The Tax Cuts and Jobs Act (TCJA) introduced comprehensive reforms to the U.S. tax code, many of which significantly reduced tax liabilities for businesses and individuals. However, several key provisions of the TCJA are set to expire at the end of 2025, reverting to pre-2018 rules unless Congress intervenes. Understanding these changes, the legal framework under the Internal Revenue Code (IRC), and potential strategies to address them will help practitioners effectively guide clients through the upcoming transition.
What Are the Key Expiring Provisions?
Several impactful TCJA provisions are temporary, meaning they will sunset after December 31, 2025, barring legislative extensions. These include:
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- Individual Income Tax Rates: Lowered marginal rates for individuals will revert to pre-2018 levels, with the top rate increasing from 37% to 39.6% (IRC § 1(j)).
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- Standard Deduction: The doubled standard deduction ($12,000 for individuals, $24,000 for married couples filing jointly in 2018) will return to prior levels, reducing the threshold for itemizing deductions.
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- Child Tax Credit: The expanded credit of $2,000 per qualifying child will revert to $1,000, and higher income phaseout thresholds will be eliminated.
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- Estate and Gift Tax Exemptions: The exemption will drop from over $12 million to approximately $6 million per individual (IRC § 2010(c)).
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- Qualified Business Income Deduction (§199A): The 20% deduction for pass-through entities will expire, impacting small businesses structured as partnerships, S corporations, or sole proprietorships.
Impact on Businesses and Individuals
The expiration of these provisions will increase tax liabilities for many taxpayers:
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- Individuals: Higher marginal rates and reduced deductions will result in increased taxable income.
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- Businesses: Pass-through entities will face higher effective tax rates without the §199A deduction, while C corporations retain their flat 21% rate.
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- High-Net-Worth Taxpayers: Reduced estate and gift tax exemptions will necessitate revisions to estate planning strategies to minimize tax exposure.
Strategies to Mitigate Impact
Practitioners should work with clients proactively to prepare for these changes:
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- Accelerate Income or Deductions: High-income taxpayers may benefit from recognizing income before rates increase or claiming deductions while thresholds are higher.
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- Estate Planning: Individuals should consider gifting strategies or other mechanisms to utilize the elevated estate tax exemption before it reverts to lower levels.
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- Review Entity Structures: Businesses should evaluate whether a transition to a C corporation or another entity type is beneficial in light of the expiring §199A deduction.
Misconceptions About Expiring Provisions
Corporate Tax Rates
Many clients mistakenly believe the corporate tax rate is also temporary. Unlike individual rates, the corporate tax reduction to 21% under the TCJA is permanent, providing stability for C corporations.
Estate and Gift Taxes
Some taxpayers assume that lower exemptions will not apply retroactively to prior gifts or estates. However, IRS guidance clarifies that prior gifts under the higher exemption will not be “clawed back” (IRS Notice 2019-41).
Legislative Action
There is often optimism that Congress will extend these provisions. While possible, the political climate may delay or prevent such action, making it prudent to plan based on current law.
Relevance for Tax Practitioners
As the expiration of key TCJA provisions approaches, tax practitioners must proactively guide clients through strategic planning to minimize financial disruptions. By staying current on legislative developments, practitioners can help individuals adjust their income and estate planning strategies, such as utilizing elevated exemptions or accelerating deductions, before the provisions sunset. For businesses, assessing the impact of the expiring §199A deduction and evaluating potential restructuring options will be critical. Effective preparation ensures clients are not only compliant with changing tax laws but also optimized for the post-2025 tax landscape, mitigating risks and maximizing opportunities.