What Happens if the Tax Cuts and Jobs Act Expires in 2025?

With Donald Trump winning reelection and Republicans taking control of the Senate, the impending expiration of the Tax Cuts and Jobs Act (TCJA) is now uncertain. There are multiple scenarios that could unfold between now and December 31, 2025. We will leave the predictions to others and focus on the law as it currently stands.

What we do know — absent an extension by Congress, is most of the individual, estate and gift provisions of the 2017 Tax Cuts and Jobs Act will expire at the end of 2025. Among the many provisions subject to the 2025 sunset are:

Marginal Tax Brackets

As an individual’s ordinary taxable income increases, the tax rate on the next level of income also increases. The amount of income at which each bracket starts and stops is indexed for inflation. The current individual marginal tax brackets of 10%, 12%, 22%, 24%, 32%, 35% and 37% will revert to pre-TCJA rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Additionally, the brackets become narrower, meaning taxpayers will move through them faster and will reach the higher tax rates at income level lower than under the TCJA.

Personal Exemptions

A personal exemption is an amount a taxpayer was allowed to reduce their taxable income for themselves, a spouse (if married and filing joint) and for each dependent. Under the TCJA, personal exemptions were eliminated. The deduction for personal exemptions will return and be adjusted for inflation for the 2026 tax year. Taxpayers with income above specific thresholds are subject to a phaseout of the personal exemption deduction.

Standard Deduction

The standard deduction is a flat amount that is subtracted from taxable income for taxpayers that do not itemize their deductions and varies based on filing status, age and whether a taxpayer is claimed by another as a dependent. The TCJA doubled the standard deduction. It is currently slated to return to pre-TCJA levels at the end of 2025.

State and Local Tax Deduction

Taxpayers who itemize deductions are allowed to deduct certain state and local taxes (SALT). The TCJA limited this deduction to $10,000 for most taxpayers ($5,000 for married taxpayers filing separate returns). The limitation is scheduled to expire, and taxpayers will again be able to deduct all of their eligible state and local taxes.

Charitable Contributions Deduction

Contributions of cash or property to eligible organizations, including public charities and private foundations, are an itemized deduction that may be claimed as a charitable contribution. Generally, the deduction for charitable contributions is limited to specific amounts of a taxpayer’s adjusted gross income (AGI) depending on the type of property donated and the nature of the receiving organization (e.g., public or private charity). The TCJA increased the limitation for cash donations to public charities from 50% to 60% of AGI. This is scheduled to revert, and cash contributions to public charities will once again be limited to 50% when the TCJA expires for tax year 2026.

Mortgage Interest Deduction

Taxpayers may deduct mortgage interest paid on up to two homes as an itemized deduction. The deduction is limited based on when the loan originated. For loans that originated before December 16, 2017, taxpayers may deduct interest on up to $1 million of acquisition debt. For loans after December 15, 2017, the deduction is limited to debt on the first $750,000. Beginning in 2026, the limitation will revert back to $1 million of acquisition indebtedness.

Miscellaneous Itemized Deduction

The TCJA eliminated the deduction for miscellaneous itemized deductions, which include but are not limited to investment expenses (see Portfolio Expenses – Are They Deductible or Not?), unreimbursed employee business expenses and tax compliance expenses. Prior to TCJA, taxpayers that itemized could deduct the amount of these that exceeded 2% of their adjusted gross income for the year.  The deduction is scheduled to be restored in 2026.

Pease Limitation

The Pease limitation was imposed on taxpayers with adjusted gross income above a certain threshold indexed for inflation. Taxpayers with income above the threshold had certain itemized deductions reduced by 3% of the amount that their AGI exceeded the threshold, not to exceed 80% of their deduction. TCJA suspended the Pease limitation through December 31, 2025.

Child Tax Credit

Taxpayers may generally claim a credit for dependent children under the age of 18. Prior to the enactment of the TCJA, the credit was $1,000 per qualifying child. Taxpayers whose adjusted gross incomes exceeded $110,000 saw the credit begin to phase out. The TCJA doubled the credit and increased the level at which taxpayers began to be phased out increase to $400,000. The credit and the phase out limitations will revert back to the pre-TCJA amounts starting in 2026.

Deduction for Pass-through Business Income

Business income from pass-through entities (e.g., partnerships, entities taxed as S corporations and business activities reported on a taxpayer’s Form 1040) is taxed at ordinary individual income tax rates. TCJA created a deduction equal to 20% of qualified business income subject to various limitations. The deduction for qualified business income is scheduled to expire December 31, 2025.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a separate tax that requires taxpayers to calculate their tax liability twice, first under the ordinary income tax rules then under AMT rules and pay the higher of the two. In calculating AMT there are fewer deductions allowed, different exemptions, phase outs and rates than under the ordinary tax rules. TCJA temporarily raised the exemption and the phase out. This in conjunction with TCJA restricting the deduction of several itemized deductions that are not allowed under AMT will likely cause more taxpayers to be subject to AMT when TCJA expires.

Estate and Gift Tax

The lifetime estate and gift exemption is the maximum amount of assets an individual can give away during life or at death without incurring federal estate tax. The 2024 lifetime gift and estate exemption was $13.61 million. The amount is indexed for inflation and has increased to $13.99 million for 2025. The exclusion is scheduled to revert to pre-TCJA levels adjusted for inflation on January 1, 2026. Current estimates for the lifetime estate and gift exemption in 2026 is approximately $7 million.

The following examples explore what 2026 taxes may look like if TCJA is extended vs. if TCJA expires as scheduled. Both scenarios use estimates of inflation adjusted brackets.

Scenario One: Married couple filing jointly, no children, combined wage income of $400,000, renting in Texas, so they claim the standard deduction.

In this scenario the taxpayer’s income tax is estimated to be $16,781 more if TCJA provisions expire.

Scenario Two: Married couple filing jointly, two children, combined wage income of $300,000, qualified business income from Schedule C business $300,000, paid property taxes of $15,000, paid state and local income tax of $30,000, mortgage Interest $20,000 and cash contributions to public charities $10,000.

In this scenario the taxpayer’s tax is estimated to be $35,469 more if TCJA provisions expire.

The Changing Tax Landscape

The provisions discussed above are not an exhaustive list of individual TCJA provisions that are scheduled to expire. Stay tuned for additional information as we wait to see what happens with the tax law. Contact us to discuss questions on the individual TCJA provisions or any other related topics.

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