The sunset of the TCJA – the Tax Cuts and Jobs Act of 2017, is currently scheduled for the end of 2025. The TCJA contributed substantial changes to the US tax code that have benefited many US taxpayers. How should a US taxpayer approach this risky contingency?
Prudent investors and US taxpayers are already at work to update transactional planning, estate plans, and tax strategies to reflect provisions scheduled to sunset. While it is possible that Congress could extend some or all of the TCJA provisions, individual taxpayers and business owners should be meeting with their tax attorney to discuss areas of potential exposure and strategies to reduce all aspects of risk.
A Summary of the Significant Impact of TCJA Provisions
The Tax Cuts and Jobs Act provided significant tax credits and deductions for many US taxpayers. The standard child tax credit was doubled to $2,000, and income tax rates were dropped across the board for US taxpayers. The standard deduction was practically doubled under the TCJA resulting in fewer US tax returns requiring itemized deductions. Both of these changes will return to their original levels in 2026 with the sunset of the TCJA.
The TCJA reduced tax rates across the board for US taxpayers, and the IRS has since increased the thresholds for each tax category, in effect providing a lower tax rate for each dollar of income in 2024 and 2025 than paid in 2023. Without a substantial tax overhaul by Congress in 2025, those rates are scheduled to return to the higher levels that existed before the 2017 TCJA.
Homeowners should review the impact of coming changes to deductions associated with mortgage interest. In essence, the TCJA limited the ability to deduct mortgage interest on homes purchased after December 15, 2017, to as much as $750,000 on your primary residence and a second home if filing jointly and as much as $375,000 for those filing separately. If you purchased your home prior to December 16, 2017, married US taxpayers can deduct interest on the initial $1 million of their mortgage(s) or the first $500,000 in mortgage interest for those filing separately. There are rules regarding the deductibility of interest on the second home based on whether it was rented out and the number of days you were in the house.
Presently, the sunset of TCJA provisions would make the mortgage interest deduction the same across the board, allowing a mortgage interest deduction on the first $1 million of home mortgage debt and reimplementing the ability to deduct interest on home equity loans up to $100,000.
Many high-earning US taxpayers have received relief from the Alternative Minimum Tax (AMT). The TCJA raised the earnings level before AMT calculations were applied, reducing the amount many taxpayers were required to pay. The AMT exemptions are scheduled to return to previous levels in 2026, resulting in increased tax burdens for many high-earning US taxpayers.
The TCJA essentially doubled exclusions for estate tax. The 2017 exemption of $5.4 million increased to $11.18 million in 2018 and presently stands at $13.61 million. The amounts are doubled for a married couple. This is expected to revert to approximately $7 million on the first of January, 2026 (reverting to 2017 levels and adjusted for inflation) for individuals and $14 million for married couples. Taxation on estates above these exemption levels will skyrocket, approaching 40% of the amount above the exemption levels in some cases.
Fortunately, many strategies are available to individual and married US taxpayers to reduce the potential risk, impact, and exposure of the TCJA’s sunset. Transactional planning protects assets while reducing the impact of taxation. Ask your tax attorney about a strategy that allows you to accelerate or decelerate capital gains or losses across tax years to reduce taxable income.
Estate planning and business planning may include vehicles such as a Health Savings Account (HAS), the Spousal Lifetime Access Trust (SLAT), a Grantor Retained Annuity Trust (GRAT), a Family Limited Partnership (FLP) or a Family Limited Liability Company (FLLC), as well as the acceleration of gifting strategies. These are just a few of the conversation starters as you approach the risks associated with the sunset of the TCJA and a return to higher individual and corporate tax rates.
It remains to be seen whether the US Congress will take action to address these issues, overhaul the tax code, or make TCJA changes permanent going forward. The potential risks are genuine and substantial. Preparation is prudence.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.