Significant Tax Effective Dates Through 2025
Our goal in this article is to help the tax professional’s planning by noting significant tax provision effective dates over the next few years.
First, let’s discuss tax provisions with broad applicability:
The Tax Cuts and Jobs Act (TCJA) enacted in December, 2017, reduced the individual tax rate schedule. For example, the top bracket of 39.6 percent was reduced to 37 percent. The brackets are adjusted for inflation.
The old rate brackets return after 2025. Keep in mind the “return” of the old rates is subject to indexing for inflation. The $10,000 cap on state and local taxes as itemized deductions expires after 2025.
The TCJA basically doubled the standard deduction and repealed the personal exemption. These temporary changes expire after 2025.
The TCJA significantly limited or eliminated many itemized deductions, such as investment fees, tax preparation fees, union dues, unreimbursed employee expenses, and hobby expenses. These limitations on miscellaneous itemized deductions are set to expire after 2025 (Sec. 67; “Miscellaneous Deductions,” IRS Publication 529, 12/2020).
Certain increases in the benefit of the child tax credit expire after 2025 (Sec. 24(h)). The health insurance premium tax credit modifications arising with the American Rescue Plan Act of 2021 were extended through 2025 by the Inflation Reduction Act of 2022. The 400 percent of federal poverty level limit is removed through 2025.
The 20 percent of business income deduction has certain exceptions but reaches most business income. This very important provision is repealed after 2025 (Sec. 199A). The unified estate and gift tax credit, equivalent exemption of $12,060,000 in 2022, is to be cut in half after 2025. This credit is also indexed for inflation.
Provisions With a Narrower Focus
The new markets tax credit program, which focuses on attracting investment into distressed areas, expires December 31, 2025 (Sec. 38(a)(13), 45D(a)).
The work opportunity tax credit benefits employers hiring targeted group employees. The targeted groups include qualified long-term unemployment recipients, veterans, ex-felons and other groups (Sec. 51). Even tax-exempt employers may be eligible to claim the work opportunity tax credit against payroll taxes (“Work Opportunity Tax Credit,” IRS.gov, Q-2).
“The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the work opportunity credit to cover employees who began work in 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the credit to cover employees who begin work after 2020 and before 2026.” (Instructions to Form 5884, Rev. March 2021).
As to energy related tax incentives and their complex pattern of effective dates, see “Inflation Reduction Act: Overview of Energy-Related Tax Provisions – An Energy Transition `Game Changer,’ sidley.com, 8/18/22).
Termination of the “Old” Electric Vehicle Credit
The old credit “terminated” in the sense of significant new requirements. This provision illustrates that important effective dates aren’t necessarily at year end.
Notable regarding electric vehicles are the following tax changes enacted by President Biden’s signing the Inflation Reduction Act on August 16, 2022.
“The Inflation Reduction Act will provide tax breaks to make electric vehicles (EVs) more affordable and help low-income households make the switch from gas-powered to electric vehicles.” However, there’s a catch.
With the new bill, most electric vehicles no longer qualify for the full $7,500 federal tax credit that supported millions of buyers with upgrades in recent years. This is because EV batteries – the majority of which are produced with minerals, components, and battery cells imported from China – must now be made in North America. More precisely, the new law stipulates that at least half of all car batteries must come from the US, Mexico or Canada by 2024, rising to 100 percent by 2028.
Moreover, the Act introduced new price and income caps, effectively excluding those whose income exceeds a certain threshold and forcing them to select a vehicle within a certain price point.” (“All You Need to Know About the US Inflation Reduction Act,” Martina Igini, earth.org, 8/17/22; see also “Here are the cars eligible for the $7,500 EV tax credit in the Inflation Reduction Act,” Jameson Dow, electrek.com, 8/16/22.)
Transitioning into the new rules focuses on vehicles purchased before August 16, 2022, and vehicles purchased and delivered between such date and December 31, 2022. (See “Plug-In Electric Drive Vehicle Credit, (IRC 30D), IRS.gov.)
Conclusion
The modern legislative environment is one of broad changes that affect many people plus many narrow measures that affect relatively few, other than tax advisers. An important part of our current planning includes monitoring expiration dates, particularly expiring tax benefits.