to claim the credit were raised. A $500 credit for other dependents was also introduced. After 2025, the CTC will decrease to $1,000, income thresholds phasing out the credit will be lowered, and the credit for other dependents will be eliminated.
Alternative Minimum Tax (AMT): The AMT exemptions and phaseout thresholds were increased under the TCJA, reducing the number of taxpayers subject to AMT by 96%. After the sunset, the pre-TCJA levels will be restored.
Estate and Gift Tax Provisions
The unified estate and gift tax exemption was roughly doubled with the TCJA. The 2024 exemption is currently $13.61 million per person. In 2026, the exemption is set to decrease to $5 million and adjusted for inflation. With such a significant change coming, it is worthwhile to review your existing estate plan and determine the need for any changes and/or opportunities for planning prior to the law’s sunsetting.
Business Tax Provisions
One notable exception to the sunset is the corporate tax rate, which does not expire. The TCJA made permanent the lower 21% flat corporate tax rate. Prior to TCJA, corporate tax rates graduated with a top rate of 35%.
As we navigate these impending changes, it’s important to stay informed and proactive in your financial planning. If you have any questions or need guidance, please do not hesitate to reach out to your Howland Capital portfolio manager and tax preparer.
