The Sunsetting of the Tax Cuts and Jobs Act of 2017: What it means for you and your clients
By Alan Friedman
The Tax Cuts and Jobs Act (TCJA) of 2017 was one of the most significant pieces of tax legislation in recent U.S. history, marking a major shift in the country's tax policy. The law provided substantial tax cuts for individuals, corporations and businesses while also making adjustments to other areas such as international tax policy and deductions. However, many provisions of the ACT were designed to expire in phases, with many of the individual tax cuts set to end by December 31, 2025. If Congress does not intervene, these changes will revert to pre-2017 tax law levels, meaning that tax rates could rise and certain deductions or credits could disappear.
One key area we focus on is Estate Planning, and a common question we receive is how to plan and prepare in today's uncertain tax environment.
A widely-used strategy is purchasing life insurance outside of the estate, typically through an irrevocable trust, to provide liquidity when it is needed to pay estate taxes. Because there is an unlimited marital deduction for estate taxes and the ability to carry over an unused exemption with a portability election, the need for estate tax liquidity usually arises upon the death of the second spouse (via a survivor policy). If estate tax liability turns out to be lower than expected or even eliminated, the life insurance policy is not wasted. It can still provide a legacy for children and grandchildren or support a charitable cause that was important to the insured during their lifetime.
Potential Impact of Sunsetting Provisions
The sunsetting of the TCJA provisions presents both risks and opportunities, with significant consequences for taxpayers, businesses, and the overall economy.
Higher Taxes for Individuals: If the individual tax cuts are allowed to expire in 2025, most taxpayers will face higher tax bills. Lower tax brackets will increase, meaning individuals and families may see a reduction in their after-tax income. Additionally, the expiration of the expanded child tax credit and the higher standard deduction will likely lead to a reduction in tax benefits for many households.
Challenges for High-Tax States: The expiration of the SALT deduction cap will particularly impact taxpayers in high-tax states such as California, New York and New Jersey, which have been most affected by the $10,000 limit. With the cap set to expire, taxpayers in these areas could see their tax burdens ease somewhat, but the ultimate effect depends on future tax policy decisions at the state level.
Business Impacts: While the corporate tax cuts are permanent, other provisions that affect businesses, such as the deduction for pass-through entities, are set to expire. If these provisions are allowed to sunset, it could raise the tax burden for small business owners and certain corporations. However, businesses may also benefit from a potential restructuring or extension of tax policies before the expiration.
Increased Deficit and Debt Concerns: The expiration of the TCJA provisions could have an impact on the federal deficit and national debt. While the tax cuts initially spurred economic growth, many economists argue that they also contributed to increased budget deficits. If tax cuts for individuals expire, the government may face reduced revenue, while simultaneously dealing with a potentially growing debt burden from pandemic-era spending and other fiscal challenges.
Key Provisions Set to Expire
Individual Income Tax Rate Reductions: The TCJA lowered tax rates for individuals across most income brackets. However, these reduced rates are set to expire at the end of 2025, reverting back to the pre-TCJA levels.
Standard Deduction Increase: The TCJA almost doubled the standard deduction, making it $12,000 for individuals and $24,000 for married couples filing jointly in 2018 (subject to inflation adjustments). After 2025, these amounts will return to previous levels unless renewed.
Child Tax Credit Expansion: The TCJA increased the child tax credit to $2,000 per qualifying child and expanded eligibility. However, this expansion will expire after 2025, and the credit is set to revert to $1,000 per child.
Limitation on State and Local Tax (SALT) Deductions: The TCJA capped the SALT deduction at $10,000, limiting the amount taxpayers could deduct for state and local taxes paid. This provision is one of the most contentious aspects of the law, particularly for taxpayers in high-tax states. It is set to expire in 2025, potentially allowing for a larger deduction.
Elimination of Personal Exemptions: The TCJA temporarily suspended the personal exemption (which allowed taxpayers to deduct a set amount for themselves and their dependents) through 2025. This provision would also expire, leaving taxpayers without this deduction.
Estate Tax Changes: The TCJA doubled the exemption for the estate tax, allowing individuals to pass on up to $11.18 million (in 2018) before triggering estate taxes. This exemption is set to return to previous levels after 2025, potentially subjecting more estates to tax.
It's essential to consider the estate planning needs of you clients not only considering current laws but also with an eye on potential changes in 2026. While we can't predict with certainty what Congress will do before January 1, 2026, clients should begin planning now to address key goals, such as tax obligations, family support and charitable giving.