The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017, bringing sweeping changes to the U.S. tax code. It was one of the most significant pieces of tax legislation in decades, cutting corporate tax rates, altering tax brackets, and introducing new deductions and credits. However, many of the provisions for individuals and certain businesses are set to expire after 2025, though there is potential for reinstatement. As we approach that deadline, it’s important to consider the potential economic and financial effects of the TCJA sunsetting, both for individuals and businesses.

Increased Tax Rates for Individuals

One of the most immediate effects of the TCJA sunsetting will be the reversal of the individual income tax cuts. Currently, the law has lowered income tax rates across several brackets. For example, the top rate is 37% under the TCJA, compared to 39.6% under the pre-TCJA law. If the tax cuts expire as scheduled, the tax rates for individuals will revert to their higher pre-2017 levels.

Loss of the Standard Deduction Increase

Another key change in the TCJA was a significant increase in the standard deduction, which nearly doubled, from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly. If the TCJA provisions sunset, the standard deduction would decrease to its pre-TCJA level, potentially increasing the number of people who itemize their deductions instead of taking the standard deduction.

Child Tax Credit Expansion Ending

The TCJA also expanded the child tax credit, increasing it from $1,000 to $2,000 per qualifying child. The phase-out thresholds were raised as well, meaning more middle-class families were eligible for the credit. When the TCJA sunsets, the child tax credit will revert to the $1,000 per child limit and phase out more quickly, impacting families with children.

Corporate Tax Rates

One of the hallmark provisions of the TCJA was the reduction of the corporate tax rate from 35% to 21%. This dramatic cut was designed to encourage businesses to invest more in growth and job growth. The corporate tax rate is scheduled to revert to 35% after 2025, which could have a number of significant consequences.

Higher corporate tax rates might incentivize some companies to scale back investments in expansion or new projects.

Impact on Smaller Businesses

The TCJA also provided a 20% deduction for pass-through businesses (S-corporations, partnerships, and sole proprietorships), which allowed small businesses to retain more of their earnings. This deduction is also scheduled to expire in 2025, potentially leading to higher tax liabilities for small businesses

State and Local Tax (SALT) Deduction Limit

Under the TCJA, the state and local tax (SALT) deduction was capped at $10,000 for individuals. This created significant tax burdens for residents of high-tax states. This cap is not set to expire in 2025, but there is growing debate about whether the cap will be adjusted or repealed by future legislation. The outcome could have significant implications for taxpayers in states like California, New York, and Connecticut, where high state income and property taxes often exceed the $10,000 cap.

The sunsetting of the Tax Cuts and Jobs Act will have far-reaching effects on individuals, businesses, and the broader economy. The 2025 sunset serves as a reminder that tax policy is always subject to change, and the future of U.S. taxation remains uncertain, making it crucial for both individuals and businesses to plan accordingly.