The Tax Hike No One’s Talking About: How the End of the TCJA Could Cost You Thousands!

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, marked one of the most significant overhauls of the U.S. tax code in recent history. It brought lower tax rates, an increased standard deduction, and various other changes that reshaped the tax landscape for individuals, families, and businesses. While the TCJA provided considerable tax relief to many, its provisions were largely temporary for individual taxpayers and are set to expire at the end of 2025. When this happens, the tax code will revert to its pre-TCJA structure, which will result in higher taxes for most Americans unless Congress acts to extend or replace the law.

This article is designed to help taxpayers understand what the expiration of the TCJA means for them, how it will impact their financial situation, and what they can do to prepare. The expiration will lead to increased tax rates, reduced deductions, and the elimination of certain credits. Whether you are a middle-income earner, a high-net-worth individual, or a small business owner, these changes will affect your tax liabilities in the coming years.

Key Changes for Individuals After the Expiration of the TCJA

As the TCJA expires, individuals will face a variety of changes that could significantly impact their taxes. One of the biggest shifts will be the return of higher tax rates and smaller deductions, which could increase tax bills for many Americans. It’s important to understand these changes and how they may affect your personal finances so you can plan ahead and take steps to minimize your tax liability.

Income Tax Rates and Brackets

One of the most impactful changes for individuals will be the return to higher tax rates and narrower income brackets. The TCJA reduced rates across all income levels, but once it expires, the rates will return to their pre-2017 levels, meaning more income will be taxed at higher rates.

Before Expiration (Under TCJA - 2024 Rates):

• Seven tax brackets ranging from 10% to 37%.
• Middle-income earners benefit from rates such as 12%, 22%, and 24%.

After Expiration (Reverting to Pre-TCJA Rates):

• The top tax rate will increase from 37% to 39.6%, and other brackets will also rise.
• Middle-income earners will see their brackets rise back to 15%, 25%, and 28%.
• For example, the 12% bracket will revert to 15%, and the 22% bracket will revert to 25%.

The following spreadsheet compares how income is taxed under the TCJA and how it will be taxed after its expiration, using a few sample income levels for both single filers and married couples.

Detailed Tax Calculations

Let’s break down the tax calculations for a married couple making $120,000 annually:

• Under TCJA (2024):
  • The first $22,000 is taxed at 10%.
  • The income from $22,001 to $89,450 is taxed at 12%.
  • The remaining income from $89,451 to $120,000 is taxed at 22%.
• Total tax liability: Approximately $17,143.
• After Expiration:
  • The first $22,000 is taxed at 10%.
  • The income from $22,001 to $89,450 is taxed at 15%.
  • The remaining income from $89,451 to $120,000 is taxed at 25%.
• Total tax liability: Approximately $20,048.

This comparison shows an increase of $2,905 in taxes for this couple once the TCJA expires.

The shift in tax brackets means that most individuals will see their taxes increase. Even if their income doesn’t change, more of it will be taxed at higher rates due to the narrower thresholds for each bracket. This is particularly true for middle-income earners who will see their tax rates rise by as much as 3% to 5% depending on their income level.

This change will directly impact how much individuals owe, especially those in the middle-income range.

The Impact on High-Income Earners

For higher-income earners, the expiration of the TCJA will have a more substantial impact. For example, a married couple earning $250,000 annually will see a tax increase of almost $9,794.

High-income earners will be taxed at 39.6% for income over $693,750 (married filing jointly), compared to 37% under the TCJA.

Standard Deduction and Personal Exemptions

The TCJA significantly increased the standard deduction, which allowed many taxpayers to stop itemizing deductions and opt for the simpler standard deduction. However, this was one of the temporary provisions that will revert after the TCJA expires, resulting in a smaller deduction and the return of personal exemptions.

Before Expiration (Under TCJA):

• Standard deduction for 2024:
  • $27,700 for married couples filing jointly.
  • $13,850 for single filers.
• Personal exemptions were eliminated entirely.

After Expiration:

• The standard deduction will revert to pre-2017 levels:
  • Approximately $13,000 for married couples.
  • $6,500 for single filers.
• Personal exemptions will return, allowing a deduction of around $4,050 per household member.

While the return of personal exemptions will offer some relief, the lower standard deduction will result in higher taxable income for many households, especially those who benefited from the nearly doubled standard deduction under the TCJA.

Impact:

• For many families, the return of personal exemptions may partially offset the reduced standard deduction. However, larger families, who lost personal exemptions under the TCJA, may find that the combination of smaller deductions and exemptions leads to higher taxes overall.

