Prepare for the TCJA Sunset — If You Can

The Tax Cuts and Jobs Act largely winds down at the end of 2025. Maybe. Many of its provisions are political, so much depends on who's in the White House and who has control of the House and Senate at that time.

Before you start planning, glean some understanding of what the TCJA does and what may change at the end of 2025. This is not a complete accounting, but it will give you an idea of some of the most major changes.

Income tax rates

Rate changes are likely to have the most impact. Consider, for example, the tax rate for a married couple earning between $274,401 and $364,200. Their tax rate in 2023 is 24%. But on Jan. 1, 2026, it becomes 33%, if the government doesn't make any adjustments. In a few brackets, however, the rate may actually go down, or not change at all. However, the net result is likely to be higher rates for the vast majority of people.

Estate and gift taxes

The TCJA doubled the 2011 estate and gift tax exemption, which was just $5 million. After adjustments for inflation, the threshold is now $12.92 million per individual and $25.84 million for couples. Look for a major cut as levels fall to pre-TCJA levels. This change won't affect most families, but it could mean a great deal to those with a high net worth. To prepare, some families may want to accelerate their giving in the next year or two.

Other changes

Most will see a decrease in the child tax credit as well as a cut in the standard deduction. Some advisers are noting that this will make itemized deductions more attractive for more taxpayers.

A key change for businesses will be the ending of the Qualified Business Income Deduction. Also called the Section 199A deduction, this generally allows sole proprietorships, partnerships, S corporations, trusts and estates to deduct up to 20% of their qualified business income. It does not apply to C corporations. Since the QBID is so popular with small businesses, there will be a lot of pressure to keep it going, but nothing is final yet.

What to do now?

No one can be sure what may change years in the future. For now, stay in close touch with tax and financial professionals. Many advisers are recommending that no one tie their plans too closely to guesses of what might happen to the TCJA. That is, be prepared to jump either way. Give us a call and we'll help you steer a prudent course in the coming months.

Copyright 2023