Worried About the Tax Cuts Jobs Act Sunsetting in 2025?

It’s been six years since the Tax Cuts and Job Act (TCJA) overhauled the federal tax code, ushering in sweeping changes that affected businesses and individuals. However, after 2025, many of the act’s tax law changes are scheduled to expire.

What did the TCJA do? Crafted in part to simplify the tax filing process for many Americans, the TCJA:

• Raised the standard deduction
• Introduced new limits on itemized deductions
• Reduced marginal tax rates
• Eliminated the personal exemption
• Expanded the child tax credit
• Modified the alternative minimum tax
• Raised lifetime estate and gift tax exemption
• Increased the total value of assets people can give during their life and/or upon their death without incurring estate or gift taxes

When does the TCJA sunset?

Most of the TCJA’s changes are scheduled to expire on December 31, 2025. Its possible Congress could extend TCJA provisions past 2025, but that possibility is still unresolved. Let’s take a deeper dive into the top five tax law changes that could impact you:

1. Income Tax Rates: The current tax brackets (ranging from 10% to 37%) would revert to higher pre-TCJA levels, with the top rate returning to 39.6%. Just as important as the rates themselves, though, are the ranges of income in which each bracket falls. We don’t know the exact dollar amounts where each bracket will land in 2026, but by inflating the number from 2017 (the last time the pre-TCJA brackets were in effect) to today, it’s possible to get an idea of how the post-TCJA bracket structure will compare (see chart below).

As illustrated above, some taxpayers will be in a higher tax bracket post-TCJA. For example: married couples with $290,250 - $383,900 of income in 2024 dollars would see their tax bracket increase from 24% to 33%. However, there are also some income ranges, particularly for single filers, where the taxpayer will be in a lower tax bracket after TCJA sunsets.

2. Deductions & Tax Credits: The TCJA nearly doubled the standard deduction. It also eliminated the personal exemption, doubled the child tax credit, capped state and local tax deductions at $10,000 and tightened limits on mortgage and home equity interest deductions. All those changes will expire if the TCJA sunsets.

An anticipated increase to the unlimited SALT (state and local tax) itemized deduction might increase your ability to itemize deductions and reduce your overall tax liability, but be mindful that SALT deductions get “added back” for determining AMT.

3. Charitable Giving Deductions: The TCJA raised the ceiling for charitable contribution deductions from 50% to 60% of adjusted gross income (AGI). If the act sunsets, those deductions may again be capped at 50% of AGI.

4. Estate & Gift Tax Exemptions: The TCJA doubled the maximum that families can give to their beneficiaries – either during their lifetime or as part of their estate – without incurring federal gift or estate taxes. As a result, for 2024, a single taxpayer can claim a federal estate and lifetime gift tax exemption of $13.61 million. Couples making joint gifts can double that amount ($27.22 million). If the act sunsets in 2025, the 2026 exemption may return to 2017 levels, adjusted for inflation: a single taxpayer limit would drop back to an estimated $7 million and $14 million for a couple.

?Remember that your taxable estate includes not only your investment portfolio, but also your home and other real estate, and, in some cases, your life insurance policy.

5. Qualified Business Income Deduction: while the corporate tax rate of 21% was made permanent, the qualified business income deduction, which lets eligible self-employed and small-business owners deduct up to 20% of their qualified business income, is scheduled to sunset.

While it’s hard to plan for the unknown, we are proactively preparing several strategies to ensure your financial plan is ready for 2025. Below is a summary of some of the strategies that we will include on our agendas with clients for their 2025 strategy meetings:?

• Review Income Tax Planning Strategies to address changes in tax brackets and tax rates. Clients should consider: Maximizing Retirement Contributions: Contribute to tax-deferred retirement accounts like a 401(k) or IRA in 2025. This reduces your taxable income, which can be especially valuable if you're expecting higher tax rates in the future.
• Consider Roth Conversions: If you anticipate higher tax rates in 2026, a Roth conversion in 2025 might make sense. Converting traditional IRA or 401(k) funds into a Roth account means paying taxes now (while rates are lower) and enjoying tax-free growth and withdrawals in retirement.