The Child Tax Credit: A Significant Reduction in Benefits

The Child Tax Credit (CTC) was expanded under the TCJA to provide more relief for families, particularly those with lower to middle incomes. The credit increased from $1,000 to $2,000 per child, with a refundable portion, which was a major benefit for families. However, the expiration of the TCJA will reduce the CTC back to its previous levels.

Before Expiration (Under TCJA):

• The Child Tax Credit is $2,000 per child, with $1,400 refundable.
• The phase-out threshold is higher under the TCJA, allowing more families to qualify for the full credit:
  • $200,000 for single filers.
  • $400,000 for married couples filing jointly.

After Expiration:

• The Child Tax Credit will revert to $1,000 per child.
• The refundable portion will be eliminated, meaning families who owe no taxes will not receive the credit as a refund.
• The phase-out thresholds will be lowered significantly:
  • $110,000 for married couples filing jointly.
  • $75,000 for single filers.

Impact on Families:

The reduction in the Child Tax Credit will lead to higher taxes for families with children, particularly those who benefited from the refundable portion. Lower phase-out thresholds will mean that fewer families qualify for the full credit, especially those in higher income brackets.

State and Local Tax (SALT) Deduction: The Cap Remains a Key Issue

Under the TCJA, the deduction for state and local taxes (SALT) was capped at $10,000. This cap disproportionately affected taxpayers in high-tax states, such as New York, California, and New Jersey. The expiration of the TCJA may see this cap lifted, allowing taxpayers to deduct all state and local taxes once again.

Before Expiration (Under TCJA):

• SALT deduction is capped at $10,000, which includes state income taxes, property taxes, and local taxes.

After Expiration:

• The SALT deduction cap will be lifted, allowing taxpayers to deduct the full amount of state and local taxes they pay, as they could before 2017.

While lifting the SALT cap will benefit high-income taxpayers in high-tax states, the overall increase in tax rates and the reduction of other deductions may offset any benefits gained from the removal of the cap.

Key Changes for Businesses After the Expiration of the TCJA

Corporate Tax Rate: Staying at 21%

One of the major wins for corporations under the TCJA was the permanent reduction in the corporate tax rate from 35% to 21%. This change helped U.S. companies become more competitive globally and encouraged businesses to reinvest in growth, hiring, and development. While the corporate tax rate won’t change, businesses need to prepare for the expiration of other provisions that could affect their overall tax burden and investment strategies.

Qualified Business Income (QBI) Deduction for Pass-Through Entities

The TCJA introduced a significant benefit for pass-through entities, such as LLCs, S-corporations, partnerships, and sole proprietorships. The Qualified Business Income (QBI) deduction allowed owners of pass-through entities to deduct up to 20% of their qualified business income, effectively lowering their tax burden.

Before Expiration (Under TCJA):

• Owners of pass-through entities can deduct 20% of their qualified business income, reducing their taxable income.

After Expiration:

• The QBI deduction will expire, meaning pass-through entities will lose this valuable tax benefit. Business owners will no longer be able to deduct 20% of their income, which will result in a higher overall tax burden.

Impact on Small Businesses:

The expiration of the QBI deduction will hit small business owners particularly hard. Without the deduction, small business owners will be taxed on the full amount of their business income, which could significantly increase their tax liability. Business owners will need to explore other tax-saving strategies, such as maximizing retirement contributions or restructuring their business, to offset the loss of the QBI deduction.

Changes in Investment Deductions and Bonus Depreciation

The TCJA provided generous incentives for businesses to invest in new equipment, property, and other capital expenditures by allowing bonus depreciation. Under the TCJA, businesses could deduct 100% of the cost of qualified property in the year it was placed into service, rather than depreciating the cost over several years.

Before Expiration (Under TCJA):

• Businesses can deduct 100% of the cost of qualified property through bonus depreciation.

After Expiration:

• Bonus depreciation will be phased out, and businesses will have to return to depreciating capital investments over time. Starting in 2026, businesses will no longer be able to deduct the full cost of new equipment or property in the year it is purchased.

Impact on Businesses:

The loss of bonus depreciation will make it more expensive for businesses to invest in new equipment, property, and other capital expenditures. This change may discourage businesses from making large investments, as the tax benefits will be spread over several years rather than being realized immediately.

Businesses should consider accelerating capital expenditures before 2026 to take advantage of the remaining bonus depreciation benefits.

Net Operating Loss (NOL) Changes

The TCJA limited the ability of businesses to carry back Net Operating Losses (NOLs) to previous tax years, but it allowed businesses to carry forward these losses indefinitely, offsetting up to 80% of future taxable income.

Before Expiration (Under TCJA):

• NOLs can be carried forward indefinitely, but only 80% of taxable income can be offset in future years.
• No ability to carry NOLs back to previous years.

