THE POTENTIAL SUNSETTING OF THE TAX CUTS AND THE JOBS ACT

There has been much discussion and speculation during the last several months about the potential sunsetting of the Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA was a sweeping tax reform law that included provisions impacting both individuals and corporations. While some of the provisions were permanent, such as the reduction in the corporate tax rate from 35% to 21%, some provisions were implemented on a temporary basis and will expire or phase out at the end of 2025 unless Congress extends or modifies them.

Now that the dust has settled on the 2024 U.S. political elections and with Republicans achieving a “political trifecta” – winning the Oval Office, the Senate, and the House - we wanted to revisit some of the most significant expiring provisions of the TCJA and, of course, some related implications.

As a point of reference, below are just some of the more significant expiring provisions of the TCJA:

Individual Income Tax Rate Cuts: The TCJA temporarily reduced income tax rates for individuals across most tax brackets. For example, the top rate dropped from 39.6% to 37% and the lowest tax rate dropped from 10% to 8%. Unless Congress acts to extend or modify these changes, the seven-bracket system would revert to pre-TCJA thresholds, which would generally lead to higher taxes for most taxpayers.

Increase in the Standard Deduction: The standard deduction was doubled under the TCJA, resulting in an increase for single filers from $6,350 to $12,000 and a corresponding increase for married couples filing jointly from $12,700 to $24,000. These higher standard deduction amounts are scheduled to return to their previous levels, adjusted for inflation, after 2025.

Personal Exemption Repeal: The TCJA eliminated the personal exemption that allowed taxpayers to deduct a set amount ($4,050 in 2017) for each person claimed on the return. While also temporary, this provision was offset by the temporary increases in the standard deduction (see above) and the expanded Child Tax Credit (see below).

Doubling of the Child Tax Credit: The Child Tax Credit, the tax credit received for each qualifying child under 17 years old, was increased from $1,000 to $2,000, and the income thresholds for eligibility were raised, as part of the TCJA. The total per-child credit and income thresholds will phase out after 2025.

Limitations on State and Local Tax (SALT) Deductions: The TCJA capped the State and Local Tax (SALT) deduction at $10,000 for individuals who itemize on their federal filing. Prior to the TCJA, taxpayers could deduct all their state and local taxes (income, sales, and property taxes). This provision is temporary, and after 2025, the SALT deduction limitations may revert to previous law (with no cap), unless extended by Congress.

Mortgage Interest Deduction Limitation: The TCJA reduced the amount of mortgage debt on which interest can be deducted. The cap on new mortgages was lowered from $1 million to $750,000 (for loans taken out after December 15, 2017). This limitation is temporary, and it is scheduled to revert to the $1 million threshold after 2025 for new mortgages, unless changed by future legislation.

It is important to keep in mind that, while temporary, some of these provisions were designed to stimulate economic growth, reduce the overall tax burden on individuals and corporations, and even simplify the tax code in some instances. If these provisions are allowed to expire, there are some specific groups that would be negatively impacted the most…high-income earners, small business owners, high net-worth individuals, being a few examples.

Another aspect of the TCJA that needs to be considered is the impact on federal government revenue. If the temporary provisions of the TCJA are allowed to expire at the end of 2025, it would result in a significant increase in federal revenue, as many of the individual tax cuts and business-related provisions would be reversed or reduced. Earlier this year, the Congressional Budget Office (CBO) estimated that allowing the TCJA tax provisions to expire could lead to approximately $3.5 trillion to $4.5 trillion in revenue over the next 10 years. Conversely, if all or some of the expiring TCJA provisions are extended, there would be lowered government revenues.