Nobody’s talking about the provisions that don’t sunset 

There have been no shortage of articles discussing the anticipated sunset of the 2017 Tax Cuts and Jobs Act (TCJA). Practitioners have repeatedly warned their clients that numerous TCJA provisions are set to expire at the end of 2025. Without Congressional action, individual taxpayers face the prospect of an increase in marginal tax rates, a halving of the estate and gift tax exemption and the expiration of the qualified business income deduction. However, the TCJA also introduced several permanent changes to the individual tax rules that remain in effect regardless of what happens this year in Washington.

So, what are a few TCJA tax items relevant to individuals that don’t sunset at the end of 2025? 

1.    Inflation adjustments: TCJA permanently changed how various income thresholds are adjusted for inflation. Following the enactment of TCJA, inflation adjustments are based on changes in the chained Consumer Price Index for All Urban Consumers, which accounts for the ability of consumers to substitute between goods. In theory, this should result in smaller inflation adjustments to tax brackets and other phaseout limitations. Over time, this could result in tax bracket creep for many individual taxpayers if their income grows faster than the rate of inflation applied to tax brackets and phaseouts. This makes bracket management increasingly important for taxpayers regardless of what happens with TCJA.

2.    Alimony: TCJA also permanently repealed various tax rules related to divorce. For divorces executed on or in some cases modified after Dec. 31, 2018, alimony payments are no longer deductible nor are alimony payments received includible in income. Clients undergoing a divorce should be aware that the TCJA alimony changes do not sunset, and they should work with their attorneys to plan accordingly.

3.    Medical expenses: The deduction for medical expenses used to be limited to only those expenses exceeding 10% of a taxpayer’s Adjusted Gross Income (AGI). TCJA temporarily lowered the floor to 7.5% of AGI, and Congress later made that change permanent. Taxpayers with significant medical expenses should be aware that this provision does not sunset at the end of 2025. They should consider ways to maximize this deduction by timing expenses to the extent possible, and for married couples, they should consider whether filing separately may yield a greater tax benefit.

4.    529 plan distributions: Most taxpayers think of 529 plans as college-savings vehicles. That remains true, but TCJA also expanded the list of eligible 529 distributions to include up to $10,000 of tuition payments for K-12 education. 529 plan assets grow tax-deferred, and distributions are tax-free if paid for qualified education expenses. Parents whose children attend private school can garner tax-savings by using 529 plan assets to pay their children’s tuition. This benefit is not due to expire at the end of 2025.

5.    Roth IRA conversion recharacterizations: Suppose a taxpayer converts a large traditional IRA to a Roth IRA right before financial markets tumble 25%. Prior to TCJA, the taxpayer had until the extended due date of their tax return to recharacterize, or undo, the Roth conversion. This was a handy tool which allowed taxpayers the benefit of hindsight. TCJA permanently eliminated the ability to recharacterize Roth conversions. Following TCJA, taxpayers contemplating Roth conversions will need to keep in mind that they cannot undo their conversion. They may wish to wait until later in the year when they have a better grasp of their tax situation before deciding whether to convert an IRA. They may also want to consider a dollar-cost-averaging approach to Roth conversions where they convert smaller amounts throughout the year to minimize the risk of market movements.

Please note that taxpayers may still use recharacterizations to fix mistakes. For example, a taxpayer contributes to a Roth IRA but then realizes while preparing their tax return that their income exceeds the maximum threshold for Roth contributions. Post TCJA, they can still recharacterize the contribution as a regular nondeductible IRA contribution to correct their mistake.

6.    Affordable Care Act (ACA) penalty: For individuals who fail to maintain required health insurance under the ACA, TCJA permanently fixed the penalty tax at zero for years after 2018. Individuals without minimum essential coverage do not need to worry about penalties returning following the sunset of TCJA.

7.    Excess business losses: The TCJA introduced a limit on business losses in excess of $313,000, or $626,000 if married filing jointly (2025 figures). This provision was originally scheduled to sunset at the end of 2025 with many other TCJA provisions, but its implementation was delayed during the pandemic and then subsequently extended through 2028. Although the excess business loss provision does eventually sunset, taxpayers should be aware that even if the TCJA sunsets at the end of 2025, the excess business loss rules remain in effect for another few years. Thus, taxpayers will continue to need to plan ahead to minimize the tax impact of this provision.

Taxpayers need to remain vigilant of the ever-changing legislative landscape in Washington, and they should be prepared to act quickly as the situation develops. In the meantime, however, taxpayers should focus on what is known with certainty. These few items will continue to apply regardless of the fate of the TCJA, so taxpayers should plan accordingly.

For more information on this topic, or to learn how Baker Tilly can help, contact us.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.