Tax Update July 17, 2024

TCJA Sunset Letter

July 17, 2024

We wanted to keep you all updated on things we are looking out for on the tax front. The law known as the Tax Cuts and Jobs Act (TCJA), included some major tax law changes, but not all of them are here to stay. A number of significant provisions that have been in place since 2018 are set to expire after 2025. Although Congress may act to extend some or all of them, it is important to know which provisions are currently set to expire so that we can help you maximize your tax savings in case the provisions sunset as currently scheduled.

What We Are Focusing on As Your Wealth Manager/Tax Advisor

Estimating the potential impact of these changes is pure “speculation” right now as it is a major “jump ball” as to what the law will look like in a year or two due to 1) the upcoming presidential election and 2) upcoming senate/house elections/split. We will explain why these two are so important to this topic.

Presidential Election – The elected president is only one piece of the pie as regarding potential tax changes as the president only has so much authority to change tax law. Their administration can come up with overall proposals, but these have to pass BOTH the house and the senate. Which leads to number 2.

House and Senate Elections – For tax law purposes, these are equally as important as the presidential election. Why? Because the president/party coming up with a proposal needs support from the president, house, and senate to pass their legislation. This is usually incredibly hard to do, and even harder given today’s political climate. As of now the Democrats have a slim 51-49 advantage in the senate and the Republicans have a slim 220-213 advantage in the house.¹ The stock market tends to like divided government because it provides certainty for business that there won’t be dramatic change.

So overall here, we are trying to stress that you will hear A LOT of “noise” about proposed tax law changes from each party/different candidates/political figures BUT what ultimately matters is what happens overall in this election cycle. This is what we focus on as experienced wealth advisors/tax planners.

A Little Recent History Lesson on Previous Major Tax Law Reforms

This might be quite mundane and boring for some of you, but the purpose is to show you a pattern of how major tax reform was ultimately passed in recent history.

Biden Administration 2020-2024 – Unable to pass major tax reforms proposed most of his administration because of a split house and senate.

Trump Administration 2016-2020 – Able to pass the TCJA in 2017 because the Republicans controlled the presidency, house, and senate (by a slim margin).² Lowered corporate and individual tax rates for most taxpayers. This was passed using what’s called ‘reconciliation” where many of the provisions in the law had to be temporary for the bill to pass. Hence the purpose of this whole piece we are writing for you. 😊

Obama Administration 2008-2016 – The Obama Administration/Democrats had a strong control of the House and Senate after the 2008 elections and was able to pass the American Recovery and Reinvestment Act of 2009 (ARRA) and the Affordable Care Act (ACA).³ The Democrats lost control of the house and senate in the 2012 elections and were unable to pass major tax legislation after that.

Bush Administration 2000-2008 – Republicans controlled the presidency, house, and senate after the 2000 elections and were able to pass tax cuts through the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Economic Growth and Tax Relief Reconciliation Act of 2001.⁴

Next up, we are going to do a deeper dive into the TCJA and what is set to stay and what is set to expire barring a major change gets passed.

Individual tax provisions to sunset after 2025

Individual tax rates: The TCJA lowered tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate decreased to 37% from 39.6%. These tax rates are set to sunset Dec. 31, 2025. The top tax rate beginning Jan. 1, 2026, reverts to 39.6%.

Individual tax brackets: The TCJA made favorable changes to tax brackets as well:

Taxable income (2023, single taxpayer)	Current marginal rate (2018–2025 per TCJA)	Pre- and post-TCJA marginal rate (scheduled to resume in 2026)
$11,000 or less	10%	10%
$11,001 to $44,725	12%	15%
$44,726 to $95,375	22%	25%
$95,376 to $182,100	24%	28%
$182,101 to $231,250	32%	33%
$231,251 to $578,125	35%	35%
$578,126 or more	37%	39.60%

Commentary: The TCJA lowered taxes overall for most taxpayers. It’s not only tax rates we are looking at but what changes are being made to income, deductions, and credits. A reversion to the old low would likely be a tax increase on most taxpayers.

Standard deduction: The standard deduction was nearly doubled for all filing statuses ($12,000 for single filers and $24,000 for married filing jointly) by the TCJA (note that these amounts are indexed each year for inflation). As a result, many taxpayers have not itemized deductions. Starting in 2026, the standard deduction will be about half of what it is currently, adjusted for inflation.

