Key Tax Provisions Expiring at the End of 2025
By John Leach, CPA, Senior Manager, Alternative Investment Group - Tax
The upcoming election holds significant implications for the Tax Cuts and Jobs Act of 2017 (TCJA), as the results could shape the future of the legislation set to expire on December 31, 2025, potentially impacting tax policy and economic strategy.
Passed in 2017, the TCJA had many significant tax code changes, many of which are scheduled to expire at the end of 2025. Although Congress may act to extend some or all of them, it is essential to know which provisions are expiring so you can be prepared in case the provisions sunset as scheduled. This article explores the expiring provisions particularly relevant to alternative asset managers and their investors.
Expiring individual tax provisions
Individual Tax Rates
The TCJA lowered the individual tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on the individual’s tax bracket. Unless Congressional action is taken to extend these reductions, the individual tax rates will revert to the pre-TCJA rate structure of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Standard deductions
The TCJA significantly increased the standard deduction amounts starting in 2018. These amounts are scheduled to revert to the pre-TCJA levels in 2018, adjusted for inflation.
Personal Exemptions
Before the TCJA, taxpayers were allowed personal exemptions for the taxpayer and the taxpayer’s qualified dependents, subject to a phaseout for those at higher income levels. The TCJA suspended these exemptions, and they are scheduled to return in 2026 once the suspension sunsets.
Limitation on deductibility of state and local taxes (SALT Deduction)
One of the most controversial sections of the TCJA was the limitation of the state and local tax deduction for noncorporate taxpayers. The TCJA imposed a cap on the deductibility of state and local income taxes at $10,000. This limitation means taxpayers in high-taxed states can be limited in the benefits they receive from paying state and local taxes. If this provision expires, the cap will be removed, and taxpayers will benefit more from these federal income tax deductions. Over the last few years, many states have adopted SALT deduction limitation workarounds for taxpayers invested in Pass-Through entities using Pass-Through Entity Taxes (PTET). Alternative asset managers who have made these optional PTET elections should keep this provision current, as its expiration would remove a significant benefit from the election.
Suspension of itemized deduction for miscellaneous expenses
The TCJA eliminated miscellaneous itemized deductions, such as management and professional fees, for tax years 2018 to 2025. For tax years beginning after December 31, 2025, taxpayers can once again claim these deductions to the extent they exceed 2% of the taxpayer’s adjusted gross income. This will be a welcome change for investors in alternative asset funds who have not been able to benefit from miscellaneous expenses in recent years.
Mortgage Interest Deduction
The TCJA limited home acquisition indebtedness incurred between 2018 and 2025. These limitations are set to expire on December 31, 2025, and will revert to pre-TCJA rules. For years beginning on or after January 1, 2026, mortgage interest can be deducted on the first $1 million in home mortgage debt (married filing jointly) and $100,000 in a home equity loan.
Child Tax Credit
TCJA made several key changes to the Child Tax Credit, most notably temporarily doubling it from $1,000 to $2,000 and increasing the phaseout thresholds from $110,000 to $400,000 (married filing jointly). These changes are scheduled to sunset on December 31, 2025, and the child tax credit will revert to pre-TCJA law.
Alternative Minimum Tax (AMT) Exemption and Phaseout
The TCJA included provisions that reduced the AMT burden on taxpayers. The TCJA increased exemption amounts as well as the exemption phaseout thresholds. It also repealed or scaled back some of the largest AMT preference items—personal exemptions, the state and local tax deduction, and miscellaneous deductions subject to the 2 percent of adjusted gross income floor. Barring congressional action, the AMT will return to pre-TCJA levels adjusted for inflation.
Expiring business tax provisions
Qualified Business Income (Sec. 199A)
The TCJA provided many owners of sole proprietorships, partnerships, S Corporations, and some trusts and estates a 20% deduction for Qualified Business Income (QBI) – also known as a Section 199A deduction. It allows eligible taxpayers to deduct up to 20% of their QBI from pass-through entities, ultimately giving the taxpayer a similar beneficial tax rate to a C Corporation. However, this deduction is subject to several limitations and restrictions. If Congress doesn’t move to extend, this deduction will end for years beginning after December 31, 2025.
Deductibility of Meals Provided at the Convenience of the Employer
Under the current law, a 50% deduction limitation applies for any food and beverages provided by employers as de minimis fringe benefits for meals provided at an on-premises eating facility or for the convenience of the employer. After December 31, 2025, no deduction will be allowed for on-premises eating facilities and the food and beverages or meals furnished to an employee for the convenience of the employer.
Global Intangible Low-Taxed Income (GILTI) / Foreign-Derived Intangible Income (FDII) / Base Erosion and Anti-Abuse Tax (BEAT)
The TCJA had three significant base erosion provisions known as GILTI, FDII, and BEAT. GILTI aims to tax foreign income from intangible assets held by U.S. corporations. FDII offers tax incentives for U.S. companies to generate income from foreign markets. BEAT targets large corporations that reduce their U.S. tax liability by shifting profits abroad. For applicable taxpayers, these tax rates are all scheduled to increase for tax years beginning after December 31, 2025. GILTI will have its effective tax rate increase from 10.5% to 12.5%, FDII will have its effective tax rate increase from 13.12% to 16.4%, and BEAT will have its effective tax rate increase from 10% to 12.5%.
With the 2024 elections and the uncertainty regarding the future of these TCJA provisions, it is essential to be mindful and stay up to date about their potential expiration.
