The Clock Is Ticking: What You Need to Know About Tax Changes as the TCJA Nears Expiration

What Happens If the TCJA Expires in 2025?  

With the recent US election and administration change on the way, many people are asking, “how might this impact our taxes?” 

Specifically, what might happen when the TCJA expires in 2025.  

What is the TCJA?  

The Tax Cuts and Jobs Act (TCJA) is a comprehensive tax reform law passed by the U.S. Congress in December 2017 and signed into law by President Donald Trump. The TCJA introduced sweeping changes to the U.S. tax system that affected individuals, businesses, and corporations starting in 2018. 

The TCJA is currently in effect through the 2025 tax year for most individual provisions. These provisions, including the lowered tax brackets, the increased standard deduction, and changes to itemized deductions, are set to expire after 2025 unless Congress takes action to extend them. Starting in 2026, the tax laws are scheduled to revert to their pre-2018 levels, which has many taxpayers understandably concerned about how this could impact their finances.  

Here’s what you need to know about potential updates and how they might affect you: 

A Look at Key Provisions Likely to Change 

1. Individual Income Tax Rates: The TCJA temporarily lowered tax rates for individuals, reducing the percentage of income taxed across all income levels. Without action, these rates are set to return to higher, pre-2018 levels in 2026. Incoming President Trump and House/Senate Republicans are expected to advocate for making these lower rates permanent, but the final decision will depend on Congressional negotiations. More updates are likely in 2025.
2. The Standard Deduction and Itemized Deductions One of the most impactful changes introduced by the TCJA was a near doubling of the standard deduction, which simplified the filing process for many taxpayers and reduced the number of itemized deductions. If the TCJA provisions expire:

• The standard deduction would revert to lower levels. 

• The previous limits on itemized deductions, such as state and local tax (SALT) deductions, may return in full force. 

The Trump administration may work to preserve the expanded standard deduction but could face challenges around broader reforms like SALT caps. 

3. Return of the Personal Exemption

One significant change under the TCJA was the elimination of the personal exemption, which in 2017 allowed taxpayers to deduct $4,050 per exemption for themselves, their spouse, and their dependents. For example, a two-parent household with one dependent could claim $12,150 in personal exemptions. 

If the TCJA expires, the personal exemption will return. The exact amount is uncertain but could be higher than $4,050 due to inflation adjustments. Some estimates suggest it could be around $4,700, though official numbers have not been confirmed. 

4. Child Tax Credit Reductions The TCJA raised the Child Tax Credit to $2,000 per qualifying child, offering substantial relief to families. If the act expires, the credit could be cut back to $1,000 per child, as it was pre-2018. Efforts to make this provision permanent are expected to be a priority for Trump’s administration.
5. Estate and Gift Tax Implications The TCJA significantly increased the exemption amount for estate and gift taxes. Without an extension, these exemptions could be halved, subjecting more estates to taxes. Trump’s campaign emphasized the importance of preserving these higher exemptions as part of broader tax relief.
6. Business and Corporate Tax Considerations While the reduction in the corporate tax rate to 21% was made permanent, other TCJA provisions for businesses, such as the 20% Qualified Business Income (QBI) deduction for certain pass-through entities, are at risk of expiring. Trump and House/Senate Republicans are likely to push for the preservation of these incentives as a means of fostering economic growth.

Preparing for Potential Changes 

The potential expiration of the TCJA is not just about what may end, but also about what might remain intact or change under the Trump administration. This could include: 

• Making expiring provisions permanent to maintain the current tax landscape. 

• Proposing other changes to address government budget concerns that may be caused by losing revenue, if the TCJA tax cuts are made permanent. 

What Should Taxpayers Do to Prepare? 

With potential changes on the horizon, it’s crucial to begin planning now: 

• Consult Your Tax Advisor: Work with your tax professional to explore strategies that may mitigate potential increases, such as accelerating income, leveraging tax-advantaged accounts, or utilizing gifting strategies. 

• Keep Informed: Stay tuned to updates on tax legislation as discussions unfold. There is a possibility that some provisions may be extended or modified, depending on legislative action. 

• Plan for Changes to Your Budget: Adjust your financial planning to anticipate shifts in tax liabilities if key TCJA provisions are not renewed. 

 

Taxpayers should stay tuned for developments, as discussions in Congress could impact not only individual tax rates but also deductions and credits currently in place.  

Disclaimer: The information provided in this blog post is for informational purposes only and should not be considered as financial planning advice. Every individual’s financial situation is unique, and it is important to consult with a qualified tax professional or financial advisor before making any decisions regarding financial matters.