With the start of the new year, we want 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 Act 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, there may be changes 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 certain rules will remain the same. This email 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 state and local tax (SALT) deduction would no longer be capped at $10,000 annually and would be subject to phase-outs 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, such as 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 deductions were allowed for households, including investment expenses, moving expenses, tax preparation fees, and unreimbursed employee expenses exceeding 2 percent of adjusted gross income. Some 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.
- Alternative minimum tax (AMT) would apply again to many more 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 roughly reduced in half.
- High-net-worth individuals, business owners, and others must be aware of this potential change.
Changes That May Affect Business Owners
- The TCJA expiration would result in all pass-through income being taxed at the personal income tax rate of 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 immediatelyexpense short-lived capital investments for five years, and the $1 million cap would return to $500,000.
- In addition to changes to capital investment, various business taxes and expenditure reductions are likely to go away, including the deductibility of net interest, net operating loss carrybacks and carryforwards, and the corporate AMT.4
Forewarned is Forearmed
Regardless of what happens in D.C., we must focus on what we can control. Please contact us if you have any questions about how these changes may impact your financial situation. We may offer some tax-related resources to help guide you through the evolving tax landscape.
1. Kiplinger Personal Finance, June 13, 2023
2. Putnam Personal Finance, February 22, 2023
3. Advisor Perspectives, October 2, 2023
4. Tax Foundation, August 30, 2023