Preparing for the TCJA Sunset: What Tax Advisors Need to Know

The Tax Cuts and Jobs Act (TCJA)—the 2017 tax code overhaul designed to boost economic growth—is set to expire on December 31, 2025. Unless Congress intervenes, the TCJA’s sunset will usher in a swathe of tax increases in 2026, with analysts estimating that over $4 trillion worth of tax hikes could take effect.

Given the widespread tax consequences of the TCJA’s sunset, we’re going to explore the specific provisions that are set to expire, outline essential tax planning strategies to help reduce the impact of the upcoming tax increases, and look at how platforms like Harness can help tax advisors manage the TCJA’s sunset more effectively.

Table of Contents

1. What is the TCJA?
2. What TCJA provisions will expire?
3. How will the 2026 tax brackets be affected if the TCJA expires?
4. How to prepare for the TCJA sunset
5. How Harness can help
6. FAQs on TCJA

What is the TCJA?

The Tax Cuts and Jobs Act (TCJA) of 2017 was a sweeping overhaul of the U.S. tax code. Its primary objectives were to stimulate economic growth through major tax reductions—particularly for corporations—and to simplify the tax system for individuals. Key features of the legislation included the permanent reduction of the corporate tax rate to 21%. Additionally, there were temporary changes for individual income taxes, such as lower tax rates and a near doubling of the standard deduction. 

While proponents of the TCJA lauded its potential to boost the economy, critics raised concerns about its impact on the national debt and its distributional effects. Either way, the TCJA’s sunset will have profound consequences across the entire U.S. tax-paying arena. 

What TCJA provisions will expire?

A number of TCJA provisions are set to revert to pre-TCJA levels or disappear entirely, impacting both individuals and businesses. 

How will the TCJA sunset affect individuals?

For individuals, the key tax implications of the TCJA’s expiry are as follows: 

Income tax rates: The reduced tax rates across all income brackets will revert to their pre-TCJA levels. This will result in higher marginal tax rates for most taxpayers, with the top marginal rate climbing back to 39.6%.

Standard deduction: The significantly increased standard deduction, which provided a larger tax-free amount for many individuals and families, will revert to its pre-TCJA levels. This will likely lead to more taxpayers itemizing deductions.

AMT exemption: Higher exemption amounts decrease, potentially subjecting more taxpayers to the Alternative Minimum Tax.

Child tax credit: The expanded child tax credit, which increased the credit amount to $2,000 per qualifying child and made a portion refundable, will revert to its pre-TCJA amount of $1,000, with less favorable refundability rules.

SALT deduction cap: The $10,000 annual cap on the deduction for state and local taxes (SALT) is also set to expire. This could allow taxpayers in high-tax states to deduct the full amount of their state and local taxes.

Mortgage interest deduction cap: The limitation on the deductibility of mortgage interest on acquisition debt of $750,000 (for mortgages taken out after December 15, 2017) may revert to the pre-TCJA limit of $1 million.

Estate and gift tax exemption: The exemption threshold will decrease from the 2024 level of $13.61 million per person to pre-TCJA levels (likely under $5 million).

How will the TCJA sunset affect businesses?

For businesses, the key tax implications of the TCJA’s expiry are as follows:

Pass-Through business income deduction (Section 199A): The 20% deduction for qualified business income from pass-through entities (sole proprietorships, partnerships, S corporations, and certain trusts and estates) is set to expire. This will likely increase the tax burden on many small business owners and partners.

Bonus depreciation: While it’s not directly tied to the TCJA sunset, the 100% bonus depreciation allowance for qualified property placed in service after September 27, 2017, has begun phasing down. It will decrease to 60% in 2024, 40% in 2025, 20% in 2026, and will be fully eliminated after 2026 unless Congress acts. 

Interest deduction limitation [Section 163(j)]: The limitation on the deduction for net business interest expense is currently capped at 30% of adjusted taxable income (ATI). After 2025, the definition of ATI will revert to earnings before interest and taxes (EBIT) instead of earnings before interest, taxes, depreciation, and amortization (EBITDA). This redefinition can‌ reduce the amount of deductible interest expense.

Limits on Net Operating Loss (NOL) deductions: Pre-TCJA rules generally allowed NOLs to be carried back two years and forward 20 years, and to offset 100% of taxable income. The TCJA eliminated most carrybacks and limited the use of NOLs to 80% of taxable income. The sunset could potentially revert to the more favorable pre-TCJA rules, offering greater flexibility for businesses experiencing losses.

The post-TCJA arena will require tax advisors to manage numerous changes and tax mitigation strategies. At Harness, we offer tax advisors an advanced software platform supported by an expert team designed to streamline the entire tax management process.

