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Riding off Into the Sunset Thumbnail

Riding off Into the Sunset

Photo Courtesy of Unsplash: Johannes Plenio

What happens when the TCJA “sunsets” at the end of 2025?

By Jon Aldrich

Each day we grow nearer the day when the current tax rates that were enacted by the Tax Cuts and Jobs Act (TCJA) of 2017 a.k.a. the “Trump” tax cuts sunset. Sunsetting is a crafty way to say that these tax cuts will be expiring and the tax rates we had in effect prior to the 2017 tax cuts will again be in existence.

Sunsetting of tax provisions is a way Congress has come up with over the years to allow for a period of tax cuts to simply go away at some point. This way, no one takes the blame for increasing taxes. Since these tax cuts were put into law under a Republican majority at the time, if Trump wins and Republicans maintain control of the House of Representatives, there is real good chance these cuts could be extended or even made permanent. However, if Joe Biden wins and Democrats continue to at least control the U.S. Senate, there is a real good chance the TCJA cuts will be allowed to “sunset”.   For many people, this will not be their idea of a beautiful sunset as most will likely end up paying more in taxes than they are currently paying. Let’s dig into the details a bit.

Increase in Tax Rates:

If TCJA does sunset at the end of 2025, most taxpayers tax rates will increase by anywhere from 1% to 9% depending on what bracket you are in. It seems like most people fall into the current 12% and 22% tax brackets, and in 2026, those brackets would go to 15% and 25% respectively. There are a couple of exceptions though, for Married Filing Jointly, those with current taxable income in a range from $462,501 to $490,000 will actually drop from 35% to 33%. Also, single filers in the current 32% bracket ($182,101 to $225,400 of taxable income) will see their rate drop to 28%, and single filers in the current 35% bracket ($231,251 to $490,000 of taxable income) will see a decrease of 2% to 33%. This was due to some of the peculiarities in tax brackets when TCJA was enacted.

The current and Projected tax rates if TCJA sunsets are shown below: (Source: Putnam Investments)

Return of Itemized Deductions for Many Taxpayers:

When TCJA took effect in 2017 one of the big changes for most people was the fact that hardly anyone was able to take itemized deductions since the standard deduction was raised so high that most people did not have enough deductions to itemize, so they just took the standard deduction. Currently the standard deduction is $29,200 for Married filing jointly taxpayers and if you are over 65, that amount is increased by $1,550 to $30,750 and for single taxpayers the standard deduction is $14,600 plus another $1,950 to $16,550 if you are over 65. 

Because TCJA capped the total amount of state, local and property taxes (SALT) you could deduct to $10,000, this severely limited many people from getting over the itemized deduction thresholds mentioned in the previous paragraph.

For people that had, say anywhere from $15,000 to $29,000 of itemized deductions when they itemized, they are actually coming out ahead by taking the higher standard deduction of TCJA rather than itemizing.   Combined with the lower rates, they likely saved a couple thousand dollars a year with these tax cuts.

If the sunset does occur, it is estimated that the standard deduction will drop by about one half. So, Married filing joint taxpayers may be looking at something like $15,500 in deductions to be able to itemize in 2026, while single filers might be looking at $7,500 to $8,000 or so to get over the threshold.

Tax Withholding

For those that are employed and had most of their tax withholding done through payroll withholding, they did not think they were getting a deal when the tax cuts were first enacted back in 2017 because their tax refunds were smaller than they were before TCJA. This was because tax withholding tables also changed at that time and if you did not adjust your withholding, less was taken from paychecks, giving the illusion to many that they were actually paying more in taxes, when they were actually paying less. A bigger or smaller refund by itself does not tell you if you are paying more taxes, you need to look at the total taxes paid or withheld for the year and if your withholding went down, you may have received a smaller refund, but you likely still paid less in total taxes.

Return of SALT

As I mentioned earlier, TCJA capped itemized deductions for state and local income taxes plus property taxes at $10,000. This was known as SALT (State and Local Taxes) If TCJA does sunset at the end of next year, this $10,000 cap also goes away and you will be able to deduct an unlimited amount of these taxes if you itemize expenses.

Miscellaneous Itemized Deductions

TCJA also eliminated the miscellaneous itemized deductions which included things like investment advisor fees and unreimbursed employee expenses. If TCJA sunsets, these deductions will be allowed again in 2026, provided that they exceed 2% of your Adjusted Gross Income (AGI).

Personal Exemptions

TCJA eliminated personal exemptions to allow for the doubling of the standard deduction. After the sunset, personal exemptions will be back and are estimated to be around $2,000 per person on the tax return. In a nutshell, the itemized deduction threshold will be cut in half, but the standard deduction will also return.

Qualified Business Income (QBI) 20% deduction

Owners of pass-through businesses such as S-Corp, LLC’s, partnerships, sole proprietors as well as owners of real estate if it is a trade or business, enjoyed a 20% reduction of qualified business income from these entities. This too will expire if the sunset occurs.

Child Tax Credit

TCJA doubled the child tax credit for qualifying children, whose parent’s income was below certain levels, from $1,000 to $2,000 where it remains today. After the sunset, this will revert back to $1,000 per child.

Estate and Gift Taxation

The Federal Estate Tax exclusion amount was essentially doubled when TCJA became law in 2017, from $5,490,000 per person to $11,180,000 and after inflation adjustments is at $13,610,000 per person in 2024. However, after the sunset, this will drop back to about one-half the current amount. States such as Illinois that never changed their $4million estate tax exemption per person will remain at $4million. However, this does not change the annual $18,000 exclusion which is the amount you can gift to a person without having to file a gift tax return.

What Should I Be Doing Now?

We have been having conversations with clients about the impending sunset of tax rates and discussing what we should be doing this year and next if it makes sense. Some of these things are:

Roth Conversions

If it makes sense, getting as much out of traditional IRA’s now at lower rates versus where rates will be in 2026 makes sense. However, for many of those taking Social Security, this complicates things a bit, because sometimes doing a Roth conversion makes more of your Social Security taxable and you don’t really save too much in taxes. A detailed tax projection can identify if this is an issue and the best way to proceed.

Accelerate Income into 2024 and 2025

If you are able to accelerate income into this year and next, this could make sense to take advantage of the slightly lower tax rates for most. However, you do not want to accelerate too much so that you bump up into a higher current tax bracket or trigger higher Medicare payments. Again, detailed tax planning can identify a sweet spot for this.

Reduce Your Estate

If you are lucky enough to have an estate over the exemption amount, you can consider doing gifting strategies to family members or setting up certain types of Irrevocable Trusts to get funds out of your estate so they are not taxable under the sunsetting provisions. Giving more to charity is also an option.

Timing of Deductions

In 2025, we should have a good idea about what will actually happen to TCJA, and if we see that it will be allowed to sunset or not. You may consider delaying 2025 deductions into 2026 to take advantage of itemizing and potential saving on taxes over a two-year period.


By the middle of next year, we may have a pretty good idea if TCJA will be sunsetting or if it will be extended or even made permanent. Thus, there is still time to plan, and you don’t want to go too crazy on things until we have a really good idea as to what will happen. However, it is a good idea to be aware of this and perhaps start taking some modest action or putting plans in motion to make sure you are doing what you can to legally minimize taxes in the future.