The Tax Cuts and Jobs Act (TCJA), enacted in early 2018 marked one of the most significant overhauls of the U.S. tax system in decades which reduced tax rates for individuals and entities, and altered deductions and depreciation rules. Although many of the provisions are set to expire at the end of 2025, the landscape could shift significantly in the interim with the election on the horizon.
If Congress does not extend the TCJA, the expiring provisions will have a profound impact on many U.S. taxpayers. The looming expiration of the TCJA provisions poses unique challenges. Here is a summary of potential changes:
Key Changes and Their Potential Impact
- The Qualified Business Income (QBI) deduction which allows up to a 20% deduction on QBI income will be eliminated at the end of 2025, meaning that pass-through income will be taxed at the individual rate without the benefit of a QBI deduction. This could significantly impact S Corps, potentially prompting a reconsideration of their corporate structure to C Corporation status to take advantage of the stable 21% corporate tax rate.
- The corporate tax rate will remain at 21% even after the TCJA completely expires. If no changes are made, this may lead owners of pass-through entities to consider switching to a C Corp status to avoid having their pass-through income taxed at higher individual rates.
- Individual tax rates will revert to their pre-TCJA levels, with the highest tax rate going from 37% to 39.6%.
- The standard deduction amount will be cut approximately in half. While this may result in taxpayers once again itemizing their deduction, some taxpayers may find their itemized deductions will be less than the higher standard deduction under TCJA.
- The child tax credit will revert from $2,000 per qualifying child to $1,000 per qualifying child. And the phaseout will drop from $400,000 for married joint filers to $110,000.
- The SALT cap of $10,000 will expire at the end of 2025, allowing taxpayers to deduct their full amount of eligible state, local, and foreign taxes. This would also impact the popular pass-through election many states have adopted to get around the SALT cap.
- The estate and gift tax exclusion will be cut approximately in half, reduced from $10M to $5M per decedent (adjusted annually for inflation).
- The TCJA allowed a 100% bonus depreciation on assets with useful lives of 20 years or less, which will begin to sunset by decreasing 20% per year starting in 2022 and will expire on January 1, 2027. As this bonus depreciation rate sunsets, businesses will need to assess whether to place qualified assets into service now to take advantage of the rate before it continues to decline.
With an eye on the election, it will be an opportunity for significant tax reform, especially with the expiration of these provisions. By staying informed and agile, banks and financial advisors can navigate these potential changes effectively, ensuring compliance, optimizing tax strategies, and continuing to provide value to their clients in a shifting tax environment.
Connect with a Pinion advisor to understand and navigate these changing tax provisions in 2025.
