TCJA Expiration: Understanding the Impact on Your Taxes

The Tax Cuts and Jobs Act (TCJA) has been a game-changer for many taxpayers, but its expiration is looming. The TCJA's individual income tax cuts are set to expire after 2025, which means that tax rates will revert to pre-TCJA levels.

The TCJA's corporate tax rate is currently 21%, which is a significant decrease from the pre-TCJA rate of 35%. This rate reduction has been a major factor in the recent surge in corporate profits.

As the TCJA expiration approaches, many taxpayers are wondering how it will affect their taxes. The answer depends on various factors, including income level and tax filing status.

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Tax deductions and credits are set to change significantly as the TCJA expires. The child tax credit will revert back to its pre-TCJA structure of $1,000 per qualifying child in 2026, with a phaseout threshold of $75,000 for unmarried taxpayers and $110,000 for married joint filers.

The state and local tax (SALT) deduction cap will expire at the end of 2025, allowing taxpayers to deduct all eligible state and local income, sales, and property taxes, as well as foreign income taxes. This change will impact taxpayers in high-tax states, who will be able to deduct foreign real property taxes as well.

Taxpayers with high-income clients should be aware of the new phaseout provision for the SALT deduction, which reduces the deduction by 30% of the excess modified adjusted gross income over the threshold amount ($500,000) in 2025.

Here are some key changes to tax deductions and credits:

The Sec. 199A Qualified Business Income (QBI) deduction will also go away after 2025, affecting real estate investors and operators who should pay close attention to the timing of making real estate purchases and capital improvements.

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The standard deduction has undergone significant changes under the Tax Cuts and Jobs Act (TCJA). The basic standard deduction amounts in 2018 were nearly doubled to $12,000 for single filers.

This doubling of standard deductions led to many taxpayers not itemizing their deductions. The increased standard deductions made it more beneficial for taxpayers to take the standard deduction rather than itemizing.

Beginning in 2026, the basic standard deduction will be roughly half of what it is now, adjusted for inflation.

The child tax credit, also known as the child credit, is a valuable deduction that can help families save on taxes.

In 2018, the child tax credit was increased to $2,000 per qualifying child, with a maximum refundable portion of $1,400. This amount can be adjusted for inflation, reaching a maximum of $2,000.

The phaseout threshold for unmarried taxpayers was raised to $200,000, while married joint filers can now phase out at $400,000.

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The charitable contribution deduction is an important tax break for those who give to public charities. You can deduct up to 60% of your Adjusted Gross Income (AGI) for cash gifts to public charities, but be aware that this limit reverts to 50% of AGI on January 1, 2026.

If you're planning to give to public charities, it's worth noting that the tax law has changed over time. Prior to the Tax Cuts and Jobs Act (TCJA), the limit for deducting cash gifts to public charities was 50% of AGI.

Here's a summary of the charitable contribution deduction limits:

This means that you can currently deduct up to 60% of your AGI for cash gifts to public charities, but this limit will revert to 50% of AGI on January 1, 2026.

The QBI deduction is a valuable tax break for small business owners. It allows them to claim up to a 20% deduction on their business income, including real estate activities.

This deduction is set to expire at the end of 2025, so it's essential to pay attention to the timing of making real estate purchases and capital improvements.

Real estate investors and operators should take note of this deadline, as it will affect their overall QBI deduction.

The QBI deduction was a key provision of the Tax Cuts and Jobs Act (TCJA) and provided significant tax relief to many small business owners.

Unless extended, the QBI deduction will be eliminated after 2025, and pass-through business income will be taxed based on individual income tax rates without a deduction for QBI.

The original cost basis for fixed assets under the unadjusted basis in qualified property immediately after acquisition (UBIA) rules was crucial in determining the overall QBI deduction.

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The SALT cap modifications are a game-changer for taxpayers with high state and local taxes.

Starting in 2025, the SALT deduction limit increases to $40,000 for joint filers, and $20,000 for individuals and married filing separately.

The limit rises to $40,400 in 2026, and then increases by 1% annually until 2029.

In 2030, the SALT cap reverts back to $10,000 unless it's extended in new legislation.

The SALT deduction is reduced by 30% of the excess modified adjusted gross income over the threshold amount ($500,000) in 2025, and this amount increases by 1% for joint filers in 2026.

This phaseout provision creates planning opportunities for clients to accelerate or defer income and deductions to maximize their SALT benefits during this window of increased limits.

The TCJA lowered individual tax rates, but these changes will expire at the end of 2025. This means individual tax rates will revert to their pre-TCJA levels, which are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

The TCJA adjusted tax bracket thresholds and widths to reduce marriage penalties and reduced five of the seven individual income tax rates. Specifically, it increased the standard deduction from $6,350 to $12,700 for single filers and from $12,700 to $25,400 for married joint filers in 2018, adjusted annually for inflation.

The TCJA also lowered tax rates across the board and restructured bracket spans. Except for those who were at 10% (those making $11,000 or less) and 35% (those earning $231,251 to $578,125) tax rate levels before 2018, all income tax rates decreased when TCJA came into effect.

Here's a breakdown of the current and pre-TCJA tax brackets:

The TCJA will expire at the end of 2025, and individual tax rates will revert to their pre-TCJA levels.

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The child tax credit is set to revert back to its pre-TCJA structure in 2026, with a phaseout threshold of $75,000 for unmarried taxpayers and $110,000 for married joint filers.

The $10,000 cap on state and local income, sales, and property taxes will expire at the end of 2025, allowing taxpayers to deduct all eligible state and local taxes.