How will the 2026 tax brackets be affected if the TCJA expires?

Should the TCJA sunset, the 2026 tax brackets for individuals will revert to their pre-TCJA structure. While the exact income thresholds will be adjusted for inflation, the number of brackets and the corresponding tax rates will change. 

The following is a general overview of what to expect, based on the 2017 tax brackets:

How to prepare for the TCJA sunset

With‌ major tax changes on the horizon, tax advisors should encourage clients to pursue a number of strategies prior to the TCJA’s expiration.

Estate and gift tax planning

Maximize gift tax exemption: Encourage clients to use the currently higher $13.61 million (single) / $27.22 million (married) gift tax exemption before it drops in 2026. This is a “use it or lose it” opportunity, as gifts made now will reduce the taxable estate under the lower post-sunset exemption.

Consider dynasty trusts: Clients with generational wealth transfer goals should explore the creation of dynasty trusts. These irrevocable trusts can‌ transfer assets across generations with minimal or no transfer taxes, offering long-term tax efficiency. Certain states also offer state income tax benefits for these trusts.

Explore Spousal Lifetime Access Trusts (SLATs): SLATs allow clients to make significant gifts while providing a potential safety net for their spouse. Gifting assets to an irrevocable trust for the benefit of their spouse allows these assets to be removed from the grantor’s taxable estate. To avoid the reciprocal trust doctrine (which prevents estate tax avoidance when two people create substantially similar trusts for each other), make sure the terms of SLATs created by each spouse for the other are substantially different.

Fund insurance trusts (ILITs): Use the current gift tax exemption to fund new life insurance policies or transfer existing ones into an Irrevocable Life Insurance Trust (ILIT). This can keep life insurance proceeds out of the taxable estate, providing liquidity for estate taxes or other needs. 

Make outright gifts: For clients with philanthropic intentions or those wishing to transfer wealth to non-spousal and non-charitable beneficiaries, making outright gifts now can make use of the higher gift tax exemption and‌ the generation-skipping transfer tax (GSTT) exemption (for grandchildren and later generations).

Income recognition planning

Accelerate ordinary income: If clients anticipate being in a higher tax bracket after 2025 due to the TCJA sunset, they may want to consider strategies to speed up the recognition of ordinary income into 2024 or 2025. This could include taking bonuses, exercising stock options, or realizing other forms of ordinary income. However, be careful of the potential impact on SALT deduction limitations and state income taxes.

Consider Roth IRA conversions: For clients with traditional IRAs or 401(k)s, converting these assets to Roth IRAs at current tax rates could be advantageous, especially if they expect higher tax rates in retirement. The taxes on the conversion are paid now, but future qualified withdrawals and growth in the Roth IRA are tax-free. This can be particularly beneficial if the taxes can be paid from non-IRA funds.

Accelerate traditional IRA withdrawals: Clients over age 59½ who anticipate higher tax rates post-TCJA sunset should think about taking larger withdrawals in 2025 from traditional IRAs than their required minimum distributions (RMDs) to make the most of the lower current tax rates.

Use Qualified Charitable Deductions (QCDs): For clients age 70½ or older who have philanthropic goals and are subject to RMDs, using qualified charitable distributions (QCDs) allows them to donate up to $100,000 directly from their IRA to qualified charities (excluding donor-advised funds). This will satisfy their RMD and reduce their taxable income.

Itemized tax deduction planning

Delay 4th quarter estimated SALT Payment (2025): For clients who itemize and are subject to the SALT deduction cap in 2025, consider delaying their fourth-quarter state and local tax payment until January 2026. This would allow them to deduct the payment in a year when the SALT cap may have expired. However, be aware of potential penalties for underpayment and the potential impact of the Alternative Minimum Tax (AMT).

Anticipate increased mortgage interest deduction: Starting in 2026, interest paid on up to $1,000,000 of acquisition indebtedness and $100,000 of home equity indebtedness may again be deductible. Clients with larger mortgages should be aware of this potential increase in deductible interest.

Understand charitable deduction limits: Advise clients that the adjusted gross income (AGI) limit for cash contributions to public charities will revert to 50% in 2026, down from the temporary 60% limit under the TCJA.

Note the permanent medical expense deduction threshold: The 7.5% of AGI threshold for deducting medical expenses remains a permanent part of the tax code and is not affected by the TCJA sunset.

Prepare for casualty loss deduction reinstatement: Beginning in 2026, the deduction for personal casualty and theft losses not attributable to a federally declared disaster may be reinstated (subject to the $100 per casualty and 10% of AGI limitations).

