It's important to stay ahead of significant tax changes that could impact your financial situation. One of the most crucial developments on the horizon is the expiration of the 2017 Tax Cuts and Jobs Act (TCJA), which introduced several temporary tax benefits that are set to sunset at the end of 2025—unless Congress acts to extend or modify them.
Many of you have likely seen tax relief in the form of reduced federal income tax rates, a higher standard deduction, or expanded estate tax exemptions. But with these cuts being temporary, it’s vital that we prepare for potential tax increases and shifts in tax planning strategies. Here’s a breakdown of the key provisions of the TCJA that are important to consider as we approach its expiration:
Key Changes Introduced by the TCJA:
- Lower Federal Individual Income Tax Rates: The TCJA generally reduced individual tax brackets.
- Capped or Disallowed Itemized Deductions: Certain deductions, such as those for state and local taxes, were limited.
- Doubled Standard Deduction: The standard deduction saw a significant increase, reducing the number of taxpayers who itemize.
- Changes to the Alternative Minimum Tax (AMT): Fewer taxpayers were subjected to the AMT due to higher exemption thresholds.
- Doubled Gift and Estate Tax Exemption: The exemption for estates and lifetime gifts doubled, currently sitting at $13.61 million.
- Introduction of the Qualified Business Income (QBI) Deduction: A new deduction was created for pass-through business income.
What Should You Be Thinking About Now?
While no one knows exactly how Congress will address the sunsetting of the TCJA, we can still plan proactively. Here are some areas to focus on during our year-end planning conversations:
Income Tax Planning
If you’ve benefited from lower tax rates under the TCJA, it’s important to understand what might happen if these rates revert to pre-2017 levels. We’ll take a look at your current tax rate compared to what it could be in 2026 and explore income deferral strategies, especially if you’re retired and managing distributions or Roth conversions. We’ll also review whether you could be subject to the AMT under the old rules and plan accordingly.
Standard vs. Itemized Deduction
Many of you have switched from itemizing to taking the standard deduction due to the higher threshold introduced by the TCJA. However, if the deduction amount returns to pre-TCJA levels, it may be beneficial to resume itemizing deductions in 2026. We’ll discuss ways to optimize your deductions based on potential changes.
Gift and Estate Planning
The current gift and estate tax exemption is at an all-time high ($13.61 million), but it will be reduced by half if the TCJA expires. If you’re considering making large gifts or transferring wealth to the next generation, now is the time to act. Strategies like trust creation or real estate transfers require careful planning, so we’ll discuss the best course of action to take advantage of the current exemption while it lasts.
Preparing for 2025 and Beyond
Though the future of the TCJA remains uncertain, planning ahead is essential. During our next review, we’ll go over how these potential changes could affect your tax strategy and explore options to help mitigate any impact. The goal is to ensure that you are prepared for the possible expiration of these tax cuts and ready to make informed decisions.
As always, feel free to reach out with any questions or concerns. Let’s work together to stay ahead of the curve and ensure your financial plan remains on track, no matter what changes come in 2025.