Understanding the Implications of TCJA income tax provisions set to expire

Qualified Business Income Deduction

TCJA provided a 20% deduction for qualified business income, which is set to expire after Dec. 31, 2025.

Planning point:

This expiration together with increasing marginal rates could lead to a 10% increase in tax rates and an 18.6% current difference between corporate and flow-through taxation. To mitigate the impact, evaluate your tax form of organization and planning strategies to account for this loss of deduction. Restructuring your business or changing the nature of your income could help maintain tax efficiency.

Top income tax rate increasing to 39.6%

The current top ordinary income tax rate of 37% will revert to a pre-TCJA rate of 39.6%. High-income earners will see an increase in tax liability if they do not adjust their tax planning strategies now.

Planning point:

Accelerating income recognition may help you take advantage of the lower tax rate. Consider implementing following techniques before  Dec. 31, 2025:

• Exercising non-qualified stock options
• Accelerating business sales
• Making Roth conversions for retirement plans
• Avoiding deferred compensation

Standard deduction amount reduced

TCJA significantly increased the standard deduction amounts starting in 2018. These increased amounts are set to be reduced after Dec. 31, 2025

Planning point:

Consider the timing of your future medical expenses, charitable contributions, and other itemized deduction expenses. Delaying itemized deductions to the 2026 calendar year, when possible, could optimize your tax benefits by using the higher standard deduction now and taking advantage of expanded itemized deductions post-TCJA.

Removal of state and local tax (SALT) deduction limits

If the cap expires as scheduled, taxpayers will be able to deduct the full amount of their state and local taxes without the $10,000 limitation.

Planning point:

Factor in SALT deductions when evaluating your investment structure and future acquisition plans. Also, if possible, be mindful of the timing of your tax payments. State, local and property taxes are deducted in the year paid, which can differ from the year assessed. Deferring the payment of certain state and local taxes until after the cap is removed may be right for you.

Personal exemptions and certain itemized deductions will be back

The reintroduction of personal exemptions and certain itemized deductions will allow taxpayers to benefit from these items that were unavailable for tax years 2018 through 2025.

Additionally, after  Dec. 31, 2025:

• 2% floor itemized deductions such as accounting fees will be deductible.
• Employees will again be able to claim the home office deduction, provided they meet the eligibility criteria.
• The mortgage interest deduction limits will revert to the pre-TCJA levels, allowing interest on up to $1 million of mortgage debt to be deductible, regardless of when the loan was taken out
• The deduction for interest on home equity loans will also revert to pre-TCJA rules

However, with the Pease limitation set to return in 2026, high-income taxpayers may see a decrease in their itemized deductions.

Planning point:

Do your miscellaneous deductions exceed the 2% of your adjusted gross income (AGI)? If you currently or historically itemized, plan to maximize these benefits.

• Review your investment strategies for deductible investment expenses and ensure a plan is in place to properly document these starting Jan. 1,2026.
• Evaluate the potential benefits of the home office deduction by ensuring your home office meets the exclusive and regular use criteria. Keep detailed records of all home-office-related expenses.
• Review your mortgage debt to take advantage of the higher deduction limits post-2025. Pay attention to nondeductible interest and review other ways to deduct both mortgage and non-mortgage interest.
• Plan for the reintroduction of the Pease limitation, which reduces the value of itemized deductions for high-income earners and strategize accordingly to minimize its impact on your tax liability.

Opportunity zone capital gain deferral

TCJA established opportunity zones to encourage economic development and job creation in low-income communities.  Investors could defer tax on prior capital gains if they reinvested those gains in Qualified Opportunity Funds (QOF) within 180 days of the sale or exchange. The deferral lasts until the earlier of the date the QOF is sold or exchanged, or Dec. 31, 2026.

Planning point:

• Do you have the cash flow necessary to pay the tax liability that will be due in 2026?
• Taxable gain is limited to the current fair market value of your investment over its basis.  Consider an appraisal of the new asset including value-reducing discount adjustments, such as lack of control or lack of marketability.
• Additionally, consider the potential benefits of holding the investment for at least 10 years to qualify for the step-up in basis to fair market value, which can eliminate capital gains on the appreciation of the investment.

Alternative Minimum Tax (AMT) changes

The AMT exemption amounts were increased under TCJA and will revert to lower pre-TCJA levels. The phase-out thresholds will also decrease. This change will likely increase the number of taxpayers subject to the AMT, particularly high-income earners, and those with significant itemized deductions or nontaxable income.

Planning point:

Review your overall tax strategy to account for the lower AMT exemption amounts and phase-out thresholds. Consider the exercise of Incentive Stock Options or adjustments to certain portfolio assets to avoid this additional tax.  It may also still make sense to make state Passthrough Entity Tax Elections to minimize AMT exposure.