TCJA Sunset

What Are The Implications Of The Tax Cuts and Jobs Act (TCJA) Sunset?

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The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the United States tax system, impacting individuals, families, and businesses alike. However, it’s crucial to recognize that many of the provisions within the TCJA are expiring on December 31, 2025. As we approach the sunset provisions of the TCJA, it’s essential to understand how these changes might affect you and to plan accordingly.

What is the TCJA?

The Tax Cuts and Jobs Act (TCJA) is a significant piece of tax legislation that was signed into law by President Donald Trump in December 2017. It represents one of the most substantial overhauls of the United States tax code in decades. 

The TCJA introduced various provisions that were designed to stimulate economic growth, simplify the tax code, and provide relief for taxpayers. However, many of these provisions were temporary and are set to expire unless Congress takes action to extend them.

What expires with the TCJA sunset? 

1. Income tax

The expiration of income tax reductions implemented by the TCJA could have a direct impact on numerous Americans. The tax brackets will return to their pre-TCJA levels, resulting in increased tax rates for many taxpayers. For instance, many of our 30s and 40s clients will likely see their federal income tax bracket jump from 24% to 28%.

Given the prospect of a potentially higher tax landscape in the future, you may want to investigate avenues to capitalize on the current lower brackets. This could involve considering strategies like accelerating income when feasible, such as through a Roth IRA conversion or making Roth 401(k) contributions.

2. Deductions

The standard deduction was nearly doubled under the TCJA, providing tax relief for millions of taxpayers. In 2024 this stands at $24,000 for joint filers and $12,000 for single taxpayers. This will revert to pre-TCJA levels for 2026. This will make itemizing, rather than taking the standard deduction, more appealing for many. 

The TCJA expanded the child tax credit, doubling the maximum per-child credit amount, and made it available to more families.

The TCJA also eliminated the phase-out for overall allowable itemized deductions affecting filers above certain AGI thresholds. However, it also restructured several major itemized deductions. Previously, itemizers could claim deductions for all state and local property taxes (SALT), as well as the greater of income or sales taxes. The TCJA imposed a cap on the itemized deduction for total state and local taxes, limiting it to $10,000 annually for both single and joint filers.

The mortgage interest deduction changed as well. Before the TCJA, taxpayers could deduct interest on mortgage payments on the first $1 million of indebtedness acquired to purchase (or substantially renovate) a primary and secondary residence, in addition to the first $100,000 in home equity debt.

However, for taxpayers obtaining new mortgages post-TCJA, deductibility was limited to interest on the first $750,000 of home mortgage debt. 

All of these deductions are set to revert to pre-TCJA levels for 2026.

3. Estate and gift tax

Under the TCJA, the estate and gift tax exemption was doubled from $5 million in 2011 to over $11 million for single filers and $22 million for couples. Today, the federal estate and gift tax threshold stands at $13.61 million per individual and $27.22 million for couples.

In 2026, this exemption is slated to revert to pre-TCJA levels, essentially halving it. It is anticipated to hover around $7 million per individual and close to $14 million for married couples.

For individuals or families with taxable estates exceeding $13 million or $24 million respectively, it’s important to solidify estate plans and capitalize on the current high exemption amount through estate and gifting strategies where feasible. For instance, gifting $11 million now, with the exemption expected to drop to $6.8 million in 2026, enables moving an additional $4.2 million out of the estate tax-free. However, such maneuvers are intricate and should only be undertaken under the guidance of estate attorneys, financial advisors, or tax advisors.

4. Qualified business income deduction

The QBI deduction, or qualified business income deduction, allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from their taxes. In general, the total taxable income in 2024 must be under $191,950 for single filers and $383,900 for joint filers.

The purpose of the QBI deduction was to assist non-C corporation businesses to compete with the reduced 21% tax rate for C corporations.

Beginning in 2026, the QBI deduction will no longer be available. The QBI deduction has resulted in significant tax savings for both large and small pass-through entities. Approximately 95% of American businesses fall under this category. Thus, we expect considerable pressure on Congress to keep the QBI deduction.

When does the TCJA sunset?

The majority of the TCJA’s alterations are set to expire on December 31, 2025. These changes were designed to be temporary, facilitating quicker approval and mitigating impacts on the federal deficit. While there’s a chance that Congress might extend TCJA provisions beyond 2025, this prospect remains unresolved.

The 5 major tax laws that are expected to change in 2026

1. Income Tax
The TCJA reduced marginal rates for the majority of individual tax brackets. However, following the sunset in 2025, those rates could revert to their former levels.

Current tax brackets (2024) vs the expected post-TCJA tax brackets (2026)

Marginal Federal Tax RateTaxpayer Income In 2024
Current rate (2018-2025 per TCJA)Pre-TCJA rate (scheduled to resume in 2026)SingleMarried filing jointlyMarried filing separatelyHead of household
10%10%$0 to $11,600$0 to $23,200$0 to $11,600$0 to $16,550
12%15%$11,601 to $47,150$23,201 to $94,300$11,601 to $47,150$16,551 to $63,100
22%25%$47,151 to $100,525$94,301 to $201,050$47,151 to $100,525$63,101 to $100,500
24%28%$100,526 to $191,950$201,051 to $383,900$100,526 to $191,950$100,501 to $191,950
32%33%$191,951 to $243,725$383,901 to $487,450$191,951 to $243,725$191,951 to $243,700
35%35%$243,726 to $609,350$487,451 to $731,200$243,726 to $365,600$243,701 to $609,350
37%39.60%$609,351 or more$731,201 or more$365,601 or more$609,351 or more

Here are three examples of how much more a ‘married filing jointly’ couple might end up paying in federal taxes in 2026 vs 2024

Taxable Income: $150,000Taxable Income: $250,000Taxable Income: $400,000
Federal taxes due in 2024*$16,700$39,000$75,000
Federal taxes due in 2026*$21,300$46,600$94,800
Federal tax bill increase27.50%19.50%26.40%
*Rough estimates


2. Deductions and tax credits
The TCJA almost doubled the standard deduction while also removing the personal exemption, doubling the child tax credit, capping deductions for state and local taxes at $10,000, and imposing stricter limits on mortgage and home equity interest deductions. These changes are all set to expire in 2026.

