By the end of 2025, individuals and businesses will be facing the expiration of the Tax Cuts and Jobs Act (TCJA) provisions. Passed in late 2017, lower tax rates and higher deductions are some of the changes the TCJA announced. These benefits will expire after 2025, which may lead to possible increases in tax liabilities. So, let’s dive into the critical changes and find some strategies to handle them.
What Happens When the TCJA Tax Cuts Expire?
The expiration of the TCJA tax cuts will bring major changes to the tax system, which will affect tax rates, deductions, credits, and exemptions. Understanding these changes and how they will impact you and your business is crucial.
Key Changes to Individual Tax Rates
To ease the tax burden for various income levels, individual tax rates were lowered to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Nonetheless, it is important to note that at the end of 2025, these rates will return to their pre-TCJA levels. The top rate of 37% will go back to 39.6%. Consequently, many taxpayers, particularly those with higher incomes, will have higher taxes. So, it is essential to understand how these changes can affect different income levels. Earners of middle and upper incomes particularly may need to prepare for a notable increase in their tax liability after the current rates expire.
Changes to Deductions and Exemptions
The Tax Cuts and Jobs Act (TCJA) brought considerable changes to deductions and exemptions, some of which will revert or change after 2025.
Standard Deduction
In 2018, the TCJA reduced taxable income for many by practically doubling the standard deduction ($12,000 for individuals and $24,000 for married couples filling jointly). Nevertheless, starting January 1, 2026, this deduction will return to its original amount (before the TCJA changes).
Itemized Deductions
- SALT Deduction Cap: The TCJA introduced a $10,000 cap on state and local tax
(SALT) deductions. After it expires in 2025, taxpayers can deduct a higher amount for state and local taxes paid. - Mortgage Interest Deduction: A broader range of deductible mortgage interest
expenses may be possible when current restrictions on its deductions for home equity loans are lifted. - Miscellaneous Deductions: Miscellaneous itemized deductions, for example, unreimbursed employee expenses and investment fees were restricted under the TCJA but are expected to come back.
A family that benefits from the $10,000 SALT cap might have higher deductible amounts after the limit expires. Likewise, people with restricted mortgage interest deductions could see changes in their allowable deductions, which may impact their general tax liability.
Child Tax Credit and Other Credits
The Child Tax Credit (CTC) increased significantly under the TCJA, from $1,000 to $2,000 per child. The refundable portion of the credit also increased to $1,400, and phase-in and phase-out criteria were adjusted. In particular, the phase-out levels were raised to $400,000 for married couples filing jointly and $200,000 for single taxpayers, but the phase-in barrier was dropped from $3,000 to $2,500.Even so, after 2025, it is expected to return to $1,000 per child.
The TCJA also changed the Alternative Minimum Tax (AMT) by raising the exemption amounts and increasing income thresholds where the exemption starts to phase out. These modifications will expire after 2025, which could impact anyone subject to AMT and modify their tax liabilities.
Estate and Gift Tax Changes
Under the TCJA, the federal estate and gift tax exclusion was raised to around $13.61 million per individual, adjusted for inflation. On January 1, 2026, it is expected to be lowered to about $7 million.
Implications
- Estate Planning: With this reduction, estates should rethink their estate planning strategies to minimize potential tax liabilities for heirs. The decrease in the exclusion could make more estates liable to federal estate taxes. The increased tax burden may bring higher costs for wealth transfer, potentially affecting how wealth is passed down to future generations.
- Let's take an estate with a $12 million present value as an example. Due to the $13.61 million exemption, it would not have to pay any federal estate tax. However, after the exclusion expires in 2026, more than half of the estate will become taxable. Consequently, the estate will owe a substantial amount of federal estate taxes, which will lower the inheritance for heirs.
