Back in 2017, the Tax Cuts and Jobs Act (TCJA) created many changes to U.S. tax law that impacted most taxpayers of all ages as it covered everything from income taxes and deductions to estate and gift taxes and charitable giving.

Unless Congress acts to extend them, many TCJA provisions are now in fact set to expire on December 31, 2025. In this post, we’ll cover which of these could most impact you and how to best prepare for the same (as applicable).

Income taxes

The TCJA lowered individual income tax rates and thresholds for almost all taxable income levels, as shown in the charts below.

While we can’t say for sure which specific actions Congress will take in the months and years ahead, income tax rates will likely see a boost of some sort beginning on January 1, 2026.

With a potentially higher tax environment on the horizon, more investors are considering Roth IRA conversions: the process of rolling over a portion (or all) of one’s balance from either an existing traditional IRA, SEP, or SIMPLE IRA into a Roth IRA. The reason why? Corresponding tax consequences are lower (assuming the same or less income) since you’d pay income taxes on the amount you convert.

Additional Roth IRA conversion benefits include the ability to take tax-free withdrawals during retirement and avoiding required minimum distributions (RMDs)—the amount of money specified by the IRS that you must withdraw from your account on an annual basis, generally starting at age 73 (75 beginning in 2033)—as Roth IRAs aren’t subject to these.

In addition to Roth IRA conversions, other strategies to better prepare for potential income tax rate increases include the following:

·      If you’re eligible for a health savings account (HSA), you can make pre-tax contributions of up to $4,150 for an individual and $8,300 for family coverage in 2024. Those age 55 or older can contribute an extra $1,000 above these thresholds.

·      Tax-loss harvesting is a tax-mitigation strategy that allows you to sell investments that have decreased in value to offset the amount of capital gains tax owed from selling profitable assets. You can deduct up to $3,000 from your taxable income when capital losses exceed capital gains; if your losses exceed this number, you can carry over the remaining amount and then deduct it from your tax returns in future years until you’ve exhausted the entire amount. Depending on your own unique circumstances, it may make sense to hold off on harvesting losses until 2026 as capital gains might be taxed at a higher marginal rate—making losses more valuable.

·      You can maximize retirement contributions to retirement accounts—such as 401(k) plans, traditional IRAs, or SEP IRAs—and make additional catch-up contributions to further reduce your taxable income if you’re age 50 or older.

Estate and gift taxes

The estate and gift tax exemption—which allows for the tax-free transfer of wealth from one generation to the next—is the amount of assets an individual can give away during his or her lifetime before incurring a gift tax (or, to the extent not used during life, the amount of estate assets permitted to be sheltered from estate tax upon one’s death). Prior to the TCJA, the corresponding threshold was $5.6 million per person or $11.2 million per couple.

The estate and gift tax exemption doubled under the TCJA, however, with thresholds of $13.61 million for individuals and $27.22 million for couples (with this number adjusted annually for inflation).

While the exemption is high enough for most people, many high-net-worth individuals with sizable estates could face significant consequences should TCJA provisions return to pre-TCJA levels as many believe the exemption would be reduced by about half its value. Knowing this, it’s easy to see why estate taxes loom large as a top concern for this demographic. Preparing for such changes involves utilizing various estate and gifting strategies.

The most straightforward option is to gift cash by leveraging the annual gift tax exclusion; in 2024, you can give $18,000 ($36,000 for married couples) to as many individuals as you’d like within a year without filing any paperwork or incurring tax liability. So long as you don’t exceed annual thresholds, this won’t count toward your lifetime gift exemption.

Making charitable donations is another alternative that would allow you to simultaneously decrease the size of your estate while fulfilling your and your family’s philanthropic wishes. Donating to tax-exempt charities can also benefit you with respect to income tax.

Another strategy involves gifting assets to a trust, in which you pay annual taxes on the trust income while helping beneficiaries and reducing taxes on your estate.

You can utilize other estate and gifting strategies but should only do so with the assistance of an estate attorney or financial advisor as these can quickly become very complex.

Deductions

The standard deduction nearly doubled under the TCJA, increasing in 2024 to $14,600 for single filers and $29,200 for married couples filing jointly; fewer taxpayers are thus itemizing deductions.

A few critical TCJA provisions regarding deductions to be aware of (but not necessarily plan for)—especially if the standard deduction returns to half of what it is now (adjusted for inflation)—include:

·      The state and local tax (SALT) deduction is capped at $10,000. This limitation is scheduled to expire after 2025, potentially allowing for higher deductions for taxpayers who reside in high-tax states.

·      Mortgage interest deductions are more limited and home equity loan interest deductions are generally suspended under the TCJA. Should the law sunset and revert to pre-TCJA levels, you can deduct interest on the first $1 million in home mortgage debt and $100,000 in a home equity loan.

·      Miscellaneous itemized deductions that were temporarily eliminated under the TCJA included investment/advisory fees, legal fees, and unreimbursed employee expenses. Such deductions may be permitted once again, assuming they exceed 2% of one’s adjusted gross income.

The bottom line on preparing for taxes to sunset

While we of course can’t predict what will happen after tax cuts expire, significant changes are likely on the horizon. You should therefore start giving more thought to income and estate tax planning, and speaking with your financial advisor is a great start.

Find out if you need to take any actions before the tax cuts expire by scheduling a FREE Discovery call with one of our CFP® professionals.

———

Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific tax advice or recommendations for any individual or business.