As we approach the sunset of the Tax Cuts and Jobs Act (TCJA) at the end of 2025, individuals and businesses must consider strategic financial planning to optimize their tax situations. Enacted in 2017, the TCJA introduced several tax reforms, including lower individual tax rates, increased standard deductions, and limitations on certain deductions, which are set to revert to pre-2017 levels after 2025.

Understanding the Changes

Reduction in Individual Income Tax Rates:
The TCJA provided a reduction across the board for individual income tax rates. Starting in 2026, these rates are scheduled to revert to their pre-2017 levels, significantly impacting taxpayers. Below are charts illustrating the changes in tax brackets for single filers as well as married filing jointly before and after the implementation of TCJA. 

Increase in Standard Deduction:
One of the hallmark features of the TCJA was the near doubling of the standard deduction. The standard deduction for singles increased from $6,350 in 2017 to $12,000 in 2018. Post-2025, the standard deduction is expected to revert to its previous levels (adjusted for inflation), potentially increasing the number of taxpayers needing to itemize deductions again.

Cap on State and Local Tax (SALT) Deduction:
The TCJA imposed a $10,000 cap on deductions for state and local taxes, significantly affecting taxpayers in high-tax states. When this cap expires, it could alleviate the tax burden for those in higher-tax states.

Limitations on Mortgage Interest and Elimination of Personal Exemptions:
The TCJA limited the mortgage interest deduction to interest paid on the first $750,000 of mortgage debt and generally eliminated the deduction for home equity debt unless used for home improvement. Additionally, it eliminated personal exemptions, previously allowing taxpayers to deduct a certain amount for themselves and each dependent. These provisions are set to revert, impacting homeowners and families.

Preparing for the Sunset

1. Accelerate Income: With the potential increase in tax rates post-2025, accelerating income into the years before the TCJA provisions sunset can be advantageous. This might include converting traditional IRAs to Roth IRAs, realizing capital gains, or discussing with your employer the possibility of receiving bonuses or stock options before rates go up.
2. Strategize Deductions: With the potential expiration of the TCJA, strategically timing your deductions can be beneficial. 
3. Maximize Retirement Contributions: Contributing to Roth IRAs or Roth 401(k)s during the period of lower tax rates can be particularly beneficial. These contributions are taxed at the time of contribution, allowing for tax-free growth and withdrawals in retirement.
4. Estate Planning: The TCJA increased the federal estate and gift tax exemption amounts significantly. Those considering transferring large estates may want to take advantage of the higher exemption amounts before they decrease in 2026 by making gifts or setting up trusts.
5. Business Planning: Businesses should consider making investments and substantial purchases under more favorable depreciation rules and expensing provisions before they potentially change. Additionally, assessing the business structure may be prudent as the corporate tax rate and pass-through business deductions could revert.

The sunset of the Tax Cuts and Jobs Act’s provisions represents a pivotal moment for tax planning. By preparing ahead of time, individuals and businesses can position themselves advantageously for the upcoming changes. If you are looking for help in navigating the shifting tax landscape, reach out to us today.

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