At the stroke of midnight on December 31, 2025, Americans will face a wave of tax changes as the Trump Tax Cuts and Jobs Act of 2017 (TCJA) expires, tax professionals warn.
This legislation, a hallmark of the Trump administration, significantly altered the tax landscape, providing broad tax relief and simplification. As the expiration date approaches, it’s essential to understand the forthcoming changes and how they might impact your finances.
Higher Tax Rates on the Horizon
The TCJA, initiated by President Donald Trump, lowered tax rates across the board and adjusted income tax brackets to benefit a wide range of Americans. This historic tax overhaul meant substantial savings for many, but those benefits are set to expire unless Congress acts. Without an extension, tax rates will revert to their pre-2017 levels, meaning everyone will likely face higher taxes.
For instance, under TCJA, a married couple with a taxable income of $250,000 enjoyed a tax rate of 24% in 2024, compared to 33% in 2017. An individual earning $39,000 in taxable income saw their rate drop from 25% in 2017 to just 12% in 2024. The top tax bracket also saw a decrease from 39.6% to 37%. These rates will revert to their higher, pre-TCJA levels if the provisions sunset.
Tax experts suggest that individuals might want to accelerate income into 2024 and 2025 to take advantage of the current lower rates. Retirees, for example, might consider withdrawing more than the required minimum distribution now. Others could benefit from Roth conversions, paying taxes at lower rates now and enjoying tax-free withdrawals later.
The Return of Itemized Deductions
One of the significant changes under TCJA was the near doubling of the standard deduction, which simplified tax filing for millions. As a result, about 90% of filers claimed the standard deduction in 2020, up from 70% in 2017. However, this could change if the TCJA provisions expire. The standard deduction would decrease, personal exemptions would reappear, and more people would need to itemize their deductions again.
This shift would make deductions more valuable, and taxpayers will have to keep meticulous records of deductible expenses, such as charitable contributions and medical expenses. The combination of higher tax rates and a lower standard deduction would be felt immediately in 2026 paychecks, with increased withholding amounts cutting into take-home pay.
Child Tax Credit Reduction
Under the TCJA, the child tax credit was doubled to $2,000 per child, with a $1,700 refundable portion in 2024. If Congress does not act, this credit will revert to $1,000 per child, with less favorable phase-in thresholds. Although the House passed a bill to expand the child tax credit further, the Senate did not vote on it, leaving the future of this provision uncertain.
Potential Benefits for Homeowners and Remote Workers
The expiration of TCJA could bring back several favorable deductions. For homeowners, the mortgage interest deduction cap would increase from $750,000 to $1 million, which could be a significant advantage in today’s high-priced housing market. Additionally, moving expense deductions for non-military personnel would return, potentially benefiting those relocating for work.
Remote workers might also see a silver lining. The elimination of job-related expense deductions under TCJA would be reversed, allowing employees to deduct expenses such as home office supplies, mileage, and work-related travel.
Alternative Minimum Tax (AMT) and SALT Deductions
The AMT, designed to ensure high-income earners pay a fair share of taxes, was significantly altered under TCJA, reducing the number of people subject to this tax from over 5 million to just 200,000. If TCJA provisions expire, the number of individuals subject to AMT could skyrocket, affecting those with incomes between $200,000 and $400,000.
The state and local tax (SALT) deduction cap of $10,000, another contentious aspect of TCJA, would be eliminated. This would particularly benefit high-income earners in high-tax states like California and New York. However, the removal of this cap could cost the federal government billions and widen the deficit, potentially slowing economic and wage growth.
Prepare for the Changes
As the potential expiration of TCJA approaches, it is crucial to prepare for these significant tax changes. Consulting with tax professionals and planning ahead can help mitigate the impact of higher taxes and lost deductions. Whether Congress will extend these provisions remains to be seen, but one thing is clear: taxpayers need to be proactive to navigate the impending changes effectively.
