When the Tax Cuts and Jobs Act (TCJA) went into effect in December 2017, it brought about significant changes to the United States tax system, impacting individuals, families, and businesses. However, unless Congress takes action to extend them, many of the provisions within the TCJA will expire, or sunset, on December 31, 2025. Given the possible impact to your taxes and estate planning strategies, now is the time to start preparing for these anticipated changes. The following is an overview of some of the provisions expiring with the TCJA sunset.
Tax Rates
The TCJA lowered the tax rates for most income levels. With the sunset, tax brackets will revert back to the 2017 rates, resulting in increased tax rates for many taxpayers. Given the possibility of a higher tax landscape in the future, you may want to investigate avenues to capitalize on the current lower brackets. Below are current rates compared to projected post-sunset rates for single and joint tax filers:
Deductions & Tax Credits
Under the TCJA, personal exemptions were eliminated, or restricted, while the standard deduction was increased, nearly doubling (for 2024 it stands at $29,200 for joint filers, $14,600 for single, or $21,900 for heads of household). These provisions were designed to provide some relief to tax payers by simplifying the tax code, reducing the number of taxpayers who itemize deductions. In fact, in 2017, 31% of all individual income tax returns had itemized deductions, compared with just 9% in 2020.
The alternative minimum tax (AMT) exemption amounts and phase-outs were increased. Certain itemized deductions, such as the state and local property tax deduction (SALT) and the mortgage interest deduction were dramatically reduced. In addition, the maximum child tax credit (CTC) doubled under the TCJA. Since these provisions are also scheduled to sunset, we recommend, if applicable, discussing potential changes with your financial advisor to avoid any sunset surprises and to identify opportunities that may benefit from the current TCJA provisions.
Charitable Contribution Deductions
The TCJA raised the ceiling for charitable contribution deductions from 50% to 60% of adjusted gross income (AGI) for tax payers who are itemizing their deductions. Without changes from Congress, the limit for deducting cash gifts to public charities reverts back to 50% on January 1, 2026. For individuals who are considering making significant charitable contributions in the near future, they may want to consider doing so before 2026.
Estate and Gift Tax
Estate, gift, and generation-skipping transfer (GST) are taxes placed on the transfer of wealth: the estate tax on the transfer of wealth at death, the gift tax on the transfer of wealth during life, and the GST tax on the transfer of wealth to a person who is two or more generations younger than the donor, such as a grandchild.
Under the TCJA, the estate and gift tax exemption was doubled. Today, the federal estate and gift tax threshold stands at $13.61 million per individual and $27.22 million for couples. Currently the TCJA provides an opportunity for high wealth taxpayers to transfer more wealth to their descendants, paying little or no federal estate, gift, or GST tax. But in 2026, this exemption is also scheduled to revert to pre-TCJA levels, essentially halving it to around $7 million per individual and $14 million for married couples. Individuals and families with taxable estates above these thresholds may want to take advantage of the current high exemption amount.
Planning for the TCJA Sunset
It's important to remember that these are just potential changes. Congress could choose to extend or modify these provisions before the end of 2025. With that being said, waiting to see what will happen may put you at risk of running out of time to put a proactive plan in place. It is also crucial to recognize that the most effective strategy will vary depending on your unique circumstances. We highly recommend meeting with your advisor to review your current tax situation, income, deductions, and investments to see how the changes may affect your specific circumstances.
Before the sun goes down, plan ahead with your CAS team. Your window of opportunity is now.