TCJA Provisions are Ending – What You Need to Know

by | Jun 7, 2024 | Tax Awareness | 0 comments

Dear Friends,

The Tax Cuts and Jobs Act (TCJA) of 2017 made many changes to U.S. tax law. However, many of those changes included sunset provisions that will cause them to expire at the stroke of midnight on January 1, 2026, unless Congress acts to extend them. In the event that no changes are made, and the sunset takes place, we have included a list of relevant changes that would occur and may affect your bottom line.

The Legacy Foundation has been helping clients address significant changes that impact on their long- and short-term planning goals for over 30 years.  Whether it’s through policy or personal changes, we have the tools and credentials to keep our clients’ financial plans up to date on a continuous basis.

Please find below a list of some of the major provisions that will sunset in 2026.

  • Marginal Tax Rates
      • Marginal tax rates are set to revert to pre-2017 levels.
      • Background: The marginal tax rate is the highest tax rate one pays on their income. The U.S. income tax system is a progressive system; that is, tax rates rise as you earn more income. A tax bracket is a range of income that is taxed at a certain rate. A “lower” bracket is subject to tax at a lower rate than the “higher” brackets.
      • Outline of Changes
          • Current Brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
          • New Brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
  • Standard Deduction
      • The standard deduction will return to its 2017 amount indexed for inflation.
      • Background: When calculating taxable income, taxpayers may deduct the “standard deduction” from adjusted gross income (AGI) or elect to itemize their deductions if they exceed the standard deduction.
      • Outline of Changes
          • Current Standard Deduction: $29,200, for married individuals filing jointly and $14,600 for single filers.
          • New Standard Deduction: the standard deduction will return to its 2017 amount indexed for inflation. The official figures have not yet been announced but current estimations put it around $14,600 for married filing jointly and $7,300 for single filers.
  • Child Tax Credit
      • The maximum amount of the child tax credit and the additional child tax credit will be reduced from the increased amounts allowed by the TCJA.
      • Background: The Child Tax Credit is meant to provide some tax relief for families. The credit was worth $2,000 per qualifying dependent child if your modified adjusted gross income was $400,000 or below when married filing jointly ($200,000 or below all other filers) with a progressive phase out above these figures. Different from an exemption or deduction, which decrease your taxable income, a credit is essentially a rebate.
      • Outline of Changes
          • Current tax credit: worth up to $2,000 per child and phaseout occurs between $400,000 and $480,000.
          • New tax credit: worth up to $1,000 per child and phase out occurs between $100,000 and $150,000.
  • Personal Exemptions
      • The personal exemption will be reinstated and return to its 2017 amount adjusted for inflation.
      • Background: A personal exemption is the amount of money you can deduct for yourself and each of your qualifying dependents on your tax return. In 2017, this number was $4,050.
      • Outline of Changes
          • Current Exemption: No exemption currently.
          • New Exemption: The exact figures have not been released yet, but in 2017 the exemption was $4,050. There was a phaseout for those with an income (AGI) in excess of $384,000 (single) and $436,000 (joint).
  • Itemized Deductions
      • The limitation on the deductibility of itemized deductions will be reinstated.
      • Background: In the case of an individual whose adjusted gross income exceeds the applicable threshold (In 2017, $313,800 joint and $261,500 single), the amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by the lesser of 3% of the excess of adjusted gross income over the threshold or 80% of the amount of the itemized deductions otherwise allowable.
      • Outline of Changes
          • Current: No limitation on deductibility based on income.
          • New: The new limitation will be implemented as discussed above.
  • Mortgage Interest Deductions
      • Restrictions on the deduction for interest paid on mortgage debt will be raised.
      • Background: For those who itemize their deductions (instead of utilizing the standard deduction) the mortgage interest deduction allows you to deduct the interest paid on the first $750,000 of your mortgage from your taxable income.
      • Outline of Changes
          • Current Mortgage Interest Deduction: Allows for the deduction of interest paid on the first $750,000 of a mortgage.
          • New Mortgage Interest Deduction: Allows for the deduction of interest paid on the first $1,000,000 of a mortgage.
  • Charitable Contributions
      • The deductibility of charitable contributions will revert to their previous limitations
      • Background: For those who itemize their deductions, when looking to account for charitable donations the limit of how much of that you can deduct from your taxable income will decrease.
      • Outline of Changes
          • Current Charitable Contributions Limit: Taxpayers can deduct an amount up to 60% of AGI (charitable organization dependent) for charitable contributions.
          • New Charitable Contributions Limit: Taxpayers will be able to deduct an amount up to 50% of their AGI (charitable organization dependent) for charitable contributions.
  • Deduction for State and Local Taxes (SALT Tax)
      • The SALT Tax limit will revert to its 2017 amount adjusted for inflation.
      • Background: The SALT tax deduction allows for those itemizing their filing to deduct certain state and local taxes.
      • Outline of Changes
          • Current SALT Tax Deduction: Taxpayers can deduct a maximum of $10,000.
          • New SALT Tax Deduction: Taxpayers have no limit on the amount of SALT tax they can deduct.
  • Estate Tax Exclusion
      • The estate exclusion will revert to 2017 amounts adjusted for inflation.
      • Background: The estate exclusion is used to determine how much of your estate will be taxed. When someone dies, if the value of their estate exceeds the allowable exclusion, then the amount in excess is subject to the federal estate tax. This adjustment carries substantial implications considering the current federal estate tax rate of 40%.
      • Outline of Changes
          • Current Estate Exclusion: $13.61 million for individuals and $27.22 million for couples.
          • New Estate Exclusion: $5 million (2017), adjusted for inflation for an individual and approximately twice that amount for a couple.
  • Alternative Minimum Tax (AMT)
      • Both the phaseout thresholds and the preference items of the AMT will revert to their 2017 levels adjusted for inflation.
      • Background: The AMT sets a minimum on the amount of tax that individuals must pay regardless of the number of deductions and credits the filer has. The AMT recalculates income tax by adding back several tax preference items. Preferential deductions are added back before subtracting the AMT exemption to determine the final taxable amount.
      • Outline of Changes
          • Current Alternative Minimum Tax Thresholds and Items: Elevated exemptions and phaseout thresholds. Additionally, the preclusion of deductions such as SALT taxes, personal exemptions, and the deduction for miscellaneous business expenses from being added back to determine AMT.
          • New Alternative Minimum Tax Thresholds and Items: Lowering of the exemption and phaseout thresholds. Inclusion of deductions such as SALT taxes, personal exemptions, and the deduction for miscellaneous business expenses when adding back to determine AMT.

Sources:

  1.  The Tax Cuts and Jobs Act of 2017 (TCJA): Pub. L. 115-97, 131 Stat. 2054
  2. For a complete list of provisions of the TCJA that expires on January 1, 2026, see Congressional Research Service, Reference Table: Expiring Provisions in the “Tax Cuts and Jobs Act” (TCJA, P.L. 115-97), R47846, November 21, 2023. For a list of all expiring tax provisions, see Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2022-2034, January 18, 2023, JCX-1-23.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.