Itemized deductions: The following items were temporarily modified or suspended by the TCJA:

SALT: The state and local tax (SALT) deduction was capped at $10,000, which had a significant impact on taxpayers in high-tax states. After 2025, this limitation will expire.
Mortgage interest deduction: The TCJA generally suspended the home equity loan interest deduction. It limited the home mortgage interest deduction to the first $750,000 of debt (if married filing jointly) for any loan originating on or after Dec. 16, 2017. Beginning in 2026, the mortgage interest deduction will revert to pre-TCJA levels, allowing interest to be deducted on the first $1 million in home mortgage debt and $100,000 in a home equity loan.
Miscellaneous itemized deductions: The TCJA temporarily eliminated most miscellaneous itemized deductions, such as investment/ advisory fees, legal fees, and unreimbursed employee expenses. These deductions will once again be allowed, starting Jan. 1, 2026, under the previous rules, to the extent they exceed 2% of the taxpayer’s adjusted gross income.

Other individual tax items:

The TCJA’s sunset also implicates several credits and other pertinent amounts and thresholds, including the following:

Child tax credit: The child tax credit was increased from $1,000 to $2,000 per qualifying child. This higher tax credit will revert to pre-TCJA levels in 2026 of $1,000 per qualifying child.
Personal exemptions: The TCJA temporarily suspended personal exemptions. The personal-exemption rules will return in 2026 once the provision sunsets. The personal exemption will be $2,000 per taxpayer and qualified dependents, adjusted for inflation (for 2023, the deemed amount, used in calculating other tax amounts that reference it, is $4,700). The personal exemption phases out at higher income levels.
Alternative minimum tax (AMT) exemption and phaseout: The TCJA increased exemption amounts as well as the exemption phaseout threshold, lessening the AMT burden on taxpayers. At sunset, the AMT exemption will revert to pre-TCJA levels.

Commentary: It’s important to note that over 90% of taxpayers take the standard deduction since the TJCA has been in effect.⁵ Eliminating this higher benefit adds quite a bit more complexity to returns (not a problem because we are experts). This just “throws a wrench” into the mix as now you’d have to recalculate your taxes based on this new “formula”. As mentioned before, even with these changes, taxes overall would likely be higher for most taxpayers under old rules.

Estate and gift taxation

The estate tax exclusion was essentially doubled by the TCJA, and currently stands at $13,610,000 ($27,220,000 for married couples). On January 1, 2026, the exclusion will revert to approximately $7 million ($14 million for couples).

Taxpayers who die with a taxable estate that, combined with certain past gifts, exceeds the amount of the exclusion may be required to pay federal estate tax at a rate as high as 40%. For many clients, the savings is basically $14 million times 40%. Clients can save up to $5-6 million of estate tax by using the doubled exclusion before it expires. Crucially, there is no claw-back when individuals transfer assets before the sunset and die after the sunset.

Of course, step-up in inherited asset basis needs to be considered when strategizing. We always evaluate potential estate tax savings vs. capital gains on a carry-over basis.

Commentary: We believe the estate tax will be a game of “political football” for the rest of most of your lives. Why? It’s a very controversial issue that people have mixed feelings on. In the early 2000’s the federal estate tax exemption was around $2 mil to $3.5 mil a person. There was an estate tax “holiday” in 2010 where the estate tax was eliminated. This was the year George Steinbrenner died. If he passed away in a different year the Steinbrenner family could’ve lost control of the Yankees to the estate tax.⁶ It’s currently now over $13 mil a person. Our point is there is a lack of consistency in this area to pinpoint what it will be when you die. Hence why it’s important for larger estates to plan appropriately for it. We are here to help!

Business tax provisions

Qualified business income (QBI) 20% deduction (Sec. 199A): Owners of passthrough businesses, such as partnerships and S corporations, as well as sole proprietorships, may currently claim a deduction of up to 20% of QBI. Beginning in 2026, the Sec. 199A QBI deduction no longer will be available.

Commentary: This is a big deal for many small business owners. The TCJA largely cut income taxes for small business owners and losing the QBI would be a “gut punch” overall for small business owners. It’s something we are watching closely and will help you plan for in the event the law reverts back in 2026.

Closing:

To recap, the purpose of this was to show you that we are on top of these potential tax changes and will keep you updated as time goes on and these things get closer to fruition. If you have any questions, feel free to reach out to any of us below.