Whether you consider it a win or a loss, I imagine we can all agree that it is good to have the presidential election behind us. Sadly, political battles won’t end. Many arguments will be made and policies implemented over the next two years, some of which we will appreciate, others perhaps not so much.
I am not one to speculate much. However, with a Donald Trump presidency and Republican majorities in the House and Senate, I fully expect that most, if not all, tax benefits under the 2017 Tax Cuts and Jobs Act will be extended. Most of the benefits of that tax law were set to expire at the end of 2025, with tax rates reverting to pre-2018 rates. Extension of the TCJA will generally be positive for farm families.
To review, the TCJA was probably President Trump’s most significant legislative win, and it was the largest tax code overhaul in at least a generation. Signed in late 2017, it took effect for the 2018 tax year. It included a variety of income, estate and gift tax changes that impact farm families.
How TCJA worked
On individual tax rates, the TCJA reduced the top rate from 39.6% to 37%. The 35% bracket remained, as did the bottom 10% bracket. The 33% bracket dropped to 32%, 28% dropped to 24%, 25% to 22%, and 15% to 12%. For young families, legislation raised the child tax credit.
The TCJA created a single flat 21% tax rate for C corporations (as opposed to subchapter S corporations) to replace the previous two-bracket rates of 15% and 35%.
The TCJA raised the exemption amount and exemption phase-out threshold for the alternative minimum tax. For the tax year 2025, the exemption amount for unmarried individuals will be $88,100 and begins to phase out at $626,350.
The standard deductions were substantially increased. With inflation adjustments, they now stand at $14,600 for a single filer and $29,200 for a married couple.
On the negative side, the deduction for state and local taxes was capped at $10,000, and deduction of mortgage interest also was limited. Few people now itemize their personal deductions, as these standard deductions are typically more than their otherwise deductible items. However, by bunching things like charitable giving for two or three years into one, you can take advantage of the large standard deduction some years, and still get most of the benefit of your charitable gifts.
The TCJA increased the ability to fully write off certain investments like equipment and buildings rather than requiring them to be depreciated over time.
Corporate, estate tax updates
One of the most innovative aspects of the TCJA was a new classification of Qualified Business Income. Owners of pass-through businesses — including sole proprietorships, partnerships and S corporations — get a 20% deduction for pass-through income. If your business had QBI of $50,000, this deduction means you only pay tax on 80% of it, or $40,000.
Last but not least, the TCJA doubled the federal estate and gift tax exemption. Former President Barack Obama had signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act on Dec. 17, 2010, and then the American Taxpayer Relief Act on Jan. 1, 2013, which raised the federal estate tax exemption to $5 million for 2011 and for the first time indexed it for inflation. By 2017, that adjusted exemption was up to $5.49 million.
The TCJA simply doubled the exemption, with it still going up with inflation. If you want to give your farm away in 2025, or you die that year, you can give up to $13.99 million with no gift tax, or you can leave that much through your estate with no federal estate tax. Illinois residents beware, however: On $13.99 million, state estate tax would be $1.47 million.
So why does the election matter? Tax cut laws typically have a limited life. Almost all the changes in the TCJA were set to expire at the end of 2025. Individual tax rates would go back up to 39.6%, standard deductions would go back down, the 20% QBI deduction would disappear, and the federal gift and estate tax exemption would drop back to half its current size. The new Congress and president indicate that one of their first priorities will be to make all the favorable provisions of the TCJA permanent.
As with all political promises, we’ll see.