The Tax Cuts and Jobs Act (“TCJA”), which is the formal name for the legislation commonly referred to as the “Trump tax cuts,” went into effect for the 2018 tax year.1 It lowered or eliminated estate taxes for many high-net-worth families, reduced many of the marginal income tax rates, simplified deductions, and more.
What many people don’t realize is that the tax cuts that resulted from this legislation were temporary and are designed to sunset after 2025. In fact, the only notable permanent change the TCJA made for individual taxes is a minor change to the way inflation is calculated.
So, let’s take a look at what this could mean to you–both good and bad–and how you can start to prepare now.
Changes that could negatively affect you
If no further tax legislation is passed before the end of 2025, the TCJA changes could go away. Effectively, the U.S. tax code would switch back to its pre-2018 state and many of the tax breaks that Americans have used for the past five years would be lost. Here are some of the biggest impacts of the TCJA that could potentially cause your 2026 tax bill to rise.
Higher tax brackets
Originally, the Tax Cuts and Jobs Act intended to simplify the tax code by reducing the number of marginal tax brackets. While the number of brackets remained at seven, most of the marginal tax rates were significantly lowered and the income thresholds raised.
Most significantly for higher-income households, before the legislation was passed, the top tax rate of 39.6% applied for income above $480,050 for married couples filing jointly for the 2018 tax year2. However, the top rate after the Tax Cuts and Jobs Act was lowered to 37% and applied to income over $600,000 for joint filers.
If the tax cuts are allowed to sunset as planned, in 2026 the marginal tax rates would revert to the old structure, and would result in a higher effective tax rate for most American households.
| Current Marginal Tax Rate |
Corresponding Rate if Tax Cuts Sunset After 2025 |
| 10% |
10% |
| 12% |
15% |
| 22% |
25% |
| 24% |
28% |
| 32% |
33% |
| 35% |
35% |
| 37% |
39.6% |
Data source: Joint Explanatory Statement of the Committee of Conference.
Standard deduction could be halved
When the Tax Cuts and Jobs Act was introduced, one of the big headlines was that the standard deduction would double.
To be fair, the standard deduction itself was roughly doubled. But this was more of a simplification than a tax break. While the standard deduction increased, the personal exemption, which would have been an additional $4,150 per-person deduction for 20183, was eliminated.
Whether the sunsetting of the higher standard deduction negatively affects you will depend on your family size and filing status, but the takeaway to us is that this isn’t as much of a negative as you might think.
Child Tax Credit could be unusable by many families
The Tax Cuts and Jobs Act made two big changes to the Child Tax Credit. First, the credit was doubled from $1,000 to $2,000 per qualifying child. And second, the income thresholds above which the credit phased out were increased dramatically. For example, prior to the Tax Cuts and Jobs Act, the Child Tax Credit started to disappear for joint filers with income greater than $110,000. Afterwards, couples who earned less than $400,000 were eligible for the full deduction.
Charitable deduction changes
Many high-net-worth households use charitable giving strategies to reduce their tax liability and plan their estates, and the TCJA increased the charitable deduction limit from 50% of income to 60%.
AMT exemptions may fall
The alternative minimum tax, or AMT, has been in place for many years. It was designed to ensure that high-income Americans pay their fair share of taxes.
Prior to the Tax Cuts and Jobs Act, the AMT started to affect a disproportionate number of households, as the AMT exemption amounts were never indexed for inflation.
The TCJA fixes this, and now the AMT exemptions are significantly higher than they were before. If the tax cuts are allowed to sunset, the AMT exemptions could revert to their old lower amounts–and stay there.
Tax breaks for small businesses could go away
The TCJA made some big changes to how small businesses are taxed.
The legislation created the Qualified Business Income (QBI) deduction–also known as the “pass-through” deduction–that allowed qualified owners of pass-through businesses like LLCs, S-Corporations, partnerships, and sole proprietorships, to deduct as much as 20% of their Qualified Business Income.
