The impending expiration of the Tax Cuts and Jobs Act (TCJA) on December 31, 2025, marks a significant turning point for individual taxpayers.
Enacted in 2017, the TCJA introduced lower tax rates and broader tax brackets, providing substantial relief to many. However, as the sunset date approaches, these provisions are set to revert to their pre-TCJA levels, leading to higher tax rates and compressed brackets. This shift will not only increase the tax burden for many individuals but also necessitate a reevaluation of tax strategies to mitigate the impact. Understanding these changes and planning accordingly is crucial for taxpayers aiming to optimize their financial outcomes in the face of these impending adjustments.
Individual Income Tax Rates
TCJA lowered the individual income tax rates and if TCJA expires the rates are set to go from 10%, 12%, 22%, 24%, 32%, 35%, and 37% to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Notably, the top individual income tax rate will increase from 37% to 39.6%. The individual income tax ranges for each bracket will also change; the top tax rate will start to apply at a lower income level and in general the brackets will compress causing more income to be taxed at higher rates.
Due to the potential increase in tax rates, taxpayers may want to investigate tax strategies that would help them take advantage of the lower rates now. Taxpayers should consider accelerating income and deferring deductions. One strategy to consider is a Roth IRA Conversion. Taxpayers may also consider deferring certain itemized deductions, this would also allow them to take advantage of utilizing the increased standard deduction before it decreases, however they should consider any AMT implications before proceeding.
Itemized Deductions
Specifically, the Tax Cuts and Jobs Act included changes to the following itemized deductions for individual taxpayers. These changes are set to revert to pre-TCJA levels beginning in tax year 2026 without direct intervention by Congress and knowing the changes allows for better planning to defer itemized deductions in favor of the higher standard deduction today or maximize the deductions now under the present ruleset.
- State and Local Taxes (SALT) Paid: One of the significant changes under TCJA garnering much attention was the institution of the SALT Cap, or the $10,000 deduction limitation for all taxpayers for taxes paid during the year. Previously, there were no limitations on these taxes - real estate taxes, state and local income taxes and personal property taxes. This provision is being closely monitored given the TCJA state tax strategies related to Pass-Through Entity Taxes (PTET) and the AMT implications for unlimited deductions for taxes paid.
- Mortgage Interest Paid: TCJA set a limit of $750,000 for acquisition indebtedness for new debts incurred after December 15, 2017, as opposed to the pre-TCJA amounts of $1,000,000 for acquisition indebtedness. TCJA also eliminated home equity loan interest deductions of $100,000 equity indebtedness slated to return in 2026.
- Charitable Contributions: The Tax Cuts and Jobs Act provision increased the Adjusted Gross Income limitation for cash donations from a 50% to 60%. This allows for a greater donation amount deductible presently as it relates to a taxpayer’s income.
- Miscellaneous Itemized Deductions Subject to the 2% of AGI Floor: These deductions were notably eliminated under TCJA and may be permitted in the future without congressional action by 2026. The 2% miscellaneous itemized deductions included tax return preparation costs, investment expenses incurred with the production of taxable income, non-reimbursed employment related expenses, and Non-Disaster Casualty Losses for hobbies and theft.
- Pease Limitation: This is otherwise known as the overall limitation to itemized deductions for high income and affluent taxpayers, which has not been a factor under TCJA. The Pease limitation phased out certain itemized deductions for high income levels at $250,000 (Single) and $300,000 (Joint) indexed for inflation. The limitation does apply to the itemized deduction categories above, but would not apply for medical expenses, investment interest expense and casualty and theft losses.
Standard Deductions
As mentioned, taxpayers experienced increased standard deductions under TCJA with joint filers and single filers having a basic standard deduction for 2024 of $29,200 and $14,600, respectively. Absent a change by Congress, these increased standard deductions will be reduced by 50% (roughly) to pre-TCJA levels, indexed for inflation, beginning in 2026. More taxpayers may itemize their deductions in the event TCJA sunsets as the strategies utilized by taxpayers to take advantage of these increased standard deductions such as charitable donation bunching may become obsolete while there will also be a renewed focus on Alternative Minimum Tax is on the horizon.
