The Tax Cuts and Jobs Act (TCJA) of 2017 made history as one of the most significant overhauls of the U.S. tax code in decades, with broad implications for businesses, individuals and the economy as a whole. But without further action from Congress, many of these provisions are set to expire on Dec. 31, 2025. While Congress may choose to extend or make them permanent, it’s crucial to be aware of these potential changes so you can plan your finances accordingly. This article explores these expiring provisions and offers strategies to maximize your tax savings before the clock runs out.
Key Changes Scheduled to Sunset
The following provisions of the TCJA are scheduled to sunset at the end of 2025:
- Individual Tax Rates: The TCJA made significant changes to individual income tax rates, including lowering them across most income brackets. The top marginal tax rate for individual filers is set to jump back up to 39.6 percent from the current 37 percent.
- Exemptions and Credits: Personal and dependent exemption credits, along with the child tax credit, are all slated for reduction. The current child tax credit under the TCJA is $2,000.
- Standard Deduction: The standard deduction, which simplifies filing for many taxpayers, is poised to be cut in half. This means more people will find itemizing deductions more beneficial.
- Business Deductions: The TCJA introduced a new deduction called the Section 199A deduction for partnerships, S-corporations and sole proprietorships. This deduction currently allows business owners to deduct up to 20 percent of their qualified business income, subject to certain limitations. However, this deduction for qualified business income of pass-through entities is set to disappear. However, the reduced corporate tax rate of 21 percent remains permanent.
- State and Local Tax (SALT) Deduction: the TCJA placed a $10,000 cap on the deduction for state and local taxes, which includes income taxes, property taxes and sales taxes. Upon sunsetting, the $10,000 cap on deducting state and local taxes will be lifted, impacting residents of high-tax states.
- Miscellaneous Itemized Deductions: The return of the two percent floor for miscellaneous itemized deductions allows taxpayers to deduct certain expenses like unreimbursed employee costs and investment fees, provided they exceed two percent of their adjusted gross income (AGI).
- Alternative Minimum Tax (AMT): The TCJA retained the individual AMT but significantly increased the exemption amounts, reducing the number of taxpayers subject to the AMT. Changes to AMT exemptions and phase-outs, coupled with the SALT deduction cap removal, could subject more taxpayers to the AMT.
- Capital Gains Taxes: Capital gains tax rates will revert to being determined by your regular income tax bracket, potentially leading to higher rates for some.
- Estate and Gift Tax: The estate and gift tax exclusion is set to be nearly halved, significantly impacting those with substantial estates. You can read more about the estate and gift tax sunset in our article, Preserving Your Family’s Wealth Before Estate and Gift Tax Exemption Expires.
Tax Planning Strategies to Consider
- Accelerate Income: If you expect to be in a lower tax bracket in the future, consider accelerating income in 2025 to take advantage of current rates. This could include bonuses, capital gains or distributions from retirement accounts. By recognizing income now, you may pay taxes at a lower rate compared to future years.
- Defer Deductions: Conversely, if you anticipate being in a higher tax bracket after 2025, defer deductions to maximize their value. This could involve delaying the payment of deductible expenses or making contributions to retirement accounts that provide tax deductions.
- Re-think Your Business Structure: The end of the qualified business income deduction for pass-through entities may incentivize taxpayers to rethink their business structure, also taking into account that the reduced corporate tax rate of 21 percent will not sunset. Consult with your tax advisor on whether restructuring your entity is the right step for your tax strategy.
- Roth IRA Conversions: Roth IRA conversion involves transferring funds from a traditional IRA or employer-sponsored retirement plan (such as a 401(k) if your plan allows and offers a Roth 401k feature) to a Roth IRA. Unlike traditional IRAs, contributions to Roth IRAs are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free in retirement. When you convert funds from a traditional IRA or 401(k) to a Roth IRA, you must pay income taxes on the converted amount in the year of the conversion. The taxable amount is added to your ordinary income for that year, potentially increasing your tax liability. However, once funds are in the Roth IRA, future qualified distributions, including earnings, are tax-free. Consider Roth IRA conversions to take advantage of potentially lower tax rates now and future tax-free withdrawals in retirement.
- Plan for Estate Tax and Gifting Strategies: With the temporary increase in the estate tax exemption under the TCJA, high-net-worth individuals should review their estate planning strategies. For 2025, this is set at $13.99 million for individuals and $27.98 million for married couples. Taxpayers with significant estates that are in excess of the expected reversion amount (approximately $7 million for individuals and $14 millions for married couples) should consult with their advisors as soon as possible to explore options for transferring wealth tax-efficiently.
By understanding the expiring provisions of the TCJA and implementing these strategies, taxpayers can take control of their tax situation and potentially maximize their tax savings in the future. For more information about sunsetting provisions of the TCJA and their impact to your tax situation, contact your Windham Brannon advisor today, or reach out to Harris Cook.
