As the Tax Cuts and Jobs Act (TCJA) is set to expire in 2025, Congress is considering extending certain provisions and/or potentially introducing new changes for the 2026 tax year. This article emphasizes certain provisions set to expire, known as ‘sunset’ provisions, as well as provisions that are intended to remain permanent as a result of the TCJA.
For Individual Taxpayers:
The TCJA of 2017 implemented significant changes to the U.S. tax system, lowering tax rates across various brackets, with the highest rate decreasing from 39.6% to 37%. However, with the TCJA set to expire and uncertainty surrounding Congressional actions, these rates may revert to their previous levels. Even still, the tax impact may be offset by the return of the personal exemptions, which were temporarily suspended. Other key provisions that are set to expire in 2025 include the increased standard deduction (currently at $14,600 for single taxpayers and $29,200 for married filing jointly for the 2024 tax year), as well as various limitations for itemized deductions reported on Schedule A.
The TCJA also limited several itemized deductions such as state and local taxes are currently limited to $10,000 for single and joint filers. Additionally, the mortgage interest deduction is also limited for new mortgages, and the deduction for home equity interest is suspended. The lifetime exclusion for estate taxes is currently $13.61 million for 2024 under the TCJA. However, in 2025, this amount will decrease back to $5 million. If the TCJA expires without new legislation, these provisions may revert, impacting taxpayers’ deductions and credits.
For Corporations:
The TCJA permanently changed the corporate tax rate to a flat 21% rate, regardless of taxable income, a provision that will not expire. Similarly, the TCJA also introduced the Qualified Business Income (QBI) deduction, allowing pass-through entities, including sole proprietorships, to deduct up to 20% of qualified business income. Both of these provisions are set to expire in 2026. Another important provision set to expire is bonus depreciation, which previously allowed an immediate deduction for qualifying property. This deduction was reduced to 80% in 2023 and is scheduled to decrease to 60% for the 2024 tax year and decrease by 20% each subsequent year through 2027 when no bonus depreciation will be allowable. The TCJA also reinstated an old rule that limits NOL carryforwards to 80% of taxable income, with any excess amount rolled forward for up to 20 years. When this provision expires, NOLs will revert to the previous rules, allowing for two-year carrybacks and 100% carryforwards. Corporations and other business entities should be aware of these changes as they plan for future tax implications.
We are continuing to monitor changes to legislation, and in order to limit any potential surprises, we encourage clients to reach out to us to discuss any potential questions or concerns regarding the information noted above.
Haley Melanson is a Audit & Tax Senior at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.