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2024 election insights: Tax Cuts and Jobs Act and its impact
Sept. 4, 2024
Election campaigns often feature calls for changes to tax policy, but this year they are a key focus at both the congressional and presidential levels as candidates, lawmakers and their constituents are grappling with the potential impact of the pending Tax Cuts and Jobs Act (TCJA) of 2017 expirations.
Absent congressional action, numerous TCJA tax provisions will expire at the end of 2025. The ramifications of a failure to address this fiscal cliff would be significant and widespread, with implications for almost all business and individual taxpayers. “This is going to be tax Armageddon” said Sen. Mark Warner (D-VA).
Below is a history of the TCJA, details on the most relevant and prevalent TCJA expiring provisions and a review on why the cost of extension may be a barrier.
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The TCJA: History
The TCJA was landmark Republican legislation that implemented expansive tax reform. The bill, which took effect in 2018, featured a reduction in the corporate tax rate, a reduction in income of up to 20% for qualifying pass-through entities, reductions in individual tax brackets, a doubling of the estate tax exemption, sweeping changes to the global tax regime, and various other changes affecting both business and individual taxpayers.
Republicans passed the law without any assistance from Democrats using reconciliation, a process that allows for expedited passage of certain federal budget legislation. Reconciliation bills are “filibuster-proof,” only requiring a simple majority to advance in the Senate, rather than the 60 votes needed for other legislation. However, reconciliation bills are subject to several restrictions, including certain financial limitations. The process of reconciliation is discussed in greater detail on the election details and possible outcomes page.
As a result, Republicans weren’t able to enact all their policy priorities permanently; many provisions were enacted on a temporary basis in order to comply with the aforementioned reconciliation rules. The original drafters of the TCJA didn’t necessarily intend for all the phase-outs to take effect; most hoped to make these provisions permanent in subsequent legislation.
Tax Cuts and Jobs Act: Expiring provisions
Most of the TCJA’s temporary provisions sunset at the end of 2025; however, there are several outliers, including three recently curtailed business provisions.
Previously expired
Scheduled TCJA changes have significantly impacted the following three business provisions, increasing the tax liabilities of affected taxpayers:
| Provision | Change in tax treatment | Effective date |
| Business provisions | ||
| Business interest deduction limitation | Deductions for business interest expense are generally limited to 30% of a taxpayer’s adjusted taxable income (ATI). Previously, the calculation of ATI approximated earnings before interest, taxes, depreciation and amortization (EBITDA). Currently, the ATI approximates earnings before interest and taxes (EBIT), making the calculation more restrictive. | Tax years beginning after Dec. 31, 2021 |
| Research and experimental (R&E) expenditures | R&E expenditures, once able to be currently deducted, became capitalizable expenses. Domestic and foreign R&E costs are amortized over 5 and 15 years, respectively. | Tax years beginning after Dec. 31, 2021 |
| Bonus depreciation | Immediate expensing of qualified property (“bonus depreciation”) has begun to phase out from 100% in 2022 and earlier years to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and will be 0% in 2027. | Phasing out between 2023 and 2026 |
Early in 2024, after months of negotiation, House Ways and Means Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) released a framework to address this trio of business provisions along with an expansion of the Child Tax Credit and several other tax provisions. Though the bill sailed through the House in January with decisive bipartisan support, it languished in the Senate before failing to pass a cloture vote in August.
2025 expirations
The scheduled 2025 expirations primarily affect individuals, estates, pass-through entities and multinational enterprises. Some of the more noteworthy provisions include:
| Provision | Anticipated change in tax treatment |
| Business provisions | |
| Qualified business income (QBI) deduction | The QBI (section 199A) deduction, which provides a benefit of up to a 20% reduction in income from qualifying pass-through businesses, will expire. |
| Individual provisions | |
| Individual income tax brackets & rates | Individual income tax brackets and rates will reset. This will decrease some bracket sizes and increase five of the seven rates including changing the 12% rate to 15%, the 22% rate to 25%, the 24% rate to 28%, the 32% rate to 33% and the 37% rate to 39.6%. |
| Standard deduction and personal exemptions | The standard deduction will be reduced by nearly 50%. Personal exemptions will return for taxpayers and their dependents. |
| Child Tax Credit (CTC) | The CTC will be reduced from $2,000 to $1,000 and phaseout thresholds will be reduced. The $500 credit for other dependents will be eliminated. |
| Itemized deductions | There will be several changes to itemized deductions including, but not limited to:
|
| Individual alternative minimum tax (AMT) | The AMT rules will revert, lowering the exemption amount and substantially decreasing the phaseout threshold. |
| Estate and gift tax provisions | |
| Estate and gift tax exemption | The estate and gift tax exemption will be reduced by 50%. |
| International provisions | |
| Base erosion and anti-abuse tax (BEAT) | The BEAT tax rate will generally increase from 10% to 12.5%. |
| Global intangible low-taxed income (GILTI) | The GILTI deduction will decrease from 50% to 37.5%. This will effectively increase the GILTI rate from 10.5% to 13.125%. |
| Foreign-derived intangible income (FDII) | The FDII deduction is scheduled to decrease from 37.5% to 21.875%. This will effectively increase a company’s tax rate from 13.125% to 16.406%. |
Without new tax legislation, the provisions above, along with numerous others, will expire. Congressional inaction would result in considerable and widespread tax increases for almost every individual taxpayer as well as affected entities.
