Published On: August 28th, 2024|By |Categories: Article, RSM|6.8 min read|

ARTICLE | August 28, 2024

Certain provisions enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Assuming no Congressional action is taken, we will see a reversion to pre-TCJA tax laws and regulations. These changes may result in an almost 10% tax increase for some taxpayers. As the expiration date approaches, it is crucial to understand how these changes might affect your financial situation and begin planning accordingly.

Below is a summary of some expiring TCJA income tax provisions and potential strategies to help you navigate their impact.

Qualified Business Income Deduction

TCJA provided a 20% deduction for qualified business income, which is set to expire after Dec. 31, 2025.

Planning point:

This expiration together with increasing marginal rates could lead to a 10% increase in tax rates and an 18.6% current difference between corporate and flow-through taxation. To mitigate the impact, evaluate your tax form of organization and planning strategies to account for this loss of deduction. Restructuring your business or changing the nature of your income could help maintain tax efficiency.

Top income tax rate increasing to 39.6%

The current top ordinary income tax rate of 37% will revert to a pre-TCJA rate of 39.6%. High-income earners will see an increase in tax liability if they do not adjust their tax planning strategies now.

Planning point:

Accelerating income recognition may help you take advantage of the lower tax rate. Consider implementing following techniques before Dec. 31, 2025:

  • Exercising non-qualified stock options
  • Accelerating business sales
  • Making Roth conversions for retirement plans
  • Avoiding deferred compensation

Standard deduction amount reduced

TCJA significantly increased the standard deduction amounts starting in 2018. These increased amounts are set to be reduced after Dec. 31, 2025

Planning point:

Consider the timing of your future medical expenses, charitable contributions, and other itemized deduction expenses. Delaying itemized deductions to the 2026 calendar year, when possible, could optimize your tax benefits by using the higher standard deduction now and taking advantage of expanded itemized deductions post-TCJA.

Removal of state and local tax (SALT) deduction limits

If the cap expires as scheduled, taxpayers will be able to deduct the full amount of their state and local taxes without the $10,000 limitation.

Planning point:

Factor in SALT deductions when evaluating your investment structure and future acquisition plans. Also, if possible, be mindful of the timing of your tax payments. State, local and property taxes are deducted in the year paid, which can differ from the year assessed. Deferring the payment of certain state and local taxes until after the cap is removed may be right for you.

Personal exemptions and certain itemized deductions will be back

The reintroduction of personal exemptions and certain itemized deductions will allow taxpayers to benefit from these items that were unavailable for tax years 2018 through 2025.

Additionally, after Dec. 31, 2025:

  • 2% floor itemized deductions such as accounting fees will be deductible.
  • Employees will again be able to claim the home office deduction, provided they meet the eligibility criteria.
  • The mortgage interest deduction limits will revert to the pre-TCJA levels, allowing interest on up to $1 million of mortgage debt to be deductible, regardless of when the loan was taken out
  • The deduction for interest on home equity loans will also revert to pre-TCJA rules

However, with the Pease limitation set to return in 2026, high-income taxpayers may see a decrease in their itemized deductions.

Planning point:

Do your miscellaneous deductions exceed the 2% of your adjusted gross income (AGI)? If you currently or historically itemized, plan to maximize these benefits.

  • Review your investment strategies for deductible investment expenses and ensure a plan is in place to properly document these starting Jan. 1,2026.
  • Evaluate the potential benefits of the home office deduction by ensuring your home office meets the exclusive and regular use criteria. Keep detailed records of all home-office-related expenses.
  • Review your mortgage debt to take advantage of the higher deduction limits post-2025. Pay attention to nondeductible interest and review · other ways to deduct both mortgage and non-mortgage interest.
  • Plan for the reintroduction of the Pease limitation, which reduces the value of itemized deductions for high-income earners and strategize accordingly to minimize its impact on your tax liability.

Opportunity zone capital gain deferral

TCJA established opportunity zones to encourage economic development and job creation in low-income communities. Investors could defer tax on prior capital gains if they reinvested those gains in Qualified Opportunity Funds (QOF) within 180 days of the sale or exchange. The deferral lasts until the earlier of the date the QOF is sold or exchanged, or Dec. 31, 2026.

Planning point:

  • Do you have the cash flow necessary to pay the tax liability that will be due in 2026?
  • Taxable gain is limited to the current fair market value of your investment over its basis. Consider an appraisal of the new asset including value-reducing discount adjustments, such as lack of control or lack of marketability.
  • Additionally, consider the potential benefits of holding the investment for at least 10 years to qualify for the step-up in basis to fair market value, which can eliminate capital gains on the appreciation of the investment.

Alternative Minimum Tax (AMT) changes

The AMT exemption amounts were increased under TCJA and will revert to lower pre-TCJA levels. The phase-out thresholds will also decrease. This change will likely increase the number of taxpayers subject to the AMT, particularly high-income earners, and those with significant itemized deductions or nontaxable income.

Planning point:

Review your overall tax strategy to account for the lower AMT exemption amounts and phase-out thresholds. Consider the exercise of Incentive Stock Options or adjustments to certain portfolio assets to avoid this additional tax. It may also still make sense to make state Passthrough Entity Tax Elections to minimize AMT exposure.

Utilize 2024 and 2025 as planning years to capitalize on these coming changes. Make the time to evaluate your current financial situation and consider where you want to be post-TCJA. Although it may seem logical to delay planning until markets are less volatile and upcoming election results provide more certainty, these decisions require careful consideration and should not be delayed.

Also, the TCJA roughly doubled the estate, gift and generation-skipping tax exemptions. That increase will sunset on Dec. 31, 2025. If you have not yet taken advantage of the increased exemptions, now is a great time to consider making lifetime gifts.

Need help understanding the impact of expiring TCJA provisions? Our tax team is ready with technical expertise and industry awareness to help you evaluate your unique circumstances. Don’t wait until it’s too late. Contact your tax advisor today to discuss how to make the most of the current tax landscape.

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This article was written by Andy Swanson, Amber Waldman, Scott Filmore, Maddie Calder and originally appeared on 2024-08-28. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/tax-alerts/2024/impacts-of-expiring-tcja-tax-provisions.html

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The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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