You’ve likely heard whispers about significant tax changes on the horizon. The year 2025 marks a pivotal moment in U.S. tax policy, as many provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire. With the 2024 election in the books, we can begin to consider what will happen to potential law changes in 2026 and how they may impact our long-term financial plans, as well as what opportunities they may present.
Understanding the TCJA Sunset
The Tax Cuts and Jobs Act (TCJA) implemented sweeping changes to the tax code, many of which were temporary and set to expire at the end of 2025. Without congressional action, we’ll see a reversion to pre-2018 tax laws, albeit with some inflation adjustments. Here are the key areas you should be aware of:
Individual Income Tax Rates
The current tax brackets and rates will expire, reverting to the previous structure. The top marginal rate will increase from 37% to 39.6%, and other brackets will shift as well (1). This change could significantly impact your personal tax liability, especially if you’re in the higher income brackets.
Standard Deduction and Itemized Deductions
The nearly doubled standard deduction introduced by the TCJA may be reduced, potentially making itemizing deductions more attractive again for many taxpayers (2). Additionally, the cap on state and local tax (SALT) deductions may be lifted, which could be beneficial if you reside in a high-tax state (5).
Business-Related Provisions
While the corporate tax rate will remain at 21%, pass-through entities will see changes. The Qualified Business Income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of their qualified business income, is set to expire (6). This could significantly impact the tax liability of S corporations, partnerships, and sole proprietorships.
Estate and Gift Tax Exemption
One of the most substantial changes affects wealth transfer. The estate and gift tax exemption, which stands at $13.61 million per individual in 2024, is projected to be roughly halved in 2026 (6). This reduction could have significant implications for your estate planning and wealth transfer strategies.
Strategic Planning for Entrepreneurs
Given these impending changes, it’s crucial to start planning now.
Here are some strategies to consider:
Income Acceleration and Deduction Deferral
If you anticipate being in a higher tax bracket post-2025, consider accelerating income into 2024 or 2025. Conversely, you might want to defer deductions to years when they could provide greater tax benefits.
Roth Conversions
With potentially lower tax rates in 2024 and 2025, converting traditional IRAs to Roth IRAs could be advantageous. This strategy allows you to pay taxes on the conversion at current rates, potentially saving on future distributions (9).
Business Structure Evaluation
With the QBI deduction sunsetting, it may be worth reassessing your business structure. Some entities might find converting to a C corporation more tax-efficient given the stable 21% corporate rate (9).
Estate Planning
If your estate exceeds the projected post-2025 exemption amount, consider utilizing the current higher exemption through strategic gifting or establishing trusts. Remember, the IRS has confirmed that using the increased exemption now won’t negatively impact you after 2025 (1).
Charitable Giving Strategies
Review your charitable giving strategy in light of potential changes to itemized deductions. Consider bunching donations or using donor-advised funds to maximize tax benefits (5).
The Road Ahead
While these changes are currently set in stone, it’s important to remember that tax laws are subject to political winds. The 2024 election outcomes could significantly influence whether these provisions are extended, modified, or allowed to expire as scheduled.
As we navigate this period of potential change, staying informed and flexible in your financial planning is key. Work closely with your tax and financial advisors to model different scenarios and develop strategies that align with your long-term goals.
Remember, proactive planning now can help you navigate these changes smoothly and potentially uncover new opportunities to optimize your tax position. By staying ahead of the curve, you can ensure that your hard-earned success continues to work for you, regardless of how the tax landscape evolves.
Adaptability is crucial in the world of entrepreneurship. Apply that same innovative spirit to your tax planning, and you’ll be well-positioned to thrive in the post-2025 tax environment.
Citations:
- https://www.blackrock.com/us/financial-professionals/insights/planning-for-tcja-sunset
- https://www.govexec.com/pay-benefits/2024/09/sunsetting-tax-cuts-jobs-act-what-federal-employees-need-know/399248/
- https://about.bgov.com/insights/elections/2025-tax-policy-crossroads-what-will-happen-when-the-tcja-expires/
- https://creativeplanning.com/insights/taxes/preparing-for-the-2025-tax-sunset/
- https://tax.thomsonreuters.com/blog/what-to-know-about-tcja-expiration/
- https://www.fiduciary-trust.com/insights/planning-opportunities-before-the-tax-cuts-and-jobs-act-sunset/
- https://www.cbh.com/insights/articles/tcja-expiration-potential-impact-on-2025-tax-legislation/
- https://www.investopedia.com/what-tax-changes-will-happen-between-2024-and-2025-8738495
- https://calvettiferguson.com/tax-planning-for-2025/
- https://www.rbcwealthmanagement.com/en-us/insights/preparing-for-the-great-sunset-what-you-need-to-know-if-tax-code-provisions-expire
- https://www.thetaxadviser.com/issues/2023/dec/tax-planning-for-the-tcjas-sunset.html