The sunsetting of the Tax Cuts & Jobs Act: What federal employees need to know

As we approach the end of 2025, a significant shift is on the horizon for federal employees and all taxpayers across the country. The Tax Cuts and Jobs Act, enacted in 2017, is set to expire at the end of next year. 

This sunset will bring about the reversion of several tax provisions to their pre-TCJA state unless Congress takes action. For federal employees, understanding how these changes may impact your tax situation is crucial for effective financial planning.

A Brief Overview of the Tax Cuts & Jobs Act

The TCJA brought about sweeping changes to the U.S. tax code. Some of the most notable changes included:

• Lower Individual Tax Rates: The TCJA reduced individual income tax rates across all brackets.
• Increased Standard Deduction: The standard deduction nearly doubled, which simplified tax filings for many by reducing the need to itemize deductions.
• Increased Child Tax Credit: The child tax credit was expanded, making it more generous for families.
• State and Local Tax (SALT) Deduction Cap: The deduction for state and local taxes was capped at $10,000, impacting taxpayers in high-tax states.
• Estate Tax Exemption: The estate tax exemption was doubled, allowing more wealth to be transferred without incurring estate taxes.
• Reduced Corporate Tax Rate: The corporate tax rate was significantly reduced from 35% to 21%.

While many assume that the current tax law is the norm, the TCJA was only approved as a temporary solution and the changes were not made permanent. To prevent the expiration of the TJCA, Congress will need to approve an extension or a new plan altogether. 

Since we all know how difficult it can be for Congress to present an agreed-upon plan, we need to prepare for the implications of a TCJA Sunset. 

The Impact of the TCJA Sunsetting on Federal Employees

Federal employees, like all taxpayers, will be affected by the sunsetting of the TCJA. Here’s how the potential changes could impact your tax situation:

1. Reversion to Higher Tax Rates

One of the most immediate impacts of the TCJA's expiration will be the return to higher individual tax rates. For example, a couple with joint income between $94k and $201k will see their tax rate increase from 22% to 25%. The next bracket up will increase from 24% to 28%.

What this means for federal employees: If your income remains steady, you could find yourself in a higher tax bracket, resulting in more of your earnings being subject to federal income tax. Even if your income drops in the future, you could be taxed at a higher rate than you are right now because of the changes in the tax brackets. 

2. Reduction of the Standard Deduction

The standard deduction, which doubled under the TCJA, will return to its pre-2018 levels. For 2024, the standard deduction for single filers is $13,850 and $27,700 for married couples filing jointly. Post-sunset, these amounts could be nearly halved.

What this means for federal employees: A lower standard deduction means that less of your income will be shielded from taxes, potentially increasing your taxable income. If you’ve been taking the standard deduction, you might consider whether itemizing deductions could be more beneficial moving forward.

3. Changes to Itemized Deductions

Several itemized deductions that were limited or eliminated under the TCJA could return. For instance, the cap on the State and Local Tax (SALT) deduction could be lifted, allowing federal employees in high-tax states to deduct a larger portion of their state and local taxes.

What this means for federal employees: If you live in a state with high income or property taxes, the return of full SALT deductions could provide some relief, but only if you itemize your deductions.

4. Child Tax Credit and Family Benefits

The expanded child tax credit, which increased from $1,000 to $2,000 per child under the TCJA, will revert to its lower level. The eligibility for this credit will also become more restrictive.

What this means for federal employees: Families with children could see a reduction in their tax credits, leading to a higher overall tax liability.

5. Estate Tax Implications

The estate tax exemption, which doubled under the TCJA, is set to return to its pre-TCJA level. This change could significantly impact estate planning for federal employees with substantial assets.

What this means for federal employees: If you have a larger estate, more of it could be subject to estate taxes, which could affect the wealth you plan to pass on to your heirs.

The Political Landscape: What Could Happen Next?

As we move closer to the expiration of the TCJA, both political parties are proposing different approaches to tax policy, which could shape the future of taxation in the U.S.

Republican Proposals

Republicans generally favor extending or making permanent the tax cuts introduced by the TCJA. This includes:

• Making the Individual Tax Cuts Permanent: Republicans aim to maintain the lower tax rates, the higher standard deduction, and the expanded child tax credit.
• Further Reductions in Corporate Taxes: There is ongoing support for maintaining or even lowering the corporate tax rate further to encourage business investment and economic growth.
• Estate Tax Elimination: Some Republicans advocate for the complete elimination of the estate tax, which they argue is a double tax on wealth.

If Republicans gain control of Congress or the presidency, these proposals could shape future tax policy. For federal employees, this could mean an extension of the current tax benefits and potentially even lower taxes.

Democratic Proposals

On the other side, Democrats generally advocate for rolling back some of the tax cuts introduced by the TCJA, especially for higher earners. Their proposals include:

• Increasing Taxes on the Wealthy: Democrats propose higher tax rates for high-income earners and the restoration of the top marginal tax rate to 39.6%.
• Expanding Tax Credits for Low- and Middle-Income Families: There is support for expanding the Earned Income Tax Credit (EITC) and child tax credit, targeting more relief to lower and middle-income families.
• Corporate Tax Increases: Democrats propose raising the corporate tax rate, though not necessarily back to the pre-TCJA level, to fund social programs and reduce the deficit.
• Tightening Estate Tax Provisions: Democrats may look to reduce the estate tax exemption or introduce new taxes on large inheritances to address wealth inequality.

If Democrats maintain or gain control of Congress and the presidency, federal employees might see higher taxes on income, especially for those in higher brackets, alongside expanded benefits for middle-income families.

What Should Federal Employees Do Now?

With the TCJA sunsetting and the uncertainty surrounding future tax policies, federal employees should take proactive steps to prepare:

1. Consider Tax-Efficient Investment Strategies: Explore tax-advantaged accounts, such as the ROTH Thrift Savings Plan (TSP) or ROTH IRAs, to help manage your tax liability. Roth contributions, which are taxed upfront but grow tax-free, might be especially valuable if tax rates rise.
2. Estate Planning: If you have a significant estate, now is the time to review your estate plan. Consider gifting strategies or trusts that could help minimize your estate tax liability under the anticipated lower exemption levels.
3. Consult a Financial Advisor: Given the potential changes, consulting with a financial advisor who understands the unique needs of federal employees can help you navigate these shifts and make informed decisions. When you’re making tax decisions, it’s important to consider your potential lifetime tax bill, not just what you’ll owe this year. A good Financial Advisor can create a plan that maps out your lifetime income and strategize ways to lower the tax burden for you and your loved ones. 

The expiration of the TCJA at the end of 2025 marks a pivotal moment for tax policy in the United States. Federal employees should be aware of the potential changes and start planning now to mitigate any adverse effects on their financial situation. Whether the tax landscape shifts toward continued tax cuts or higher taxes, being prepared will allow you to make the most of your financial future and make the most of the opportunities available.

Austin Costello is a certified financial planner with Capital Financial Planners. If you don’t feel confident in your investment strategy or your ability to keep a level head and would like feedback, register for a complimentary check up. For topics covered in even greater depth, see our YouTube page.