Will You Be Better or Worse Off When/If The Tax Cuts and Jobs Act Sunsets?
By John H. Robinson, Financial Planner (August 31, 2024)
The Trump Era Tax Cuts and Jobs Act (TCJA), which was signed into law in December 2017 and went into effect in 2018, is slated to expire on 12/31/2026. Assuming that Congress does not act to extend the TCJA, most of the personal income estate tax laws will revert to the inflation adjusted, 2017 levels and limits.
While there is ample room for debate over the political and social welfare impact of the TCJA, there is no debating that the TCJA made tax filing simpler for millions of Americans. By doubling the standard deduction and eliminating personal exemptions and many common deductions the TCJA The Tax Cuts and Jobs Act significantly diminished the value of itemized deductions.
The popular perception is that tax savings was a byproduct of this tax simplification. The fact that tax revenue fell by nearly $4 trillion since the the TCJA has been in place lends credence to this belief. However, as I wrote shortly after Act became law, the tax savings from the law were not uniformly distributed. In fact, some taxpayers saw their taxes rise.
There are plenty of articles that take a deep dive into the calculus of coming tax law changes, and I will provide links to a few of these articles at the end of this post. However, the purpose of this essay is to help our clients and other readers get a general sense of whether they will be positively or negatively impacted by the TCJA sunsetting.
What Is Not Changing
Below are a few tax provisions that people commonly ask about that are not part of the anticipated sunsetting of the TCJA:
- Capital Gains Tax Rates – The current capital gains tax rates were not changed by the TCJA and will not change when it expires. The applicable capital gains tax rate will still be determined by stacking on top of taxable income. However, the tax rates for capital gains will be linked to their tax brackets rather than their taxable income. This may lead to some taxpayers being bumped to a higher capital gains tax rate (e.g., from 15% to 20%).
- Corporate Income Tax Rates – The TCJA lowered the maximum corporate income tax rate from 35% to 21%. Congress specifically made this TCJA change permanent. It is worth noting, however, that raising the corporate income tax rate is a plank in the Democratic Party’s platform.
- Net Investment Income Tax - The 3.8% Net Investment Income Tax was not part of the TCJA and, as such, it will still kick in for MFJ with MAGI above $250,000 and for single filers with MAGI above $125,000.
- IRA and Qualified Retirement Account Contribution Limits – IRA and Qualified Plan rules changes were not part of the TCJA.
The Most Visible Changes – Personal Exemptions and Different Tax Brackets
The two most visible changes from the sunsetting of the TCJA will be the restoration of the seven 2017 federal marginal income tax brackets and the return of personal exemptions paired with a roughly halved standard deduction.
The TCJA created new, lower tax rates and increased the income thresholds before each new marginal tax bracket applied. For example, in 2017, the marginal tax brackets were 10%, 15%, 25%, 28%, 33%, 25%, and 39.6%. In 2018, the brackets dropped to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Taken on its own (i.e. without accounting for deductions and credits), the 2017 tax brackets would raise income taxes for virtually all taxpayers with taxpayers in the middle brackets seeing an increase of approximately 9% (Source: Forbes) . However, whether income taxes will actually increase or decrease for most lower-middle income taxpayers who take the standard deduction depends in large part on the interplay between their income and the number of exemptions they have.
For families who do not have sufficient deductions to exceed the sum of standard deduction (estimated to be $8,300 for single tax payers and $16,600 for MFJ filers) (Source: Forbes/Cato Institute) and exemptions (estimated to be $5,300 per person), we can extrapolate that larger family sizes may benefit from a return of the 2017 rules. With a personal exemption amount of $5,300per exemption, families of four or more people may expect to have a total family deduction that is higher than the current standard deduction. Whether their income tax liability will be higher or not may depend on their income levels. Single-tax payers and couples may generally expect their tax bills to rise from a combination of a lower total family deduction and higher marginal tax rates.
Higher earning taxpayers should also be aware that the TCJA will also revive the dreaded Personal Exemption Phaseout (PEP) and "Pease limitation" on itemized deductions above a specific income threshold, both of which effectively create a surtax on income within the threshold range, increasing the household's marginal tax rate above their nominal tax rate based on the tax brackets alone.
Location - Red vs Blue States (Goodbye SALT Limit)
The $10,000 cap that the TCJA placed on state and local tax deductions from the federal income tax calculations was viewed as a politically motivated salvo aimed at Democratic led Red states which tend to have higher state income tax rates than Republican led blue states. This tax deduction cap stung the highest earning taxpayers in Red states, and has been cited for exacerbating an already existing exodus of affluent taxpayers from high income tax states to low income tax states.
For residents of high income tax states such as California, Hawaii, New York, New Jersey, Rhode Island, Massachusetts and Connecticut who continue to endure onerous income and property taxes, the elimination of the SALT cap may produce a windfall that may more than make up for the higher marginal tax rates.
Bad News for Small Business Owners (Goodbye QBI Deduction)
For owners of pass-through businesses including partnerships, S corporations, and sole proprietorships, the biggest concern around TCJA's sunset is the elimination of the Section 199A deduction on Qualified Business Income (QBI), which allowed for a deduction equal to 20% of the lesser of the taxpayer's QBI or their taxable income. For most pass-through business owners, the end of the QBI deduction will result in much higher marginal tax rates in 2026 and beyond. As such, many business owners may wish to accelerate income in 2024 and 2025 while the QBI deduction is still in effect.