Alternative Minimum Tax (AMT)
In short, the AMT exemption and phaseouts were increased under the TCJA, so the looming sunset after 2025 reduces these amounts (even when indexed for inflation) thereby potentially exposing more households and taxpayers to AMT. Many taxpayers have not been subject to AMT for years, which is specifically attributed to these higher exemptions, phaseouts and a number of the itemized deduction changes noted before.
By way of example, the potential itemized deduction changes would translate to higher Alternative Minimum Taxable Income since the SALT deduction and the 2% itemized deduction would immediately be added back for AMT purposes. This addback coupled with the lower exemption and income phaseouts creates taxpayer vulnerability to AMT again particularly in those high tax states. So, while it may seem like the removal of the $10,000 SALT Cap and reinstatement of the 2% itemized deduction allowance is beneficial, there may be a separate tax cost.
Qualified Business Income Deduction
The qualified business income (QBI) deduction is also set to expire. The QBI deduction allows many owners of sole proprietorships, partnerships, and S corporations to deduct up to 20% of their QBI. This deduction will be lost if TCJA expires. Businesses that currently qualify for QBI may want to consider accelerating income and deferring deductions for more income to qualify for the 20% deduction.
Child Tax Credit
Under TCJA the child tax credit was increased from $1,000 to $2,000 per qualifying child. The tax credit is set to revert to $1,000 per qualifying child if TCJA expires. In addition, the phaseout threshold had been increased to $200,000 for unmarried taxpayers and $400,000 for married joint filers under TCJA and is set to revert to $75,000 for unmarried taxpayers and $110,000 for married joint filers.
Estate and Gift Tax Implications
The TCJA doubled the amount of estate and gift tax exemption for the years 2018-2025. The 2025 exemption amount is $14 million. That means on January 1, 2026 the exemption is scheduled to revert back to approximately $7 million depending on the prior year’s inflation rate. It bears mentioning that the annual exclusion amount ($19,000 in 2025) will not be affected.
The IRS has issued anti-clawback regulations that will allow a taxpayer to utilize the current higher gift tax exemption should the TCJA sunset occur. Since this is a use it or lose it provision, one may consider gifting prior to the end of 2025 to utilize the full $14 million of lifetime exemption available. You need to use up $7 million of the exemption before any benefit to utilizing further gifting as the exemption will be reduced from the top of people’s exemptions.
Examples of gifting techniques that may be utilized here are:
- Lifetime gifting: regular gifts of assets
- Irrevocable Lifetime Insurance Trusts: creating a life insurance trust for the benefit of the grantor’s heirs
- Spousal Lifetime Access Trusts: Created by one spouse for the benefit of the other spouse’s lifetime.
For married people planning to utilize large gifts in the near future but not the entire amount available now, another angle to consider is using up one spouse’s exemption to the full $14 million before gifting from the other rather than using two exemptions equally.
As wealth transfer planning takes time and consideration it is advisable to begin thinking about this sooner than later. Often times appraisals and business valuations need to be done to properly substantiate large gifts. Many estate advisor’s may be overwhelmed and not able to assist if the decision is made too late next year.
Takeaways
As the sunset of the TCJA approaches, taxpayers must proactively plan to mitigate the impact of higher tax rates and the loss of certain deductions and credits. By considering strategies such as accelerating income, deferring deductions, and utilizing Roth IRA conversions, individuals can better position themselves financially. Additionally, [pass-through] businesses should evaluate their income and deduction timing to maximize the Qualified Business Income deduction while it is still available at the individual owner and investor level. With careful planning and timely action, taxpayers can navigate the impending changes and optimize their tax outcomes in the face of the TCJA’s expiration. Of course, some or all of these provisions may be extended given recent election results. Nonetheless, it is important to be aware of the expiring laws as they stand today and stay tuned for updates from us as they become available.
Authors: David Price, CPA | [email protected], Shannon Park | [email protected] , and William Thomas | [email protected]
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