Strategic Considerations for Tax Planning
Tax planning has become vital to plan finances effectively, especially now that the TCJA tax cuts expiration approaches. With the changes in tax rates and deductions, smart tax planning can help people save money and minimize tax liability. Here are several strategic considerations and examples of how proper planning can be beneficial:
1. Managing Income Timing
- Deferring Income: Deferring income to upcoming years can benefit high-income earners. For example, if you think you may be in a lower tax bracket after 2025, you could delay receiving bonuses, stock options, or recognizing capital gains until 2026. Passing income into 2025 may be profitable if you expect your future tax rate to be higher.
Example: Suppose you expect a significant bonus at the end of 2025. You could ask your employer to receive it in 2026 instead. In that way, you could defer a part of your tax liability, although, after 2025, it will be at a higher rate.
2. Maximizing Deductions and Credits
- Bunching Deductions: If you bunch itemized deductions in other years, you could surpass the standard deduction threshold now that the standard deduction is expected to decrease in 2026. This could maximize your tax benefits. To do this, you should time your deductible expenses, such as property taxes, charitable contributions, and medical expenses. They have to fall within the same year.
Example: If your total itemized deductions are close to the standard deduction, two years' worth of charitable contributions in 2025 could be a great way to itemize your deductions for that year. At the same time, you can take advantage of the higher standard deduction in 2026.
- Charitable Giving: Using donor-advised funds to group charitable contributions can bring tax benefits while you distribute those funds to different charities over a few years.
3. Estate and Gift Tax Planning
- Lifetime Gifting Strategies: With the current estate tax exclusion amount ($12.92 million per person in 2023), you could transfer wealth without provoking major estate tax consequences by organizing lifetime gift strategies. Large gifts before the exclusion limits disappear in 2026 can hold the higher exemption amounts.
Example: In 2025, a wealthy individual could gift $11 million to an heir or multiple heirs using the present exemption amount. If this amount decreases to more or less $7 million in 2026, they would have already moved significant wealth without incurring estate tax.
4. Capital Gains Management
- Harvesting Gains and Losses: Tax liability can be managed and reduced with some strategic decisions. Tax-loss harvesting involves selling investments at a loss to offset gains elsewhere in the portfolio.
Example: If your capital gains come from the sale of stock, you could sell underperforming stocks at a loss and counterbalance the gains, thereby reducing your taxable income for the year.
- Long-Term vs. Short-Term Gains: Long-term capital gains tax rates are usually lower than short-term gains. If you wait over a year before selling your investment, you can reduce the total tax rate applied to those gains.
5. Retirement Planning
- Tax-Advantaged Accounts: Use your retirement accounts to your advantage. Your contributions to 401(k) plans, IRAs, and Health Savings Accounts (HSAs) can offer tax benefits and defer taxes into future years. Analyzing Roth conversions before rates increase may also be important in reducing tax in the long-term.
Example: If you make higher contributions to a 401(k), you reduce your taxable income. This could lower your tax bracket and defer taxes until retirement. Your tax rate very well may be lower.
CMP: Your Partner in Proactive Tax Planning
As the expiration of the TCJA tax cuts draws near, CMP is here to help you manage the transitions effectively. Our team is committed to assisting you with proactive tax planning so that you can maximize available deductions and credits and keep your tax burden to a minimum.
Our experienced professionals offer tax strategies that will fit your specific financial scenario, provide personalized guidance, and expertly handle complex tax situations.
At CMP, our tailored plans are designed to manage income timing, optimize deductions, and handle estate and gift tax planning. We create solutions for your unique circumstances, ensuring you stay ahead of the curve.
Whether you need help with capital gains management, retirement planning, income tax services, or navigating other financial challenges, CMP offers comprehensive support. We’re dedicated to helping you prepare for the upcoming changes and ensure your financial future.
Conclusion
Higher taxes may be our new reality starting in 2026. Currently, marginal tax rates are scheduled to increase, the standard deductions are set to be reduced, and the estate tax exclusion will return to a much lower level after 2025.
Do not hesitate to contact CMP for professional guidance. Our team can help you manage these changes with personalized tax strategies that maximize your benefits and minimize possible liabilities.
Staying informed and proactive is your best defense against uncertainty. As the tax landscape changes, let CMP support you in making well-informed decisions for a secure financial future.
