TCJA sunset: What it means for your clients
November 05, 2024
by April Walker CPA-NC, CGMA Lead Manager, Tax Practice & Ethics — Public Accounting, AICPA & CIMA
Jobs Act (TCJA) were enacted in 2017, marking a significant overhaul of the tax code. Aspects of this legislation are now scheduled to expire at the end of 2025.
As tax practitioners and our client's trusted advisers, we are crucial in assisting business leaders and individuals in navigating changes and optimizing their tax situations. With the anticipated sunset of the TCJA, we’re again preparing for significant changes. When major tax legislation expires or is introduced, it affects nearly every taxpayer and business.
Unless Congress acts, the expiration of the TCJA could lead to a reversion to pre-2017 rules, adjusted for inflation. We can’t predict precisely what will happen, but we can anticipate key tax code provisions that are scheduled to expire. Proposed legislation will likely depend on the upcoming election results and which party is in control of the legislative and executive branches. This uncertainty is likely disconcerting for your clients and for you.
Looking forward to potential expiring provisions, you should be preparing clients to include an increase in individual tax rates, a reduced standard deduction, and a lifting the State and Local Tax (SALT) deduction cap. Additionally, the pass-through business income deduction may be eliminated, the estate tax exemption could decrease, and the child tax credit may be reduced.
Individual tax rates are likely to increase
A notable change under the TCJA was reducing individual tax rates and shifting of income tax brackets. Although not every person experienced a tax reduction, most individuals saw a decrease in their overall tax liability.
If the provision expires as scheduled, tax rates will revert to pre-2017 levels, and many taxpayers' overall tax liability will increase, especially for those in higher income brackets.
Standard deduction will decrease
The TCJA nearly doubled the standard deduction, capped state and local taxes at $10,000, eliminated miscellaneous deductions, and more.
The standard deduction in 2024 for single or married filing separately is $14,600; for married filing jointly or qualifying surviving spouse, it’s $29,200. After the sunset of TCJA, these amounts could be reduced by almost half.
Many taxpayers who worked with tax practitioners itemized their deductions before the TCJA. The nearly doubled standard deduction under the TCJA dropped that number significantly. With the potential expiration of this provision, the standard deduction will return to pre-2017 levels adjusted for inflation.
Taxpayers could once again find it beneficial to itemize their deductions, changing the dynamic of tax filing for many clients. Planning for charitable contributions, unreimbursed business expenses and determining whether it is an advantage to prepay state income taxes could become a more prevalent discussion as in the pre-TCJA years.
State and Local Tax (SALT) deduction cap could lift
Pre-TCJA, there was no specific cap on the amount you could deduct for state and local taxes.
The TCJA placed a $10,000 limit on the SALT deduction for single filers, married couples filing jointly, and heads of households ($5,000 for married filing separately). This change significantly affected taxpayers in high-tax states, reducing the deduction's benefit.
Unless Congress extends or makes the provision permanent, the SALT deduction cap expires at the end of 2025.
With the removal or increase in the cap on the amount of state and local taxes, determining the actual benefit of those deductions due to the alternative minimum tax will become an important factor again.
Pass-through business income deduction (Section 199A) may disappear
The pass-through business income deduction, also known as Section 199A, is a 20% deduction for qualified business income. Introduced as a new concept in 2017, significant guidance and learning were needed to understand how the deduction worked and what type of income qualified —or didn’t qualify—for the deduction.
The deduction was introduced in combination with lowering the corporate income tax rate from 35% to 21% to bring some parity to the taxation of corporations and flow-through entities.
Without legislative action, this deduction will no longer be available starting in 2026, potentially increasing the tax burden for many small business owners.
Estate tax exemption may drop significantly
The estate tax exemption doubled under the TCJA, rising from $5.49 million in 2017 to $11.18 million in 2018. Further adjustments for inflation brought the exemption to $13.61 million in 2024, not considering the ability to transfer the unused exemption from one spouse to another.
If this provision of the TCJA sunsets, the exemption will revert to approximately $7 million. For clients with large estates, more could potentially be subject to the federal estate tax, making strategic estate planning crucial before 2026.
Planning in advance of the potential sunset will take time, for example, implementing gifting strategies for 2024 and 2025 and meeting with an estate attorney to update estate documents. Starting these conversations early is critical to maximize the ability to plan.
Reduction in child tax credit
The TCJA increased the child tax credit to $2,000 per qualifying child and expanded eligibility.
With the expiration of these provisions, the credit will revert to $1,000, and fewer families will qualify for the full amount. This will affect middle- and lower-income families who benefit from the increased credit.
Preparing now for TCJA sunset
As tax professionals, we know the value of being proactive. Discussing changes set to occur for 2026 tax returns filed in 2027 ensures we can prepare our clients now for projected change. By planning, we guide our clients to optimize their tax situation and trust us to keep them informed even while the legislative future is uncertain.
Clients with significant estates, for example, may want to take advantage of the current estate tax exclusion before it potentially decreases. Business owners might reconsider their entity structures due to potential changes to the pass-through deduction and corporate tax rates. Now is the time to implement proactive planning.
Additional reporting by Mari Sagedal, M.A., senior content writer at AICPA® & CIMA®, together as the Association of International Certified Professional Accountants.
April Walker is a Lead Technical Manager in the AICPA’s Tax Division. Prior to joining the AICPA in January 2016, April was in the public accounting field for twenty years, specializing in individual tax, closely held businesses and their respective owners, and not-for-profit taxation. April practiced at Blackman & Sloop, CPAs, a local firm in Chapel Hill, NC, for the past 14 years and prior to joining that firm, she worked for almost 5 years at PriceWaterhouseCoopers, LLP in Raleigh, NC. April is a member of the American Institute of CPAs and the North Carolina Association of CPAs.