Expiring provisions promise tax hikes if not extended.
T he Tax Cuts and Jobs Act (TCJA) of 2017, which took effect January 1, 2018, included many noteworthy tax law changes, including significant middle-class tax cuts (discussed further below). The problem is that most of the changes were enacted on a temporary basis. They will expire at the end of 2025 if Congress does nothing. If the law does expire, those same Americans will see substantial tax increases.
The good news for the TCJA is that Donald Trump was reelected president. The TCJA is his baby. He campaigned on the idea of the extending the law’s provisions, while former Vice President Harris promised to repeal much of them. With Republicans controlling both Houses of Congress, it is likely that major provisions of TCJA will in fact be extended.
While on the campaign trail, Trump floated three additional ideas for specific changes to the tax code. They are: 1) eliminating income taxes on tips, 2) not taxing overtime pay of wage-earners, and 3) eliminating all taxes on Social Security benefits. For a detailed discussion of these proposals, see my article here.
Given the election result, my guess is the president and Congress will focus more on the big picture — with TCJA at the center of attention — rather than tinkering around the edges. The following is a discussion of some of the major provisions of the TCJA that are set to expire, and how it will impact most Americans if they do.
- The standard deduction and dependent exemptions. The TCJA just about doubled the standard deduction for all classes of tax filers, with the tradeoff being the elimination of personal dependent exemptions. According to calculations by the Tax Foundation, under the TCJA, the standard deduction in 2026 for married filing jointly will be $30,850, and for single filers, $15,450.
But if the TCJA expires, the standard deduction will fall to $16,700 in 2026 for married couples and $8,350 single filers. The personal exemption of $5,300 would be added back. Even so, in the case of joint filers, taxable income (all other things being equal) will go up by $3,550, and for single filers, taxable income will go up by $1,780.
- Individual income tax rates. During the recent presidential campaign, much attention was paid to the top individual income tax rate under the TCJA. That rate dropped from 39.6 percent to 37 percent. This is one reason the Left cried “tax cuts for the rich” when the Jobs Act passed (and throughout the last campaign).
But the fact is rates were cut mostly across the broad by the TCJA. If the law expires, all rates will return to their 2017 levels. Here’s a chart showing what will happen to all brackets if the law expires:
Under TCJA If TCJA expires
10% 10%
12% 15%
22% 25%
24% 28%
32% 33%
35% 35%
37% 39.6
The heart of the middle classes, joint filers earning between $24,500 and $212,000 annually, will see their assessments rise the most if rates go up. To make matters worse, the amount of income necessary to push one into the next higher bracket drops slightly if the TCJA expires. So taxpayers end up paying a higher rate of tax on less taxable income. This is hardly “tax cuts for the rich.”
3.The Pease Limitations. The so-called Pease Limitations, named for Donald Pease, the late Democrat representative from Ohio who conceived them, created what amounted to a surtax on high-income individuals. The limitations reduced the value of itemized deductions by 3 percent for every dollar of taxable income above certain amounts. This was a clever (and hardtosee) way to increase income tax assessments without actually increasing tax rates. The scheme was eliminated by the TCJA, but will be fully restored if the TCJA expires.
- State and local tax (SALT) deductions. The TCJA limited (or eliminated) certain itemized deductions in favor of the higher standard deduction. One such limitation is that imposed on the deductibility ofstate and local taxes (SALT). Such taxes include state and local income taxes, real estate taxes, and other non-federal tax obligations. Under TCJA, the deductibility of all such taxes is capped at $10,000, a number not adjusted for inflation.
Upon the passage of this provision, state government authorities in high-tax jurisdictions were livid that their assessments were no longer fully deductible on federal tax returns. Many various work-arounds were considered in an attempt to bootstrap the expenses back into a tax-deductible category. None of them worked, nor did my idea that high-tax states should simply reduce the tax burden placed on their residents, thus lightening the load.
On the 2024 campaign trail, President Trump vowed to restore the full deduction for SALT, regardless of what happened with the TCJA generally. But if you want to talk about tax cuts for the rich, this certainly is it. It is well-settled that high-income earners disproportionately benefit from the SALT deduction.
- The child tax credit. The TCJA increased thetax credit for each child under age 17 from $1,000 to $2,000 (not adjusted for inflation). This was part of the tradeoff between a higher standard deduction versus a lower standard deduction combined with a dependent exemption. The credit is partially refundable. The refundable portion is adjusted for inflation, fixed at $1,700 for 2024.
The TCJA also increased the income thresholds at which the credit phases out. Under the TCJA, the credit phases out at $200,000 for single filers, and $400,000 for married filing joint taxpayers. If the TCJA expires, the credit drops to $1,000, and begins to phase out at $75,000 for single filers and $110,000 for joint filers.
- The Qualified Business Income (QBI) deduction. In my opinion, the QBI deduction is the most beneficial aspect of the TCJA for small business owners. The TCJA created tax code section 199A which provides a 20 percent deduction for certain income earned from sole proprietorships, partnerships, and S-corporations. The purpose of the deduction is to put small businesses on the same footing as regular C-corporations, which saw their tax rate drop from 35 percent to 21 percent under the TCJA.
The QBI deduction is a huge deal for small business owners. Suppose a sole proprietorship has a net business income of $100,000. That is considered ordinary income to the owner and is taxed as such. Under section 199A, a 20 percent deduction applies to net business income, reducing taxable business income to $80,000. Normally, a business has to spend money to get a deduction. But in this case, the 20 percent is applied after all other business expenses are computed.
The benefits of this deduction phase out and are eventually not available to high-income taxpayers. For single filers, the deduction begins to phase out at $157,500 ($315,000 for joint filers), and is capped when income reaches $207,500 ($415,000 for joint filers). It should be noted that the corporate tax rate reduction to 21 percent does not expire, regardless of what Congress does or does not do with the TCJA. It is a permanent provision, except to the extent that law makers of the future change their minds.
This is an example of how the claim that eliminating the TCJA will not affect anybody earning less than $400,000 annually does not hold up. If the TCJA expires, this deduction will go away for every small business owner.
- The alternative minimum tax (AMT). Many times over the years, the National Taxpayer Advocate complained to Congress that the AMT’s fundamentally flawed structure was causing it to reach well into the middle class, raising taxes for millions of people that were never intended to be touched by it.
AMT structures were fundamentally changed by the TCJA, principally by raising both the AMT exemption amount and the income levels at which the AMT exemption phases out. If the TCJA is allowed to expire, more citizens will face an AMT liability which they have not had to face since prior to 2018.
- Estate taxes. The TCJA doubled the estate tax exemption. Under current law, the exemption in 2026 will be about $28.6 million for married couples, compared to $14.3 million if the TCJA expires.
The TCJA was caricatured as “tax cuts for the rich,” but allowing its major provisions to expire will mean increased taxes for the middle class. It expires on December 31. The clock is ticking. Congress must address the TCJA as a primary concern to avoid across the board tax increases.