When the Tax Cuts And Jobs Act (TCJA) was signed into law on December 22, 2017, it was the most sweeping rewrite of U.S. tax law since the Tax Reform Act of 1986. Now, it’s about to be undone.
On December 31, 2025, tax rules changed by TCJA affecting individuals will expire. Reversal of the seismic shift wrought by TCJA is widely expected because TCJA increased the U.S. Government debt and materially weakened the nation’s balance sheet. Now, two years before expiration of TCJA, it is time to begin financial planning moves to minimize the impact of the coming reversion to pre-TCJA tax rules.
In the financial press and among tax nerds, the expiration at the end of 2025 is often referred to as a “sunset” of TCJA, misleadingly conjuring up a proverbial day at the beach. Far from it, the expiration will be jarring financially for many wealthy individuals.
To appreciate the depth and breadth of the changes just ahead, consider these key reforms ushered in by TCJA:
- Before TCJA, 68.7% of individual filers claimed the standard deduction, and about a third of all individual returns itemized deductions. After TCJA became effective in tax-year 2018, IRS data show nearly 90% of individuals claimed the standard deduction; only 11% of individual filers itemized deductions — vastly simplifying tax-filing.
- TCJA permanently slashed the maximum corporate income tax rate by 40%, from 35% to 21%, but tax cuts for individuals would be temporary, lasting from 2018 through 2025.
- Most income-tax brackets for individuals were reduced, but only from 2018 through 2025.
- For high-income earners, TCJA reduced the top marginal tax bracket from 39.6% to 37%.
- The amount exempt from estate tax doubled to $11.2 million, and after annual adjustments for inflation, now is $12.9 million.
- Owners of sole proprietorships, partnerships, S corporations, and some trusts and estates, have been eligible to deduct up to 20% of income from a qualified trade or business, but reversion to pre-TCJA rules ends that tax break after 2025.
The nonpartisan Congressional Budget Office (CBO), the research arm of Congress, has projected TCJA will increase U.S. budget deficits by about $1.5 trillion between 2018 and 2027, raising the federal debt from 91.2% of annual gross domestic product (GDP) in June 2017 to 97.5% of annual GDP in 2027.
CBO estimates TCJA reduced federal revenue by $0.47 trillion over 10 years, before accounting for the modest GDP growth it spawned.
TCJA's negative impact on the long-term federal debt makes it more likely reversion to pre-TCJA laws will spur Congress to enact new legislation to reduce the impact on some taxpayers while hiking taxes for others. Examining the impact on your personal situation of the expiration of TCJA will better prepare high-income-earning and high-net-worth individuals for any new tax rules.
The rewards of planning for expiration of TCJA's sweeping changes are significant for many clients and prospects, as are the consequences of failing to plan.