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Proactive Tax Planning for the TCJA’s Sunset in 2026

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As the Tax Cuts and Jobs Act (TCJA) of 2017 approaches its sunset at the end of 2025, taxpayers need to prepare for significant changes. Many provisions that have provided substantial tax benefits will expire, potentially increasing tax liabilities for individuals and businesses. Here, we outline the key provisions set to expire and strategies to maximize tax savings before and after the sunset.

tax law changes

Key Provisions Expiring After 2025

Individual Tax Provisions

Tax Rates: The TCJA lowered individual federal tax rates, with the top rate decreasing from 39.6% to 37%. Starting January 1, 2026, the top rate will revert to 39.6%, impacting high-income earners by increasing their tax liability.

Standard Deduction: The standard deduction nearly doubled under the TCJA ($12,000 for single filers, $24,000 for married filing jointly). Post-2025, the deduction will be about half of the current amount, adjusted for inflation, potentially reducing the simplicity and benefits that many taxpayers currently enjoy.

Itemized Deductions:

  1. SALT Deduction: The cap on state and local tax deductions will expire, allowing taxpayers to once again fully deduct these taxes. This could significantly help high-income taxpayers in high-tax states save on their federal tax bills.
  2. Mortgage Interest: The mortgage interest deduction will revert to pre-TCJA levels, applicable to the first $1 million of home mortgage debt and $100,000 of home equity loan debt, restoring a benefit for homeowners with higher mortgage balances.
  3. Miscellaneous Itemized Deductions: Deductions for investment/advisory fees, legal fees, agent fees, and unreimbursed employee expenses will return, exceeding 2% of the taxpayer’s adjusted gross income, offering relief for various personal and business expenses.
  4. Child Tax Credit: This will revert from $2,000 to $1,000 per qualifying child, decreasing the financial support available to families with children.
  5. Personal Exemptions: Suspended by the TCJA, personal exemptions will return at $2,000 per taxpayer and qualified dependents, adjusted for inflation, reintroducing a tax benefit relied on by many middle-income families.
  6. Alternative Minimum Tax (AMT): The TCJA raised exemption amounts and phaseout thresholds, which will revert to pre-TCJA levels, increasing the AMT burden, particularly affecting taxpayers with high deductions or significant income from capital gains.

Business Tax Provisions

  1. Corporate Tax Rate: The flat corporate tax rate of 21% established by the TCJA is permanent and will not expire.
  2. Qualified Business Income (QBI) Deduction: The 20% deduction for pass-through business income will no longer be available after 2025.
  3. Bonus Depreciation: The allowance for 100% bonus depreciation will phase down annually and will be fully phased out by the end of 2026.

Estate and Gift Taxation

The TCJA effectively doubled the estate and gift tax exclusion amounts. In 2024, the exclusion is $13.61 million per person. After 2025, this amount will be cut roughly in half. Estates exceeding the reduced exclusion will be subject to a federal tax rate of up to 40%.

Planning Strategies Before and After TCJA Sunset

Estate and Gift Planning
  1. Utilize Exclusion Amounts: Make substantial gifts before the end of 2025 to utilize the current higher exclusion amounts.
  2. Spousal Lifetime Access Trust (SLAT): Transfer assets into a SLAT to benefit from the current exclusion while retaining indirect access to trust assets.
  3. Grantor Retained Annuity Trust (GRAT): Use a GRAT to transfer assets out of your estate while receiving annuity payments.

Income Tax Planning

  1. Timing of Deductions: If higher tax rates are expected post-2025, defer deductible expenditures to offset higher future income.
  2. Retirement Contributions: Maximize contributions to retirement accounts such as 401(k) plans and IRAs to reduce taxable income.
  3. ROTH Conversions: Consider gradually converting traditional retirement savings to ROTH accounts to effectively manage future tax liabilities.
  4. Capital Gains Tax Planning: Realize capital gains before tax rates increase. Utilize long-term capital gains rates, which are lower than ordinary income tax rates.
  5. Charitable Giving: Make charitable donations of appreciated assets to avoid capital gains taxes and receive tax deductions.
  6. Business Structure Review: Evaluate the benefits of converting pass-through entities to C corporations to take advantage of the flat 21% corporate tax rate.

Miscellaneous Strategies

  1. Education Savings: Contribute to 529 plans for tax-free growth and withdrawals for qualified education expenses.
  2. Health Savings Accounts (HSA): Maximize contributions to HSAs for tax-free withdrawals for qualified medical expenses.
  3. Tax-Loss Harvesting: Offset capital gains with capital losses to reduce overall tax liability, which is particularly beneficial if higher rates are anticipated in the future.

Conclusion

As the sunset of the TCJA approaches, proactive tax planning is essential. Both individuals and businesses should assess their current tax strategies and make necessary adjustments to mitigate potential tax increases. By taking advantage of the current provisions and planning for the changes ahead, taxpayers can optimize their tax positions and minimize liabilities. Consulting with a tax/financial planner is crucial to navigate the complexities and ensure a proactive approach to the upcoming changes.