Additional expirations
The following TCJA provisions are scheduled to lapse after the major 2025 cliff:
- Opportunity Zone (OZ) program: This initiative, which aims to spur long-term private investment in low-income communities, provides taxpayers with qualifying investments with several tax benefits. Taxpayers can defer the taxation of eligible gains by investing them in a Qualified Opportunity Fund (QOF); "gains are deferred until the earlier of (1) Dec. 31, 2026, or (2) when the investment is disposed of,
- Excess Business Loss (EBL) limitation: This provision, which limits individual taxpayers' ability to deduct business losses in excess of business income, was originally scheduled to sunset at the end of 2025. The EBL limitation is a revenue raiser and has been extended twice in order to offset the cost of other legislation. The provision now expires at the end of 2028.
Other expiring provisions
In addition to the TCJA expirations, there are several other tax provisions that are scheduled to lapse at the end of 2025, including the below. The expiration of these taxpayer-favorable positions only compounds the severity and potential cost of addressing the impending fiscal cliff.
New Markets Tax Credit (NMTC)
The NMTC provides federal tax credits to taxpayers who invest in community development entities.
Work Opportunity Tax Credit (WOTC)
The WOTC provides credits to employers who hire individuals who are members of certain targeted groups that often face employment barriers.
Affordable Care Act enhanced subsidies
Enhanced premium tax credits increased the subsidies for taxpayers buying health insurance in the marketplace. If Congress would like to extend these, they must do so before their expiration, as open enrollment will occur in the fall of 2025.
Student loan discharge
In recent years, student loan forgiveness has been excluded from gross income.
Educational assistance
This provides employers with the opportunity to make up to $5,250 in payments per year toward employee’s student loans without including it in the employee’s gross income.
The cost of extension
The Congressional Budget Office has estimated the cost to extend all expiring TCJA provisions would be $4.6 trillion over 10 years (2025 through 2034*). The breakout of the projected costs is:
| Provision category | Cost to extend |
| Individual provisions (including qualified business income (QBI) deduction) | $3.723 trillion |
| Estate and gift tax provisions | $189 billion |
| 100% bonus depreciation provision | $469 billion |
| International provisions | $197 billion |
*This 10-year period includes 2025, a year in which most of the TCJA’s expiring provisions remain in place. The cost of extension for the 10-year period beginning in 2026 is likely to cost more.
In 2017, when the TCJA was drafted, the Joint Committee on Taxation (JCT) estimated the cost of the entire bill to be $1.5 trillion, making the projected cost of extension three times the projected cost of the original legislation. A $4.6 trillion price tag is likely to be prohibitive, even for lawmakers who support the TCJA, amid growing concern regarding the national debt.
The national debt, which is comprised of the total amount the federal government has had to borrow to cover the cost of legislation and budget imbalances, has surged in recent years. Many economists believe that the United States is on an unsustainable fiscal course, due to the impact of increasing annual federal budget deficits and exacerbated by the increased borrowing costs associated with higher interest rates. Accordingly, the United States’ debt sustainability has become a complex and tenuous political issue.
Policymakers are divided on whether tax reform should create a budget deficit, which would increase the national debt. (See the tax policy platforms page for more details). Regardless of the outcome of the election, the party(ies) in power will face difficult decisions tackling tax policy for 2026 and beyond. Realistically, any potential legislation is likely to include revenue raisers to help offset the cost of any TCJA expansion.
Impact
With a sizeable portion of the comprehensive tax reform the TCJA effectuated at risk, the United States is facing its largest tax cliff in decades. The ultimate resolution will have financial implications for almost every U.S. taxpayer.
We will continue to monitor updates throughout the election cycle. If you have questions, please contact your Baker Tilly tax advisor.
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Last updated Oct. 4, 2024
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