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SuraLinkWritten by Russell Goodman
Uncertainty looming in Washington has CPAs and taxpayers across the country wondering the same thing. What will happen if the Tax Cuts and Jobs Act (TCJA) “sunsets” in 2026? We all know that Congress is working on extending many of the provisions of the TCJA, even though some may be permanent and others temporary. But what if no bill is passed and many of the benefits businesses and individuals have received under the TCJA are allowed to expire? What would happen then? Let’s cover a few of the major tax provisions that will change effective January 1, 2026, if the sun sets on the TCJA….
The first major change for individuals will be the tax rates. As of 2024, the tax brackets are approximately 3% lower than they were in 2017, and the thresholds were shifted in the TCJA to be more favorable for middle- and upper-class individuals. This could lead to major swings, especially with middle-class individuals having to pay more income tax. If the TCJA expires, the top tax rate would increase from 37% to 39.6%. Another threshold to watch in 2025 is the capital gains and dividend threshold. Although this will not be as substantial as the tax rates, it would be beneficial to consult with your tax advisor if you could realize significant capital gains in 2025 or 2026.
If the TCJA sunsets, more individuals would likely itemize deductions in 2026 rather than taking the standard deduction. The TCJA nearly doubled the standard deduction for individuals, but that increase is set to expire at the end of 2025, and the standard deduction will be cut in half. The SALT (State and Local Taxes) will also no longer have the $10,000 cap if the TCJA expires. This will be good news for individuals living in high tax states, as well as individuals in higher tax brackets. But remember, the more SALT, the more exposure to the Alternative Minimum Tax (AMT). Other TCJA provisions include a change in the charitable contributions limit based on adjusted gross income, the elimination of the phaseout of itemized deductions on high income taxpayers, and a significant reduction in the deductibility of casualty losses, which could all expire. And finally, the 2% Miscellaneous Itemized Deductions will return if the TCJA expires – that includes investment fees and employee business expenses.
In 2026, if the TCJA expires, personal and dependent exemptions will again be allowed. In 2017, the amount was $4,050 for each dependent claimed. Higher income taxpayers will not be able to benefit though, as thresholds will limit these deductions, as was the case prior to the TCJA. The Child Tax Credit will be cut in half after the TCJA sunsets, and the credit will phase out at income levels starting at $75,000 (instead of $200,000 for single taxpayers in 2024). The credit for other dependents that are not qualifying children will be eliminated as well (an additional $500 for other dependents claimed under the TCJA).
Individuals who receive any income from proprietorships or pass-through businesses will likely see an increase in taxes if the TCJA sunsets, as the Section 199A QBI deduction will expire after 2025. The 21% corporate tax rate will not be affected as this was a permanent change and not subject to sunset. While corporations are subjected to double taxation (income taxed at 21% as well as any dividends taken by the owner taxed at the personal level), the 20% QBI deduction made pass-through entities more favorable for tax planning purposes. The details of the QBI deduction are complicated, but if it is not extended, it could mean big tax changes. Please consult with your advisor if you are planning to form a new business entity, as the TCJA changes should be considered before choosing the type of entity.
The final change that needs consideration in tax planning is the increased estate and gift tax lifetime exemption that is scheduled to sunset as of January 1, 2026. The exemption that can be elected for any individual until December 31, 2025 is $13,990,000. Based on IRS guidelines, the use of this exemption in 2025 will be respected even if the donor’s death occurred after 2025. In 2026, the exemption is projected to drop to about $7,200,000 if the TCJA expires. Acting before the exemption decreases could save a taxpayer roughly $2.5 million in excess taxes not owed at death if fully used. If the value of your assets is close to or more than $7,200,000 in 2025, consult with your BMSS advisor to see if it would be beneficial to make gifts and take advantage of the higher exemption now, or to wait.
With all the looming changes present, there is no certainty as to what is going to happen. What has been seen with the change in Congress and the White House is that the desire is to extend many of the TCJA benefits and consider other tax legislation as well that would lower income taxes. That means provisions that are not at all related to the TCJA like expensing for research and experimental costs or bringing back 100% bonus depreciation for asset purchases could be considered, along with campaign promises to eliminate income taxes on tips, overtime, or Social Security benefits. It certainly seems that extending the TCJA is on the agenda, but we will keep our eyes on Washington D.C. to monitor the progress as the year progresses.
Even with the work being accomplished now, we cannot determine when this legislation would be passed in 2025. Congress has a looming budget that must be passed by mid-March, and there are many other priorities for the President and Congress. But, staying up-to-date, consulting with your BMSS advisor, and putting in place effective planning in 2025 can ensure the best tax results, regardless of what extensions of the TCJA provisions are passed. If you have any questions or if you would like to discuss your unique situation further, please reach out to your BMSS professional at (833) CPA-BMSS or visit our website for contact information.