Taxpayers in high-tax states have been significantly impacted by the SALT cap, which has led to the implementation of pass-through entity taxes as a workaround.

The Sec. 199A QBI deduction, which allowed taxpayers to claim up to a 20% deduction on their business income, will go away after 2025, affecting real estate investors and operators.

With the Sec. 199A QBI deduction going away, real estate investors and operators should pay close attention to the timing of making real estate purchases and capital improvements.

In 2026, the limit for deducting cash gifts to public charities will revert to 50% of AGI, down from 60% under the TCJA.

Here are the key tax provisions that will change or expire in 2026:

The State and Local Taxes (SALT) deduction has been a topic of interest for many taxpayers. Under the TCJA, the cap on this deduction was set at $10,000.

Taxpayers who itemize their deductions can deduct up to $10,000 in state and local income, sales, and property taxes, as well as foreign income taxes. Foreign real property taxes, however, are not eligible for the deduction.

For those in high-tax states, the SALT cap has had a significant impact on their tax bills. The cap has limited the amount of state and local taxes that can be deducted, resulting in higher taxable income.

Unless extended by Congress, the SALT cap will expire at the end of 2025. At that time, taxpayers will be able to deduct all eligible state and local income, sales, and property taxes, as well as foreign income taxes. Furthermore, they will be able to deduct foreign real property taxes.

The corporate tax rate was permanently cut as part of the TCJA, which changed long-run investment decisions by making more projects economically viable.

This is because companies will invest more if they know they'll be able to keep more of the potential returns to investment.

The corporate tax rate cut was permanent because it creates a long-run benefit by increasing the long-run level of investment.

Temporary corporate tax cuts would not drive new investment and would instead provide a windfall benefit to shareholders.

The corporate tax cuts were not completely free of temporary provisions and phaseouts, however.

The amortization of research and development expenses took effect in 2022, requiring companies to spread deductions out over several years instead of taking them immediately.

New limits on the deductibility of interest payments were also implemented to raise revenue in later years.

Full expensing for capital investment, a key component of the original House blueprint, was made temporary and only applies to short-lived capital assets.

One hundred percent bonus depreciation began phasing out in 2023.

The TCJA had a significant impact on estate and gift taxes, doubling the basic exclusion amount. This change provided a temporary reprieve for individuals and families.

For a short period, the estate and gift tax exclusion amount was roughly doubled. However, this temporary reprieve is set to expire in 2025.

At the end of 2025, the estate and gift tax exclusion amount will be reduced to $5 million per decedent. This reduction will have a significant impact on estate planning and tax strategies.

The estate and gift tax exclusion amount will then be adjusted annually for inflation. This means that the actual amount may be higher or lower than $5 million, depending on the inflation rate.

The Republican Party supports a permanent extension of the TCJA's individual provisions, like standard deductions.

Republicans are in favor of keeping the TCJA bracket sizes and tax rates permanent, which would benefit many taxpayers. The current child tax credit amount of $2,000 per child is also set to be extended.

However, some Republicans oppose repealing or increasing the SALT cap, which is a tax limitation on state and local taxes. This means that many taxpayers in high-tax states may not see a change in their tax burden.

The original vision for tax reform was outlined in the 2016 House GOP blueprint, which estimated the tax reform would cost $2.4 trillion over 10 years. The bill was later revised to meet cost constraints, resulting in the TCJA.

To bring down the cost, Senator Orrin Hatch amended the individual provisions to expire after 2025, which was a crucial change to the bill. This decision was made to meet the Byrd Rule requirements, which govern Senate budget procedures.

The TCJA was passed under a special legislative process called reconciliation, which allows a bill to pass with a simple majority in the Senate without being filibustered. This process has some restrictions, including the Byrd Rule, which prohibits provisions that are not budget-related.

The Byrd Rule means that reconciliation legislation cannot include non-budget changes, and it also limits the deficit increase to only the 10-year budget window. This rule was crucial in shaping the TCJA's provisions and expiration.

Congress made compromises to stay within the budget rules, which included limiting the individual tax cuts to temporary and large rather than permanent. This is why many of the TCJA provisions are set to expire at the end of 2025.

The TCJA's budget resolution included a self-imposed limit of $1.5 trillion in revenue costs within the 10-year budget window. This constraint made it necessary for Congress to amend the bill to fit within these limits.

Here are the major TCJA individual provisions set to expire at the end of 2025:

These provisions, including the reduced individual tax rates and the doubled maximum child tax credit, will expire unless Congress takes action to extend, revise, or make them permanent.

Let's take a closer look at the tables and data related to the TCJA expiration.

The TCJA had several key components that changed over time, and we can see this in the tables provided. There were 3 brackets in the 2016 House GOP Blueprint, with a top individual rate of 33%.

The Big Six Tax Reform Framework proposed 3 brackets, with a top individual rate of 35%, and a possible additional higher tax bracket. This framework also eliminated the SALT deduction, kept the MID, and taxed pass-through businesses at a maximum rate of 25%.

The Nov. 2017 House Version introduced 4 brackets, with a top individual rate of 39.6%. It capped the MID at $500,000 of principal and the SALT deduction at $10,000.

The Nov. 2017 Senate Version had 7 brackets, with a top individual rate of 38.5%. It fully repealed the SALT deduction, kept the MID but eliminated it for home equity debt, and doubled the estate tax exemption.

Let's summarize the key differences between the House and Senate versions:

The Conference Version ultimately adopted a 7-bracket system, with a top individual rate of 37%. It capped the SALT deduction at $10,000 and the MID at $750,000 of principal, and eliminated the MID for home equity debt.