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Now that the new administration is in place, taxpayers are closely watching as lawmakers determine the fate of key tax-favorable provisions.
The 2017 Tax Cuts and Jobs Act (TCJA) introduced significant reforms, including lower corporate and individual income tax rates, a nearly doubled standard deduction, and a significantly increased estate tax exclusion. Unless lawmakers take action, most of these provisions are set to expire at the end of 2025, potentially leading to higher tax bills, lower estate exclusions, and a more complex tax code beginning in 2026.
Although there is ongoing discussion about extending certain tax cuts, any changes would require the passage of a budget reconciliation bill. Without legislative action, the expiration of these tax cuts could lead to significant changes in tax obligations. Considering potential future tax adjustments, thoughtful planning can help individuals navigate these evolving circumstances and position themselves for a range of possible outcomes.
In this article, we’ll examine the potential implications of the TCJA’s sunset and discuss tax strategies to consider as the situation evolves.
If left unchecked, individual income tax rates and brackets will revert to pre-TCJA levels as the temporary tax rate cuts expire. This change would include an increase in the top marginal rate from 37% to 39.6%.
For taxpayers benefiting from the 20% Qualified Business Income (QBI) deduction (discussed below), the effective rate could rise from 29.6% to 39.6%, representing a 33% increase.
The TCJA lowered the corporate income tax rate from a top rate of 35% to a flat 21% tax rate, providing substantial tax relief to C corporations. To balance this advantage for pass-through entities and sole proprietorships, the 20% QBI deduction was enacted, effectively reducing the top individual rate from 37% to 29.6% for those eligible.
However, this deduction is set to expire after 2025, potentially widening the gap between tax rates on C corporation income and pass-through income.
The TCJA eliminated or restricted many itemized deductions beginning in the 2018 tax year. At the same time, the standard deduction nearly doubled, reaching $15,000 for single filers and $30,000 for married filing joint filers in 2025. As a result, many taxpayers who previously itemized found it more beneficial to claim the standard deduction instead.
If this provision expires, the standard deduction will be cut in half in 2026, potentially making itemizing deductions more attractive to a larger portion of taxpayers. Now is a good time to review tax strategies, such as deferring deductible itemized expenses into 2026 or adjusting charitable giving plans. If Congress does not extend the provision, shifting certain deductions into future years may provide greater tax benefits. Taxpayers planning to return to itemizing after a potential TCJA expiration should maintain records to support their deductions.
Although individuals could continue to deduct state and local taxes, the TCJA capped the deductible amount at $10,000, a limit that was not indexed for inflation. This limitation significantly increased the federal income tax burden for individuals in high-tax states.
This limitation is set to expire at the end of 2025. Unless new legislation is enacted, taxpayers will once again be able to deduct state and local taxes in full starting in 2026. However, the potential return of the Alternative Minimum Tax (AMT) and the Pease limitation in 2026 could limit the benefit of SALT deductions for high-income taxpayers.
The TCJA reduced the impact of the AMT by raising exemption amounts and phasing them out at higher income levels, meaning fewer individuals were subject to the tax. Additionally, certain common AMT adjustments, such as the deductibility of SALT, were limited or repealed. For tax year 2025, the AMT exemption amounts are $88,100 for single taxpayers and $137,000 for married couples filing jointly.
Starting in 2026, the AMT exemption amounts could revert to pre-TCJA levels, increasing the number of taxpayers subject to AMT liability. This change, combined with the return of the SALT deduction cap, highlights the importance of staying in touch with your tax advisor to best mitigate potential exposure.
Before the TCJA, high-income taxpayers faced the Pease limitation, which could reduce itemized deductions by up to 80%. The TCJA temporarily eliminated this limitation, allowing taxpayers to fully deduct itemized deductions regardless of income. However, the Pease limitation is set to return in 2026, reinstating significant restrictions on itemized deductions for wealthy individuals.
High-income taxpayers should work closely with advisors to evaluate how the Pease limitation might affect their overall tax liability and develop a plan to preserve valuable deductions.
High-net-worth individuals and families can benefit from evaluating their wealth transfer goals now to take advantage of current opportunities before they potentially expire at the end of 2025. The basic exclusion amount (BEA) has more than doubled from its pre-TCJA level of $5.49 million to the current $13.99 million. However, any unused portion of the enhanced BEA will be permanently lost if the exclusion amount is reduced.
While the exact post-sunset exclusion amount remains uncertain, it is widely expected that some favorable tax extensions may be enacted, though not guaranteed. Using the BEA for gifts or other wealth transfer strategies can help secure substantial tax benefits under the existing rules, making it a prudent step for families looking to transfer significant wealth or assets to future generations.
Working closely with a trusted advisor to calculate the remaining BEA and develop a tailored plan helps make the most of this historic opportunity before it potentially disappears.
For more information on wealth transfer techniques, see our article, Using the Estate Tax Exemption to Transfer Stock Tax Free.
The TCJA temporarily increased the charitable deductions limit, allowing qualifying contributions in some years to offset up to 100% of adjusted gross income (AGI). In 2025, cash contributions to public charities remain subject to a 60% AGI limitation. However, beginning in 2026, the limitation is scheduled to return to the pre-TCJA level of 50% if Congress doesn’t step in.
Maximizing current deduction limits by accelerating charitable contributions into 2025 may provide significant tax benefits. Donor-advised funds (DAFs) or large one-time gifts to public charities can offer flexibility for future distributions while optimizing tax savings.
The TCJA significantly limited the deductibility of mortgage interest to the first $750,000 of mortgage debt, with exceptions for “grandfathered” loans taken out before December 15, 2017. Home equity interest deductions were further restricted to loans of up to $100,000, provided the proceeds were used to buy, build, or substantially improve the home securing the loan.
These limitations are set to expire, and mortgage interest deductibility will revert to the higher pre-TCJA levels of $1,000,000 for acquisition debt and $100,000 for qualified home equity interest debt unless Congress takes action to modify this provision.
This creates an opportunity to revisit financial and tax planning strategies. Individuals considering refinancing or new loans may want to assess whether it makes sense to act now in anticipation of the potential return to more favorable deduction thresholds. Taking advantage of this window could help maximize tax benefits and reduce long-term financial burdens.
The TCJA provided a new opportunity for taxpayers to defer capital gains into Qualified Opportunity Funds (QOFs) beginning in tax year 2017. The primary benefits to investing in QOFs include:
While Opportunity Zone incentives do not technically “sunset,” the deferral period is worth noting. Taxpayers who reinvested capital gains into a QOF can defer the gain until either they sell the investment or December 31, 2026, whichever comes first. If the investment is held until the end of 2026, the deferred gain will be recognized, potentially creating phantom income.
The maximum amount of incentives available for QOFs dissipates over time. However, the exclusion benefit for investments held for at least 10 years remains available through 2026.
With the future of TCJA provisions uncertain, the best approach is to stay in close contact with your trusted tax advisor. Our team is available to keep you informed on tax law changes and help you adjust your tax strategy accordingly.
Contact us today to connect with an Elliott Davis team member for the latest updates and a personalized tax plan tailored to your specific needs.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
