The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, and brought sweeping changes to the tax code. While taxpayers and tax professionals have grown accustomed to these new tax provisions, what many don’t realize is that quite a few of these changes are not permanent.
These temporary provisions will “sunset” or expire at the end of 2025 if there are not additional tax policy changes passed into law. The rationale at the time for the temporary nature of these provisions was compliance with government budgetary constraints.
What is currently set to expire? Here are a few notable sunset provisions.
Income Tax Brackets
For individual taxpayers, the tax brackets have been updated and in some cases reduced under the TCJA. Notably, the top tax bracket was reduced from 39.6% to 37%.
State and Local Tax (SALT) Deduction
The state and local tax (SALT) deduction is an itemized deduction that covers both property taxes and state income taxes paid during the calendar year. Under the TCJA a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayers filing separate returns) for the aggregate of these SALT payments.
The sunset of this TCJA provision will likely be beneficial for many taxpayers as it will remove this $10,000 deduction ceiling. This is especially true for high net worth individuals and those that live in high property tax states.
Mortgage Interest Deduction
Under the TCJA the deduction for interest on “acquisition indebtedness” is limited to debt principal of up to $750,000 ($375,000 for married taxpayers filing separate returns). Acquisition indebtedness is debt incurred to acquire, construct, or improve the taxpayer’s primary or second residence.
The sunset of this TCJA provision will be beneficial for those taxpayers with significant mortgage debt obligations, as it will restore the prior $1 million/$500,000 limitations on debt principal. Additionally there will be greater freedom to deduct interest paid on home equity loans, such as HELOCs.
Qualified Business Income Deduction
The Section 199A Qualified Business Income Deduction was a completely new tax provision added by the TCJA. This provision allows non-corporate taxpayers a deduction of up to 20% of their “qualified business income” (QBI) from a partnership, S Corporation, or sole proprietorship. The QBI deduction can be taken regardless of whether a taxpayer takes the itemized deductions on their Schedule A and has proven to be a valuable tax saving tool for small business owners.
Estate and Gift Tax
Under the TCJA the lifetime exclusion for gift and estate tax was doubled from $5 million to $10 million, adjusted annually for inflation. In 2022 the inflation adjusted exclusion amount is $12.06 million for single taxpayers and $24.12 million for couples. Taxpayers can gift and/or transfer at their death up to this exclusion amount before a 40% flat tax is imposed on the excess.
The sunset of this lifetime exclusion amount may have the most significant impact on taxpayers, particularly high net worth individuals. For taxpayers with a net worth exceeding the pre-TCJA exclusion amounts ($5 million for single taxpayers and $10 million for couples, both adjusted annually for inflation), it will be important to shore up estate plans and where possible take advantage of the higher TCJA exclusion amounts. Proactive and strategic advice from estate planning professionals will be critical prior to the TCJA sunset at the end of 2025.
Origin CPA Group is dedicated to providing proactive tax compliance and we can help you navigate the always changing tax landscape. We strive to provide our clients peace of mind and proactive strategic advice.