By Bijan Golkar, CFP® and Hanah Bjorklund
As 2024 comes to an end, it’s time to talk about the Tax Cuts and Jobs Act (TCJA). Unless Congress acts, the TCJA is set to expire at the end of 2025, and many business owners and high-income individuals are unaware of the many tax changes set to take effect if it is allowed to expire. The Alternative Minimum Tax exemptions (AMT) and the Qualified Business Income deduction (QBI) are two key provisions in the TCJA, and their expiration will have significant tax consequences. Below, we break down these changes and provide a clear picture of how these changes may impact you.
Visualizing the Impact
| Tax Provision | 2024 (TCJA in effect) | 2026 (Post-TCJA Expiration) | Impact |
| AMT Exemption | $81,300 for singles, $126,500 for couples | $54,300 for singles, $84,500 for couples | More than 7 million taxpayers affected (up from 200,000 under TCJA) |
| QBI Deduction | Up to 20% deduction for eligible businesses | No deduction | Taxable income may increase by 20% |
| Top Income Tax Rate | 37% | 39.6% | High earners face an increase of 2.6% in tax rate |
| Business Tax Rate (C-Corp) | 21% | 21% | No Change |
How AMT Works
The AMT is essentially a parallel tax system that requires taxpayers to calculate their tax liability twice: once under regular tax rules and once under the AMT rules. They must then pay whichever amount is higher. Before the TCJA, many high-income earners were subject to AMT. However, the TCJA significantly raised the income threshold, reducing the number of people impacted.
Important Post-2025 Impact: If the current AMT exemption limits expire, the number of taxpayers affected will increase from an estimated 200,000 to more than 7 million. Tax returns will become far more complex as more people are forced to navigate AMT calculations.
AMT and SALT Restrictions: Understanding the Complexity
A common misconception about Alternative Minimum Tax (AMT) and the State and Local Tax (SALT) deduction is that taxpayers either gain or lose these deductions based solely on income levels. However, the reality is much more nuanced, particularly in regard to AMT. Under the AMT system, certain deductions—referred to as “preference items”—are disallowed or reduced. These preference items include the SALT deduction, personal exemptions, and certain miscellaneous deductions.
The TCJA limited the SALT deduction to $10,000. Furthermore, if a taxpayer becomes subject to AMT calculations, the SALT deduction is disallowed entirely because AMT rules categorize it as a preference item. In other words, hitting the AMT threshold negates the benefit of the SALT deduction completely.
How This Could Impact You
- Your tax return could become more complicated because your income may now exceed the lower TCJA thresholds, requiring you to calculate AMT.
- If the lower income thresholds require you to calculate AMT, you may lose the ability to claim deductions like SALT, personal exemptions, and certain miscellaneous deductions.
- The loss of these deductions could push you into a higher tax bracket, resulting in a higher tax bill.
- For high-income earners, this push into a higher tax bracket could place you in the top bracket, which is set to increase from 37% to 39.6%.
Qualified Business Income (QBI) Deduction: Another Big Change
The QBI deduction is a significant benefit introduced under the TCJA. It allows eligible businesses (including sole proprietorships, partnerships, S-Corps, and some trusts) to deduct up to 20% of their qualified business income. The QBI deduction helps level the playing field between these entities and C-Corps, who benefit from a flat 21% corporate tax rate. If the TCJA is allowed to expire, this benefit will no longer exist.
How This Could Impact You
- Your eligible business or trust will no longer be able to deduct up to 20% of qualified income from taxable income.
- The loss of this deduction could push you into a higher tax bracket, resulting in a higher tax bill.
- For high-income earners, this push into a higher tax bracket could place you in the top bracket, which is set to increase from 37% to 39.6%.
In Summary
If the TCJA is allowed to expire, parts of the tax code will revert to pre-2017 rules. These changes could result in more complex tax calculations, the loss of several key deductions, and higher tax rates. While the potential changes may seem daunting, it is important to remember that they may not occur because new tax legislation will likely be introduced after the election.
While it may be too early to predict the specific impacts, as the variety of potential outcomes makes it difficult to foresee, it is important to stay informed and prepare for change. Planning now will help ensure you’re ready to adjust your strategy when the time comes.