During Donald Trump’s first year in office, Congress passed the Tax Cut and Jobs Act of 2017 (TCJA). It was the broadest tax package in decades. Due to an obscure Senate rule most comprehensive changes to the tax code expire – or “Sunset” – after ten years. Astonishingly, the TCJA is due to expire on December 31, 2025. Just a year and half from now.
While of course there were technical provisions for corporations and the like, many of the changes directly affect our typical wealth management clients. When a tax law “sunsets” the code reverts to its former state; unless Congress (with the President’s signature) extends it or passes a new law in time to interrupt the reversal. Some kind of change is very likely, depending on which party wins the Presidential election and has control of Congress in January of 2025. Since much of the TCJA changes benefited corporations and upper income taxpayers, we are likely headed for a political battle royale.
Plan Ahead
But it is not too early to begin thinking about how this may affect you and to plan for what may be ahead. The Congressional Research Service has published what might be the “official” guide to the expiring provisions of the TCJA. And we provide a comparison guide “cheat sheet.” As well as some issues to consider as we move from pre-sunset to post-sunset planning.
From the summary below, you can see just how far reaching were the most important provisions:
- Marginal rates. The highest marginal rate will rise from 37% to 39.6%. The lowest bracket will remain at 10%. The brackets in between will all rise by 2% – 4%.
- Personal Exemption. The $5,050 personal exemption would be restored.
- Standard Deduction. The standard deduction will fall from $14,600 (Single) and $29,200 (MFJ) to $6,500 and $13,000 respectively. Millions more taxpayers will go back to itemizing their deductions.
- Deduction Limitations. 1) The mortgage interest limitation would go back to being based on $1,000,000 of principal. 2) Miscellaneous itemized deductions would be restored. 3) The $10,000 cap on the deduction for state and local taxes would be removed. 4) The “Pease” limitation on itemized deductions for high income taxpayers would be restored.
- Pass-through Income. The 20% (QBI) deduction for pass through business income for low to moderate taxpayers would expire.
- Estate Tax Exemption. The current estate tax exemption is $13,600,000 per person. ($27,200,000 for married couples.) This will be cut in half. A significant change for high net worth families. However, there are some good planning opportunities for families facing this challenge if you act before the deadline.
The Congressional Budget Office estimates the cost to the Treasury of extending the TCJA in its entirety to be $3.5 trillion by 2033. So there is a lot at stake; both for individual taxpayers and for the country’s burgeoning budget deficit.
Stay tuned.
