The Tax Cuts and Jobs Act Is Set to Expire Next Year

The Tax Cuts and Jobs Act of 2017, also known as the TCJA, was enacted by former President Donald Trump and took effect on January 1, 2018. It is set to expire at the end of 2025. Below are some of the current provisions of the TCJA and how they will change after 2025.

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1.       Income Tax Rates

With the currently scheduled sunset of the TCJA in 2025, one component of taxes that will greatly affect taxpayers is the change of individual income tax rates. The TCJA reduced the respective rates of the tax brackets for individuals: the top rate fell from 39.6% to 37%, the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The 35% bracket stayed the same, and the lowest bracket remained at 10%.[1]

Since the tax brackets/rates are projected to return back to the pre-TCJA tax rates in 2026, taxpayers should plan to pay approximately 1% to 4% more in personal income taxes unless the TCJA provisions are extended past 2025.

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2.       Standard Deduction & Child Tax Credit

Another component of the TCJA that is changing after 2025 is the standard deduction. Under the TCJA, the standard deduction was practically doubled from what it was before 2018. In 2017, the standard deduction was $6,350 for single filers, $9,350 for heads of household, and $12,700 for married joint filers. The standard deduction under the TCJA (2023, for example) was $13,850 for single filers, $20,800 for heads of household, and $27,770 for married joint filers.[2]

According to Forbes, around 90% of taxpayers claim the standard deduction over itemizing their deductions.[3] Now that the standard deduction could possibly be reduced, many taxpayers may start itemizing their deductions once the TCJA provisions sunset. However, itemizing deductions can add more complexity than claiming the standard deduction.

The TCJA also raised the child tax credit to $2,000, increased the refundable portion to $1,400 ($1,600 in 2023), and widened the eligibility for the credit.[4]

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3.       Gift and Estate Tax Exemptions

An advantageous component of the TCJA for taxpayers is that it doubled the estate and gift tax lifetime exemption from $5,490,000 in 2017 to $13.61 million (2024) for individuals. However, when the TCJA ends at the end of 2025, the exclusion will significantly decrease by approximately 50 percent.

In 2019, the IRS implemented regulations (known as the “anti-clawback” regulations) that removed the possibility of a larger taxable estate solely due to a reduction in the exclusion amount.[5] Therefore, even if the exclusion amount is reduced in 2026, taxpayers who make gifts now will not increase their future taxable estate.

Nonetheless, a lower federal gift and estate tax exemption would not impact most taxpayers; less than 0.2% of people who died in 2023 had a taxable estate.[6]

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4.       Other Tax Items

For individuals who prefer to itemize their deductions, the TCJA is generally not as advantageous; it capped the state and local tax (SALT) deduction at $10,000, and it temporarily suspended personal exemptions. The TCJA also temporarily eliminated most miscellaneous itemized deductions, such as legal fees and unreimbursed employee expenses. The TCJA also put limits on itemized deductions dealing with mortgage interest.

However, for businesses, the TCJA is generally more advantageous – it created the Qualified Business Income (QBI) deduction where owners of passthrough businesses can claim a deduction of up to 20% of QBI (a provision that will expire at the end of 2025). The TCJA also changed the corporate tax rate structure from a top rate of 35% to a flat rate of 21% regardless of the corporate taxable income amount. This is one of the few provisions that is permanent; it will not expire after 2025.[7]

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Conclusion

While the TCJA is set to expire in 2025, the future outlook of the federal income tax system is, in part, unknown. While some provisions will stay in place, most will expire unless they are extended. In any case, it is important for taxpayers to comply with current tax laws/regulations and to contact an experienced tax professional if they have any questions or need tax advice. Before the TCJA expires, individuals should also review their estate plans or contact an estate planning attorney to set up (and/or revise) their estate plan.

Contact Provident Legal Counsel today to discuss your case and legal options. Schedule a Consultation or call (214) 432-6100.

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[1] David Floyd, What Is The Tax Cuts And Jobs Act (TCJA)?, Investopedia (July 2024), available at https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/.

[2] David Nadelle, Trump Era Tax Cuts Are Set To Expire – Here’s How Much More You’ll Pay, Yahoo Finance (April 2024), available at https://finance.yahoo.com/news/trump-era-tax-cuts-set-160750197.html.

[3] Id.

[4] Id.

[5] Lifetime Gifts: Is The Window Of Opportunity Closing?, PNC (March 2024), available at https://www.pnc.com/insights/wealth-management/transferring-family-wealth/lifetime-gifts-is-the-window-of-opportunity-closing.html.

[6] Kate Dore, Trump-era Tax Cuts Set To Expire After 2025 – Here’s What You Need To Know, CNBC (May 2024), available at https://www.cnbc.com/2024/05/18/trump-tcja-tax-cuts-are-slated-to-expire-after-next-year.html.

[7] Nina Daigle, Tax Planning For The TCJA’s Sunset, The Tax Adviser (December 2023), available at https://www.thetaxadviser.com/issues/2023/dec/tax-planning-for-the-tcjas-sunset.html.