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Most tax changes are set to disappear after 2025, but it might not be as bad as you think. Read on to learn how this could affect you.
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The Tax Cuts and Jobs Act that went into effect for the 2018 tax year was the most significant piece of tax legislation in decades. It made simplifications to the tax code, such as eliminating the personal exemption and increasing the standard deduction instead. And for many American families, the tax changes resulted in significantly lower tax bills.
However, you might not realize that these changes are not permanent — at least not in their current form. All of the personal tax changes in the Tax Cuts and Jobs Act (TCJA) are scheduled to go away after 2025 unless Congress acts to make them permanent. So, with that in mind, here’s what could change and how it might impact you.
What tax cuts could be going away?
The TCJA made some big changes to the tax code, and several of them were highly beneficial to millions of American families. While this isn’t a complete list, some of the most significant tax breaks that could disappear after 2025 include:
Lower tax brackets: The TCJA generally lowered marginal tax brackets. For example, the top tax rate fell from 39.6% to 37%. The second lowest tax bracket dropped from a 15% rate to a 12% rate. If the TCJA changes go away, the old tax brackets would return.Standard deduction: The TCJA roughly doubled the standard deduction, so it would be roughly cut in half after 2025.Child tax credit: Not only did the TCJA double the Child Tax Credit from $1,000 to $2,000 per qualifying child, but it also increased the income threshold to qualify from $110,000 to $400,000 for joint tax filers, opening the credit up to more people.Qualified business income: Also known as the “pass-through” deduction, this allowed owners of LLCs, S-Corps, partnerships, and sole proprietorships to deduct as much as 20% of their business income.Estate tax threshold: Estate taxes only kick in for estates above certain asset thresholds. The TCJA doubled the amount of money that was exempt before the estate tax took effect, and will revert to old levels after 2025.
What could be coming back?
On the other hand, it’s also important to remember that not every change made by the TCJA was a positive one. There are some tax breaks that many people would love to see return:
Personal exemption: The personal exemption essentially provided an additional deduction for every member of your household. Even with the smaller standard deduction, this gave large households a better overall tax break.Unlimited SALT deduction: As part of the TCJA, the deduction for state and local taxes was limited to $10,000. If the changes sunset after 2025, this limit will be eliminated.Mortgage interest deduction: The TCJA lowered the limit on the mortgage interest deduction from $1 million in qualified mortgage debt to a total cap of $750,000. Plus, interest on home equity debt up to $100,000 was eliminated.Miscellaneous deductions: Before 2008, households that itemized could deduct investment expenses, moving expenses, unreimbursed employee expenses, and more. The TCJA eliminated most of these “miscellaneous” deductions.
How could it impact you and how should you prepare?
Just as the initial implementation of the TCJA affected households in different ways, the potential sunsetting of the changes it made would also have different effects on different households. For example, if you previously had a $30,000 SALT deduction because you live in a high-tax area, or if you have a large family and therefore would be entitled to several personal exemptions, you could actually benefit from the tax cuts expiring. On the other hand, if you own a small business, have young children, or have benefited from the generally lower tax brackets, your taxes could increase.
To be sure, it’s difficult to do anything to prepare for this for most people, but it’s important to know what could happen. One big exception is estate taxes, and if you have enough assets where estate taxes could be a concern, it could be a smart idea to contact a qualified estate planning specialist who can advise you of the best course of action.
And finally, it’s important to reiterate that the sunsetting of the TCJA isn’t set in stone by any means — it’s entirely possible that Congress could extend the changes or even make them permanent.
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