The Tax Cuts and Jobs Act (TCJA) of 2017 made sweeping changes to the Internal Revenue Code (IRC). It lowered tax rates for individuals, businesses and families. Some provisions of the statute are intended to discourage businesses from moving assets overseas. Many of the changes made by the TCJA will expire at the end of 2025 unless Congress acts to extend them or make them permanent. Whether this will happen largely depends on the outcome of the election in November 2024. For now, taxpayers can begin planning for 2025 and beyond based on the schedule provided by the TCJA.
Numerous provisions affecting individual taxpayers will expire on December 31, 2025 under current law. Below are just a few of the changes that will affect taxpayers.
The TCJA lowered individual federal income tax rates for all tax brackets beginning on January 1, 2018. At the beginning of 2026, those rates will revert to their pre-2018 levels. The tax rates for unmarried individuals, for example, will change as follows:
|
Tax bracket (with cost-of-living adjustments for 2024) |
Tax rate under the TCJA (2018-2025) |
Tax rate beginning on January 1, 2026 |
|
1 ($11,600 or less) |
10% |
10% |
|
2 ($11,601 to $47,150) |
12% |
15% |
|
3 ($47,151 to $100,525) |
22% |
25% |
|
4 ($100,526 to $191,950) |
24% |
28% |
|
5 ($191,951 to $243,725) |
32% |
33% |
|
6 ($243,726 to $609,350) |
35% |
35% |
|
7 ($609,351 and up) |
37% |
39.6% |
The TCJA created a deduction based on qualified business income (QBI) from pass-through business entities, such as sole proprietorships, partnerships or limited liability companies (LLCs). QBI is based on net income from business activities earned within the U.S. with some exceptions. The deduction is equal to 20 percent of QBI.
Taxpayers whose taxable income is below the threshold amount may claim this deduction for most types of businesses that meet the above criteria. The threshold amounts for 2024 are $315,000 for married couples filing jointly and $157,500 for everyone else. Above those amounts, only certain types of businesses may qualify.
Under § 199A(i) of the IRC, the QBI deduction will expire on December 31, 2025.
The TCJA raised the Child Tax Credit to $2,000 starting in 2018. The increase specifically only applies to tax years 2018 through 2025. In 2026, the amount of the credit will return to $1,000.
The standard deduction amounts for individuals and families increased on January 1, 2018. The TCJA specified that the higher deduction will expire at the end of 2025:
|
Taxpayer |
Standard deduction under the TCJA (2018-2025) |
Standard deduction in 2026 |
|
Married, filing jointly |
$24,000 |
$13,000 |
|
Head of household |
$18,000 |
$9,550 |
|
Unmarried or married, filing separately |
$12,000 |
$6,500 |
Along with the lowering of the Standard deduction, the SALT (state and local tax) deduction will also be reverting back to pre-TCJA limits. The TCJA capped the SALT deduction at $10,000, which had a significant impact on taxpayers who resided in high-tax states. With the sunsetting of these laws after December 2025, the limitation will expire, which will allow a greater benefit of deducting taxes paid during the calendar year.
The TCJA made some permanent changes to corporate tax law, while others are scheduled to expire or change in 2026.
The corporate tax rate has been 21 percent since 2018. The TCJA did not include any provision limiting the duration of this change. Congress may decide to change the rate again, but it would need a new tax law to do so.
A provision added to the IRC by the TCJA addresses global intangible low-taxed income (GILTI). This is income earned by U.S.-controlled foreign corporations (CFCs) from intellectual property, such as trademarks or patents, and other types of intangible assets.
Shareholders of CFCs must include GILTI in their taxable income, but it is taxed at a lower rate than other corporate income. The TCJA established a 50 percent deduction for GILTI, giving it a tax rate of 10.5 percent. The deduction will decrease to 37.5 percent in 2026, raising the tax rate to 13.125 percent.
The definition of foreign-derived intangible income (FDII) is very similar to that of GILTI. It also deals with income derived from intangible assets, including intellectual property, in other countries.
The TCJA allows a 37.5 percent deduction from the 21 percent corporate tax rate for FDII, which leads to a 13.125 percent tax rate. In 2026, the deduction will decrease, raising the tax rate to 16.4 percent.
The TCJA created a Base Erosion and Anti-Abuse Tax (BEAT) to prevent corporations operating within the U.S. from trying to avoid tax liability by moving profits overseas. The BEAT is a form of minimum tax that applies to corporations that meet the following criteria:
The BEAT is equal to 10 percent of a covered corporation’s “modified taxable income.” In 2026, this rate will increase to 12.5 percent.
Being that 2024 is an election year, whether or not these changes will happen as scheduled, or if there will be different tax law changes made by the elected party is unfortunately unknown. It is important to talk with your tax advisor about your tax situation and discuss how the sunsetting of the TCJA laws may affect your taxes. Now is the perfect time to meet with your tax advisor and go over all of the various potential scenarios so you are fully informed and prepared for the upcoming TCJA sunsetting provisions.
Curious about 2024 R&D Payroll Tax Credits? Discover more here!
If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com.