What You Need to Know About the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) was an amendment to the Internal Revenue Code that was rolled out in 2018. It had implications for both businesses and individuals. However, most TCJA provisions are set to expire at the end of 2025. What will happen if it does?

Let’s look at the TCJA, how it impacts individuals and businesses, and what to expect if some provisions expire.

What was the Tax Cuts and Jobs Act?

The Tax Cuts and Jobs Act was designed to overhaul the U.S. tax code with the goals of providing tax relief for individuals and businesses, stimulating economic growth, simplifying the tax system, and enhancing the competitiveness of American businesses in the global market. 

How the TCJA Impacted Filers

The TCJA impacted both individual and business tax payers. Let’s look at a few of the most notable changes.  Because this was such a substantial change, we haven’t listed all of the updates here, but they can be found on the IRS website.

Individuals

• Lower Tax Rates–The TCJA reduced tax rates for most individuals and families.  It maintained seven tax brackets but generally lowered the rates within those brackets.
• Increased Standard Deduction—The standard deduction was nearly doubled for all filing statuses. This change meant fewer taxpayers needed to itemize deductions, simplifying the tax filing process for many.
• Changes to Itemized Deductions—While the standard deduction increased, several itemized deductions were either reduced or eliminated. This includes a cap on the state and local tax (SALT) deduction and limitations on the mortgage interest deduction.
• Child Tax Credit—The TCJA increased the Child Tax Credit from $1,000 to $2,000 per qualifying child.
• Alternative Minimum Tax: The TCJA retained the individual alternative minimum tax (AMT) but increased the exemption amounts and phase-out thresholds, resulting in fewer taxpayers being subject to the AMT.
• Healthcare Individual Mandate: The TCJA effectively repealed the penalty for not having health insurance under the Affordable Care Act (Obamacare). Starting in 2019, individuals were no longer required to pay a penalty for lacking health insurance coverage.

Businesses

• Corporate Tax Rate Reduction—One of the most notable changes was a reduction in the corporate tax rate from a maximum of 35% to a flat rate of 21%.
• Pass-Through Business Deduction—The TCJA introduced a new deduction for certain pass-through businesses, such as partnerships, S corporations, and sole proprietorships. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income, subject to certain limitations and thresholds.

What to Expect if the TCJA Expires in 2025

Now that we understand some of the changes the TCJA included let’s look at what may change if the bill expires at the end of 2025.

Individuals

• The individual income tax rates would revert to their pre-TCJA levels which had seven tax brackets ranging from 10% to 39.6%.   Taxpayers would see higher tax rates applied to their income.
• The standard deduction, which was nearly doubled under the TCJA, would decrease. Taxpayers who benefited from the higher standard deduction would see a reduction in the amount they can deduct from their taxable income.
• The Child Tax Credit, which was increased to $2,000 per qualifying child under the TCJA, would potentially revert to its pre-TCJA amount of $1,000 per child. This change would result in less tax relief for families with children.
• The $10,000 cap on the deduction for state and local taxes (SALT) would no longer apply. Taxpayers would once again be able to deduct their full state and local tax payments, providing more tax benefits, particularly for those in high-tax states.
• The deduction allowed for mortgage interest would increase from $750k of debt to $1M plus $100k in home equity debt.
• Miscellaneous deductions could return.
• The AMT would apply again to many more taxpayers.
• The unified lifetime exclusion for estates and gifts would be reduced from $13,610,000 today to roughly half that amount.

Businesses

• The TCJA permanently changed the corporate tax rate structure, which previously had a top rate of 35%, to a flat 21% tax rate regardless of the amount of corporate taxable income. This provision is one of the few that will not expire at the end of 2025.
• The Qualified Business Income Deduction of 20% would go away which will result in pass-through business income being taxed according to ordinary individual income tax rates without a deduction for qualified business income.

The potential expiration of the TCJA will impact many taxpayers; some more significantly than others.  Therefore it is advisable that you consult with your tax professional to determine how these potential changes will impact your individual or business tax situation.