• Plan for the Reversion of the Estate & Gift Tax Exemption: the current estate and gift tax exemption, which is $12.92 million per person (as of 2023), is set to drop to around $5 million in 2026. Here’s how to take action: Use the Higher Exemption before It Expires: High-net-worth individuals should consider using the larger exemption to make lifetime gifts or implement other estate planning strategies before the exemption shrinks. Making significant gifts in 2025 can help lock in the current higher limits. Review Your Estate Plan: If the exemption reverts to lower levels, estates that previously fell under the exemption threshold could become taxable. Review your estate plan now to ensure it is aligned with these potential changes and make any necessary updates.

• Charitable Giving Strategies: as tax rates rise and the estate tax exemption shrinks, charitable giving can play a critical role in tax planning. Consider these strategies: Annual Gifting: An individual can gift $18,000 and a couple can gift $36,000 in annual gifts to as many people as they like. These can be direct payments to a school to cover a child’s or grandchild’s tuition, or to a medical provider for health expenses, without incurring taxes. These annual gifts do not count toward your lifetime gifting limit. Qualified Charitable Distributions (QCDs): If you’re 70? or older, using a QCD to make donations directly from your IRA can reduce taxable income. This strategy could be particularly valuable if tax rates rise in 2026.

• Investment Planning: potential changes to capital gains tax rates and other investment-related taxes mean it’s a good time to review your investment strategy: Harvest Capital Gains in 2025: If you expect higher tax rates in the future, it may be beneficial to sell appreciated investments in 2025 to lock in gains at the current lower capital gains rates. Tax-Loss Harvesting: Harvesting losses to offset gains can continue to be a valuable strategy, particularly if you expect future tax increases. By offsetting gains with losses, you can reduce your taxable income and potentially avoid a higher tax burden in the future.

Other Retirement Strategies to Remember for 2025 due to Changes from SECURE Act 2.0:

• Catch-Up Contributions: For individuals aged 60-63, the catch-up contribution limit for 401(k) and similar retirement plans will increase to the greater of $10,000 or 150% of the standard catch-up amount (which would be $11,250 in 2023).

This is a meaningful change for those who want to catch up for retirement by being able to contribute additional dollars at age 60, 61, 62, and 63.

• Mandatory Roth Contributions for High Earners: Starting in 2025, employees making over $145,000 will be required to make catch-up contributions to a Roth account.

What does this mean? In 2024, the retirement plan catch-up contribution limit for those over 50 is $7,500. This year, you can choose if you want your catch-up contribution to go towards your pre-tax 401(k) or after-tax Roth 401(k). In 2025, if your income is greater than $145,000 then you don’t get to choose pre-tax or after-tax – the catch-up contribution must be designated as a Roth contribution.

This change has some important implications for high-income earners. While you won’t receive the immediate tax deduction on these catch-up contributions, the long-term benefit is that Roth contributions grow tax-free and withdrawals in retirement are tax-free as well.

• Maximize Roth Contributions Now: If you’re not yet contributing to a Roth account, 2025 could be the perfect time to start, particularly if you expect higher tax rates in the future.

?

Make Financial Planning a Priority

The anticipated tax law changes in 2025 present both opportunities and challenges, but proactive planning can help you stay ahead of the curve. From accelerating income and maximizing retirement contributions to revisiting estate plans and charitable giving strategies, now is the time to ensure your financial plan is aligned with these potential shifts.

To make the most of 2025 and beyond, it's crucial to have a strategy in place before the year begins. Make sure you have your next financial review scheduled for early 2025 so we can assess your situation, discuss these tax changes, and ensure you're on track to meet your goals.

You can schedule a time by calling the office 781-863-5800, emailing Kim at [email protected] or using our online calendar: https://go.oncehub.com/SMBScheduleMeeting