After Expiration:

• NOL rules will revert to pre-TCJA standards:
  • Businesses will once again be able to carry losses back up to two years, allowing them to amend past returns and claim refunds.
  • Businesses will no longer be subject to the 80% limit on taxable income for NOL carryforwards, meaning they can offset up to 100% of their future taxable income with past losses.

Impact on Businesses:

The return of the carryback provision for NOLs could provide businesses with valuable cash flow flexibility, particularly during economic downturns. Companies that experience losses can apply those losses to prior profitable years, potentially receiving refunds for taxes paid in those years. The removal of the 80% limit on NOL carryforwards will also allow businesses to fully offset future taxable income with past losses.

Limitations on Interest Deductions

The TCJA introduced a limitation on how much interest businesses could deduct, capping it at 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization). This provision was designed to prevent companies from excessively using debt to reduce their tax liabilities.

Before Expiration (Under TCJA):

• Businesses can deduct up to 30% of EBITDA in interest expenses.

After Expiration:

• The limitation on interest deductions will become stricter, capping deductions at 30% of EBIT (earnings before interest and taxes), which excludes depreciation and amortization.

Impact on Businesses:

The shift from EBITDA to EBIT will reduce the amount of interest expense that companies can deduct, especially for capital-intensive businesses that have large depreciation and amortization expenses. Businesses that rely heavily on debt financing will face higher taxes as a result of these stricter limitations on interest deductions.

What Can You Do to Prepare?

As the expiration of the Tax Cuts and Jobs Act (TCJA) approaches, taxpayers across all income levels, as well as businesses, need to start planning for the changes that will occur. Higher tax rates, reduced deductions, and the loss of key credits mean that without careful preparation, many individuals and businesses will face higher tax liabilities. I’ll outline some practical steps you can take now to prepare for the post-TCJA tax landscape.

Maximize Contributions to Tax-Advantaged Accounts

One of the most effective ways to reduce taxable income is by maximizing contributions to tax-advantaged accounts. These accounts allow you to either defer taxes until retirement or grow your investments tax-free, depending on the type of account.

Key Accounts to Consider:

• 401(k) and 403(b): Contributing the maximum allowable amount to these employer-sponsored retirement accounts will reduce your taxable income now. The contribution limit for 2024 is $23,000 for those over 50, including catch-up contributions. If you’re younger than 50, the limit is $20,500.
• Traditional IRAs: Contributions to a traditional IRA reduce your taxable income, with a limit of $8,000 for 2024 (including catch-up contributions). The income tax on growth and earnings is deferred until withdrawal.
• Health Savings Accounts (HSAs): For individuals with high-deductible health plans, HSAs provide a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. The 2024 contribution limit is $8,300 for families and $4,150 for individuals.

By maximizing contributions to these accounts, you lower your current taxable income, which will be especially valuable as tax rates increase post-TCJA.

Consider Roth IRA Conversions

A Roth IRA conversion can be a strategic move to minimize taxes in the long term. By converting traditional IRA funds into a Roth IRA, you pay taxes now at current rates, but all future growth and withdrawals are tax-free. This strategy is particularly beneficial before tax rates increase after the TCJA expires.

Why Consider a Roth Conversion Now?

• Lock in Lower Tax Rates: With tax rates set to rise, converting to a Roth IRA now allows you to lock in today’s lower rates. While you will owe taxes on the converted amount, all future withdrawals will be tax-free, providing significant tax savings in retirement.
• No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not require you to take RMDs, allowing your investments to continue growing tax-free indefinitely.

Action Plan:

• Evaluate your current and future tax bracket to determine if a Roth conversion makes sense.
• Work with a financial advisor to calculate the optimal amount to convert without pushing yourself into a higher tax bracket.

Accelerate Income and Defer Deductions

With tax rates set to rise, you may benefit from accelerating income into lower-tax years and deferring deductionsinto future higher-tax years.

Accelerating Income:

• If you’re expecting higher tax rates in the future, consider accelerating income into 2024 and 2025 when rates are still lower. This can include:
  • Selling appreciated assets to realize capital gains at current rates.
  • Negotiating year-end bonuses to be paid in a year with lower tax rates.
  • Invoicing clients earlier to report business income before tax rates increase.

Deferring Deductions:

• If possible, defer certain deductions to future years when tax rates are higher, allowing you to get a bigger tax benefit. This may include:
  • Charitable contributions that can be delayed until tax rates rise.
  • Medical expenses that can be pushed into higher-tax years.

By carefully timing when you receive income and take deductions, you can minimize your overall tax burden in the years after the TCJA expires.

