Planning for the Tax Cut and Jobs Act Sunset
BY: Lisa M. Wood, CPA, MT - Director of Tax
The Tax Cut and Jobs Act (TCJA) was passed in 2017 and made significant changes to the Tax Code. The changes were not permanent and most tax provisions sunset at the end of 2025. Absent additional legislation, beginning in 2026, the tax law will revert to the way it was before the TCJA passed.
There is the possibility that provisions in the TCJA could be extended; however, that will largely depend on the outcome of the 2024 Presidential, Senate and House of Representative elections. Republican control of all three would likely result in some or all the TCJA provisions being extended, while Democratic control of all three would more likely end up with most of the provisions expiring. If neither party has control, politicians will have to negotiate a deal that would get enough votes for passage or risk a stalemate that would result in the TCJA sunsetting at the end of 2025.
If the TCJA is extended or replaced, it probably will not happen until later in 2025 or early 2026. It is more difficult to plan when the legislation is uncertain, but it is not impossible. Taxpayers may want to consider alternative plans of action to put in place under different scenarios. The main issue is determining when to accelerate or defer both income and deductions. The following is a list of some of the provisions that are expiring.
The TCJA implemented lower individual tax rates, and the rates will increase starting in 2026. Not only will most tax bracket rates increase, but the highest tax bracket rate will also increase from 37% to 39.6%.
The standard deduction was almost doubled in the TCJA. In 2024, a single taxpayer is allowed a $14,600 deduction, and the amount for married filing jointly taxpayers is $29,200. In 2026, the reduced amount is projected to be around $8,000 for single taxpayers and $16,000 for married filing jointly taxpayers.
Personal exemptions were repealed in the TCJA. They will return in 2026 and are projected to be around $5,300 per taxpayer. The ability to deduct personal exemptions is limited for high income taxpayers, and the deduction is eventually disallowed when income reaches a certain level.
The Pease limitation reduced the amount of itemized deductions that higher income taxpayers were able to deduct. This limitation was suspended by the TCJA and is reinstated starting in 2026. As a result, higher income taxpayers will not be able to deduct a percentage of their total itemized deductions.
The TCJA caps the State and Local Tax (SALT) itemized deduction at $10,000. Even though several taxpayers paid more than this amount in state and local taxes (especially in Ohio where we have state and municipal income taxes and higher real estate tax rates), their maximum deduction was limited to $10,000. There will no longer be a limitation in 2026.
Home equity loan interest was suspended by the TCJA (with a few exceptions). The home mortgage interest deduction was only allowed on the first $750,000 of debt (married filing jointly). In 2026, the mortgage interest deduction will be allowed on the first $1 million of debt and on $100,000 for home equity loans.
The Qualified Business Income Deduction (QBID) was added by the TCJA and is generally available to owners of pass-through business entities and sole proprietors. The deduction is 20% of qualified business income, subject to certain limitations. This deduction will no longer be available for taxable years beginning after December 31, 2025.
TCJA increased the Alternative Minimum Tax (AMT) exemption amounts, and the threshold for the exemption phase-out, which resulted in many taxpayers either not paying AMT or paying a considerably lesser amount. The tax will revert to pre-TCJA levels in 2026. Exemption amounts will be greatly reduced, and the income level at which the exemption begins to phase-out is also substantially lowered. The result is that many additional taxpayers will once again be subject to the AMT.
The TCJA expanded the child tax credit to $2,000 per qualifying child. The credit amount will revert to $1,000 per child, and the income threshold at which the credit begins to phase-out is lowered.
The estate and gift tax exclusion was essentially doubled with the passing of TCJA and then adjusted each year for inflation. In 2024, the exemption amount is $13.61 million per individual or $27.22 million for married taxpayers. In 2026, this provision will sunset, and the exclusion will revert to approximately half the amount. Taxpayers with estates above the adjusted exclusion amount should discuss with their advisors, as soon as possible, ways to take advantage of the higher exclusion before it expires at the end of 2025.
With just over a year before the expiration of the TCJA, it is crucial to be proactive and begin planning as soon as possible. Taxpayers will experience the TCJA sunset in a variety of different ways. The benefit of planning now outweighs the risk that the TCJA is extended. Your Buckingham Advisors team has planning ideas that can be tailored to your specific needs. If you have questions or want to put a financial plan into place, please reach out to one of our team members.