Sunsetting of Tax Cuts & Jobs Act Provisions in 2025
On December 22, 2017, President Trump signed the Tax Cut and Jobs Act (TCJA) which, at the time, represented the most comprehensive overhaul of the U.S. tax code in over three decades. Unless Congress takes action to extend the key points that were changed by the TCJA, many of these provisions are set to expire at the end of 2025.
The following information could affect your tax obligations. It is important to consider these details when planning your finances.
Individuals
Marginal Tax Rates: Marginal tax rates lowered by the TCJA (10%, 12%, 22%, 24%, 32%, 35% and 37%) will revert back to pre-TCJA levels (10%, 15%, 25%, 28%, 33%, 35% and 39.6%). For example, income previously taxed at 22% under the TCJA provision will now be taxed at 25%.
Standard Deduction: The standard deduction was effectively doubled by the TCJA. This will be reduced by half and adjusted for inflation. Reducing the standard deduction increases taxable income, creating more of a tax burden for many taxpayers, especially those who do not itemize deductions. Taxpayers who do itemize deductions may want find ways to maximize their deductions in order to reduce taxable income, such as increasing deductible expenses like charitable contributions.
Personal Exemptions: Personal exemptions, which were removed by the TCJA, will be reinstated and adjusted for inflation. Reinstating these exemptions will help reduce taxable income and overall tax liability. Personal exemptions are of particular greater benefit to low and middle income taxpayers as well as larger families that can deduct certain expenses for each taxpayer and dependent.
Medical Expenses: The TCJA lowered the adjusted gross income (AGI) limitation from 10% to 7.5% for medical expenses. The pre-TCJA10% AGI limitation rate will be reinstated.
State and Local Tax (SALT): The SALT cap of $10,000 on state and local tax deductions for individuals who itemize will be removed. Higher income taxpayers would benefit the most since this enables a substantial reduction to their federal tax liability due to the full amount deductibility of their state and local taxes, which often exceeds $10,000.
Mortgage Interest: The mortgage interest deduction was limited on mortgage loans above $750,000 (previously $1,000,000) for homes purchased after January 1, 2018, and the home equity interest deduction was suspended by the TCJA. The loan limit will return to $1,000,000, and the home equity deduction will be reinstated.
Miscellaneous Deductions Subject to the 2% Floor: The TCJA disallowed certain deductions, which included unreimbursed employee expenses, tax preparation fees, hobby losses, union dues and others. These deductions will be reinstated.
Personal Casualty Losses: The TCJA disallowed personal casualty losses unless they were attributable to a federally declared disaster. If reinstated, it will make more funds available for recovering and rebuilding.
Limitation on Itemized Deductions: The TCJA eliminated the AGI threshold on itemized deductions. The threshold will be reinstated and adjusted for inflation.
Charitable Contributions: The TCJA increased the AGI limitation for charitable contributions from 50% to 60% as well as removed the ability to deduct any portion of amounts paid to a higher education institution and received the rights to purchase tickets. The limitation will decrease to 50%, and the ability to deduct 80% of the amount paid to higher education for tickets will be reinstated.
Moving Expenses: The TCJA suspended the above-the-line deduction for qualified moving expenses. These will be reinstated.
Child Tax Credit: The TCJA increased the child tax credit from $1,000 to $2,000 for each qualifying child as well as allowing up to $1,400 to be refunded per qualifying child. The TCJA also provided a $500 nonrefundable tax credit for qualifying dependents. The child tax credit will revert back to $1,000 for qualifying dependents only.
Qualified Business Income Deduction (QBID): The TCJA created the QBID (also known as -Section 199A deduction), which allowed non-corporate taxpayers to receive a deduction of up to 20% of the pass-through income from a partnership or S corporation as well as from a sole proprietorship. The QBID will be eliminated.
Estate and Gift Taxes
Exclusion Amount: The TCJA increased the basic exclusion for estate and gift from $5 million to $10 million as adjusted for inflation each year. The exclusion will revert back to approximately $5.49 million, as adjusted from inflation.
Businesses
Bonus Depreciation: Prior to the TCJA, bonus depreciation was 50% of the cost in the initial year and was to be eliminated by 2020. The TCJA increased the bonus depreciation amount to 100% for five years and then decreasing in 20% increments over five years and no longer being available after 2026.
Section 179 Depreciation: The TCJA doubled the Section 179 limit from $500,000 to $1,000,000 for qualified property. The Section 179 limit will revert back to $500,000 and adjusted for inflation.
Net Operating Losses (NOL): The TCJA limited eliminated the ability to carryback NOL for up to two years, limited NOL to 80% of taxable income, and allowed NOL to be carried forward indefinitely. Upon expiration of the TCJA, the ability to carryback NOL will be reinstated, and NOL will be able to offset 100% of taxable income and be carried forward indefinitely.
Interest Expense: The TCJA limited the ability to deduct business interest expense to 30% of adjusted taxable income (ATI) for select taxpayers. Following the expiration of the TCJA, this limitation will be removed and interest expense will be 100% deductible.
With the results of the recent November election, there are many items listed above that the incoming administration has indicated they would like to either extend or make permanent. As such, future updates are anticipated, and we will provide information on new developments as they emerge.
