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TCJA Sunsetting: What This Means for Your Tax Bill

Caroline J. Marschall June 11th, 2024

Starting January 1, 2026, several provisions of the Tax Cuts and Jobs Act (TCJA) will expire, leading to significant changes in the tax code. Here are the key changes, along with additional important information:

  1. Income Tax Rates: Personal income tax rates will increase across most brackets, with the top rate returning to 39.6% from 37%, and other brackets similarly reverting to higher pre-TCJA rates​.
  2. Standard Deduction: The nearly doubled standard deductions will revert to pre-TCJA levels, reducing the deduction for single filers from $13,850 to approximately $6,350​​.
  3. Personal Exemptions: The personal exemption, which was eliminated by the TCJA, will be reinstated, allowing deductions for the taxpayer and dependents​.
  4. Child Tax Credit: The maximum amount for the child tax credit will decrease from $2,000 to $1,000 per qualifying child, and the credit for other dependents will expire​.
  5. State and Local Tax Deduction (SALT): The $10,000 cap on the deduction for state and local taxes will expire, potentially allowing for larger deductions
  6. Mortgage Interest Deduction: The cap on the mortgage interest deduction will revert from $750,000 to $1 million, and interest on home equity loans will again be deductible regardless of the loan’s purpose​.
  7. Miscellaneous Itemized Deductions: The ability to deduct miscellaneous expenses exceeding 2% of AGI will be restored​​.
  8. Limitation on Itemized Deductions: The phaseout of itemized deductions for higher-income taxpayers will return​​.
  9. Alternative Minimum Tax (AMT): The AMT exemption amounts will revert to lower, pre-TCJA levels​.
  10. Qualified Business Income Deduction: The 20% deduction for pass-through business income will expire​.
  11. Estate and Gift Tax Exemption: The doubled exemption amounts will be reduced by about half, significantly lowering the amount that can be passed on tax-free​.
  12. Bonus Depreciation: The allowance for 100% bonus depreciation will phase out, reducing the amount that can be immediately expensed for property used in a trade or business​.
  13. Qualified Opportunity Zones: The ability to defer capital gains by investing in Qualified Opportunity Funds will end​​.
  14. Corporate Tax Rate: Under the TCJA, the C corporate tax rate was permanently reduced to 21%. This rate will remain unchanged even after the individual tax provisions expire in 2026. This creates a disparity as pass-through entity owners will face higher effective tax rates of up to 39.6%, while C corporations will continue to benefit from the lower 21% tax rate. It’s important to note that while double taxation occurs at both the corporate level and again at the shareholder level when dividends are received, a significant portion of C corporation shareholders never pay the second level of tax on dividends. Studies estimate that in 2026, between 24.7% and 30.1% of C corporation shareholders will not be subject to tax, compared to an estimated 42.5% before the TCJA​.
  15. Economic Impact: At the end of 2025, the individual tax provisions in the TCJA will expire all at once, leading to notable tax increases for most taxpayers in 2026 without congressional action. Business taxes will also be higher as 100% bonus depreciation phases down and TCJA base broadeners like research and development (R&D) amortization and tighter interest deduction limits remain in effect. Policymakers may consider extending the current TCJA policies for individual tax provisions and canceling the business tax hikes. The Tax Foundation estimates that making these provisions permanent would cost about $3.8 trillion over the 10-year budget window from 2025 through 2034​.​.

The tax hikes from TCJA expiration would vary across the United States, with the largest average tax hikes experienced by taxpayers in high-tax states like California. For example, the San Francisco area would see an average tax hike of $16,127 per taxpayer, the highest in the U.S. By contrast, northern New York City would see an average tax increase of $807 per taxpayer. Across all congressional districts, the average tax increase would be about $2,853 per taxpayer compared to current policy where TCJA remains in place and the business tax hikes are canceled​.

Additionally, the geographic variation in individual tax provisions, such as the SALT deduction cap, impacts taxpayers in higher tax localities, particularly on the U.S. coasts. Permanence for TCJA is estimated to create about 904,000 full-time equivalent jobs, with significant job creation in states like California and Texas. The resulting increase in employment, wages, and GDP would not occur if the TCJA is allowed to expire as scheduled in 2026​.

For a detailed understanding and personalized advice, please check in with your CPA or call our offices for more information.