Preparing for the Sunset Provisions in the TCJA

By Amy Sewell, CPA, Senior Tax Manager

As part of our ongoing commitment to keep you informed about critical tax topics, we’d like to advise clients about the upcoming sunset provisions and potential tax planning impacts in the Tax Cuts & Jobs Act (TCJA). This is not an exhaustive list but provides information about the most impactful provisions that may expire.

What is TCJA?

The Tax Cuts and Jobs Act, enacted in 2017, introduced sweeping changes to the tax code, affecting nearly every aspect of taxation for the 2018-2025 tax years.¹ Many provisions in the Act are set to expire on December 31, 2025, unless Congress extends them. As such, understanding TCJA provisions and potential tax code changes is essential for proactive planning.

Key TCJA provisions and potential changes:

Individual

• Tax Rates — Current tax brackets are lower than pre-TCJA rates at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, unless Congress extends these lower rates, they will revert to pre-TCJA levels, with the top rate increasing to 39.6%. High-income earners would be most affected by this change.²
• Standard Deduction — The TCJA nearly doubled the standard deduction, significantly reducing the number of taxpayers who itemize deductions. If these provisions expire, the standard deduction will decrease, leading many taxpayers to revert to itemizing their deductions.²
• Mortgage Interest Deduction — For loans that are not grandfathered, this deduction is limited to $750,000 of principal for loans, down from $1M under pre-TCJA rules. Once the TCJA expires, the limit will revert to $1 million.²
• State and Local Tax (SALT) — The TCJA capped SALT tax itemized deductions at $10,000. If the cap is removed, taxpayers in high-tax states could see a significant increase in allowed itemized deductions. However, the alternative minimum tax (AMT) will still be in place to limit deductions for high-income taxpayers.²
• Child Tax Credit — This credit will decrease from $2,000 per dependent to $1,000, affecting taxpayers with dependent children. The TCJA introduced a $500 nonrefundable credit for other dependents, including children 17 and older, and elderly parents. This credit will be eliminated with the TCJA sunset.²
• Charitable Contributions — The TCJA raised the limit on cash donations to qualified charitable organizations from 50% of adjusted gross income to 60%. This will revert to 50% when the TCJA sunsets.³
• Estate and Gift Tax Exemption — The exemption amount will drop significantly from the current $13.99 million per person limit to the $5M pre-TCJA amount, adjusted for inflation.²

Business / Pass-through

• Qualified Business Income Deduction (QBI) —The TCJA enacted a 20% QBI deduction for pass-through entities. Many businesses, including small business owners, currently benefit from this provision. Unless Congress extends it, this deduction will expire at the end of 2025.⁴
• Bonus Depreciation — The TCJA allowed 100% bonus depreciation for qualified property with a decrease of 20% per year starting in 2023. In 2023, the permitted bonus depreciation percentage was 80%. The allowable percentage for property placed in service in 2025 will be 40%. By 2027, bonus depreciation will be fully phased out.⁴
• Business Interest Expense Deduction — The TCJA significantly changed the rules for deducting business interest expense. Before 2018, business interest was generally fully deductible. The TCJA disallows net interest expense that exceeds 30% of the taxpayer’s adjusted taxable income, plus any business interest income and floor plan financing interest. In 2026, the business interest expense deduction will revert to pre-TCJA rules.⁴
• Meals and Entertainment — Before TCJA was enacted, a 50% deduction was allowed for entertainment expenses. This deduction was eliminated with the TCJA but may be restored in 2026 if it expires. Regardless, businesses may continue to deduct 50% of the cost of meals if the taxpayer is present and the meal is not considered extravagant.⁴
• Corporate Rates — The TCJA lowered corporate tax rates to 21% from 35%. However, this provision was made permanent and does not sunset at the end of 2025. Post-TCJA, new legislation will have to be passed by Congress to change or increase corporate tax rates.⁴

Without congressional action, the sunset of these provisions could result in higher overall tax brackets.⁵ Reduced standard deductions and elimination of the 20% QBI deduction could result in higher taxable income for many taxpayers, including small business owners.⁴ For high-net-worth clients, reducing the Estate and Gift tax exemption could dramatically impact estate tax planning strategies, including a greater effort to remove highly appreciated assets from a taxpayer’s estate.

In addition to the key TCJA provisions above, the Act also eliminated some important tax benefits, including suspending the ability to deduct miscellaneous itemized deductions over 2% of AGI.⁶ This includes many expenses, but the most significant are investment advisory fees, tax return preparation expenses, and unreimbursed employee expenses. While significant concerns about tax benefits may be lost with a TCJA sunset, the restored ability to deduct miscellaneous itemized deductions will be a welcome change for many taxpayers.

Post-Election Tax Update

Tax and financial professionals have been closely examining the potential impacts of the TCJA cliff and a second term for President Trump, both of which are expected to significantly influence tax policy beginning in 2025. Based on the 2024 election outcome, it is anticipated that some TCJA provisions (e.g., lower tax rates, higher standard deductions, and the 20% passthrough QBI deduction) are more likely to be extended under Republican control.⁷

However, tax reform is generally expected to be revenue-neutral. This means new laws should generate the same amount of revenue as current laws, which is one of the reasons sunset provisions were included in the TCJA. While it is possible to pass tax reform that is not revenue-neutral, it can be very challenging due to budget constraints, budget reconciliation rules, and political opposition to increased deficits. Therefore, any extension of the TCJA provisions will likely be balanced by other revenue-generating measures, such as reducing energy credits or imposing tariffs.

As the expiration of TCJA approaches, your team is available to help you navigate potential changes in tax laws and adjust tax planning strategies for clients. Please reach out to your advisor if you have questions or need assistance.

Sources:

1. Investopedia (11/4/24) - What Is the Tax Cuts and Jobs Act (TCJA)
2. Tax Policy Center (1/1/24) - How did the Tax Cuts and Jobs Act change personal taxes?
3. Bipartisan Policy Center (12/5/24) - Paying the 2025 Tax Bill: Charitable Deductions
4. IRS (11/5/24) - Tax Cuts and Jobs Act: A comparison for businesses
5. Tax Foundation (10/24/24) - How 2026 Tax Brackets Would Change if the TCJA Expires
6. Investopedia (10/25/24) - Tax Deductions That Went Away After the Tax Cuts and Jobs Act
7. CBS News (12/16/24) - Trump wants to extend his 2017 tax cuts — and more. Here's what that could mean for you.

Disclaimer: The information provided in this webinar is for educational purposes only and should not be considered as financial, tax, or legal advice.

Exencial Wealth Advisors is an SEC registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.