Category: Blog

The enactment of the Tax Cuts and Jobs Act (TCJA) in 2017 brought with it major changes to the tax code on both personal and business levels. While many taxpayers have not only enjoyed but come to see these tax provisions as normal over the past seven years, many provisions of the TCJA are set to expire at the end of 2025. This makes 2026 and beyond potentially a very different tax landscape than the one we operate in today. This article reviews main provisions of the TCJA that could be affected and what it could mean for taxpayers.

Return of Higher Tax Rates

Lower tax rates were a hallmark of the TCJA. Rates on all income brackets were lowered (except the lowest 10 percent bracket). Without an extension of this act, tax rates will automatically return to their former levels, with the highest at 39.6 percent for federal income taxes.

Look for Return of Lower Standard Deductions; Higher Personal Exemptions; Unlimited SALT Deductions

The TCJA created a sort of trade-off by raising the standard deduction but lowering personal exemptions and limiting the state and local tax deductions (SALT) for itemizers. The reversal of these provisions can be either a net positive or negative, depending on each taxpayer’s situation. Generally, for those who reside in high tax brackets (income tax and/or property tax) or with a lot of dependents, the reversion will be favorable.

Currently, the standard deduction is $29,200 (married filing jointly) or $14,600 (single). These amounts will be almost cut in half to $16,600 and $8,300, respectively.

Offsetting these deduction losses, personal exemptions return. Currently, there are no personal exemptions, but this will go back to pre-TCJA levels adjusted for inflation, approximately $5,300 for each taxpayer, spouse and dependent.

The SALT deduction is capped at $10,000 under the TCJA. This limit will be eliminated; potentially giving dramatic benefit to taxpayers in high-income tax and property tax states.

Finally, it should be noted that materially lower standard deductions may create a lot more taxpayers who would benefit from itemizing deductions versus taking the standard deduction. In addition, the SALT cap, currently at $10,000 per tax return (not per person), will be eliminated.

Tax-Deductible Mortgage Interest on Large Loans

The TCJA limited tax-deductible interest on mortgages taken out in 2018 and after to interest on $750,000 of mortgage debt, versus the previous $1 million cap. This will revert back to the higher $1 million limit.

Lower Alternative Minimum Tax (AMT) Exemptions and Phase-Outs

Significant increases in AMT exemptions and phase-out limits were part of the TCJA and, as a result, millions of taxpayers were no longer subject to the AMT. This provision will revert as well, subjecting millions of taxpayers to the AMT. In particular, taxpayers who take large, itemized deductions and benefits from incentive stock compensation schemes will be the most negatively impacted.

Lower Estate and Gift Tax Limits

The TCJA nearly doubled the federal lifetime estate and lifetime gift tax exemption from $7 million to $13.61 million for a single taxpayer. These amounts double for couples making joint gifts. The limits would revert back to the $7 million level. Note that the annual gift tax exclusion of $18,000 per person is not expected to change.

Elimination of 20% Qualified Business Income Deduction and Bonus Depreciation

Pass-through business owners (e.g., S-corps, LLCs) benefitted from up to a 20 percent deduction on qualified business income under the TJCA (subject phase-outs). Business owners also benefitted from bonus depreciation as part of the TCJA – as high as 100 percent at one point. Both of these business-friendly provisions are set to expire completely unless Congress takes action.

Plan For Change

Whatever may be in the near-term, the only constant when it comes to taxes is that they will certainly be here. History teaches us to never get comfortable with the current tax code. The exact iteration of an extension of the TCJA or lack thereof is uncertain at this point, but the provisions at risk are known. For some taxpayers, this article is more of an FYI; while for those with multi-year planning strategies, the time to consider various outcomes and work with your tax advisor is now.

I sincerely hope you have never had to go through an IRS audit – and never have to in the future. But what if that dark day does arrive? Should you go it alone and defend yourself or hire a CPA to be on your side?

The temptation to handle this alone is usually prompted by one of two things. First, the notion is that this is not such a big deal. Other times, people think if they handle it themselves, they will save money.

Unfortunately, neither of these are good reasons to defend yourself in a tax audit against the IRS. While the decision to hire a CPA or tax lawyer does depend on the case and the issues at hand, the procedural setting plays an important role as well. The answer is nearly universal that you should hire a CPA to defend you – or even a tax lawyer if the situation warrants it (sometimes they are one in the same person).

Why it is a Terrible Idea to Defend Yourself in a Tax Audit

There are several reasons why partnering with a pro is a good idea. Let’s look at each one and why.

1. Working with your CPA, you can go back and forth with your side of the story, dig into the facts, and challenge each other in formulating a response. You essentially have a thinking partner and someone to fact check your side of the situation. Plus, they know how to “handle” the IRS in the messaging of responses.
2. It is prudent to create some space between you and direct communications with the government. For the same reason, defense attorneys do not want their clients talking directly to the police. It is best if you communicate via your CPA or tax lawyer. Whenever you are in direct communications with the IRS, the chance of making a misstep is greater. Once you have said or written something to the IRS, it is pretty much impossible to backtrack.
3. CPAs are experienced in advocating for clients and documentation.
4. Early representation is a must! One of the biggest mistakes taxpayers subject to an audit make is to start off on their own and then end up in an even worse situation than they started. One of the biggest reasons why an audit can cost a lot is because the taxpayer dug themselves into hole that a CPA then later had to get them out of.
5. Most cases rest on fundamental accounting problems. Someone with expertise and good records can address these problems early and competently. Seeing your own facts and documents through an unbiased and objective lens is not easy for most of us.

Conclusion

Ultimately, the decision to hire a CPA to represent you in a tax audit is a personal one. Exactly how necessary this is depends on the facts and circumstances of each individual situation, but it’s almost never a good idea to go it alone. If you ever find yourself in an audit, seriously consider hiring a CPA – and do it early in the process.