The Tax Cuts and Jobs Act (TCJA), which became effective on January 1, 2018, made significant changes to tax legislation that impacted individuals, families, business owners and companies. Some changes were intended to be permanent, but others will expire on December 31, 2025, unless Congress acts to extend them. Given this uncertainty, it is crucial to understand and prepare for what could lie ahead.
TCJA Provisions for Individual Taxation Set to Expire in 2025
Some federal income tax changes that could negatively affect individual taxpayers:
- Marginal tax rates will increase. The lower marginal tax rates under the TCJA of 10%, 12%, 22%, 24%, 32%, 35% and 37% will revert to pre-TCJA levels of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
- Standard deduction will decrease. The standard deduction nearly doubled under the TCJA to $12,000 for single filers, $18,000 for head of household filers and $24,000 for married filing jointly filers, adjusted for inflation. The deduction will revert to pre-TCJA levels, cutting it nearly in half.
- Child tax credit will decrease. The maximum allowable credit per child will decrease from $2,000 back to $1,000. The refundable portion of the credit and phaseout income thresholds will decrease.
- Charitable contribution deduction will decrease. Deductions for cash contributions to charities will decrease from 60% to 50% of adjusted gross income.
- ABLE (Achieving a Better Life Experience) account contribution limits will return. Designated beneficiaries will no longer be able to make additional contributions (the lesser of the federal poverty level for a one-person household in the prior year or the beneficiary’s compensation for the year) above the annual gift tax exclusion amount. Additionally, all rollovers from 529 accounts will be subject to taxation.
- Overall limitation on itemized deductions (the “Pease” limitation) will return. Taxpayers with adjusted gross income over a certain threshold will be subject to an itemized deduction cap.
- Alternative minimum tax exemption amounts will decrease. The alternative minimum tax exemption and exemption phaseout amounts will decrease, resulting in more taxpayers being subject to the tax.
- Estate, gift and generation-skipping transfer tax exemption amounts will drop significantly. Currently, an individual can transfer up to $13.61 million ($27.22 million per married couple) without paying transfer taxes. This provision will sunset, and the exemption will revert to pre-TCJA levels ($5 million, adjusted for inflation), possibly triggering a 40% transfer tax for many taxpayers.
Some federal income tax changes that could positively affect individual taxpayers:
- The cap on state and local tax (SALT) deductions will disappear. There will no longer be a $10,000 cap on the deduction, and taxpayers will be able to deduct all eligible state and local income taxes, property taxes and foreign income taxes.
- Mortgage interest deduction limit will increase. The current limit, allowing a deduction for interest on the first $750,000 of mortgage debt for loans originating on or after December 16, 2017, will increase to $1 million of home mortgage debt and $100,000 in home equity loans, even if used for items unrelated to the property.
- Personal exemptions for dependents will return. The TCJA suspended personal exemptions, but they will revert to their pre-TCJA levels, adjusted for inflation.
- Schedule A miscellaneous deductions for certain expenses will return. Miscellaneous itemized deductions will be allowed to the extent they exceed 2% of a taxpayer’s adjusted gross income.
TCJA Provisions for Business Taxation Set to Expire in 2025
Some tax provisions that will affect businesses:
- Section 199A deduction for pass-through business income will disappear. Owners of S corporations, partnerships, LLCs and other pass-through entities (including some trusts and estates) will no longer be able to deduct up to 20% of qualified business income (QBI) and the income will be taxed according to individual income tax rates.
- Loss limitations will change. Businesses will be able to carry over net operating losses (NOLs) to past and future years.
- Bonus depreciation on qualified property sunsets in 2026. For tax years beginning after December 31, 2022, the 100% bonus depreciation deduction will phase out by 20% per year until it fully sunsets after the end of the 2026 calendar year.
- Employers will lose tax credit for wages paid to employees on family and medical leave. The credit for employer-provided family and medical leave will no longer be available.
What Should Individuals Do to Prepare for the Expiration of the TCJA?
- Thoughtfully plan your gifting strategy. If you are able, consider making large gifts to utilize the temporarily higher estate and gift tax exemptions.
- Consider making larger charitable donations now to take advantage of the current deduction limit of 60% of adjusted gross income before it decreases.
- Complete any Roth IRA conversions before tax rates are likely to rise.
- Consider accelerating income into 2024 and 2025 to utilize the current tax rates before they increase.
- Plan for the possibility of exposure to the alternative minimum tax, assuming the exemption amounts will decrease after 2025.
- Maximize benefits under the TCJA for family members with ABLE accounts.
- If the beneficiary is working, they can make additional contributions to their ABLE account up to the TCJA limit (the lesser of the federal poverty level or the beneficiary’s annual compensation) during 2024 and 2025.
- If money is left in a 529 plan for the beneficiary, and the beneficiary has not made contributions up to the annual contribution limit, roll 529 assets over to the ABLE account to reach the maximum contribution limit. Note that any rollover funds over the ABLE limit are taxable.
What Should Businesses Do to Prepare for the Expiration of the TCJA?
- Owners of pass-through entities should discuss their entity structure with their attorney to determine if a change in structure would provide tax and other benefits.
- Utilize the Section 199A deduction for pass-through business income for S corporations, partnerships, LLCs and other pass-through entities while it is still available.
- Utilize the available bonus depreciation for business equipment before it disappears after 2026. Bonus depreciation percentages are 60% in 2024, 40% in 2025 and 20% in 2026.
What is Next for the TCJA Provisions?
Some of the TCJA’s business provisions were meant to be permanent and will continue to be in effect, including the reduction of the top federal corporate tax rate from 35% to 21%, unless changed by future legislation. Should Congress wish to keep any of the TCJA’s expiring provisions, they will need to act before December 31, 2025.
If you have questions about how the expiration of the TCJA will affect your personal or business taxes, contact your Warner attorney or Erin Lasenby at elasenby@wnj.com or 313.546.6133.
Summer Associate Rachel Durbin contributed to this blog post.
