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What Happens if the TCJA Sunsets?



Enacted in December 2017, the TCJA brought significant changes to the U.S. tax code, impacting individuals, businesses, and the overall economy. However, many of these changes had an expiration date of December 31, 2025. The potential sunset of these provisions raises critical questions about the future of tax policy and its effects on various stakeholders. In this post, we'll explore the ramifications of the TCJA sunsetting and what it means for taxpayers and the economy.

One of the most noticeable impacts of the TCJA was the reduction in individual income tax rates. These reduced rates are scheduled to revert to pre-TCJA levels after 2025. For many taxpayers, this will result in higher tax liabilities. The current tax brackets, which range from 10% to 37%, will shift back to the previous range of 10% to 39.6%. This change will affect millions of Americans, particularly those in higher income brackets, who will see a significant increase in their tax bills.

The TCJA also nearly doubled the standard deduction and eliminated personal exemptions in some ways simplifying tax filing for many Americans.  This made it difficult for most filers to accumulate enough itemized deductions to exceed the standard deduction, which meant most taxpayers no longer needed to track things like medical expenses, charitable contributions, and non-reimbursed employee expenses. With the sunset, the standard deduction will decrease, and the personal exemption will be reinstated. This shift will complicate tax planning and filing, and it could increase taxable income for many households.

The TCJA increased the child tax credit from $1,000 to $2,000 per qualifying child and expanded eligibility. This provision significantly benefited families with children, reducing their overall tax burden. However, if the TCJA sunsets, the child tax credit will revert to its previous level, reducing the financial relief available to families.

The TCJA capped the state and local tax (SALT) deduction at $10,000, affecting taxpayers in high-tax states. If the TCJA sunsets, the cap on the SALT deduction will be lifted, potentially benefiting those taxpayers with higher income and more state and local withholding. However, this change could also result in increased complexity in tax filings and planning.

The TCJA reduced the corporate tax rate from 35% to 21%, aiming to spur investment and economic growth. If these rates increase after the sunset, it could have significant implications for businesses. The TCJA also included several provisions beneficial to small businesses, such as the 20% deduction for qualified business income (QBI) for pass-through entities. If these provisions expire, small business owners could face higher tax burdens, potentially impacting their.

The TCJA temporarily doubled the estate tax exemption, allowing individuals to pass on up to $11.7 million (as of 2021) without incurring estate tax. If the sunset occurs, the exemption will revert to pre-TCJA levels, significantly increasing the estate tax liability for wealthy individuals.

The expiration of the TCJA provisions could have broader economic and budgetary implications. Higher taxes on individuals and businesses may reduce disposable income and investment, potentially slowing economic growth. Additionally, the increased tax revenue could help address budget deficits, but it might also lead to debates over spending priorities and fiscal policy.

 

The sunsetting of the Tax Cut and Jobs Act presents a complex set of challenges and opportunities. Taxpayers and business owners must prepare for the potential changes and their implications. As the expiration date approaches, it will be crucial to monitor legislative developments and discuss strategies with your tax preparer to mitigate the impact of these changes. Whether the provisions are extended, modified, or allowed to expire, the outcomes will shape the future of tax policy and its effects on the economy.

 

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