We are only a few weeks from the Presidential election and, as of today, there is no clear leader across the various polls. In addition, control of the House and Senate is also not yet clear. The result of all these races will have a massive impact on how tax law is handled, particularly as we face many expiring tax laws at the end of 2025. We have spoken to many clients about how these potential changes might impact them individually and wanted to provide a list of tax law changes that are likely to impact you.
The Tax Cuts and Jobs Act (TJCA) of 2017 temporarily enacted several tax laws, all of which are set to expire at the end of next year. The temporary tax laws from this act will revert to the tax law in place before TJCA’s passing (most adjusted for inflation). The next Presidential administration, along with Congress, will have to pass new tax laws or extend the existing law to keep any TJCA provisions in place.
- The standard deduction for a married couple under age 65 in 2024 is $29,200. If TJCA expires, that deduction will be approximately $16,525 in 2026.
- TJCA capped state and local tax deductions to $10,000 per year. Because this total includes property taxes, many individuals cannot fully deduct all of their state and local taxes. With a higher standard deduction, far fewer households itemize deductions. Prior to TJCA, 31% of households itemized deductions. In 2020, only 9% of households itemized.
- TJCA lowered the highest marginal tax bracket from 39.6% to 37%. For 2023, this applies to married households with income above $693,751 and individuals above $578,126. Without new tax laws enacted, the highest rate will revert to 39.6%.
- TJCA created a 20% deduction on pass-through income for small business income, excluding certain professional and service industries. This tax deduction would be eliminated if no new law is passed.
- TJCA doubled the estate tax exemption. The Brookings Institute estimates that, if TJCA expires, the exemption would be about $14.3 Million in 2026 for married couples versus $28.6 Million if the provision is continued (1).
Interestingly, TJCA did lower the corporate tax rate to 21% but this law does not sunset at the end of 2025. Both candidates have supported extension for, at least, some of these provisions. As well, we have heard several new tax policy proposals although it is challenging to know which laws are realistic or simply campaign strategies. As planners, we have seen the benefits and some unforeseen consequences of these tax law changes. In many ways, we have to be agnostic to tax law changes; we focus our efforts on optimizing your situation within the laws in place. As much as the focus is on the Presidential race, Congress and which political party (if any) has control may have an equally important role in the future of tax law.
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Sources:
1 https://www.brookings.edu/articles/which-provisions-of-the-tax-cuts-and-jobs-act-expire-in-2025/
2 https://taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions
