What Does the Upcoming Expiration of the Tax Cuts and Jobs Act (TCJA) Mean to You?

What is the Tax Cuts and Jobs Act (TCJA)?

The TCJA, which was passed in 2017, made significant changes to individual income taxes by: expanding income tax brackets, lowering tax rates, doubling the estate tax exemption and the standard deduction while limiting what could be itemized, along with other changes. The law took effect on January 1, 2018, but in an interesting quirk, portions of it expire on January 1, 2026, meaning the tax code will revert to 2017, with adjustments for inflation.

Changes were also made to corporate taxes, which do not expire in 2026, and will not be covered here.

Significant Impacts of TCJA Expiration on Individuals

Tax Rates: The expiration of the TCJA will bring back the higher tax rates and narrower tax brackets that existed in 2017. This is best shown using a couple examples from the Married Filing Jointly tables in 2018.

Not only are the rates themselves increasing, but the brackets will be narrower, moving filers not just to a higher rate, but potentially a higher bracket as well.

Tax Deductions: The TCJA limited the State and Local Taxes (SALT) that could be included in itemized deductions to $10,000. If you are living in a high tax state, you will again be able to deduct your full state and local taxes. Mortgage interest deductions which were limited to the first $750,000 of indebtedness, will increase back to $1,000,000.

The benefits from these increased deductions are partially offset by the reduction in the standard deduction, which was doubled as part of TCJA.  The standard deduction for Married Filing Jointly filers in 2023 is $27,700, which we can expect to drop to about $13,850, adjusted for inflation.

A little-known rule, the “Pease Limitation”, was suspended and will come back into effect. This rule limits the amount of itemized deductions a filer can take based on their income (for MFJ filers making over $313,800 in 2017 dollars). This reduces the benefit of the itemized deductions taken, effectively raising marginal tax rates.

Alternative Minimum Tax: TCJA also caused a massive reduction in filers subject to the Alternative Minimum Tax (AMT). An estimated 5 million taxpayers were hit by the AMT in 2017, but only 200,000 per year since the passing of the act, which increased the AMT exemption from $84,500 to $109,400 (2018 dollars). Another significant item that pushed filers into AMT in 2017 was large SALT deductions, which will once again no longer be limited.

Estate Tax: Lastly, the TCJA doubled the Estate Tax Exemption, currently at $13.61MM per person. This will continue to be adjusted for inflation but is scheduled to be cut in half at expiration in 2026. With the top tax rate at 40%, this can significantly impact the legacy many hope to leave behind.

In Summary

It is unknown if the TCJA will be extended in 2025, though there will certainly be a lively debate. Looking at the bigger picture, record federal debt and deficits exceeding $1.5 trillion per year might make it difficult to pass anything that looks like a tax cut. Financial planning should incorporate the current and expected tax laws to be truly comprehensive. Please contact your JMG advisor with any questions that you might have. We invite you to share this article with others who may also find it helpful.

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