The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, introduced sweeping changes to the U.S. tax code, affecting individuals and corporations.
Since the TCJA was structured as a net tax cut, many of its provisions were implemented on a temporary basis, with many set to expire on December 31, 2025, unless Congress acts to extend or modify them.
Here's what the expiration could mean:
For Individuals:
1. Reversion to Pre-TCJA Tax Brackets:
The TCJA temporarily reduced most individual income tax rates and adjusted brackets. When it expires, rates will revert to pre-2018 levels, meaning higher tax rates for most income levels.
The top individual income tax rate will rise from 37% to 39.6%.
The 12%, 22%, 24%, and 32% tax brackets will increase to 15%, 25%, 28%, and 35%, respectively.
The upper thresholds for various tax brackets will lower, reintroducing the “marriage penalty” for some couples.
2. Standard Deduction and Personal Exemptions:
The TCJA nearly doubled the standard deduction, while eliminating personal exemptions. In 2026, the standard deduction will decrease, and personal exemptions will return.
3. Child Tax Credit:
The expanded child tax credit of $2,000 per child for children under 17 will drop from $2,000 to $1,000
Income thresholds for phaseouts will tighten
4. State and Local Tax (SALT) Deduction:
The $10,000 cap on SALT deductions will expire
Potential to allow higher deductions for taxpayers in high-tax states.
5. Itemized Deductions:
The TCJA limited or eliminated several deductions (e.g., for moving expenses and miscellaneous itemized deductions). Some of these will return after 2025.
6. Estate and Gift Tax:
The TCJA significantly increased the estate tax exemption, raising it to $13.61 million per person for 2024. Estates exceeding this threshold are taxed at a flat rate of 40%.
At the 2025 expiration, the exemption will be reduced to $7 million in 2026 with the 40% tax rate unchanged.
For Businesses:
1. Corporate Tax Rate:
The TCJA reduced the corporate tax rate to a flat 21%, and this rate is permanent, so it will not change with the 2025 expiration.
2. Pass-Through Deduction (Section 199A):
The 20% deduction for qualified business income (QBI) for pass-through entities (e.g., sole proprietors, partnerships, and S corporations) will expire, significantly increasing taxable income for many small business owners.
3. Bonus Depreciation:
For 2024, businesses currently benefit from 60% bonus depreciation for qualifying assets. However, this provision is already phasing out and will end by 2027, irrespective of the TCJA expiration.
4. Interest Deduction Limitations:
The rules limiting the deduction for business interest expense to 30% of adjusted taxable income will revert to tighter pre-TCJA definitions of income, reducing allowable deductions.
Potential Impacts
With the expiration of the TCJA at the end of 2025, there are many potential impacts specific to individuals and businesses. Individuals may see higher taxes, reduced deductions, and more complexity with tax filings due to the reintroduction of personal exemptions and changes to deductions. For businesses, there may be increased tax liabilities due to pass-through entities losing major deductions. In addition, the loss of bonus depreciation and changes to interest deductions may affect investment and expansion plans and also increase taxable income.
The TCJA expires after December 2025. If Congress doesn’t act to extend or revise these provisions, individuals and businesses will face significant tax changes beginning in 2026. It's advisable to consult with a tax professional or advisor to proactively plan for these potential impacts.
Baker Holtz is well versed in the navigation of tax policy and planning. Check out our Baker Holtz Blog for more tax tips and policies for your financial future.
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