The Tax Cuts and Jobs Act (TCJA) enacted significant changes to the U.S. tax code when it was signed into law in 2017. However, many of these changes are not permanent and are scheduled to sunset, or expire, at the end of 2025. Below is a list of the most impactful changes scheduled to sunset.
1. Individual Tax Cuts: One of the most notable aspects of the TCJA was the reduction in individual income tax rates across several brackets. Additionally, the standard deduction was nearly doubled for all filing statuses. These changes provided relief for many taxpayers, resulting in lower tax liabilities and simplified tax filing. However, these individual tax cuts are temporary and are scheduled to revert to pre-TCJA levels after 2025. As a result, taxpayers may see an increase in their tax obligations.
2. Limits on State and Local Tax (SALT) Deductions: The TCJA imposed a $10,000 cap on the deduction for state and local taxes (SALT), which includes property taxes, state income taxes, and sales taxes. This limitation disproportionately affects taxpayers in high-tax states, where SALT deductions were previously substantial. The $10,000 cap is scheduled to remain in place through 2025.
3. Qualified Business Income Deduction (Section 199A): The TCJA introduced the Qualified Business Income (QBI) deduction, also known as Section 199A deduction, which allows eligible pass-through entities, such as sole proprietorships, partnerships, and S-corporations, to deduct up to 20% of their qualified business income. This deduction provides substantial tax savings for many small business owners and entrepreneurs. However, the QBI deduction is scheduled to expire after 2025.
4. Increased Estate and Gift Tax Exemption: The TCJA substantially increased the estate and gift tax exemption, effectively doubling the amount that individuals can transfer tax-free during their lifetime or upon death. For the tax year 2024, the estate and gift tax exemption is set at $13.61 million per individual, with portability allowing married couples to effectively double this amount. However, this increased exemption is also set to sunset in 2025, reverting to lower levels unless Congress intervenes. High-net-worth individuals and families should consider the potential impact on their estate planning strategies in light of these impending changes.
5. Corporate Tax Rate Reduction: The TCJA implemented a significant reduction in the corporate tax rate, lowering it from 35% to 21%. This change aimed to enhance the competitiveness of U.S. businesses on the global stage and stimulate economic growth. While corporations have benefited from this reduced tax burden in recent years, it's important to note that this provision is also temporary. Without legislative action, the corporate tax rate is scheduled to revert to its previous level after 2025. Businesses should factor this potential increase in their long-term financial projections and strategic planning.
Again these are not all of the changes, but the ones that I thought are the most impactful.
Best to start planning with your CPA, accountant, CFP, etc. now!
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