Article Highlights: Standard Deductions Personal & Dependent Exemptions Child Tax Credit Home Mortgage Interest Limitations Tier 2 Miscellaneous Deductions Phaseout of Itemize Deductions SALT Limits Moving Deduction Commuting Tax Benefits Personal Casualty Losses Estate Tax Exclusion Tax Brackets Alternative Minimum Tax (AMT) Qualified Business Income (QBI) Deduction By now you have probably gotten used to the provisions in the Tax Cuts and Jobs Act (TCJA) that became effective January 1, 2018. But don’t forget, most of the tax changes made by the TCJA are not permanent and will expire (sunset) after 2025. This will have an impact on long range tax planning and will result in a mixed bag of tax increases and tax cuts. How it will impact individual taxpayers will depend upon which provisions of TCJA affect them. The following is a review of what will happen when TCJA expires if Congress doesn’t intervene. Standard Deductions – The standard deduction is that amount of deductions you are allowed on your tax return without itemizing your deductions. The standard deduction is annually adjusted for inflation. In 2018, the TCJA just about doubled the standard deduction as illustrated in the table below that also illustrates the 2023 standard deduction amounts. With expiration of TCJA the standard deduction will be cut roughly in half. HISTORICAL STANDARD DEDUCTIONS Tax Year 2017 (pre-TCJA) 2018 (post-TCJA) 2023 Married Filing Joint and Surviving Spouse $12,700 $24,000 $27,700 Head of Household $9,350 $18,000 $20,800 Single $6,350 $12,000 $13,850 Married Filing Separate $6,350 $12,000 $13,850 The increased standard deduction under TCJA benefited lower income taxpayers and retirees, whose itemized deductions often were just barely more than the pre-TCJA standard allowance. The increased standard deductions also meant fewer taxpayers claimed itemized deductions – roughly 10% of filers now itemize versus 30% before TCJA – which helped simplify these filers’ returns. Personal & Dependent Exemptions - Prior to 2018, the tax law allowed a deduction for personal and dependent exemption allowances. One allowance was permitted for each filer and spouse and each dependent claimed on the federal return. For the year prior to the TCJA’s suspension of the exemption deduction, the exemption amount was $4,050, which would have been inflation adjusted to $4,700 in 2023. The deduction for exemptions phased out for higher income taxpayers. Child Tax Credit – Prior to 2018 the child tax credit was $1,000 for each child below the age of 17 at the end of the year. With the advent of TCJA the child tax credit was doubled to $2,000 for each child below the age of 17 at the end of the year. This more than made up for the loss of a child’s personal exemption deduction for lower income families. The child tax credit is subject to phaseout for higher income taxpayers. However, TCJA substantially increased the income phaseout thresholds as illustrated in the table below, so much so that the credit became available to middle-income taxpayers. Also of note is the fact that the phaseout thresholds for the credit are not inflation adjusted. As a result, each year the credit benefit is gradually diminished for higher-income taxpayers. CHILD TAX CREDIT INCOME PHASEOUT THRESHOLDS Filing Status Pre-TCJA Post-TCJA Married Filing Joint $110,000 $400,000 Married Filing Separate $55,000 $200,000 Head of Household $112,500 $200,000 All Others $75,000 $200,000 If the credit is allowed to revert to the pre-TCJA amount of $1,000 and the lower income phaseout levels, it will have significant negative impact on families. You may recall that for one year during the Covid-19 pandemic, the child credit amount was increased to $3,000 or $3,600, depending on the child’s age, and other temporary changes were made. Some in Congress want to permanently bring back these enhancements, so that possibility could become part of any legislation negotiations surrounding the sunsetting or extension of TCJA provisions. Home Mortgage Interest Limitations – Prior to the passage of TCJA taxpayers could deduct as an itemized deduction the interest on $1 Million ($500,000 for married taxpayers filing separate) of acquisition debt and the interest on $100,000 of equity debt secured by their first and second homes. With the passage of TCJA, the $1 Million limitation was reduced to $750,000 for loans made after 2017 and any deduction of equity debt interest was suspended (not allowed). A return to pre-TCJA levels will tend to benefit higher income taxpayer with more expensive homes and higher mortgages. Tier 2 Miscellaneous Deductions – TCJA suspended the itemized deduction for miscellaneous deductions for tax preparation fees, unreimbursed employee business expenses, and investment expenses. Most notable of these is unreimbursed employee expenses which allowed employees to deduct the cost of such things as union dues, uniforms, profession-related education, tools and other expenses related to their employment and profession not paid for by their employer. Investment expenses included investment management fees charged by brokerage firms and tax preparation fees, including the cost of tax return preparation and tax planning expenses. These types of expenses were allowed only to the extent they totaled more than 2% of the taxpayer’s adjusted gross income.