In 2017, our lawmakers passed the Tax Cut and Jobs Act. The changes in this legislation were written to sunset in December 2025, but the expectation at that time was that Congress would make the changes permanent before December 2025. This has not yet happened. While there is still time to amend the law, the current political environment offers little incentive for either side of the aisle to address this issue for two main reasons.
Firstly, most of the tax changes set to expire in 2025 will lead to increased taxes across the board. According to The Tax Foundation a non-profit nonpartisan tax organization founded in 1937, the TCJA (Tax Cuts and Jobs Act) reduced average tax rates for taxpayers at all income levels. Those changes expire “coincidently” just before the next election cycle – the 2026 mid-terms. The mid-term elections in 2026 will occur before most people feel the effects of these expiring tax laws, which will only become apparent when taxpayers file their 2026 tax returns in April 2027. Politicians rarely act without significant public outcry, so it is reasonable to assume there will be little to no political will to address the sunsetting tax laws before then.
Secondly, in 2017, interest rates were at record lows, and have since increased substantially along with our national debt and deficits. I should note that our national debt has continued to grow regardless of which party has been in office. At present, interest payments on our national debt are the highest in our nation’s history relative to both tax revenue and gross domestic product. Addressing this issue will require budget cuts and tax increases, to which neither party will likely agree. Allowing the tax cuts to expire in 2025 will increase taxes, which addresses part of that problem without any effort by a sitting elected official.
What Tax Laws Are Set to Sunset?
1. Individual Income Tax Rate Reductions: Lower individual income tax rates will revert to pre-2017 rates.
2. Increased Standard Deduction: The nearly doubled standard deduction will revert to lower amounts.
3. Child Tax Credit: The doubled child tax credit from $1,000 to $2,000 per child will revert to the lower amount.
4. Elimination of Personal and Dependent Exemptions: These exemptions will be reinstated.
5. Changes to Itemized Deductions: Several itemized deductions, including a $10,000 cap on the deduction for state and local taxes (SALT), will revert to previous rules.
6. Alternative Minimum Tax (AMT) Adjustments: Increased exemption amounts and raised income thresholds for the AMT will revert to pre-2017 rules.
7. Estate Tax Exemption: The doubled estate tax exemption will revert to the lower exemption amount adjusted for inflation between $6 to $7 million.
On a final note, expect your accountant to be busier than usual next year. With the existing shortages in the accounting and estate planning profession, attempting to execute and finalize plans closer to the deadline will likely be unfeasible.
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