However, an exception to this applies to Owners of Specified Service Trades or Businesses (SSTBs) such as lawyers, consultants, tax firms, financial planners, and investment advisers. These business owners may be better served by deferring income until after the TCJA expires.
Other Notable Returning Deductions
- Miscellaneous Deductions for Tax Preparation Fees, Investment Advisory Fees, Legal Fees, and Unreimbursed employee expenses – The deduction for miscellaneous deductions for these expenses has been restored to the extent that they exceed 2% of AGI. Paired with the restoration of the full SALT deduction, these deductions, will certainly help many taxpayers offset the amount of additional tax from higher marginal tax rates. When the TCJA went into effect, I actively encouraged clients to pay our asset-based advisory fees proportionally from all accounts, including retirement accounts, so that some portion of the fees could be paid with pre-tax money. With the restoration of the advisory fees, I will recommend clients who can use this deduction revert to paying entirely from taxable accounts.
- Charitable Deductions – These were not eliminated under the TCJA, but the doubling of the standard deduction dramatically reduced or eliminated the value of this deduction for most taxpayers. When combined with the SALT deduction and he deductions for CPA and investment advisory fees, charitable deductions will once again be impactful as a tax reduction tool for millions of American taxpayers. It is safe to assume that charitable organizations will be relived to see the TCJA go away.
- Home Equity Loan Interest – The interest deduction on new home equity loans was suspended under the TCJA and the deduction on existing HELOC interest was limited to the portion attributable to home improvements. Beginning in 2026, the interest on first $100,000 of home equity loan debt will be deductible without limitation.
- Mortgage Interest – The TCJA reduced the mortgage interest deduction from the interest on the first $1,000,000 of debt for married couples filing jointly to $750,000. It is slated to be restored to $1,000,000 in 2026.
Key Takeaways
The purpose of this essay has been to give readers a general sense of whether they will be better or worse off after the TCJA sunsets. Here are the key takeaways –
- Assuming they take the standard deduction on their 1040s, lower-middle income families with families of 4 or more people are likely to fare better after the TCJA sunsets than single taxpayers or two-person families.
- Small business owners are likely to see the largest tax increases as a result of the loss of the QBI deduction.
- The combination of the lowering of the standard deduction, the restoration of personal exemptions, the elimination of the SALT cap, the restoration of the deductions or tax preparation and advisory expenses, and the restoration of the looser pre- TCJA mortgage and home equity loan interest deductions will incentivize millions of taxpayers to go back to filing itemized tax returns.
- Charitable contributions will be more useful as a tax reduction tool, which in turn will benefit charitable organizations.
In sum, different households will experience the end of TCJA in a wide variety of ways, with income level, filing status, number of dependents, applicable deductions, and QBI all factoring heavily into the impact that the TCJA sunset will have.
Conclusion – Planning for the Sunset
I have had a couple of clients report back to me this year that their CPAs do not share my sense of urgency for planning for the end of the TCJA because it is not certain that it will sunset. I respectfully disagree with this perspective. While it possible that Congress will Act to extend the TCJA, the legislative branch has not been great in recent years about enacting bipartisan tax laws. From the Democrats perspective, with a Democratic president and a democratic controlled house, part of the party’s objective of raising tax revenue can be accomplished by doing nothing and letting the TCJA expire. While the Republicans would very much like to extend the TCJA, it will take larger margins of control in the House and Senate to achieve that. Further, even if planning is done with the expectation of the law sunsetting, it is doubtful that any planning measures we may implement will be harmful (i.e., we do not anticipate that either party will push to lower income tax rates below the TCJA levels). Simply put, to my thinking there is more to be lost by not planning.
In terms of planning, the most commonly recommended TCJA sunsetting strategies involve filling up the 22%-24% marginal tax brackets in the 2024 and 2025 tax years with either distributions from pre-tax retirement accounts (for taxpayers old enough to withdraw without penalty) or partial Roth conversions. Since the end of the year is nigh upon us, we strongly encourage all readers to meet with their CPAs to discuss potential year-end tax-planning opportunities. We are happy to sit in on those conversations if you wish. October and November are the best months to do that.
In closing, it should be noted that that the items listed in this essay represent some of the most impactful provisions of the TCJA that will be sunsetting, but do not represent the complete list.Lastly, since the focus of this essay has been on income tax planning, I did not discuss the 50% reduction in the federal estate and gift tax exemption limits that will go into effect when the TCJA sunsets. That is not an insignificant matter, but it is a topic for a future essay.
The information in this piece is intended to raise general awareness of important issues pertaining to the sunsetting of the Tax Cuts and Jobs Act. As such, it is not intended to be specific tax advice. All readers are encouraged to consult with their CPAs or other tax advisors for specific tax planning guidance.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
Related Reading:
Planning for Changes in Client Marignal Tax Rates after TCJA's Sunset (Nerd's Eye View/Kitces.com)
Tax Planning for the TCJA’s ?Sunset (The Tax Adviser)
Major Tax Changes Are Coming in 2026. Are You Ready? (Forbes)
Trump's Tax Cuts Could Expire in 2025. If They Do, Here's Where/Who Will Feel It the Most. - WSJ (WSJ)
At End of Trump Tax Cuts, Progressives See Leverage to Target the Rich
