Kevin Kingston: Possible changes on horizon if TCJA sunsets

Should you be considering the possibility of tax rates reverting to their pre-2018 levels? While anything could happen between now and the end of 2025, it’s probably a good idea to stay up to date on which provisions could expire and discuss the implications with your financial, estate, or tax advisor. Here is an overview of some of the Act’s sunsetting provisions:

The TCJA lowered tax rates for many individuals and married couples. If allowed to sunset on Dec. 31, 2025, the following rate changes could revert to their 2017 levels:

• The 12% rate could return to 15%
• The 22% rate could return to 25%
• The 24% rate could return to 28%
• The 37% rate could return to 39.6%

When first enacted, the TCJA increased the standard deduction in 2018 to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. If allowed to revert to their pre-TCJA schedule, these amounts would be much lower. For 2018, before the TCJA, the standard deduction for married filing jointly would have been $13,000, $9,550 for head-of-household filers, and $6,500 for all other taxpayers.

Mortgage interest: The TCJA temporarily limited home-equity loan interest deductions to the first $750,000 of debt for any loan that originated after Dec. 15, 2017. If allowed to revert to pre-TCJA levels, taxpayers could generally deduct interest on the first $1 million of home mortgage debt and $100,000 on a home equity loan.

State and local tax (SALT): The TCJA capped the SALT deduction at $10,000 for taxpayers who itemize. This could include state and local income, sales (in lieu of income), real and personal property taxes, and foreign income taxes (but not foreign real property taxes). If allowed to sunset, taxpayers would potentially be able to deduct all eligible state and local income, sales (in lieu of income), real and personal property taxes, foreign income taxes, and foreign real property taxes.

Other itemized deductions: The TCJA does not allow most miscellaneous itemized deductions, such as unreimbursed employee business expenses or investment expenses.

Under the TCJA, the personal exemption amount used to calculate taxable income was effectively eliminated until the sunset date. Before the TCJA, for 2018, it would have been $4,150 per taxpayer, subject to income limitations.

The TCJA increased the child tax credit to a maximum of $2,000 per qualifying child and allowed a $500 credit for each dependent who isn’t a qualifying child. If allowed to lapse, the $2,000 tax credit will revert to $1,000.

The basic estate and gift tax exemption effectively doubled under the TCJA and included annual inflation adjustments. For 2024, the exemption is $13.61 million for individuals and $27.22 million for married couples. Unless Congress makes changes, the exemption will revert to 2017 levels, which was $5.49 million for individuals and $10.98 million for married couples.

This is an important area to watch for families who plan to pass on their wealth. If this provision is allowed to sunset at the end of 2025, those who adopt a “wait and see” posture may lose the ability to save on their estate taxes.

At this point, we don’t know whether Congress intends to renew, modify, or let the provisions from the TCJA sunset as planned, but it never hurts to be prepared. Consider scheduling a meeting with your estate planning attorney, financial advisor, and tax preparer to help develop a plan.