Take Advantage of Estate and Gift Tax Exemptions

The estate tax exemption is set to drop significantly after 2025, from $13.61 million per individual in 2024 to approximately $5-6 million. High-net-worth individuals should consider taking advantage of the current higher exemption by making strategic gifts before the TCJA expires.

Key Strategies for High-Net-Worth Individuals:

• Lifetime Gifts: Make significant lifetime gifts now to lock in the higher estate tax exemption. Gifts to children, grandchildren, or other beneficiaries will reduce the size of your taxable estate in the future.
• Annual Gift Exclusion: In addition to lifetime gifts, take advantage of the $18,000 in 2024, per recipient exclusion for tax-free gifts. This allows you to gradually transfer wealth to family members without affecting your lifetime estate tax exemption.
• Set Up Trusts: Consider creating irrevocable trusts to protect assets and reduce the value of your estate. Trusts like Grantor Retained Annuity Trusts (GRATs) and Irrevocable Life Insurance Trusts (ILITs) can help you manage tax-efficient wealth transfers while providing income during your lifetime.

Plan for the Expiration of the QBI Deduction

For business owners, the expiration of the 20% Qualified Business Income (QBI) deduction will mean higher taxes on pass-through income from entities like LLCs, S-corporations, and partnerships. With this deduction set to disappear after 2025, business owners should plan for ways to offset this tax increase.

Key Strategies for Business Owners:

• Maximize Retirement Contributions: Contribute to Solo 401(k) or SEP IRA plans, which allow you to defer income and reduce your taxable income. Business owners can contribute up to $69,000 for 2024 to a SEP IRA, depending on income.
• Accelerate Capital Investments: Take advantage of bonus depreciation before it phases out. By making large purchases of business equipment before the end of 2025, you can fully deduct the cost in the year of purchase, reducing your taxable income.
• Restructure Business Entity: Explore restructuring your business as a C-corporation, which will continue to benefit from the permanent 21% corporate tax rate. This may provide tax savings over the long term compared to paying higher personal rates on pass-through income.

Invest in Tax-Efficient Vehicles

Tax-efficient investment strategies will become increasingly important as tax rates rise. Taxpayers should consider shifting more of their portfolio into tax-advantaged accounts and investments that minimize their tax liability.

Key Investment Strategies:

• Municipal Bonds: Income from municipal bonds is typically exempt from federal taxes and can be a smart way to generate tax-free income, especially in high-tax environments.
• Index Funds and ETFs: These funds tend to have lower turnover and thus generate fewer taxable capital gains compared to actively managed funds. This makes them more tax-efficient, particularly in taxable investment accounts.
• Tax-Loss Harvesting: Continuously monitor your portfolio for opportunities to sell losing investments to offset gains. This reduces taxable capital gains and lowers your overall tax liability.

Consider Professional Tax Planning Support

With the complexity of the tax changes ahead, working with a tax professional or financial advisor is highly recommended. They can provide personalized advice tailored to your situation and help you navigate the upcoming changes.

Key Benefits of Working with a Financial Advisor:

• Strategic Guidance: A financial advisor can help you implement advanced tax strategies, such as Roth conversions, income deferral, or estate planning.
• Tax Law Expertise: Some financial advisors are well-versed in the latest tax laws and can help you take advantage of current opportunities before they disappear.
• Comprehensive Tax Planning: A financial advisor can work with you to develop a comprehensive tax plan that considers both your short-term and long-term financial goals, ensuring you are fully prepared for the post-TCJA environment.

Navigating the Post-TCJA Tax Landscape

The expiration of the Tax Cuts and Jobs Act (TCJA) will significantly alter the tax landscape for individuals, families, and businesses. As we’ve explored throughout this article, the return to pre-2017 tax rules will lead to higher tax rates, fewer deductions, and reduced credits. For many, this means a noticeable increase in tax liabilities unless proactive steps are taken.

We’ve covered the key changes that are coming, the impact they will have on different income groups and business structures, and the strategies that can be employed to reduce the impact of those changes. The tax system will become more complex, with many provisions returning to their previous forms, such as the lower Child Tax Credit, higher marginal rates, and the elimination of the Qualified Business Income (QBI) deduction.

The expiration of the TCJA is not just a challenge; it is also an opportunity to rethink your financial strategies and position yourself for success in a more taxing environment. The actions you take now—whether in retirement planning, business investments, or estate management—will help ensure that you are well-prepared for the changes to come. With thoughtful planning, you can mitigate the impact of higher taxes and continue to grow and protect your wealth in the years ahead.

Now that you have the knowledge and strategies discussed in this article, you’re already ahead of the curve. Schedule a visit with us today to ensure a more stable and financially secure future when the TCJA expires.