Individual Income Tax Rates

The TCJA notably decreased individual income tax rates across various income levels, leading to lower federal taxes for numerous Americans. Should the TCJA sunset, these rates will return to their pre-2018 figures. The highest marginal rate would rise from 37% to 39.6%. Increases in other tax brackets could also lead to higher tax liabilities for many individuals.

Standard Deduction and Personal Exemptions

Significant changes were also made to the standard deduction, which was almost doubled by the TCJA to $12,000 for single filers and $24,000 for married couples filing jointly in 2018, with subsequent inflation adjustments. If the TCJA is allowed to expire, the standard deduction will revert to about half of these amounts. Moreover, the personal exemption, which was removed by the TCJA, would be restored. This reinstatement could complicate the tax filing process and potentially increase taxable income for numerous households.

Child Tax Credit

Under the TCJA, the child tax credit was enhanced from $1,000 to $2,000 per qualifying child, with expanded eligibility criteria, benefiting many middle-income families. If the TCJA sunsets, the credit will return to $1,000 per child, and the eligibility thresholds will lower, potentially increasing the tax burden for families with dependent children.

Alternative Minimum Tax (AMT)

The TCJA made significant adjustments to the AMT by raising the exemption amounts and the thresholds at which these exemptions phase out, thereby reducing the number of individuals affected by the AMT. If the TCJA is not extended, these exemption amounts will revert to their lower, pre-2018 levels, potentially subjecting more taxpayers to the AMT and increasing their tax obligations.

Estate Tax

The TCJA also significantly increased the estate tax exemption, doubling it to allow individuals to leave up to $11.7 million (as of 2021) to heirs without facing federal estate tax. Should the TCJA expire, this exemption will decrease to approximately $5.5 million, thus expanding the scope of estates that will incur this tax.

Corporate Tax Rates

One of the hallmark changes of the TCJA was the reduction of the corporate tax rate from 35% to 21%. Unlike the individual tax provisions, this change is permanent. Therefore, even if the TCJA expires, the corporate tax rate will continue to be 21%.

Deductions and Credits

The TCJA also streamlined various deductions and credits, eliminating, or capping some while introducing others, such as the Qualified Business Income Deduction for pass-through entities. If the TCJA sunsets, many of the previous rules governing deductions and credits will be reinstated. For example, the deduction for state and local taxes, which was capped at $10,000 by the TCJA, could once again become uncapped, potentially benefiting taxpayers in states with higher taxes.

Implications for Tax holders

The end of the TCJA could lead to increased tax liabilities for many due to higher tax rates and a reduced standard deduction. The impact will be particularly significant for families, who may face a reduced child tax credit. Additionally, the reintroduction of personal exemptions and changes to the AMT will add complexity to tax planning.

Conclusion

With the TCJA set to expire soon, it’s a pivotal time for taxpayers to start gearing up for the changes that might be on the way. Getting advice from tax professionals can clear up how these shifts could play out for your financial situation. Now, the upcoming presidential election could throw another layer of uncertainty into the mix. Depending on the outcome, we could see efforts to extend or modify the TCJA, or perhaps a shift back to the pre-TCJA tax rules. So, staying informed and proactive in your tax planning is more crucial than ever. Keep an eye on the election results—they might just shape the tax landscape in significant ways.