With the start of the new year, we wanted to discuss a topic that will likely garner attention throughout 2024: the potential sunsetting of the Tax Cuts and Jobs Act (TCJA) in 2025.
Although some of the provisions within the TCJA are permanent, such as reducing the corporate tax rate from 35 percent to 21 percent, most individual tax changes are not. If Congress does not act to renew all or part of this law passed in 2017, changes may be on the horizon for taxpayers.1
It’s important to remember that tax rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article is for information purposes only and is not a substitute for real-life advice. You may want to review any specific questions about the TCJA with a tax, legal, or accounting professional.
While allowing the TCJA to sunset at the end of 2025 may have some positive outcomes, there might be some negatives to consider when evaluating potential tax strategies.
Current and Post-TCJA Comparison
The TCJA had multiple provisions, modifications, and new rules. If the law is allowed to sunset, untangling everything might create new complexities. To help you better understand what may change, here is a comparison of where things stand today and what could happen after the TCJA expires.2
Changes That May Affect Some
- The SALT deduction would no longer be capped at $10,000 annually but would be subject to phaseouts at higher income levels.
- Because state and local taxes vary widely throughout the country, this cap affected wealthy taxpayers the most in states with high tax rates, like New York, New Jersey, California, and Illinois.
- The deduction allowed for mortgage interest would increase from $750k of debt to $1M plus $100k in home equity debt.
- This would be felt by taxpayers with high mortgage debt.
- Miscellaneous deductions could return.
- Before the TCJA, several household deductions, including investment expenses, moving expenses, tax preparation fees, and unreimbursed employee expenses exceeding 2% of adjusted gross income, were allowed. Specific households may see these deductions return.
Changes That May Affect Others
- The standard deduction would be cut in half, to the level it was before the TCJA.
- Whether this change affects you may depend on your family size and filing status.
- The AMT would apply again to many more taxpayers.
- The AMT has been around for many years and has been a thorn in the side of some taxpayers. Originally designed to ensure that high-income earners paid more taxes, it affected a disproportionate number of households over the years because it was never indexed for inflation. The TCJA raised the AMT exemptions, but if the law sunsets, the AMT is expected to return to prior levels.
- The unified lifetime exclusion for estates and gifts would be reduced roughly in half.
- High-net-worth individuals, business owners, and others need to know about this potential change.
For Business Owners Specifically
- The TCJA expiration would result in all pass-through income being taxed at the personal income tax rate of the business owners.
- The TCJA changed how pass-through entities were taxed, creating a new 20% qualified business income deduction for many owners of pass-through entities, such as FLPs, LLCs, and S corporations.3
- Businesses would no longer be allowed to fully and immediately expense short-lived capital investments for five years, and the $1 million cap would shrink back to $500,000.
- In addition to changes to capital investment, various business taxes and expenditure reductions are expected to go away, including the deductibility of net interest, net operating loss carrybacks and carryforwards, and the corporate AMT.4
Forewarned is Forearmed
We have yet to determine what Congress will do about the pending expiration of the TCJA. Congress could have a bipartisan epiphany and decide to renew all or at least parts of the law, making them permanent and taking a degree of uncertainty out of your future tax strategy.
Regardless of what happens in D.C., focus on what you can control. If you have any questions about these potential changes, don’t hesitate to contact us. We may have some tax-related resources to help guide you through the evolving tax landscape.
1. Kiplinger Personal Finance, June 13, 2023
https://www.kiplinger.com/taxes/what-to-do-before-tax-cuts-and-jobs-act-tcja-provisions-sunset
2. Putnam Personal Finance, February 22, 2023
https://www.putnamwealthmanagement.com/taxpayers-face-challenges-as-tax-provisions-sunset-in-2025#:~:text=On%20the%20positive%20side%3A,deduction%20for%20certain%20investment%20expenses
3. Advisor Perspectives, October 2, 2023
https://www.advisorperspectives.com/articles/2023/10/02/preparing-for-the-sunset-of-the-tcja-tax-relief
4. Tax Foundation, August 30, 2023
https://taxfoundation.org/taxedu/glossary/tax-cuts-and-jobs-act/
