Six years ago, most of us received a discount on our tax bill. The Tax Cuts and Jobs Act (TCJA) of 2017 was a landmark in U.S. tax legislation, bringing sweeping changes to both corporate and individual tax codes. But, as with a beautiful sunset, some aspects of the TCJA are not here to stay forever. In this blog post, we'll explore what the 'sunset' of certain provisions of the TCJA means and how it could impact taxpayers.
The Concept of "Sunsetting" in Tax Legislation
First, let's demystify the term “sunsetting". Imagine tax laws as temporary art installations in a city: they're designed to be there for a while, to make an impact, and then they're scheduled to be taken down. In legislative terms, "sunsetting" refers to the expiration of a law or part of a law at a predetermined date unless further legislative action is taken to extend it.
Key Provisions of the TCJA Set to Sunset
Several critical elements of the TCJA are set to sunset after 2025. Here’s a simple breakdown:
- Individual Tax Rates: The TCJA introduced lower tax rates for individuals. These are scheduled to revert to pre-2017 levels* leading to a higher percentage paid on the same income*.
- Standard Deduction and Personal Exemptions: The TCJA nearly doubled the standard deduction but eliminated personal exemptions. Post-sunset, we might see a reversal*, impacting how much of your income is subject to tax.
- State and Local Tax (SALT) Deduction: The $10,000 cap on SALT deductions is another feature that could expire, potentially benefitting taxpayers in high-tax states.
- Child Tax Credit: The expanded Child Tax Credit, a boost for families, might shrink back to its former size*.
- Estate Tax Exemptions: The estate tax exemption was doubled by the TCJA. It would return to its, much lower, pre-2017 level*.
*Adjusted for inflation
Implications for Taxpayers
The sunset of these provisions means several things for taxpayers:
- Higher Taxable Income: If the standard deduction decreases and personal exemptions don't return, many taxpayers could see a higher taxable income.
- Higher Tax Rates: The return to pre-2017 tax brackets could mean higher tax rates for many, impacting take-home pay and financial planning strategies.
- Changing Deductions and Credits: Adjustments in deductions like SALT and credits like the Child Tax Credit may require taxpayers to rethink their tax-saving strategies.
- Estate Planning Adjustments: For those with significant assets, the potential decrease in the estate tax exemption is reason enough for immediate review of your estate plan.
What Can Taxpayers Do?
Be aware of tax law and stay proactive. There are strategies that may require action now, well before we know if these provisions will sunset. “Waiting it out” could mean paying more to the government than you would have with proper planning.
Our thoughts on whether this sunset will occur should not impact the decision to review our financial plans. “Sunsetting” is the perfect example of tax and financial planning being an ever-changing space. What works in 2024 may not make sense in 2026. Gain confidence by consulting a trusted tax and planning professional.