The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant tax reforms for individuals and businesses, but many of its provisions are set to expire at the end of 2025. As this sunset date approaches, now is the time to evaluate your tax strategy to mitigate potential impacts and maximize current benefits. Proactive planning can help individuals and businesses prepare for the return to pre-TCJA tax rules and avoid surprises.
This guide provides an overview of the key changes expected after 2025, the potential implications, and strategies to plan ahead.
What is the TCJA Sunset?
The TCJA, enacted in 2017, brought sweeping changes to the U.S. tax code, including reduced tax rates, increased deductions, and changes to credits. However, many provisions for individuals and some for businesses were temporary and will revert to pre-2018 rules unless Congress acts to extend them.
Key TCJA Provisions Set to Expire
For Individuals
- Income Tax Rates
- Current lower tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) will revert to higher pre-TCJA rates (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%).
- The income thresholds for these brackets will also change, potentially increasing taxes for many households.
- Standard Deduction
- The increased standard deduction will decrease to pre-TCJA levels:
- Single: $13,850 in 2023 (set to decrease to $6,500).
- Married filing jointly: $27,700 in 2023 (set to decrease to $13,000).
- The increased standard deduction will decrease to pre-TCJA levels:
- Child Tax Credit
- The credit will drop from $2,000 per child to $1,000 per child.
- Phase-out thresholds will revert to lower levels, reducing eligibility for higher-income taxpayers.
- State and Local Tax (SALT) Deduction
- The current $10,000 cap on SALT deductions may be removed, but it will revert to being subject to the itemized deduction limitation.
- Estate and Gift Tax Exemption
- The current exemption of $12.92 million per individual (2023) will drop significantly to approximately $6 million (adjusted for inflation).
- Qualified Business Income (QBI) Deduction
- The 20% deduction for pass-through business income may phase out, impacting small business owners and independent contractors.
For Businesses
- Corporate Tax Rate
- The flat 21% corporate tax rate is permanent and not subject to the sunset, providing stability for C corporations.
- Bonus Depreciation
- The 100% bonus depreciation provision will phase out, dropping to 80% in 2023 and disappearing entirely by 2027.
- Interest Deduction Limitation
- More stringent rules for the deduction of business interest expenses will take effect, reducing allowable deductions.
- Net Operating Losses (NOLs)
- Limitations on NOL carrybacks and carryforwards will revert to pre-TCJA rules, impacting businesses with significant losses.
Potential Impacts of the TCJA Sunset
For Individuals
- Higher Tax Bills: Many taxpayers will see an increase in their tax liability due to higher rates and reduced deductions.
- Reduced Incentives for Families: Lower child tax credits and smaller standard deductions could strain family budgets.
- Increased Complexity: The return of itemized deductions and phase-outs will complicate tax filings.
For Businesses
- Reduced Investment Incentives: The phase-out of bonus depreciation will increase the cost of acquiring new assets.
- Higher Interest Expense: Stricter limitations on interest deductions may affect businesses relying on debt financing.
Strategies to Plan for the TCJA Sunset
Maximize Current Tax Benefits
- Leverage Current Tax Brackets: Consider accelerating income into lower tax years before the sunset, especially if you expect to be in a higher bracket post-2025.
- Increase Contributions to Retirement Accounts: Maximize tax-deferred contributions to reduce taxable income under current rates.
- Take Advantage of the Standard Deduction: Bundle itemized deductions into one year to exceed the higher standard deduction before it decreases.
Plan for Estate and Gift Taxes
- Use the higher estate and gift tax exemptions before they drop in 2026. Consider lifetime gifting strategies or establishing trusts to protect wealth.
Evaluate Business Investments
- Bonus Depreciation: Take advantage of the 100% bonus depreciation for qualifying assets before it phases out.
- Capital Investments: Plan major purchases or upgrades now to maximize current tax benefits.
Review Pass-Through Business Strategies
- Consider how the potential loss of the QBI deduction will affect your tax liability. Explore restructuring options or reevaluating compensation strategies.
Consult a Tax Professional
- A tax advisor can help model potential outcomes under post-TCJA rules and recommend tailored strategies to minimize your tax burden.
Stay Proactive
The sunset of the TCJA represents a significant shift in the tax landscape, with widespread implications for individuals and businesses. Proactive planning now can help you avoid surprises, minimize your tax liability, and take full advantage of the benefits currently available.
At Gulla CPA, we specialize in helping clients navigate complex tax changes and create forward-looking strategies. Contact us today to schedule a consultation and prepare for the upcoming TCJA sunset with confidence.