Lawmakers Will Have to Reform the Tax Code in 2025

The 2017 Tax Cuts and Jobs Act (TCJA) reduced average tax burdens for taxpayers across the income spectrum by temporarily changing the structure of the individual income tax, including lower rates, wider brackets, a larger standard deduction and child tax credit in lieu of personal and dependent exemptions, and limitations on itemized deductions. The reforms also reduced the individual income tax compliance burden by making it more advantageous for most filers to take the standard deduction and by eliminating the complexity of calculating their taxes again under the alternative minimum tax for millions of filers. Those changes all expire at the end of 2025, along with several TCJA business provisions over the next several years.

The Expiring Tax Provisions

The TCJA adjusted tax bracket thresholds and widths to reduce marriage penalties and reduced five of the seven individual income tax rates. Rates fell from 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.

The TCJA reconfigured tax adjustments for household size, shifting tax benefits toward lower- and middle-income households with roughly revenue-neutral adjustments to the standard deduction, personal and dependent exemptions, and the child tax credit (CTC). Specifically, the TCJA:

  • Increased the standard deduction from $6,350 to $12,700 for singles and from $12,700 to $25,400 for married joint filers in 2018, adjusted annually for inflation
  • Increased the CTC from $1,000 to $2,000, with the maximum refundable portion increased from $1,000 to $1,400 in 2018, adjusted for inflation until it reaches $2,000; lowered the CTC phase-in threshold from $3,000 to $2,500; and lifted the phaseout thresholds from $75,000 to $200,000 for single filers and from $110,000 to $400,000 for married couples filing jointly
  • Created a nonrefundable $500 credit for certain dependents who do not meet the CTC eligibility guidelines
  • Suspended the personal exemption, which had previously allowed households to reduce their taxable income by $4,050 for each filer and dependent, adjusted annually for inflation

To simplify the tax system and offset part of the cost of the rate reductions, the TCJA reduced itemized deductions by:

  • Lowering the cap on home mortgage interest deductions from $1 million in principal to $750,000 and making interest on home equity debt nondeductible
  • Introducing a $10,000 limitation on the itemized deduction for state and local taxes paid
  • Suspending miscellaneous itemized deductions such as casualty and theft losses

The TCJA also simplified the tax system by significantly reducing the number of households caught up in the alternative minimum tax (AMT) by increasing the AMT exemption and the exemption phaseout thresholds and by repealing the Pease limitation on itemized deductions.

For noncorporate businesses, the TCJA established a temporary 20 percent deduction that effectively reduced marginal tax rates by 20 percent. The pass-through deduction is subject to several complex limitations that restrict the benefit of the provision for high-income households.

The TCJA also introduced a limitation on excess business loss deductions for noncorporate businesses. It disallows losses that exceed income by more than $250,000 for single filers and $500,000 for joint filers. The thresholds adjust for inflation each year. The limitation was scheduled to be in effect from 2018 through 2025 but it was postponed to tax years beginning after 2020 during the coronavirus pandemic. The American Rescue Plan Act (ARPA) of 2021 then extended the limitation through 2026 and the Inflation Reduction Act (IRA) of 2022 extended the limitation through 2028.

The TCJA doubled the estate tax exemption from $5.6 million in 2017 to $11.2 million in 2018, adjusted for inflation moving forward.

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