Ryan J. McDonell CPA, MSA
Tax Manager

At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was enacted, providing sweeping changes to the tax code for both individuals and businesses. In order for Congress to get the TCJA to meet the $1.5 trillion budget goal, several of the provisions of the tax law were crafted with “sunset” language, meaning they would revert to pre-TCJA law after 2025. The end of 2025 will be here before you know it, and it’s important to know which of these sunsets may impact you, your family or your business. 

It is important to note that Congress could act to extend some or all of these sunsets in the next 18 months. But for now they remain in place.

Following are some of the most significant provisions scheduled to sunset and guidance on how to prepare for these changes. (See our detailed chart at the end of the article.)

Individual tax rates

After December 31, 2025, individual tax brackets will increase, with the top income tax rate returning to 39.6%, up from 37%. Additionally, the income levels at which taxpayers enter higher brackets will adjust, causing higher rates of tax on lower amounts of taxable income. The standard deduction – currently $14,600 for individuals and $29,200 for married filing jointly – will be reduced by about half, adjusted for inflation. The return of personal exemptions will help some taxpayers to counteract the reduced standard deduction, but personal exemptions phase out and are unavailable for higher income taxpayers. Each taxpayer’s situation is different, but generally, these changes will cause tax increases even for taxpayers with straightforward tax situations.

Reduced child tax credit – Taxpayers with children will face a reduced child tax credit and reduced opportunity for a refundable portion of the credit. The child tax credit will also phase out at lower income levels, making the credit unavailable to more taxpayers. The $500 non-refundable credit for non-child dependents under current law will also go away completely.

Qualified Business Income (QBI) deduction sunsets – After the 2025 sunset, this deduction is scheduled to go away completely. The QBI deduction was created to provide parity for small business owners versus the C corporation tax rate having been cut down to 21%. The QBI deduction allows owners of pass-through entities, such as S corporations and partnerships, to take a deduction against income equal to 20% of the qualified business income from the business. The deduction is limited for higher income taxpayers and for certain service trades or businesses, such as consulting. The impact of the QBI deduction expiration will be significant, since more than 90% of American businesses are pass-through entities. Pair this with the fact that the TCJA reduction of the C corporation tax rate is permanent and will not sunset, and many taxpayers will be put into disadvantageous positions after 2025 simply because of the structure of their businesses.

Sunny Side Up– There are, however, some upsides to the upcoming tax sunsets for taxpayers. Moving expenses have generally been nondeductible since TCJA – this above-the-line deduction will return for work-related moving expenses. For taxpayers who are reimbursed by employers for moving expenses, these reimbursements are currently considered wages subject to income and payroll taxes. Going forward, these reimbursements will be excluded from income and not subject to tax.

Itemized deductions – Taxpayers who claim itemized deductions (the number of which may increase due to the reduced standard deduction) will see several favorable changes, including:

• No limitation (cap) on the deduction for state and local taxes (SALT), versus the current $10,000 limitation.
• Interest will be deductible on the first $1million of mortgage debt, regardless of acquisition date of the debt. Interest will also be deductible on the first $100,000 of home equity debt regardless of the use. Currently, interest on mortgage debt acquired after December 15, 2017, is deductible only on the first $750,000 of mortgage debt, and home equity debt must be used to improve the property to be deductible.
• Personal casualty and theft losses not covered by insurance will be deductible without the current requirement that the losses be related to federally declared disasters.
• Other miscellaneous itemized deductions, deductible to extent they exceed 2% of the taxpayer’s adjusted gross income, will also return. This means expenses such as investment advisor fees, tax prep fees and unreimbursed employee expenses will once again be deductible.

However, some other sunsets will disadvantage taxpayers. Charitable contributions of cash to exempt organizations are currently limited to 60% of a taxpayer’s adjusted gross income, with the percentage decreasing back to 50% after TCJA expires. The overall limitation on itemized deductions, sometimes referred to as the Pease limitation, also returns after the sunset. This limitation is designed to reduce the amount of itemized deductions available to higher-income taxpayers, with a reduction of up to 80% of itemized deductions. Further, after TCJA expires, reduced alternative minimum tax exemptions paired with accelerated phase out of the AMT exemptions will subject more taxpayers to AMT tax, which negates any benefit from certain itemized deductions such as the SALT deduction and miscellaneous itemized deductions.

Estate and gift taxes

The TCJA doubled the estate and gift tax exemption from $5 million to $10 million, paired with inflation adjustments, which have pushed the total exemption for 2024 to $13,610,000 for an individual and $27.2 million for a married couple filing jointly. After the 2025 sunset, the base exemption will be cut in half back down to $5 million (adjusted for inflation).

Taxpayers who expect to have lifetime gifts or taxable estates that could reach the current $13.6 million threshold should strongly consider making additional gifts before the sunset. Start this planning now, because it will be stressful to rush to transfer millions of dollars worth of assets if you wait until the last minute. Planning ahead may entail identifying which assets you intend to transfer, and/or setting up trusts by which you will facilitate these transfers. Taxpayers who take advantage of the full $13.6 million before TCJA expires will not be subject to a clawback of the exemption into their eventual estates.

Congress could act – or not

So, are all the sunset changes guaranteed to happen? Not quite. The 2025 sunset could be curbed in whole or in part when the new Congress begins after the 2024 presidential election. The TCJA was a landmark victory for the Republican party and one which many members of the party would like to see continue beyond 2025. The party has already formed subcommittees to plan for a large new tax bill that would look to preserve the most popular of the TCJA provisions. And while no Democrats voted for the TCJA legislation, in part as a protest to the majority party at the time – some of the changes, such as the enhanced child tax credit, have bipartisan support.

The Biden administration has also reaffirmed its position not to raise taxes on taxpayers making less than $400,000. As mentioned in the administration’s fiscal year 2025 budget, this could mean extending or making permanent TCJA provisions for taxpayers under the $400,000 threshold. Congress also has the option to extend select provisions, usually done at the end of the calendar year just before expiration. In short, the new Congress and administration could certainly intervene to prevent some or all of the provisions from sunsetting.

Don’t panic – but do plan

While the 2025 TCJA sunset is not worth panicking about, it helps to know what the future could hold. The effects of some provisions are nearly unavoidable, such as the change in brackets or slashing of the standard deduction. Other changes, such as the elimination of the QBI deduction, could be more painful – but may be worth waiting to see if they are extended before racing to change the structure of your business. If your estate is valued at more than $5 million, it is essential for you to take a look at how the change in the estate and gift exemption will impact you, and speak with an advisor about how to gift certain assets and restructure your estate plan. Not doing so will mean leaving money on the table – and no one wants to do that.

Contact your G.T. Reilly advisor today to discuss how the sunsetting TCJA provisions may impact your tax situation.