Tax planning is a critical aspect of financial management, enabling individuals and businesses to reduce their tax liabilities while staying compliant with the law. The Tax Cuts and Jobs Act (TCJA), a significant overhaul of the U.S. tax code passed in 2017, brought about numerous changes that have an impact on tax planning strategies. Among the many provisions of the TCJA, the sunset provisions are important for taxpayers to consider.
Understanding the TCJA’s Sunset Provisions or Sunset Clause
Sunset provisions, or a sunset clause, are built-in expiration dates for certain tax laws, meaning that they are set to automatically revert to their previous state after a specified period unless further legislative action is taken.
The TCJA introduced several provisions that are slated to expire or “sunset” at various times, with most of them set to revert after 2025. These include reducing individual income tax rates, increasing the standard deduction, and making other changes to business taxes. As these provisions expire, they can significantly impact taxpayers’ financial circumstances, making proactive tax planning essential.
If Congress does not take action to extend these provisions, taxpayers could see their taxes go up in 2026. Here are some of the key changes that could take effect:
Individual tax rates
The TCJA reduced individual income tax rates; these lower rates are set to expire in 2025, meaning that tax rates could revert to their pre-TCJA levels.
The TCJA increased the standard deduction for both single and joint filers. These higher standard deductions are set to expire in 2025, meaning that the standard deductions could be reduced.
Deduction for qualified business income
The TCJA created a deduction for qualified business income, which provides a 20% deduction for certain pass-through business income. This deduction is set to expire in 2025.
Child tax credit and additional child tax credit
The TCJA increased the child tax credit and created an additional child tax credit. These credits are set to expire in 2025.
Estate and gift tax exemptions
The TCJA temporarily doubled the estate and gift tax exemptions, but these provisions are also scheduled to expire after December 31, 2025. This means that the exemptions could revert to their pre-TCJA levels.
The TCJA allowed for increased bonus depreciation deductions for certain business assets. These deductions are set to phase out starting in 2023 and expire after 2026.
The expiration of these TCJA provisions could have a significant impact on taxpayers. It is important to be aware of these changes and take a proactive tax planning approach.
Unsure of how to navigate these evolving tax laws? Connect with Vesta and let us guide you in making informed decisions that will help position your business for success.