Which Parts of the TCJA Expire Next Year and How Much Do They Cost?

A preview of the tax code discussion (fight?) we'll be having next summer.

No matter what happens with the election, the new presidential administration and Congress will have to deal with the TCJA (The Tax Cuts and Jobs Act, also called the Trump tax cuts) expiring at the end of calendar year 2025.

So what are we going to be fighting about next summer surrounding tax reform?

What Did the TCJA Change and What Is Expiring?

The TCJA had a lot of tax code changes, but I think it helps to break them down the major ones into these categories:

• Personal Income Tax Bracket Changes

  • TCJA: Tax brackets changed to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

  • Post-TCJA, they would go back to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, with different tax bracket limits.

  • Would raise $2.16 trillion in the ten years from FY2025-2034 (all estimates cited are from the supplemental data in this May 2024 CBO report).

• Standard Deduction / Personal Exemption

  • TCJA: Eliminated personal exemption and increased standard deduction to $12,000 for single filers and $24,000 for married filers (they increase each year with inflation).

  • Post-TCJA, the standard deduction would fall nearly in half, but it would be coupled with a resumption of the personal exemption for each person in your tax unit. Before the TCJA, the standard deduction was $6,500 for single filers and $13,000 for married filers, with personal exemptions worth $4,150. Those numbers would be higher in 2026 due to inflation.

  • Standard deduction changes would raise $1.25 trillion and personal exemption changes would cost $1.7 trillion, netting a cost of $466 billion over ten years (although this is not likely to be right without the ensuing tax bracket changes).

• Child Tax Credit

  • Oh boy, lots here (plus temporary changes after the TCJA), but basically when the personal exemption went away, the TJCA bumped up the child tax credit to partially offset the change along with the higher standard deduction. The TCJA increased it to $2,000 from $1,000, which is where it would return to if the TJCA expired.

  • Would reduce deficit by $735 billion over ten years.

• Alternative Minimum Tax (AMT)

  • TCJA: Raised the AMT exemption amounts and phase-out thresholds by quite a lot, but kept the 28% rate.

  • Post-TJCA: More high-income earners (several million) would face the AMT of 28%.

  • Would raise $1.36 trillion over ten years.

• State and Local Tax (SALT) Deduction

  • TCJA: Capped allowable SALT deduction at $10,000 to the chagrin of high-income earners in high-tax (blue) states.

  • Post-TCJA: Return to no cap on the SALT deduction, allowing high-income people in blue states to deduct more due to their state income and property taxes.

  • Would cost $1.2 trillion over ten years (Includes mortgage interest deduction and a few other small provisions).

• Mortgage Interest Deduction Limit

  • TCJA: Brought the allowable deduction down to the interest paid on the first $750,000 borrowed.

  • Post-TCJA: Limit goes back up to the interest paid on the first $1,000,000 borrowed.

    • Note:: This is more costly than just a 25% increase in world of 7% mortgage rates than in the previous world of 4% mortgage rates!

  • Cost is included in SALT deduction above.

• Business Income Pass-through

  • TCJA: Pass-through business income that is taxed at individual income tax rates got a new 20% deduction against qualified business income in order to help equalize the tax treatment of business and personal income

  • Post-TCJA: No more deduction

  • Reduces deficit by $684 billion over ten years.

• Corporate Tax Rate

  • There will be no change here, as the corporate tax rate was permanently lowered from 35% to 21%.

  • FWIW, Vice President Harris has proposed increasing the corporate tax rate to 28%.

  • The Tax Foundation has estimated dynamic effects on revenue and GDP here.

• Expensing for Businesses

  • TCJA: Temporarily allowed full-expensing instead of the normal annual deductions for depreciation or amortization.

  • Post-TCJA: Back to standard method of depreciation or amortization over time.

  • Extending would cost $378 billion over ten years.

    • Note: This has already mostly phased out, but JCT scored it to allow additional first-year depreciation.

• Estate and Gift Tax

  • TCJA bumped up the amount exempted to around $10 million with annual adjustments for inflation.

  • Post-TCJA it would fall to $5 million.

  • Reduce revenues by $166 billion over ten years.

Big Picture: What Happens if the TCJA Expires Completely?

One thing is for sure: Taxes would go up across the board (with much higher taxes for high-income earners).

CRS estimated in 2023 that allowing the TCJA provisions to expire would raise $3.5 trillion from FY 2023 to 2033.

More recently, CBO estimated that if all of the expiring provisions of the TCJA were allowed to expire, revenues would increase by $4.0 trillion and interest costs would decline by $0.6 trillion over ten years (Table 2).

Not surprisingly, more tax revenue means a higher tax burden for all taxpayers. Here’s a Tax Foundation calculator to illustrate how different groups would be affected.

Vice President Harris has proposed extending all of the individual tax provisions, except for taxpayers making over $400,000. The Penn Wharton Budget Model estimates that could cost between $1.4 trillion to $2.4 trillion in lost revenue (with the latter being more likely in my view because it would include a phase-out and prevent an enormous tax cliff).

Former president Trump has proposed extending all parts of the TCJA.

Something Has Got To Give

CBO’s June 2024 update to the 10-year Budget and Economic Outlook estimates that GDP will rise from $29.7 trillion to $41.4 trillion in ten years (an $11.7 trillion or 39% increase), while debt held by the public will rise from $30.2 trillion to $50.7 trillion (a $20.5 trillion or 68% increase).

And that’s already assuming that the TCJA expires and revenues go up.

Running $2 trillion deficits in a time of strong economic growth and low unemployment is a bad, bad idea.

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