In 2017, the Tax Cuts and Jobs Act (TCJA) was a significant piece of legislation that transformed the tax landscape for individuals, businesses, and corporations alike. After nearly three decades without such a substantial overhaul, the TCJA introduced various changes that many have come to rely on. However, as we approach the end of 2025, it's essential to understand that these tax cuts will sunset, reverting many provisions back to their pre-TCJA state unless new legislation intervenes.
As the TCJA sunsets, several key tax provisions will revert to their previous forms. Here’s a breakdown of the most significant changes:
One of the most notable changes will be in the ordinary income tax brackets. Currently, the brackets include rates of 22%, 24%, and 32%. After the sunset, these will shift to 25%, 28%, and 33%, respectively. Additionally, the top bracket will increase from 37% to 39.6%. This means that for many taxpayers, the next dollar earned could be taxed at a higher rate.
The TCJA significantly increased the standard deduction, making it more beneficial for many taxpayers. However, as it sunsets, the standard deduction will be halved, and personal exemptions will return. While this may seem alarming, families with children may find that the combination of the standard deduction and personal exemptions could mitigate the impact of the reduced standard deduction.
Several itemized deductions will also see changes. The state and local tax deduction, which was previously capped at $10,000, will become unlimited again. Mortgage interest deductions will be available for loans up to $1 million, and the deductibility of charitable donations will also be affected. Additionally, financial advisory fees may become deductible again, providing some relief for taxpayers.
Child tax credits are set to decrease, which may not impact retirees but could affect families with children. Furthermore, the Alternative Minimum Tax (AMT) brackets will change, which could lead to different tax calculations for some taxpayers.
One of the most significant changes will be the reduction of the estate and gift tax lifetime exemption. Currently set at approximately $13 million per person (or $26 million for couples), this exemption will be cut in half. This change could have substantial implications for estate planning, especially for those with significant assets.
As we prepare for these changes, it’s crucial to consider various planning opportunities:
For larger families, the combination of the reduced standard deduction and the return of personal exemptions may not lead to a significant tax increase. However, for those who itemize, the unlimited state and local tax deductions and mortgage interest deductions could provide new opportunities to maximize deductions.
Small business owners should be aware that the Qualified Business Income (QBI) deduction may disappear, potentially increasing their tax liabilities. Planning ahead will be essential for managing these changes.
Taxpayers should evaluate their retirement account strategies. With the potential for higher tax brackets in the future, converting traditional retirement accounts to Roth accounts may be beneficial. This strategy allows individuals to pay taxes now at a lower rate rather than later when they may be in a higher bracket.
With the impending reduction in estate and gift tax exemptions, individuals can take advantage of the current higher limits by gifting assets now. Utilizing the annual gift exclusion can help reduce the taxable estate and minimize future estate taxes.
As the Tax Cuts and Jobs Act approaches its sunset in 2025, understanding the changes and planning accordingly is crucial. While some taxpayers may face increased tax liabilities, others may find opportunities to optimize their tax situations. Engaging in proactive financial planning can help navigate these changes effectively. If you need assistance in understanding how these changes may impact your financial situation, consider reaching out to a financial planner for guidance.