LGT's Profit Sense

The Tax Cuts and Jobs Act (TCJA) was enacted in 2017 with many temporary tax provisions taking effect in the 2018 tax year. As we approach the 2025 tax year and look forward to the 2026 tax year, many of the TCJA provisions will expire unless there are changes by the incoming administration.

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Key Provisions Set to Expire

• Inflation Adjusted Individual Income Tax Rates for the 2025 tax year, then increased marginal rates and changes in the taxable income brackets for the 2026 tax year.
• The 20% Qualified Business Income Deduction for pass-through entities will go away for the 2026 tax year
• Bonus Depreciation will phase out to 60% for the 2024 tax year, 40% for the 2025 tax year, 20% for the 2026 tax year and go away completely for the 2027 tax year.
• Increased Standard Deduction for the 2025 tax year, then a decrease back to standard deduction amounts pre-2017 tax year for the 2026 tax year.
• State and Local Tax Deduction limitation of $10,000 in effect for the 2025 tax year will go away for the 2026 tax year.
• Mortgage Interest Deduction Debt Limitation of $750,000 will increase to $1 million for the 2026 tax year.
• The Estate and Gift exemption of $13.61 million ($27.22 million for MFJ) will decrease to pre-TCJA amount of $5 million ($10 million for MFJ) as adjusted for inflation.
  
  

Marginal Tax Rates

Marginal tax rates will go up after the 2025 tax year. The top rate of 37% applies for the following filing statuses and brackets:

Tax Year 2025 (due 2025)

Tax Year 2025 (due 2026)

Starting in the 2026 tax year, marginal rates will revert to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% for different taxable-income ranges.

Qualified Business Income Deduction

For tax years beginning before 2026, the TCJA allowed noncorporate taxpayers to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship from their taxable income. After the 2025 tax year, the deduction will not be available.

Bonus Depreciation

Bonus depreciation has been around since before the enactment of the TCJA. It was established under the 2010 Tax Relief Act at 100% and has since been adjusted to various percentages for different tax years. The TCJA changed the rate of bonus depreciation and the rules on which assets were eligible for bonus depreciation. Starting in the 2025 tax year, the bonus depreciation rate is 40% and goes down to 20% in 2026. After the 2026 tax year, bonus depreciation will go away.

Standard Deduction

The TCJA increased the standard deduction to the following levels for 2024 and 2025.

Personal Exemptions

The TCJA suspended the deduction of exemptions for tax years 2018-2025. Exemptions that were allowed for individual taxpayers and dependents will resume for the 2026 tax year.

State and Local Tax Limitation

The TCJA limited the amount of nonbusiness state, and local taxes to $10,000 for taxpayers that itemize their deductions. The $10,000 is comprised of your cumulative income, domestic real estate taxes and sales tax. The TCJA disallowed the deduction for foreign real property taxes. After 2025, the $10,000 limit will not apply, and taxpayers will be able to deduct foreign real property taxes.

Home Mortgage Debt Interest Limitation

The TCJA lowered the limit of debt treated as acquisition debt from $1 million to $750,000. After the 2025 tax year, the limit will increase to $1 million.

The TCJA also eliminated deductible interest paid on home equity debt. After 2025, the interest on the first $100,000 of home equity debt will be deductible.

Estate and Gift Tax Exclusion Amount

The federal estate tax is imposed on the transfer of an individual’s property at death and transfers considered to be the equivalent of transfers at death. The basic exclusion amount for gifts and estates, and the exemption amount for generation-skipping transfers, is $13,610,000 per taxpayer for decedents dying in 2024 and $13,990,000 in 2025. After the 2025 tax year, this amount goes back to the pre TCJA of $5,000,000 which will be adjusted for inflation.

Child Tax Credit

Generally, taxpayers are allowed to claim a Child Tax Credit for each “qualifying child.” The TCJA enhanced the credit to $2,000 per child. In 2026, the credit drops to $1,000 per child.

During 2018-2025, the credit phased out for taxpayers with MAGI above $400,000 (joint filers) and $200,000 (all other filers).

For the 2026 tax year, the MAGI phase-out decreases to the following levels: (please note that these amounts are not indexed for inflation).

• Joint filers with one child - $110,001-$149,001
• Single taxpayer, Head-of-household, or qualifying widower with one child - $75,001-$114,001
• Married-fling-separate taxpayer with one child - $55,001-$94,001

Charitable Deduction AGI Limitation

The TCJA increased the charitable contribution ceiling from 50% of AGI to 60% of AGI for individual taxpayers. After 2025, the ceiling is going down to 50% of AGI.

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If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com