It’s Election Year, friends! As a result, we should brace ourselves for significant tax changes.
In 2018, the Tax Cuts and Jobs Act (TCJA) was passed, introducing substantial changes to corporate taxes and individual tax cuts. However, these benefits are set to expire on December 31, 2025.
As the December 31 date approaches, you might be curious about what changes we can expect on your 2026 federal tax bill. The answer is uncertain because the results of this November's presidential and congressional elections will likely influence the fate of the TCJA and other tax provisions.
To recap, the TCJA lowered the corporate tax rate from 35% to 21%, shifted to a regional tax system, and allowed immediate expensing of certain capital investments. For individuals, it reduced income tax rates, nearly doubled the standard deduction, eliminated the personal exemption, increased the child tax credit, and capped the state and local tax deduction at $10,000. In addition, through 2025, certain itemized deductions are eliminated. Others are more limited, including those for home mortgage interest and state and local tax. The TCJA also provided a 20% deduction for qualified business income from pass-through entities and doubled the estate tax exemption.
For small business owners, the potential expiration of the Section 199A qualified business income (QBI) deduction should be top of mind. This deduction allows for a write-off of up to 20% of QBI from noncorporate pass-through entities, such as S corporations and partnerships, as well as from sole proprietorships.
Nevertheless, in less than 4 months, a new president will be elected, and Washington’s new political landscape will bring about tax law changes. As we look forward into the future, we aim to provide peace of mind in discussing the four possible outcomes.
All of the TCJA provisions scheduled to expire will actually expire at the end of 2025.
All of the TCJA provisions scheduled to expire will be extended past 2025 (or made permanent).
Some TCJA provisions will be allowed to expire, while others will be extended (or made permanent).
Some or all of the temporary TCJA provisions will expire — and new laws will be enacted that provide different tax breaks and/or different tax rates.
How your tax bill will change in 2026 depends on which scenario plays out and whether your tax bill goes up or down from the TCJA’s initial enactment in 2018. Influential factors taxpayers should pay attention to are income thresholds, filing status, location of filing (the SALT cap impacts taxpayers in certain states more), and children or other dependents status.
Your tax situation will also be influenced by the results of the presidential election and which party controls Congress. Democrats and Republicans have different ideas about tax policy. New tax laws can only be enacted if they pass both houses of Congress and are signed by the President, or if there are enough votes in Congress to override a presidential veto.
As the end of the TCJA provisions approaches, it's important to understand potential changes and consider tax-wise moves you can make. As new information becomes available, we will promptly inform our tax clients via email. Make sure you are subscribed to our listserv to stay updated. We're here to answer your questions and will work diligently to devise tax-saving strategies for you and your small business.