The Tax Cuts and Jobs Act (TCJA) of 2017 was a major tax reform law that overhauled the US tax code, affecting both businesses and individuals. Most of the tax changes made by the TCJA are set to sunset or revert to their previous state at the end of 2025. This will happen unless Congress acts to extend these provisions or make them permanent. In the meantime, taxpayers should be aware of the potential tax implications of the sunset and plan accordingly with an advisor.
TCJA Changes to Individual Income Taxes
The TCJA provisions affected various aspects of individuals’ taxable income, deductions, credits and tax liabilities. Key provisions of the TCJA that are going to sunset in 2025 include:
Lower marginal tax brackets- Increased standard deduction
- State and local taxes $10,000 capped deduction limit
- Elimination of most miscellaneous expenses for itemized deductions
- Lower threshold for the deduction of medical expenses
- Limitation on deductible mortgage debt to $750,000 for new loans taken out after December 14, 2017
- Overall limitation on itemized deductions and increased income thresholds for the phaseout of itemized deductions
- Increased child tax credit and expanded eligibility for it
- Lifetime exemption amount increased for estate and gift tax from $5.6 million to $11.2 million per person (and adjusted for inflation each year)
- The 20% qualified business income (QBI) deduction for qualified pass-through entities
The items above are not an exhaustive list of all the provisions set to expire in 2025.
Potential Tax Implications of the Sunsets
The impact of these potential changes on individual taxpayers will depend upon which provisions of the TCJA affect them. All the tax changes listed below are subject to any action made by Congress:
- Statutory tax rates will revert to their 2017 amounts
- Income brackets will return to their previous ranges, adjusted for inflation
- Standard deductions will be lowered
- Itemized deductions and their rules will revert to pre-TCJA rules
- The child tax credit amount will decrease to $1,000 and a higher threshold of eligibility
- The credit for dependents who aren’t qualifying children will be eliminated
- Personal and dependent exemptions will return.
- The lifetime exemption amount for estate and gift tax will decrease to pre-TCJA levels adjusted for inflation.
- The 20% deduction for qualified business income (QBI) from certain pass-through entities will be eliminated
Preparing for the TCJA Sunset
Below are a few general tactics taxpayers can consider taking advantage of current and future tax benefits.
Consider Ways to Accelerate Income
By accelerating their income into the current year, or before the end of 2025 if they expect their income to increase, taxpayers can take advantage of the lower tax rates and brackets. For example, taxpayers may want to exercise stock options, sell appreciated assets, convert traditional IRAs into Roth IRAs or take distributions from retirement accounts.
Defer Itemized Deductions
If taxpayers expect their income to be lower in the future, they may want to defer some of their itemized deductions until after 2025 to take advantage of the higher tax benefit in 2026. Taxpayers could delay large charitable contributions, medical expenses or mortgage payments if they can afford to and expect to itemize their deductions.
Make Larger Gifts Now
Taxpayers with large estates who want to reduce their estate tax liability might want to make gifts to heirs or trusts before the end of 2025 to take advantage of the higher exemption amount. For 2024, the annual gift tax exclusion is $18,000 per person without using any of the taxpayer’s lifetime exclusion amount.
Anders Family Wealth and Estate Planning advisors can work with you to develop a tax planning strategy that minimizes your tax burden while maximizing your tax savings that take current and upcoming legislature changes into account. For more information on how advisors can help in your situation, plus the associated costs, request a meeting with an Anders advisor below.
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