Sunsetting the Tax Cuts and Jobs Act

One of the most defining pieces of legislation spawned during the Trump Administration is the Tax Cuts and Jobs Act (TCJA). Enacted in 2017, the legislation aimed to lower the tax burden shouldered by many working American families. The act achieved this objective by increasing the standard deduction and decreasing marginal tax rates.

Unfortunately, as the common proverb quips: “All good things must come to an end.” Fittingly, a “sunset clause” was built into the TCJA at its inception, which ensured that the law would cease to exist by 2026 if no action was taken to extend the legislation. This sunset would end the Tax Cuts and Jobs Act and inflate the 2017 tax regime (Pre-TCJA) to 2026 dollars.

Although there are a multitude of ways in which you could be impacted by the tax changes, there are three main categories of changes that would affect a significant portion of people: tax brackets, deductions and credits, and the estate tax exemption.

Firstly, tax brackets would be changed by the sunset of the TCJA. The standard deduction would be cut dramatically, from $14,600 to $7,850 (2024 dollars) for single filers and from $29,200 to $15,750 (2024 dollars) for married filing jointly. Personal exemptions do make a comeback, but they would not be enough to bring the standard deduction up to TCJA levels. Thankfully, the income thresholds under the sunset would remain very similar to the status quo, but the marginal tax rates increase. Most notably, what is currently the 12% tax bracket will increase to 15%, and what is currently the 22% tax bracket will increase to 25%.

Deductions and credits are also impacted by the sunset. The charitable deduction limit for cash gifts would be lowered from 60% of AGI to 50%. However, the current $10,000 limit to deductions for SALT (State and Local Taxes) is eliminated entirely, which means that there is no cap on the deductibility of state income and property taxes. The Qualified Business Income (QBI) deduction would unfortunately be eliminated. A primary concern to many would be the reduced child tax credit. The amount of the credit would be cut in half, from $2,000 to $1,000.

Finally, the sunsetting of the TCJA could significantly affect the taxability of estates. For years, we have had no need to worry about estate taxes for those with taxable estates in the single-digit-millions. This would end. Unfortunately, the estate tax exemption would be halved, falling from $13,610,000 to $6,810,000 (2024 dollars), which would expose more people to the dreaded 40% estate tax.

It is important to be aware of these upcoming changes so that we can help you plan to achieve your goals in the most tax efficient way, whether that be through Roth conversions, charitable giving, and more. Reach our to your advisor today if you have any questions!