Are we headed for a “tax cliff” in 2025?

by taxteam_pjopel

Learn about what provisions are set to expire.

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, represents a significant transformation of the U.S. tax code. As the most substantial tax overhaul in recent decades, it introduced numerous changes that have far-reaching implications for taxpayers. However, many of its key provisions are set to expire at the end of 2025, leading to concerns about what this “tax cliff” might mean for American households.

Key Features of the TCJA

  • Effective Date: The TCJA became effective on January 1, 2018.
  • Provisions Impacting Millions: The law affects numerous aspects of tax policy, including:
    • Changes to the standard deduction.
    • Alterations to the child tax credit.
    • Adjustments in income tax rates.
    • Modifications to various popular tax credits and deductions.

Potential Impacts of Expiration

  • Tax Burden Increases: The Tax Policy Center estimates that approximately 53% of taxpayers could face an increased tax burden if key provisions expire.
  • Tax Rate Changes:
    • For single filers with incomes over $38,700, the federal tax rate dropped from 25% to 22%.
    • Married couples filing jointly with incomes over $80,050 saw their rate decrease from 39.6% to 35%.
  • Distribution of Benefits: Wealthier households (earning $450,000 or more) account for about 45% of the benefits from the TCJA, highlighting a trend where higher-income individuals receive more substantial tax reductions compared to lower-income taxpayers.

Major Provisions at Risk

  • Standard Deduction:
    • Increased significantly:
      • Single filers: from $6,500 to $12,000.
      • Married couples: from $13,000 to $24,000.
    • Indexed for inflation but will revert to lower amounts if the TCJA expires.
  • Child Tax Credit (CTC):
    • Increased from $1,000 to $2,000 per qualifying child.
    • Reverts to $1,000 and limits eligibility to children under 16 if the TCJA expires.
    • Changes to requirements regarding Social Security numbers may affect credit eligibility for some families.
  • Personal and Dependent Exemptions:
    • Eliminated under the TCJA but will return if the law expires.
    • Prior to the TCJA, over 292 million people claimed these exemptions, representing significant potential savings.
  • State and Local Tax (SALT) Deduction:
    • Limited to $10,000, affecting taxpayers in high-cost areas like New York, New Jersey, and California.
    • Previously, there was no cap, allowing for unlimited deductions.
  • Miscellaneous Deductions:
    • Changes include limiting deductible medical expenses and home equity loan interest.
    • Increased charitable contribution deduction rate from 50% to 60%.
    • Elimination of deductions for unreimbursed employee expenses, moving expenses (unless military-related), and others.

Implications for Higher-Income Taxpayers

• Alternative Minimum Tax (AMT):

  • Income thresholds were raised, meaning fewer high-income individuals are subject to AMT.
    • The current threshold for 2024 applies to taxpayers earning above $232,600.
  • Estate Tax Exemption:
    • Increased from $5.6 million to $11.2 million, with inflation adjustments bringing the current exemption to approximately $13.61 million.

Both the AMT and estate tax benefits will revert if the TCJA expires, potentially leading to higher taxes for wealthy individuals.

Business Tax Changes

The TCJA also implemented significant changes for businesses, including:

• Corporate Income Tax Rate:

  • Reduced from 35% to 21%.
  • Business Deductions:
    • Introduced a 20% deduction on qualified business income for pass-through entities.
    • Limited deductions for meals and entertainment expenses
  • Immediate Expensing:
    • Businesses can fully expense certain qualifying assets immediately, a departure from previous depreciation rules. This provision allows companies to invest more upfront, which may lead to job creation and wage increases.

Future Considerations

The expiration of the TCJA’s provisions is a critical issue that will likely be debated in upcoming legislative sessions, particularly following the 2024 elections. Key points to consider include:

  • Bipartisan Proposals: Various political figures have suggested expanding the Child Tax Credit and other provisions, indicating ongoing discussions about tax reform.
  • Planning for Changes: Individuals should consult with tax planners to prepare for potential tax changes in 2026 and beyond.

The Tax Cuts and Jobs Act has fundamentally altered the U.S. tax landscape, with significant benefits for many taxpayers. However, the looming expiration of many provisions raises concerns about future tax burdens and what changes may follow. As lawmakers consider the implications of the TCJA, taxpayers should stay informed and proactive in their financial planning.