The Sunset of the Tax Cuts and Jobs Act

By Livia DeMarchis, Esq.

The law known as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), P.L. 115-97, is set to expire at the end of 2025. If Congress does not act, this expiration will generally result in higher tax rates, fewer deductions, and increased taxes for many of our clients. Therefore, while Congress may ultimately extend some or all of the TCJA’s provisions, it is important that clients know which provisions are set to expire and think about how to maximize their tax savings in case the provisions sunset as currently planned.

The following are some of the key provisions of the TCJA that are set to expire at the end of 2025: 

Estate and gift tax exemption. The TCJA essentially doubled the estate and gift exemption amount from $5,490,000 per person in 2017 to $11,180,000, adjusted each year for inflation. The 2024 exemption is $13.61 million per person, or $27.22 million for a married couple. This amount will again be indexed for inflation in 2025, but it will drop back to an inflation-adjusted 2017 level on January 1, 2026, which is estimated to be around $7 million per person or $14 million per married couple. The same sunset provisions also apply to the federal Generation Skipping Transfer Tax exemption. 

Individual tax rates. The TCJA lowered income tax rates for individuals across many brackets. The top rate decreased from 39.6% to 37%. After the sunset of the TCJA, the top tax rate will revert to 39.6% on Jan. 1, 2026. 

Standard deduction. The TCJA almost doubled the standard deduction. As a result, many taxpayers have not itemized deductions in recent years. After 2025, the standard deduction will drop to roughly half the current amount, adjusted for inflation. 

The state and local tax (SALT) itemized deduction. The TCJA capped the SALT deduction at $10,000, significantly impacting taxpayers in high-tax states. This cap is set to expire after 2025, allowing increased benefit from deducting such taxes, which include real estate taxes, state/local income taxes, and personal property taxes. 

Child tax credit. The TCJA increased the child tax credit from $1,000 to $2,000 per child, but the credit will return to the pre-TCJA amount in 2026. 

Alternative minimum tax (AMT) exemption and phaseout. The TCJA increased exemption amounts and phaseout thresholds for the AMT, lessening its effect on taxpayers. When the TCJA sunsets, the AMT exemption will revert to prior levels. 

Qualified business income (QBI) deduction (Sec. 199A). Owners of passthrough businesses (e.g., partnerships, S corporations, sole proprietorships) may currently claim a deduction of up to 20% of QBI under the TCJA. This 20% deduction will expire at sunset, increasing the effective tax on QBI.

In light of the anticipated changes from the sunset of the TCJA, taxpayers should consider some of the following planning opportunities in order to maximize use of their estate and gift tax exemption and mitigate changes to income tax rates. 

Maximize use of the increased estate and gift tax exemption. Taxpayers should consider making substantial gifts now, whether outright or in trust, in order to maximize their use of the higher estate tax exemption amount before it sunsets. For high- net-worth married couples, one approach to consider is fully utilizing at least one spouse’s elevated exemption amount by gifting to a spousal lifetime access trust (SLAT) or to a combination of a SLAT and other trusts. If a married couple wishes to gift a total of $13.61 million (one spouse’s exemption) before the TCJA sunsets, it is much more advantageous for one spouse to make the gift on their own rather than having each spouse use half of their respective exemption amount. This is the case because the increased exemption is “use it or lose it,” so if each spouse makes pre-sunset gifts that use only up to, but not over, the post-sunset exemption amount, they haven’t preserved their pre-sunset increased exemption. A SLAT allows one spouse to transfer assets into an irrevocable trust for the benefit of the other spouse (and, if desired, the couple’s descendants), removing these assets from the donor’s taxable estate, but allowing the family to continue to benefit from the assets during the donor’s lifetime. High-net- worth unmarried donors should also consider making gifts to irrevocable dynasty trusts for the benefit of their descendants in order to maximize use of the current, elevated estate and gift tax exemption. 

Transfers of income-producing property. Taxpayers might consider transferring income-producing assets to family members who could be in lower tax brackets. 

Consider Roth conversions or other ways to accelerate income. Taxpayers should think about converting a portion of traditional retirement savings into Roth accounts before the sunset to ensure use of the current lower tax rates on converted amounts. Roth accounts offer tax-free growth and tax-free future withdrawals and are some of the very best assets to leave to beneficiaries on death.

Since tax rates are set to rise, pushing income into the current lower tax bracket years can be advantageous as a general matter. 

Charitable giving. In any year, taxpayers should consider donating appreciated assets to charity to avoid capital gains taxes and to receive a tax deduction. If taxpayers are considering a large charitable gift in the upcoming few years, they should closely evaluate the income tax effects of doing so in 2024 or 2025 versus 2026 to see which year offers the most tax benefits given the expected sunset of the TCJA. 

Plan for itemized deductions and the SALT deduction. Taxpayers will more likely need to itemize deductions after the sunset of the TCJA, and in high-tax states, they may be allowed larger deductions once the SALT cap expires. Strategic planning for these changes should be considered to maximize benefits. 

Reconsider business structure. The corporate tax rate of 21% available to C corporations is not expiring with the sunset of the TCJA, so taxpayers with entities taxed as partnerships or S corporations may want to consider converting to a C corporation if that offers tax benefits. 

QBI deduction planning (Sec. 199A). Passthrough business owners should consult with their accountants and other tax advisors to consider ways to structure their business to maximize the QBI deduction before it expires. 

While there is still uncertainty about whether Congress will act to extend any provisions of the TCJA, it is important for taxpayers to think proactively and plan for the potential sunset of the TCJA. Trust Company of Vermont is happy to schedule meetings with our clients to discuss whether there is any planning appropriate for their specific situation in light of the potential TCJA sunset.