CNN
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If following the law's tax changes is a sport, then 2017 and 2025 could be called the tax Olympics.
Recall that in the first year of President-elect Donald Trump's first term, lawmakers defied expectations and passed the largest overhaul of the tax code in more than 30 years.
Now, this year, lawmakers will use the first 11-plus months of President Trump's second term to decide what to do about the sweeping overhaul known as the Tax Cuts and Jobs Act. That's because most major personal income tax provisions and some corporate provisions expire on December 31st.
A lot has changed over the past few years, but one thing has remained the same. That is, high-stakes tax discussions can cause a great deal of confusion for filers.
They are once again faced with a dizzying array of changes before they know which provisions will remain, which ones will be repealed, which ones will be adjusted, and how it will all combine to impact their bottom line. A series of new proposals, amendments, and political battles will need to be understood.
During the 2017 debate and subsequent enactment of the TCJA, Enrolled Agent Carla Dennis stated, [professional] My friends were really overwhelmed. tax [changes] They were coming at you from the right and the left. …I don’t know how they expect individuals to respond to this. ”
Miklos Ringbauer, CPA, treasurer of the California Institute of Certified Public Accountants, said there were many questions about how the 2017 law was originally written, and some provisions, particularly those for businesses applying under the law. He noted that the new 20% deduction for partnerships was open to interpretation. Personal income tax code. “There are many new additions and changes that have raised unanswered questions, and to this day, the IRS is still making some final decisions. [its guidance]'' Ringbauer said.
As for filers, Tom Oseven, an enrolled agent and director of tax content for the National Association of Tax Preparers, said some clients still have questions seven years after the TCJA was enacted. spoke. That's partly because a number of other high-impact short-term tax provisions went into effect during the pandemic, including a very large temporary increase in the child tax credit that temporarily cut the poverty rate in half. .
There are at least 34 According to the Joint Committee on Taxation, the tax provisions related to the TCJA are scheduled to expire in 2025. Those that are allowed to expire will revert to the state they were in before the TCJA took effect. among them:
Personal income tax rate: The TCJA lowered five of the seven personal income tax rates and, in most cases, changed the range of taxable income (also known as tax brackets) subject to each rate. The new brackets were based on the previous tax law, which was adjusted annually for inflation, but the TCJA applied a different index of inflation than had been used for decades prior to 2017.
Personal exemption: The TCJA also eliminated the personal and dependent exemption, which allowed you to deduct $4,050 for yourself, your spouse, and your dependents in 2017.
Standard deduction: Due to the 2017 tax reform, the basic deduction amount has almost doubled. By doing so, the number of filers itemizing their deductions was significantly reduced. This will only happen if the total amount of deductions exceeds the threshold. These deductions include mortgage interest, state and local taxes, foreign taxes, charitable contributions, and more.
Child tax credit: The TCJA doubled the size of the Child Tax Credit, reducing tax liability dollar for dollar. It also increased the amount paid as a refund to filers who do not have sufficient tax liability to offset the full credit, and expanded the eligibility of those eligible for a refund.
State and local tax deductions: The 2017 law places a $10,000 cap on the so-called SALT deduction, which is only available to people who itemize their deductions. If the cap is allowed to expire, filers will be able to deduct all state and local income, property, and sales taxes. Before the TCJA, the SALT deduction was the main reason many people living in high-tax states itemized, since their total state and local taxes can easily exceed $10,000.
Alternative minimum tax: The TCJA significantly reduced the number of filers affected by the AMT, a parallel tax system that can result in high tax bills. Although the system was originally created to ensure that high-income and wealthy taxpayers could not avoid paying federal income taxes, it eventually became a This ensnared upper-middle-income taxpayers, including those living in states with high income. Many deductions normally available to regular filers are no longer allowed.
Qualified business income deduction: QBI was created under the TCJA and allows businesses filing under the Personal Tax Act to deduct 20% of their income. This provision reduces the incentive for companies to convert to C corporations in order to lower their corporate tax rates. However, according to the Tax Policy Center, in order to prevent gambling, new deductions will not be allowed for some high-income earners in certain occupations, and the benefits for other high-income earners will be limited to wages paid to employees and businesses. The limit is based on the amount invested. .
Inheritance tax: Among other changes related to estate and gift taxes, the TCJA nearly doubled the amount of your estate exempt from federal tax upon your death. It increased from $5.6 million in 2017 to $11.2 million in 2018, and when adjusted for inflation, it now stands at $13.99 million per person (about $28 million per married couple).
Although the TCJA made many corporate provisions permanent, most of the individual provisions were created temporarily to limit the total cost of the bill and keep it within the budget rules in place at the time.
It is estimated that expanding the TCJA in its current form would cost $4.6 trillion over 10 years.
Therefore, to the extent that legislators decide they want to ensure that the TCJA continues to run out of money, they can change the size and eligibility rules of some provisions, refuse to extend other provisions, and change most provisions. They may find other ways to offset the costs of the extension. Even if not all of the provisions expire.
No matter how emphatically President Trump or members of Congress propose to extend or modify tax measures, or create new tax provisions, such as proposals not to tax Social Security benefits or tips, it becomes a legal issue. You shouldn't rely on it. .
Dennis educates clients on this discussion throughout the year and what the various practical proposals mean for their tax situations, particularly as they apply to the standard deduction, SALT, personal deductions, and child tax credits. I am planning to run a scenario for this.
Ringbauer said tax professionals, now equipped with more tax tools to predict and analyze change, can more quickly identify clients affected by a particular proposal and “understand the challenges and benefits of that proposal.” It will help us understand.” Tax laws will change. ”
Dennis also cautions customers not to make changes based on assumptions. “Don't change your tax withholding in 2025. Get it right this year,” she advised.
He will also continue to recommend maintaining good financial records for all actions, even if documentation for itemization is no longer required due to the switch to the standard deduction under the TCJA.
“Keep your documents. You don't have to decide what you can and can't deduct,” Dennis said.
Because the answers to your tax questions and other questions could change more or less significantly by the end of this year.