Plan for moving expense deduction/exclusion: For moves occurring in 2026 and beyond, reimbursed moving expenses paid to an employee will again be excludable from gross income. Additionally, unreimbursed moving expenses will be deductible for those who meet certain requirements (related to a new job).

Consider reinstated miscellaneous itemized deductions: Beginning in 2026, certain miscellaneous itemized deductions that were suspended under the TCJA, such as investment management fees, tax preparation fees, and unreimbursed employee business expenses, may again be deductible, but only to the extent they exceed 2% of the taxpayer’s AGI.

Be aware of the return of the Pease limitation: High-income taxpayers should be aware that the Pease limitation, which could reduce the total amount of itemized deductions, may be reinstated in 2026. This limitation was suspended under the TCJA.

Business Income Planning

The expiration of the Qualified Business Income (QBI) deduction and the permanent nature of the lower corporate tax rate (21%) may result in some business owners needing to re-evaluate their business structure. While the corporate rate is fixed, future policymakers could revise it. Pass-through entities will see a direct tax increase due to the QBI deduction’s expiration, potentially making the C corporation structure more attractive for some.

Alternative Minimum Tax (AMT) Planning

Manage income and deductions: With the increased likelihood of AMT exposure due to the lower exemption amounts, tax advisors should help clients manage the timing of income and deductions to potentially reduce AMT liability. Bear in mind that certain deductions, like state and local taxes, are not deductible for AMT purposes.

Consider municipal vs. corporate bonds: The changes to the AMT could influence investment decisions for high-income earners. Interest income from private activity bonds is generally subject to AMT, while interest from most other municipal bonds is not.

How Harness can help

The sweeping tax changes that the TCJA sunset will bring, should it materialize, will require efficient and accurate management for tax advisors. The Harness platform merges advanced tax practice management software with an expert in-house team to deliver a more efficient and dependable environment in which tax advisors can offer exceptional service to their clients.

FAQs on TCJA

Some commonly asked questions about the TCJA sunset include:

What are the key changes regarding corporate income tax under current tax law, and how will related corporate tax provisions affect overall business taxes?

The current corporate income tax rate is 21%. However, the sunset of TCJA corporate tax provisions like the bonus depreciation phase-out and the reversion of stricter interest deduction limits after 2025 will impact overall business taxes.

Beyond income tax, will the sunset impact sales taxes, or is the change to the estate tax exemption the primary non-income-related concern?

The TCJA did not change sales taxes. The primary non-income-related concern is the estate tax exemption, which is scheduled to be halved in 2026.

What is the current maximum child tax credit, and how will the expiring provisions of the tax act alter it?

The current maximum child tax credit ($2,000) will revert to $1,000 after the expiring provisions of the tax act sunset.

How might the sunset affect the deductibility of interest on home equity debt, and what tax savings strategies should individuals consider?

The rules for deducting interest on home equity debt may revert to the pre-TCJA standard, allowing broader deductibility. Individuals should consider tax savings by strategically timing deductions and planning for potential rate increases.

How will the TCJA sunset generally affect my tax bill, and what are the key differences in its impact on single and joint filers?

The TCJA sunset will likely increase your tax bill. The impact will vary for single and joint filers depending on their income levels, tax brackets, and changes in deductions.

Where can I find official information from the Internal Revenue Service regarding these upcoming tax changes and their effect on federal revenue?

You can find official information from the Internal Revenue Service (irs.gov) regarding these changes and their anticipated impact on federal revenue.

How might the sunset impact the tax treatment of business property, and what are the most significant expiring provisions of the tax act for businesses?

The sunset may affect the tax treatment of business property, with the possibility of altering NOL rules. Significant expiring provisions of the tax act for businesses include the expiration of the QBI deduction.

Will the ability to claim specific itemized deductions change after the sunset, and what are the specific implications for single filers?

Yes, changes to certain itemized deductions are expected, such as the expiration of the SALT cap. Single filers should consider how the lower standard deduction and changes to itemized deductions will affect them.

Could the TCJA sunset eliminate any current tax breaks that might influence decisions around capital investments for businesses or individuals?

Yes, the sunset of certain provisions, such as the phase-out of bonus depreciation (which acts as a significant upfront tax break for capital investments), will likely reduce the immediate tax benefits associated with acquiring new assets. This could influence the timing and attractiveness of making capital investments.

Considering the TCJA sunset, should taxpayers anticipate changes in how the consumer price index is used to calculate their annual taxes for the next tax year, compared to recent years?

Taxpayers should anticipate potential changes. While the consumer price index will continue to adjust tax thresholds affecting annual taxes, the underlying tax brackets and standard deduction amounts reverting in the next tax year will be the pre-TCJA figures, adjusted by the CPI. This could result in different outcomes under the TCJA’s structure compared to recent years.

 

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