An Ugly Sunset: What Will Happen if the Tax Cuts and Jobs Act Expires

If the Tax Cuts and Jobs Act "sunsets" without action from Congress, it will have a significant impact on taxpayers. Here's what you need to know.

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An Ugly Sunset – For Most of Us

Those of us fortunate enough to live on the Front Range of Colorado are treated to some of the most impressive sunsets seen anywhere. As the sun sets behind the Rocky Mountains, whether they be snowcapped in the winter or bare in the summer, it is an inspiring site.

The ugly sunset I’m referring to is the automatic sunset of the Trump tax cuts, officially known as the “Tax Cuts and Jobs Act”, which was passed on December 22, 2017. The Act did several things for individual taxpayers:

  • It reduced marginal tax rates.
  • It increased the standard deduction.
  • It reduced or eliminated some itemized deductions.
  • It increased the child tax credit.
  • It eliminated personal exemptions and exemptions for dependents.
  • If Congress does nothing to prevent the sunset that will occur on December 31st, 2025, we will revert to the regulations in effect prior to the passage of the Act.

How the sunsetting of the Tax Cuts and Jobs Acts could impact the average person or couple

We heard a lot on the news when the Act was passed that it was a tax break for the rich. If history repeats itself, those who expressed this view will be in favor of letting the Act sunset. Those of us who understand math, and the tax code, will be in favor of extending the Act and potentially making it permanent—to the extent anything regarding taxes is permanent.

Before picking a side on this issue, look at what will happen to three couples. The first couple is a young working couple with two children. They have combined gross income of $108,000. For this couple, and the next two examples, income will stay constant. By the year 2025 the standard deduction for this couple will be up to $28,000 based on a 2.5% inflation rate. Exemptions are no longer used in the Act, so no exemptions are used to reduce gross income. This couple’s gross federal taxes are $11,201; after the child tax credit for both the kids of $4,000 their net federal taxes are $7,201.

Now, assuming the Act expires, let’s look at the young couple’s tax situation in 2026. Their standard deduction is $15,600; their exemptions (that are now used again) are $20,000; and their child tax credits are $1,200. Even though their taxable income has dropped by $7,600, their total tax bill has increase by 54% to $11,501. This is because of us returning to the prior tax brackets and the reduced child credit.

Now let’s look at another couple. This couple retired in 2020. They have combined Social Security benefits of $60,000 ($2,500 per month for each) and are taking $48,000 in distributions from IRA’s. This gives them the same gross income as our previous couple. To keep things simple, we will hold their income constant as we did with the young couple. By 2025 their standard deduction will be up to $31,000. Because it does not tax some of their Social Security, they will pay less in taxes than the young couple. Their federal tax liability will be $5,782.

In 2026 this couple will also get an ugly surprise when they do their taxes. It will reduce their standard deduction to $18,700 but they will pick up $10,000 in personal exemptions. While their taxable income will only go up by $2,300, their federal tax liability will increase by $1,206 to $6,988 – a 21% increase.

Because the Act was a reduction in taxes, it shouldn’t be a surprise that both couples saw an increase in their taxes after the sunset. This should not be the stopping point in this analysis. Because so much airtime has been devoted to calling the Act a tax cut for the rich let’s look at a California high income couple.

This California couple have joint gross income of $750,000. In 2025 they will have the same standard deduction as our first couple – $28,000. The child tax credit for their two children is phased out – they can’t use the $4,000 in credits the first couple had access to. In 2025 their total federal tax liability will be $196,036.

Once the act sunsets, this couple will get some help from itemizing their deductions. Under the Act, the deduction for state and local taxes (SALT) is limited to $10,000. Because this couple live in California, their state income taxes are high. Assuming a small mortgage interest deduction along with property taxes, their itemized deductions will be about $62,061. Their taxable income in 2026 will be reduced by $34,051. Even though they are now back under the old tax brackets, they only see a 5% increase in their federal taxes, from $196,036 to $205,478.

Let’s summarize:

  • Couple: Tax Increase after Sunset
  • Young Married Couple: 54%
  • Retired Couple : 21%
  • High Income California Couple : 5%

How to reduce the impact of the Act (if it does sunset)

There will be a lot of talk leading up to the sunset. Be careful if you are listening to people with high incomes from states with high state income tax rates (most of the media and most of the leadership of the non-Trump opposition to the Act). For planning purposes, we are assuming the Act will sunset. This conservative approach is based as much on the vocal opposition to the Act as it is on the historically low tax rates coupled with the high federal debt.

If you are curious about what your taxes will look like if the Act is allowed to sunset, please call us at 303-694-1600 and we would be happy to project your tax situation. Most people can take proactive measures to reduce the effect the sunset will have.

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