Sunset/Expires; Tomato/Tomahto
/To address the question of the day, given the approaching election, we must think back to the tax law changes introduced in 2017 by the Tax Cuts and Jobs Act (TCJA). As the sunset quickly approaches, what will happen if most of the Act’s provisions expire as scheduled on December 31, 2025? Here are some highlights to ponder.
Enacted by TCJA, statutory tax rates decreased all but the lowest levels of taxable income which remained the same at 10%. It also shifted the threshold for several income tax brackets, reducing the tax for those in the 32% bracket and below. Affecting the taxable income is the standard deduction, which nearly doubled, reducing non-itemizer taxable income and the need to itemize as well as benefiting those who didn’t have enough deductions to itemize.
The Act also introduced us to the not-so-popular state and local tax (SALT) limitation, capping this itemized deduction to $10,000, as well as the elimination of the miscellaneous itemized deductions with few exceptions. It also changed the structure of the mortgage interest deduction, limiting it to the first $750,000 of loan principal and eliminated the deductibility of interest for home equity debt unless used to buy, build, or substantially improve the taxpayer’s home. The Pease provision, phase-down of the total amount of allowable itemized deductions, was eliminated.
It repealed the personal and dependent exemptions. In their place, it doubled the child tax credit and created a new $500 tax credit for dependents not eligible for the child tax credit. And fewer taxpayers are subject to the alternative minimum tax (AMT).
Finally, TCJA doubled the lifetime estate and gift tax exemption at the time, which now has reached a historic high of $13.61 million this year per taxpayer. If this portion of the Act sunsets, it is expected to drop the exemption to half (or less) in 2026.
Needless to say, the TCJA was a significant change for most taxpayers. While there may be new legislation between now and 2026, it may be time to anticipate the “what if” and how either direction may impact your income tax planning, estate planning and goals. You may ask, how is this election going to determine if the TCJA sunsets? It depends on who controls Congress. I’ll leave that research up to you!
- Pam Smitson, CPA, CGMA®, Smitson Erhart-Graves Financial Advisors
