02-12-2025
When the Tax Cuts and Jobs Act (TCJA) passed in 2017, it ushered in the largest change to the tax code since the Reagan administration. These changes granted both individual taxpayers and businesses avenues for tax savings. However, many of these provisions were crafted to expire at the end of 2025. If left unchanged, both individual and business taxpayers may be in for an increased tax bill in 2026, with a total tax increase estimated by KPMG of over $4 trillion.
Many of the changes set to expire relate to individual taxpayers and pass-through business entities. While C-corporations benefited from a permanently decreased income tax rate (21%), individuals with pass-through entity income could potentially benefit from a new Qualified Business Income (QBI) deduction, allowing for the reduction of business income by up to 20%. However, this provision is set to expire in 2026 and would drastically increase the taxation on pass-through business entity income.
Individuals have benefited from a reduction in marginal tax rates, capped at 35%. In 2026, these are set to revert to pre-TCJA levels, with a maximum rate of 39.6%. Individuals also benefited from a doubling of the child tax credit from $1,000 to $2,000 per child and an increase to the phaseout threshold, as well as a near doubling of the standard deduction utilized by individuals unable to itemize their deductions. If left unchanged, these provisions will both revert to pre-TCJA amounts.
Not all TCJA changes were favorable to taxpayers. A major point of contention for taxpayers in states with higher state taxes was the implementation of a $10,000 cap on the itemized state and local tax deduction. The $10,000 cap, called the SALT Limit, is set to expire, reverting to the pre-TCJA unlimited deduction.
With so many unfavorable changes on the horizon and GOP control of the White House, Senate and House, the expectation is that Republicans and President Trump will push through legislation to act on promises made during and after the 2024 election cycle. For instance, the president has previously supported extending the QBI deduction, eliminating the SALT limit, and extending the individual marginal tax rates currently in effect.
Still, no one should make assumptions. For decades, R&D expenses were immediately deductible for businesses. Under the TCJA, that treatment was set to expire in 2022. While it was assumed new legislation would extend this treatment, it never materialized and businesses were caught flat-footed, having to start amortizing R&D costs over 15 years. While most expect beneficial tax treatments to be extended by the current Congress, everyone should be wary of potential tax increases in 2026.
Dr. James Karan, CPA, is a lecturer in the accounting area at the Mitch Daniels School of Business. He has over a decade of experience in higher education teaching a wide variety of accounting and business topics, including managerial accounting, financial accounting, taxation and economics.