Estate tax changes
Perhaps most significant for high-net-worth households, the TCJA doubled the lifetime exemption amount for estate and gift taxes.
As a result, many families who were previously planning to pay estate taxes are now likely to be exempt under the TJCA. This has big implications for many households and is one of the changes you can actually plan ahead for, so we’ll discuss this one in detail later on.
It isn’t all bad news
It’s important to realize that not everything in the TCJA was a positive change for all taxpayers. If the tax changes sunset after 2025, you might experience some potentially positive effects.
The return of the unlimited SALT deduction
Prior to the TCJA, taxpayers were allowed to deduct all of their state and local taxes on their federal tax return. This included state income taxes or state sales taxes, property taxes on homes and other vehicles, and more.
The TCJA limited the SALT deduction to $10,000 per year per household, which dramatically reduced the deduction’s value for many households-–especially high-net-worth households in states with relatively high income and/or property taxes.
Higher limits for mortgage interest
Prior to the TCJA, a deduction could be taken for interest paid on qualified mortgage debt up to $1 million. And interest on up to $100,000 of home equity debt was deductible. The TCJA limited the home equity interest deduction to debt that was specifically incurred to improve a primary home and reduced the overall mortgage limit to $750,000.
Personal exemptions could return
Earlier we mentioned that while the standard deduction was roughly doubled, the personal exemption was eliminated by the TCJA. This actually produced a tax increase for some households.
For example, a married couple with three dependent children would have received a $13,000 standard deduction plus five $4,150 personal exemptions in 2018 under the old tax law, for a total of $33,750. After the TCJA, they got a $24,000 standard deduction, but no exemptions. Sunsetting the TCJA changes after 2025 would mean the return of the personal exemption.
Miscellaneous deductions could come back
Prior to 2018, there were several deductions that were allowed for households. Investment expenses, moving expenses, tax preparation fees, and unreimbursed employee expenses exceeding 2% of adjusted gross income (AGI) are just a few examples. While the elimination of these deductions certainly simplified the tax code, many households could likely benefit if they were to return.
Preparing for estate tax changes
It’s tough to prepare for most of the potential changes. Knowing what might change could certainly help you anticipate changes in your tax bill and budget accordingly. With estate planning in particular, and there could be some smart moves to make between now and the end of 2025.
If you’re worried about a lower estate tax exclusion, here are a few potential steps you can take in the meantime:
- Make use of annual gift exclusions. In 2023, you can give as much as $17,000 per person without any gift tax implications. This can make a serious dent all by itself. For example, if you have two children with spouses and five grandchildren, you can give as much as $135,000 to them this year tax-free, and double this amount if you are married. If you repeat this process in 2024 and 2025 before the TCJA is scheduled to sunset, you could reduce your taxable estate by a significant amount.
- Beyond the annual exclusion, you could help guard against future appreciation by transferring some of your assets into an irrevocable trust. If you do this now, before the TCJA sunsets, you can take advantage of the higher exemption amounts currently in place. An experienced estate planning attorney, tax specialist, or financial planner could help you determine the best course of action for your family.
What are the chances of the tax cuts getting extended, or even made permanent?
First of all, it’s important to point out that this isn’t meant to be an exhaustive list of the ways the tax code could change if the Tax Cuts and Jobs Act is allowed to sunset. These are just the ones we believe are most likely to affect your wallet.
Second, while these tax changes are currently set to sunset after 2025, it’s entirely possible that they’ll be extended or made permanent before then. It’s tough to say how likely that is, as we have no idea what political party will be in the White House or in control of Congress at that point. And it’s also worth noting that it’s possible that some of these changes could be kept in place, while others could be allowed to sunset.
The bottom line is that American households should be aware that under the current law, these tax breaks will go away after 2025.
However, this is likely to be an evolving situation for the next couple of years, especially after the 2024 elections, so be sure to keep up with the latest developments.
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