Tax Cuts and Jobs Act – Revisited in 2023

Tax Cuts and Jobs Act of 2017

It was 2,081 days ago on Friday, December 22, 2017, when President Donald Trump signed the Tax Cuts and Jobs Act of 2017 into law.

The historic piece of legislation is the largest overhaul of the Internal Revenue Code since the Tax Reform Act of 1986 signed by then President Ronald Reagan.

With nearly 6 years under our belt, the provisions of the TCJA have become the new normal. However, as we approach 2025, the “sunset” provisions of the Tax Cuts and Jobs Act loom in the shadows.

Without legislation to “renew” the Tax Cuts and Jobs Act, many of the provisions will simply vanish and return to the 1986 tax code that existed before it.

In this revised blog post, we will revisit the changes made by TCJA and point out which provisions are on the chopping block if Congress doesn’t act.

Tax Brackets

Although the President and many Republican members of Congress promised a “simpler” Tax Code, the Tax Cuts and Jobs Act is anything but that.

TCJA lists seven income tax brackets, which is the same number of brackets under the previous law. The seven tax brackets under TCJA are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

In the event of a sunset, the highest income tax bracket will increase back to 39.6%.

Standard Deduction

Taxpayers can either take a standard or itemized deduction. You would only want to itemize if your itemized deductions exceeded the standard deduction.

Under the old provisions, single taxpayers had a standard deduction of $6,350 and married filers had a standard deduction of $12,700 (adjusted for inflation).

Under the Tax Cuts of Jobs Act, single filers have a standard deduction of $13,850 and married taxpayers filing jointly have a standard deduction of $27,000 (2023).

Without an act of Congress, it’s likely that the standard deduction will cut in half.

Personal Exemption

Under the old tax code, taxpayers claimed an exemption of $4,050 for themselves, their spouse, and for each qualifying child.

The Tax Cuts and Jobs Act completely eliminated personal exemptions.

Congress attempted to offset the repeal of the personal exemption by increasing the standard deduction and the child tax credit.

The TCJA sunset would likely reinstate the personal exemption provisions.

Child Tax Credit

The Tax Cuts and Jobs Act called for the child tax credit to increase from $1,000 to $2,000.

Due to legislation addressing COVID and inflation, that amount has fluctuated throughout the reign of TCJA.

However, the TCJA sunset will cause the child tax credit to drop back to $1,000. It will also become non-refundable again.

Charitable Contributions

Before the Tax Cuts and Jobs Act, the deduction for charitable contributions was capped at 50% of adjusted gross income (AGI). Any excess was carried forward for up to 5 years.

The charitable deduction limit expanded to 60% of AGI under TCJA. However, due to the increase in the standard deduction, fewer taxpayers have been itemizing their deductions.

The Tax Cuts and Jobs Act sunset will revert the charitable contribution limit back to 50%.

However, due to the lower standard deduction, charitable contributions may become a more effective tax planning tool.

State and Local Tax (SALT) Deduction

In my opinion, the SALT deduction limitation has been one of the most impactful pieces of TCJA. Under the now-5-year-old law, state income tax and property tax deductions are capped at $10,000—total—per year.

This has massively affected residents of California and New York where tax rates are higher.

This provision—along with the expanded standard deduction—has significantly decreased the number of taxpayers that itemize their deductions.

If TCJA is not extended and the SALT deduction cap is abolished, high income taxpayers in California and New York will likely see a decrease in their overall tax liability.

Mortgage Interest Deduction

At this time, the mortgage interest deduction is limited to $750,000 in acquisition indebtedness. The previous amount was $1,000,000.

In addition, taxpayers can no longer deduct interest paid on home equity debt (including HELOCs).

The sunsetting of TCJA would increase the limit on indebtedness and likely reinstate home equity interest.

Estate Tax Exemption

The Tax Cuts and Jobs Act of 2017 doubled the estate tax exemption. This exemption included lifetime gifting as well.

In 2023, the lifetime exemption is $12.92MM for single filers and $25.84MM for married taxpayers filing jointly.

These amounts will cut in half if TCJA sunsets. Those who may be affected should consider estate planning before TCJA sunsets.

Alimony

For divorce agreements entered into beginning January 1, 2019, alimony payments are no longer tax deductible. And, alimony payments are no longer taxable to the recipient.

This provision is not set to expire in 2025.

Corporate Tax Rate

The Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21%.

Even if TCJA sunsets, the corporate tax rate will remain at 21% unless new legislation is passed.

Net Operating Losses (NOL’s)

TCJA removed the NOL carryback and made NOL carryforwards indefinite.

Additionally, the infant legislation capped NOL usage to 80% of a corporation’s current year net income. So, if your corporation had net income of $100k, you would still pay tax on $20k.

If the Tax Cuts and Jobs Act sunsets, the 2 year carryback will return. Carryforwards will be limited to 20 years again and NOLs should be able to fully offset current year earnings.

In my opinion, the pre-TCJA provisions were more favorable.

QBI Deduction

The QBI deduction has been the golden child of the Tax Cuts and Jobs Act. Although it was a bit ambiguous at first, it became rather simple to grasp once Congress issued Treasury Regulations.

QBI allows for a 20% deduction from pass-through entity income. This affects sole proprietors, LLCs, and S-Corporations. Virtually every business entity type except C-Corporations.

This deduction stands alone as the only business deduction that doesn’t require you to spend money. In fact, that’s why it made my list of best tax deductions for small businesses.

In my opinion, this provision is the elephant in the room as it relates to the great tax sunset of 2025. A world without QBI is hard for me to imagine.

Elections & The Tax Cuts and Jobs Act

As we enter into an election year, all eyes are on the Tax Cuts and Jobs Act.

It will be interesting to see how pressing of an issue it is for presidential and congressional candidates.

The 2024 election cycle will decide the fate of TCJA and the American people will be left in its wake.