Current (2024) standard deduction vs the expected TCJA sunset standard deduction (2026)

2017
(before the TCJA)
201820242026
(after TCJA sunset)
Single taxpayer$6,350$12,000$14,600All revert to
approximate
pre-TCJA levels
Married filing jointly$12,700$24,000$29,200
Head of household$9,350$18,000$21,900

3. Estate & gift tax exemptions
The TCJA roughly doubled the lifetime estate and gift tax exemption. This is set to reduce to around $7 million per person beginning in 2026. 

Current (2024) estate and gift tax exemptions vs the expected TCJA sunset estate and gift tax exemptions (2026)

2017 (pre-TCJA)201820242026 (projected, after TCJA sunset)
Individual$5.49 million$11.18 million$13.61 million$7 million
Married couple$10.98 million$22.36 million$27.22 million$14 million

4. Charitable gifting
The TCJA raised charitable contribution deductions from 50% to 60% of adjusted gross income (AGI). This is set to expire in 2026.

5. QBI Deduction
The TCJA allowed eligible self-employed individuals and owners of pass-through entities to deduct up to 20% of their qualified business income from their taxable income. This is set to expire in 2026.

C-Corporation vs Pass-Through Taxation

Pre-TCJA (Before 2018)TCJA (2018-2025) C-Corporation TaxationPost-TCJA (After 2025)
C-Corporation Net Income$1,500,000$1,500,000$1,500,000
C-Corporation Tax Rate35%21%21%
C-Corporation Tax$525,000$315,000$315,000
C-Corporation Dividend*$975,000$1,185,000$1,185,000
LT Capital Gains Tax Rate**23.80%23.80%23.80%
Capital Gains Tax$232,050$282,030$282,030
Total Corporate and Individual Tax$757,050$597,030$597,030
Total Effective Tax Rate50.47%39.80%39.80%
Total Income After Tax$742,950$902,970$902,970
Pass-Through Taxation
LLC Net Income***$1,500,000$1,500,000$1,500,000
QBI Deduction (20%)****-$-300,000-
Taxable Income$1,500,000$1,200,000$1,500,000
Highest Individual Tax Income Rate39.60%37%39.60%
Total Individual Income Tax$594,000$444,000$594,000
Total Effective Tax Rate39.60%29.60%39.60%
Total Income After Tax$906,000$1,056,000$906,000
Advantage Of Tax Rate For LLC10.87%10.20%0.20%
*Assumes 5 shareholders each owning 20% of the C-Corporation.
**Tax assumes a 20% capital gains tax rate and 3.8% net investment income tax.
***Assumes 5 partners each owning 20% of the LLC.
****Assumes each partner qualifies for the QBI deduction.


What should I do to plan for the TCJA sunset?

1) You may want to consider a Roth conversion:
If you have a non-deductible traditional IRA then you may want to consider converting it to a Roth IRA before 2026. With a non-deductible traditional IRA, you contribute after-tax funds. If you invested the money and have earnings, the earnings are taxable upon withdrawal or conversion to a Roth. Once in a Roth IRA, it will grow tax-free.

If you anticipate facing a higher marginal tax rate post-TCJA sunset, it could be advantageous to pay taxes on your IRA funds sooner—while TCJA rates are still applicable—rather than waiting until rates revert to pre-TCJA levels.

2) You may want to consider passing down money early:
When the TCJA sunsets, the individual lifetime estate and gift tax exemption is set to decrease from approximately $14 million to $7 million. This means that if you have a large estate it may be advantageous to transfer assets early before the TCJA sunsets.

For example, you may have an estate worth $11 million. If you decide to gift this in 2026 approximately $7 million would be exempt from federal estate taxes, leaving the remaining $4 million subject to taxation. However, if you were to gift $11 million before the conclusion of 2025, all of it might qualify for exemption from gift and estate taxes. 

However, it’s crucial to recognize that the most effective strategy will vary depending on your unique circumstances. Therefore, it’s highly advisable to seek guidance from a financial advisor before committing to any significant financial choices.

>> Wondering where your next dollar should go? Download our free guide to help you decide.

Will the 2024 presidential election affect the TCJA sunset?

While the TCJA is set to expire in 2026, the impending 2024 presidential election adds an intriguing layer of uncertainty to the tax horizon. The outcome of this election has the potential to reshape the tax landscape significantly. It’s influenced not only by the victor of the White House but also by the party securing control of the House and the Senate. We will be monitoring this very closely.

Review your financial strategy before the TCJA sunset

The sunset provisions of the Tax Cuts and Jobs Act (TCJA) will bring about many changes to the tax landscape in 2026. By understanding these provisions and planning accordingly, you can mitigate potential impacts on your finances and take advantage of available opportunities. Stay informed, evaluate your options, and consider consulting a financial advisor to ensure you’re prepared for the changes ahead.

If you are interested in a comprehensive financial plan, join the waitlist for a free consultation with one of our financial planners.

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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