The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant tax changes for individuals and businesses. However, many of its provisions are set to expire at the end of 2025, potentially leading to higher taxes, reduced deductions, and shifting estate planning strategies. With just a year to prepare, now is the time to assess how these changes could impact your financial situation and what proactive steps you can take.
What Changes Are Expected When the TCJA Expires?
If Congress does not pass new legislation, tax rules will revert to pre-2018 laws. Here’s what that could mean:
1. Higher Income Tax Rates
The top marginal tax rate could increase from 37% back to 39.6%.
2. Restoration of Personal Exemptions
The return of personal exemptions could add complexity to tax planning.
3. Lower Estate Tax Exemption
The current estate tax exemption of $13.99 million per person may drop to around $6 million.
4. Reduced Standard Deduction
The standard deduction will decrease (from $15,000 for individuals/$30,000 for married couples in 2025).
5. State and Local Tax (SALT) Deduction Cap Removed
The $10,000 cap on SALT deductions may be lifted or changed.
6. Business Tax Changes
Business deductions, including the Qualified Business Income (QBI) deduction, may expire or be reduced.
Top 5 Ways to Prepare for TCJA Expiration
To minimize tax exposure and help protect wealth, consider these five strategies:
1. Accelerate Income & Consider Roth Conversions
• With tax rates likely to rise, accelerating income into 2025 (when rates are still lower) could help reduce taxes later.
• Consider Roth IRA conversions before 2026 to lock in lower tax rates on withdrawals in retirement.
2. Optimize Estate & Gift Planning Before Exemption Drops
• The estate tax exemption is expected to cut in half after 2025.
• High-net-worth individuals should consider gifting strategies such as:
– Grantor Retained Annuity Trusts (GRATs)
– Irrevocable Life Insurance Trusts (ILITs)
– Gifting assets to heirs now to maximize current exemption levels.
3. Review Business Tax Strategies
• If you own a business, plan for potential loss of the 20% QBI deduction (which benefits pass-through entities).
• Consider restructuring your business or maximizing deductions while they are still in place.
4. Evaluate Charitable Giving Strategies
• The return of lower itemized deduction limits could increase the likelihood of being able to deduct charitable contributions.
• Consider donor-advised funds (DAFs) or Qualified Charitable Distributions (QCDs) to maximize charitable tax efficiency.
5. Plan for State & Local Tax (SALT) Deduction Changes
• If the SALT cap is lifted, it may make sense to delay state tax payments until after 2025.
• High-income earners in states with high taxes (CA, NY, NJ) could see significant benefits.
Q&A: Common Questions About the TCJA Expiration
Q1: How will the expiring tax laws affect high-income earners?
If the TCJA provisions sunset as scheduled, high-income earners will face higher federal tax rates and fewer deductions. Estate planning strategies and Roth conversions should be reviewed in advance.
Q2: What should business owners do before 2026?
Business owners should evaluate entity structures (LLCs, S-corps, C-corps) and consider accelerating deductions or investments before the QBI deduction disappears. Tax-efficient retirement plan contributions may also be beneficial.
Q3: How does this impact estate planning?
The estate tax exemption dropping from $13.99 million to approximately $6 million means more estates will be subject to taxation. Consider gifting assets now to lock in the higher exemption.
Q4: What’s the best way to stay ahead of these changes?
Working with a James Investment financial planner to review your tax plan, estate plan, and investment strategy now can help ensure you’re well-prepared for potential changes.
Next Steps: Take Action Now
The expiration of the TCJA could lead to significant financial implications, especially for high earners and business owners. While it’s still uncertain whether Congress will intervene, preparing now can help you minimize future tax burdens.
At James Investment, we help clients navigate complex tax changes. Schedule a consultation today to review your options and develop a tax-efficient strategy for 2025 and beyond.
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