Major Tax Changes Expected in Two Years, Plan Now to Reduce Impact

  • Tax Reform
  • 2/1/2024
Business People in the Office

Key insights

  • Major tax changes may be coming for individuals and business owners with the upcoming sunset of many Tax Cuts and Jobs Act provisions.
  • Expected changes include increased individual tax rates, the loss of the QBI deduction for business owners, and changes to several itemized deductions.
  • It’s yet to be seen how a sunset will impact those who have given away more than the $5.49 million lifetime exclusion amount related to estate and gift taxes.

Are you prepared for the TCJA related tax increases?

Talk to an Advisor

The Tax Cuts and Jobs Act (TCJA) brought sweeping tax changes to businesses and individuals. Individual and some business tax rates were cut — some significantly — starting in 2018.

Built into the law was the sunset of certain important provisions on December 31, 2025. This means on January 1, 2026, tax law reverts to the tax law before the TCJA’s passage. Because the sunset is part of law, it would take an act of Congress to prevent it.

Explore some of the upcoming changes and learn steps you should consider now to reduce your tax impact.

Increase in individual tax rates

The TCJA reduced individual tax rates. The rates will sunset and increase to pre-2018 tax rates. The following table reflects current and future tax rates if the TCJA sunsets.

2023 tax rate Tax rate after TCJA sunset
10% 10%
12% 15%
22% 25%
24% 28%
32% 33%
35% 35%
37% 39.6%

Loss of QBI deduction

More significant is the sunset and loss of the qualified business income (QBI) deduction after 2025. While this is a deduction, it effectively reduces the income tax rates significantly on pass-through business income. The tax rate on pass-through business income will increase 10% for those in the top tax bracket.

  • Current top tax rate if subject to QBI: 29.6% (80% of 37%)
  • Top tax bracket in 2026: 39.6%

If the TCJA sunsets, significant planning should be undertaken to help mitigate tax rate increases, especially as it relates to business income. Two considerations are:

  • Accelerating income to 2025
  • Deferring deductions to 2026

Ultimately, both result in accelerating taxable income to take advantage of lower tax rates in 2025. For business owners, there is a real cost to paying tax earlier, given the current interest rate environment — increased borrowings on a line of credit or lost earnings on cash reserves.

The TCJA did not change the tax rates on capital gains. And while the TCJA significantly reduced the C corporation tax rate to a flat 21%, this is not sunsetting. Businesses should consult with their CPA on whether changing from a S corp to a C corp might save them money.

Change in itemized deductions

The TCJA changed many itemized deductions. Some of the most significant ones are:

Standard deduction

A combination of two changes made many taxpayers who previously itemized their deductions now claim the standard deduction. First, the TCJA doubled the pre-TCJA standard deduction for all filing statuses. On its own, this change likely would not have had that large of an impact.

State and local tax (SALT) deduction

The TCJA also created the “SALT cap” of $10,000. For the first time, state and local taxes of all kinds — including income taxes and real estate taxes — were limited to a deduction of $10,000. The SALT cap resulted in a large reduction of itemized deductions for many taxpayers.

After 2025, the SALT cap will expire, and state income taxes and real estate taxes will again be fully deductible. This creates new planning opportunities, along with some challenges:

  • Year-end tax planning will once again require looking at prepaying state income taxes and real estate taxes by year end.
  • An unlimited state tax deduction creates alternative minimum tax (AMT) for many taxpayers, especially residents of certain states. Most taxpayers haven’t had to worry about AMT much since 2017 but it will now become a concern again.
  • If the sunset occurs on the SALT cap, how the pass-through entity tax (PTET) elections come into play will be a new consideration. In some states, the PTET laws expire if the SALT cap is no longer part of tax law. For other states, you may still want to consider the PTET election, especially if AMT will be a factor.

Mortgage interest deduction

The TCJA reduced the amount of deductible mortgage interest expense in two ways:

  • Eliminated home equity loan interest deductions unless used to improve, remodel, or enlarge a personal residence
  • Reduced the amount of eligible mortgage where interest can be deducted, from $1 million of principal down to the current $750,000

If the tax law sunsets, home equity loan interest will be deductible on up to $100,000 of principal, regardless of the use of the proceeds. In addition, more mortgage interest will be deductible due to the increased $1 million mortgage balance limit.

Charitable contribution deduction

The TCJA increased the percentage of adjusted gross income limitation on cash charitable contributions to 60% from the pre-TCJA limit of 50%.

If the TCJA sunsets, taxpayers’ cash charitable contributions will be limited to 50% of adjusted gross income (AGI).

Overall 3% phaseout of itemized deductions (a.k.a. Pease limitation)

Prior to the TCJA, taxpayers with AGI over certain thresholds were subject to a phaseout of itemized deductions. The phaseout was based on 3% of the excess of AGI over the AGI phaseout threshold for their filing status (3% of an income amount). Contrast this with a phaseout of 3% of their itemized deductions (3% of deductions). There is a difference.

If the sunset occurs, higher income taxpayers will be subject to this limitation and lose itemized deductions equal to 3% of their AGI exceeding a certain threshold.

Estate and gift tax

The TCJA made significant increases to an individual’s lifetime exclusion. The lifetime exclusion is the amount a person can give during lifetime and pass at death without being subject to estate and gift tax. The lifetime exclusion, prior to the TCJA was $5.49 million. TCJA increased this to $11.42 million in 2018. Due to the annual inflationary increase, the 2024 lifetime exclusion per person is $13.6 million.

A sunset would revert the lifetime exclusion amount to $5.49 million adjusted for inflation to 2026 (estimated $6.4 million). It’s yet to be seen how a sunset will impact those who have given away more than the $5.49 million lifetime exclusion amount. Explore more in this article: Gift Business Shares Now to Avoid Tax Cuts and Jobs Act Sunset in 2025

What does NOT sunset?

TCJA provisions not sunsetting include:

  • $500,000 (adjusted for inflation) excess business loss limitation for individuals
  • Net operating loss limited to offset 80% of taxable income with no carryback
  • Section 174 research and development expense disallowance and required amortization over five years (awaiting congressional action for repeal or postponement)
  • Section 163(j) interest expense limitation computed without the addback of depreciation expense (awaiting congressional action for repeal or postponement)
  • The gradual phaseout of bonus depreciation through 2027 (awaiting congressional action for repeal or postponement)

How we can help

Even though the sunset is two years away, it’s a good idea to have preliminary discussions with your CPA now. Many business owners are already planning for 2025, and these upcoming changes should be part of your tax planning discussions. Contact us to get started.

Contact Us

Complete the form below to connect with CLA.

Experience the CLA Promise