As the 2024 U.S. presidential election looms, the outcome is likely to shape tax policy for years to come. The party that takes office will have its own tax policy initiatives and need to posture for a number of items set to sunset on 12/31/2025 as part of the Tax Cuts and Jobs Act (TCJA). Which TCJA provisions get extended or which ones lapse is unpredictable, making tax planning a bit more challenging in the months to come.
Key Changes on the Horizon
The TCJA, signed into law in 2017, brought significant changes to both individual, corporate, and estate taxes. However, many of these changes were temporary and are set to expire at the end of 2025. Among the most impactful sunsetting provisions are:
- Individual Tax Rates: The current tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% are set to revert to pre-TCJA levels, ranging from 10% to 39.6%.
- Standard Deduction: The TCJA nearly doubled the standard deduction. In 2026, these amounts will be reduced by half, potentially leading more taxpayers to itemize deductions instead of taking the standard deduction.
- Alternative Minimum Tax (AMT): The AMT exemption amounts, which were increased under the TCJA, will revert to pre-2018 levels. This means that more taxpayers may once again be subject to the AMT.
- State and Local Tax (SALT) Deduction: The TCJA capped the SALT deduction at $10,000, a significant blow to high-income earners in states with high local taxes. If the cap is eliminated after 2025, taxpayers in high-tax states could greatly benefit from deducting all eligible state and local taxes.
- Estate and Gift Tax: In 2026, the estate and gift tax exclusion will be reduced from $13.61 million per decedent to an estimated $7 million (adjusted for inflation).
- Qualified Business Income (QBI) Deduction: This deduction, which allows pass-through business owners to deduct up to 20% of their qualified income, will be eliminated.
- Bonus Depreciation on qualified property: Taxpayers were allowed to take a 100% bonus depreciation deduction on qualified property (equipment, autos, furniture, fixtures) for tax years 2017 through 2022. This deduction will be scaled back to 80%, 60%, etc., in tax years following 2022. Bonus depreciation expires completely after 12/31/2026.
Tax Planning Strategies to Consider
With so many provisions set to expire, multiyear tax planning is essential. Taxpayers should work closely with their tax professionals to explore the following strategies:
- Income Acceleration: Taxpayers who expect to be in higher tax brackets after 2025 may want to accelerate income into 2024 or 2025 to take advantage of the lower current rates.
- Defer Deductions: Similarly, taxpayers expecting to be in a higher tax bracket may want to delay deductions (e.g., charitable contributions, property taxes, maximize retirement contributions) to maximize deductions under higher rates.
- Roth Conversions: Converting some of a traditional IRA to Roth IRAs while tax rates are lower could help taxpayers minimize taxes on future distributions and have options when taking a distribution. Withdrawing from pre-tax sources would be strategic during times of low brackets while tapping into Roth resources would be advantageous when facing higher brackets.
- Business Structure: Business owners should begin exploring different entity structures to mitigate the impact of QBI sunsetting. Since the corporate rate will remain at 21%, converting to a C Corporation may be more tax efficient.
- Estate Planning: For taxpayers with significant estates, gifting strategies or trust formation can help reduce future estate tax liabilities. Given the multi-million pending reduction in the estate tax exclusion, now is the time to act.
The Importance of Staying Informed
The imminent expiration of key provisions in the Tax Cuts and Jobs Act (TCJA) in 2025 presents a significant challenge for both individuals and businesses. To mitigate these risks and optimize their tax strategies, taxpayers should adopt a proactive, multi-year planning approach. By working closely with experienced tax professionals, individuals and businesses can navigate the complexities of the changing tax landscape, identify potential tax liabilities, and implement strategies to minimize their tax burden. At Calvetti Ferguson, our dedicated teams of experts in trust and estate planning, state and local tax, and tax planning for individuals and businesses are committed to providing comprehensive guidance and tailored solutions to help our clients navigate these challenges successfully.
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