Into the Abyss: TCJA Sunset Twists Await

The Tax Cuts and Jobs Act (TCJA), passed in 2017, reshaped the U.S. tax system significantly, affecting numerous individual U.S. taxpayers. However, it’s essential to recognize that many of these changes weren’t permanent. Several TCJA provisions are slated to expire, or “sunset,” within the next year (effective January 1, 2026), which could lead to a reversal of tax laws to their pre-TCJA status unless further legislation is enacted. It’s important to explore the impacts of the various TCJA provisions that are set to sunset as of 2026 and to review applicable strategies where possible.

1. Income Tax Rates:

The TCJA reduced income tax rates, easing the tax burden for many Americans. But if the sunset provisions go through, the tax rates could return to pre-TCJA levels, potentially raising tax bills and affecting financial plans.

2. Standard Deduction vs. Itemized Deductions:

The TCJA almost doubled the standard deduction and reduced many itemized deductions including charitable donations, leading most taxpayers to benefit from the standard deduction instead of itemizing ever since the TCJA was enacted. If the sunset provisions kick in, these changes could reverse, and the value of the standard deduction would be reduced accordingly. Taxpayers would have to reconsider their deduction choice, possibly affecting their tax owed.

It’s important to note that the TCJA disincentivized charitable donations for most US taxpayers since you only get the benefit of the charitable donation tax deduction when you itemize. If the standard deduction returns to pre-TCJA levels, charitable donations for most US taxpayers may become more financially advantageous once again.

3. Child Tax Credit:

The TCJA boosted the child tax credit, providing additional tax relief for families with children. However, this enhancement is temporary and could be subject to the sunset provisions. If not extended, the child tax credit might revert to its previous, lower amount, impacting families’ tax obligations and financial planning strategies.

4. Estate and Gift Tax Exemption:

Under the TCJA, the estate and gift tax exemption doubled, standing now at $13.61 million USD in 2024. The doubling has offered greater protection from estate tax exposure for more estates. However, this provision is also temporary and could expire under the sunset provisions. If the exemption returns to its pre-TCJA level, more estates might become subject to estate and gift taxes, necessitating adjustments in estate planning for affluent individuals.

5. Alternative Minimum Tax (AMT):

The TCJA raised the AMT exemption and increased the income thresholds for phase-out, resulting in fewer taxpayers being subject to the AMT. However, these changes are temporary and could be reversed if the sunset provisions are enacted. Taxpayers may find themselves once again subject to the AMT, necessitating careful tax planning to mitigate its impact.

6. Qualified Business Income Deduction (QBI):

The TCJA introduced the QBI deduction, offering tax relief for certain pass-through businesses. However, the availability and extent of this deduction hinge on the sunset provisions. If not extended, taxpayers could lose out on this valuable tax break, affecting small business owners and self-employed individuals.

7. State and Local Tax (SALT) Deduction:

The TCJA imposed a $10,000 cap on the deduction for state and local taxes (which includes property taxes), affecting taxpayers in high-tax states. The sunset provisions might lead to changes in the SALT deduction limits, potentially impacting the tax liabilities of individuals residing in states with high income and property taxes.

8. Education-Related Provisions:

The TCJA made various changes to education-related tax provisions, such as the deduction for student loan interest and the treatment of 529 savings plans. These changes, too, are temporary and subject to the sunset provisions. Taxpayers should stay informed about potential reversals of these provisions and adjust their education financing strategies accordingly.

Conclusion:

The TCJA’s sunset provisions introduce uncertainty into the tax planning landscape for individuals. While it’s unclear which provisions will be extended or allowed to expire, taxpayers should stay informed about legislative developments and be prepared to adapt their financial plans accordingly. Consulting with a cross-border tax advisor can provide valuable insights and strategies for navigating potential changes in individual taxation laws.