Are Major Federal Tax Changes on the Horizon?

By NEIL BECOURTNEY, CPA SMOLIN LUPIN & CO., LLC

The Tax Cuts and Jobs Act (TCJA) was legislated in late 2017 and primarily became effective as of Jan. 1, 2018. Numerous tax changes impacting individuals, some business provisions and the estate tax threshold under TCJA were enacted with a set expiration of Dec. 31, 2025, for budgetary reasons. That deadline is rapidly approaching.

Congress will have choices to consider, such as the following:

• It can take no action, resulting in many tax provisions reverting in 2026 to what they were in 2017.

• It can extend the expiring TCJA provisions for additional years by approving legislation making the TCJA provisions permanent or blow everything up via new legislation.

The Congressional Budget Office and the Joint Committee on Taxation have estimated that extensions of all provisions that are scheduled to either expire or become less generous would cost an estimated $5 trillion between FY2025 and FY2034.

Summary of Expiring TCJA Provisions

• The top personal income tax rate would increase from 37% to 39.6%.The TCJA did not increase the reduced tax rates on long-term capital gains or qualified dividends.

• Standard deductions would revert to $6,350 for single filers and $12,700 for joint filers. Consider that for 2024, the basic standard deduction for joint filers (neither spouse age 65 or blind) will be $29,200. This resulted in a substantial drop in the number of taxpayers itemizing their deductions.

• The maximum child tax credit would drop from $2,000 to $1,000 along with a corresponding drop in the income phaseout thresholds.

• Personal exemptions of $4,050 for each filer and dependent would resurface.

• The $10,000 state and local tax (SALT) deduction limit would vanish. There have been continuous efforts by Congressional representatives of high-tax states to either increase or repeal the SALT limit over the past seven years without success.

• The cap on home mortgage interest deductions would increase from $750,000 of acquisition indebtedness to $1,000,000 along with interest paid on home equity indebtedness of up to $100,000 again being deductible.

• The “Pease” limitation (3%) on itemized deductions would resume.

• Cash contributions to public charities, currently limited to 60% of AGI, would be limited to 50% of AGI.

• Miscellaneous itemized deductions above 2% of AGI would again be deductible as would moving expenses, the latter deduction “above the line.”

• All casualty losses (currently only those incurred as a result of a federally declared disaster) would be eligible for deduction.

• The alternative minimum tax (AMT) on individuals that has rarely reared its ugly head since 2018 would reflect decreases in the AMT exemption and phaseout thresholds, which combined with the elimination of the SALT deduction limit (often a leading cause of incurring AMT), would make many taxpayers again subject to AMT.

• The Sec. 199A (QBI) deduction would disappear. This deduction effectively reduced the top tax rate on eligible Schedule C, rental and pass-through entity income to 29.6% (37% less 20%) compared with the 21% C corporation tax rate (permanent change that is not expiring).

• Bonus depreciation for assets placed in service during calendar year 2026 currently slated at 20% would be eliminated.

• The estate and gift tax exemption for 2024 has increased to $13,610,000 via annual indexing for inflation. It would revert to $5 million (indexed for inflation, estimated to be about $7 million) for decedents dying on or after Jan. 1, 2026. Final regulations adopted in November 2019 (known as the “ anti-clawback” rule) generally prevent an estate from being taxed on gifts made during 2018 through 2025 on a higher basic exemption amount (BEA) that would exceed the exemption amount for 2026 and future years.

The following individual tax changes included in the TCJA were either made permanent or expire after 2026:

• For divorces occurring after Dec. 31, 2018, alimony is no longer deductible to the payer and no longer taxable to the payee (note that New Jersey did not adopt the alimony changes). This permanent change was a revenue raiser as the alimony payer is typically in a higher tax bracket than the alimony recipient.

• The Sec. 461 loss limitation (conveniently calculated on Form 461) of $250,000 for single filers and $500,000 for joint filers (indexed for inflation) was extended to 2028 by the Inflation Reduction Act.

• At the end of 2026, the Qualified Opportunity Zones that were created under the TCJA to allow the deferral of capital gains taxes on certain new investments in economically distressed areas are set to expire.

State and Local Tax Impact

Some states piggyback the Internal Revenue Code, thus expiring federal provisions would impact state and local income taxes. New York enacted legislation decoupling from the various itemized deduction changes contained in the TCJA, therefore continuing to allow an unlimited deduction for real estate taxes and allowing miscellaneous itemized deductions above 2% of AGI. Taxpayers with very high incomes can take that with a grain of salt as all their itemized deductions are phased out but for 50% of charitable contributions.

Various reports have indicated an increase in recent years of migration by residents of high-tax northeast states, such as New Jersey and New York, to Florida (no personal income tax), spurred by both the SALT deduction limit and the pandemic where many taxpayers realized they could perform their jobs remotely and no longer needed to reside in close proximity to their employer’s location. If the SALT limitation ceases to apply in 2026, it is conceivable that some high-income taxpayers might move back north with the knowledge that they will be obtaining a federal tax benefit for their state income and real estate taxes, assuming they escape the reach of the AMT. Another consideration is meeting the two out of five preceding year test for excluding up to $500,000 of gain on the sale of a principal residence.

Neil Becourtney, CPA, is a tax director in the Red Bank office of Smolin Lupin & Co., LLC. He is a member of the NJCPA and can be reached at nbecourtney@smolin.com .