Tom Talks Taxes - August 24, 2023

Are you prepared for significant tax law changes starting in 2026?

When Congress wrote the Tax Cuts and Jobs Act (TCJA) in 2017, it made many of the provisions sunset on December 31, 2025. Post TCJA, Congress has added to the list of provisions sunsetting on December 31, 2025, leading to a significant shift in the taxation of individuals and businesses in 2026 unless Congress and the President can agree to legislation to mitigate the abrupt changes.

These automatic changes are now less than three years away; it is impossible to ignore them when doing long-term tax planning for a taxpayer. Tax professionals have to assume changes under current law will occur; Congressional changes to the tax law are unpredictable, even when one party controls the Congress and the presidency.

Taxpayers should consider accelerating actions to tax years 2023, 2024, and 2025 if they would receive a benefit from any of the expiring provisions. Likewise, if a non-deductible expense becomes deductible starting in 2026, the taxpayer should consider deferring the expense until 2026 or later (if possible).

The Joint Committee on Taxation publishes an annual report detailing the tax provisions that expired in the prior calendar year and will expire in future tax years. The 2023 report was published on January 18, 2023. The JCT report lists 35 tax provisions that expire effective December 31, 2025; the ones that tax professionals will most commonly see in practice are below.

Individual income tax rates. The rates will return to pre-TCJA rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, up from the current 10%, 12%, 22%, 24%, 32%, 35%, and 37% structure.

Personal exemption deduction. Personal exemption deductions will return starting in tax year 2026.

Standard deduction. TCJA significantly increased the standard deduction amount; in 2026, the standard deduction will revert to the 2017 amount adjusted for inflation.

Qualified business income deduction. The §199A deduction will no longer be available starting in 2026. For sole proprietorships, partnerships, and S corporations, this will require re-evaluating the choice of entity for tax purposes since the C corporation rate reduction to 21% was a permanent change.

State and local tax cap. The $10,000 ($5,000 married filing separately) deduction cap on state and local taxes will go away in 2026; however, due to simultaneous changes in the alternative minimum tax (AMT), high-income taxpayers may see a reduced benefit.

Alternative minimum tax. The TCJA increase in the exemption amount and phaseout threshold will go away in 2026, subjecting more taxpayers to AMT.

Miscellaneous itemized deductions subject to the 2% AGI limitation. These expenses become deductible again starting in 2026; for example, expenses for the production of income, personal tax-related expenses, and §183 “hobby” expenses.

Mortgage interest deduction. The acquisition indebtedness deduction limit will go from $750,000 to $1 million in 2026; the interest deduction for up to $100,000 of home equity debt (proceeds do not have to be used to buy, build, or improve the residence) will return.

Personal casualty losses. Starting in 2026, a taxpayer can deduct a personal casualty loss (for example, theft losses) regardless of whether the loss occurs in a Federally declared disaster area.

Cash charitable deduction limitation. The current limit of 60% of AGI will go down to 50% of AGI in 2026, which was the limit pre-TCJA.

Itemized deduction limitation. The limit on itemized deductions for higher-income taxpayers (also known as the “Pease limitation”) returns in 2026.

Child tax credit. The child tax credit will go from $2,000 to $1,000, along with other modifications to the refundable credit, starting in 2026.

Premium tax credit. The premium tax credit increase for purchasing health insurance on a Marketplace in effect since 2021 will disappear in 2026.

Principal residence debt cancellation exclusion. This exclusion will not be available starting in 2026; a taxpayer with principal residence debt cancellation will need to qualify for a different §108 exclusion, such as insolvency.

Student loan cancellation exclusion. The American Rescue Plan Act enhanced the debt cancellation exclusion to include almost all student loan forgiveness. The provision will revert in 2026 to a more limited exclusion generally available due to the death or disability of the borrower.

Student loan employer benefit. Since 2020, an employer could provide a §127 tax-free educational assistance benefit (up to the annual §127 limit) to pay an employee’s student loans. Student loans will not be a qualifying expense starting in 2026.

Moving expenses. A taxpayer can deduct certain employment-related moving expenses starting in 2026; an employer can also begin providing again tax-free qualified moving expense reimbursements under §132(g).

Unified estate and gift tax exemption. The 2023 lifetime exemption is $12.92 million per individual; it will likely decrease to somewhere between $6 million and $7 million per individual in 2026. Married taxpayers can continue to elect to transfer a deceased spouse’s unused exclusion to the surviving spouse on a timely filed Form 709 (or within five years of the date of death per Rev. Proc. 2022-32).

New markets tax credit. The §45D credit expires and will no longer be available in 2026.

Employer credit for paid family and medical leave. The §45S credit expires and will no longer be available in 2026.

Work opportunity tax credit (WOTC). The §51 credit expires and will no longer be available in 2026.

Three important tax provisions will expire one year later, on December 31, 2026.

§168(k) bonus depreciation. TCJA created a 100% bonus depreciation deduction for property placed in service during tax years 2018 through 2022. The bonus depreciation rate decreases to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and forward.

Saver’s credit. The nonrefundable §25B saver’s credit is replaced in 2027 with the refundable §6433 saver’s match. The saver’s match will generally be directly deposited into the taxpayer’s retirement account. This is a SECURE 2.0 of 2022 Act change.

Opportunity zones. TCJA created a capital gain deferral mechanism if a taxpayer reinvests capital gains into a qualified opportunity zone fund; long-term investments may be tax-free when later sold. The deferral election is not available starting in 2027.

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