Tax Planning for the Years Ahead – A Reminder of the TCJA Tax Laws Scheduled to Sunset
With the end-of-year tax planning season upon us, and the US elections recently concluded, we offer some reminders and tax planning opportunities. The Tax Cuts and Jobs Act (TCJA – aka Trump Tax Laws) which passed in 2017, and went into effect in 2018, is scheduled to sunset at the end of 2025. Former President Trump’s re-election, and the Republican Party winning control of the Senate and the House of Representatives, negotiations will ostensibly potentially extend this legislation.
Though we have seen a slight pullback in short-term cash rates since the Federal Reserve announced a .50% rate cut on September 18th, interest rates as a whole are still relatively high when compared with recent history. Even if the sunsetting of the Trump tax breaks does not occur, our current rate environment is likely to increase most people’s tax payments (quarterly and/or annually) for any portfolio with a meaningful percentage of fixed income or funds stored in a regular savings or money market account. Furthermore, as appropriate, this potentially raises the benefit and impact of deliberately placing income-producing assets into one’s tax-deferred (e.g. traditional 401k and IRA) and tax-free (Roth 401k/IRA) portfolio(s) – known as asset location.
Separate from the TCJA, the Old-Age, Survivors, and Disability Insurance (OASDI) program’s annual trustees report was released in early May 2024. In the report, the estimated “exhaust date” for the Social Security Trust fund shifted later by one year (to 2035 from 2034). It is now estimated that annual revenues in 2035 may only be sufficient to cover 83% of total scheduled benefits. While these numbers are slightly improved from last year’s report, it’s clear that Social Security is still on an unsustainable path forward, assuming no further action from Congress. This is one other area that may lead to higher tax rates in the coming years.
Below is a list of the most notable sunset provisions from the TCJA that, without a passage of a new law, would lapse to pre-2018 levels. In other words, the default scenario is that the law will go back to pre-TCJA levels. Beyond taxes, before the TCJA was passed, you may recall that citizens paid a fine to the IRS if they did not have health insurance. This is another provision that ostensibly could return.
Estate and Gift Tax
The TCJA doubled the 2011 estate and gift tax exemption of $5M (adjusted for inflation to slightly over $11M for single tax filers and $22M for couples). This means that without any estate planning, estates above these levels could be taxed ~40% above the exemption level. In 2024 (per the TCJA), inflation indexing brought these numbers up to $13.61M per person ($27.22M for couples) and will rise to $13.99M and $27.98M respectively in 2025. If a law is not passed to make these provisions permanent, these limits would revert to ~$7M per person (~$14M for a couple) depending on inflation – in other words, back to pre-TCJA levels.
We have been encouraging clients to consider these limits and make decisions PRIOR to 2026, as an untimely passing may result in your assets/wealth going to one of three entities:
- A spouse and/or your children
- A chosen charitable organization
- The IRS via estate taxes – and, not necessarily in the proportions you would want.
A properly crafted estate plan can best help you influence which of the above entities (and the proportions) your wealth goes to. We can partner with you to consider strategies that can mitigate this issue, including gifting, spousal trusts, estate plan liquidity insurance, etc.
Income Tax Brackets
Personal tax brackets could revert to pre-TCJA levels, which means most taxpayers may see their marginal tax rates increase. Not only is this likely to translate into higher income taxes from 2026 forward, but it will also make tax planning opportunities such as Roth conversions more expensive. As an example, the top individual, estate, and trust tax bracket would go back to 39.6% (from the current 37%). Of note, tax brackets for determining long-term capital gains remain largely unchanged.
Marginal Rates for Tax Year 2025
- Top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
Standard Deduction/Personal Exemptions
The TCJA nearly doubled the standard deduction when it went into effect in 2018 and set the personal exemption to $0. For tax year 2024 the standard deduction is $14,600 for single filers ($29,200 for married filing jointly) and increases to $15,000 and $30,000 respectively for tax year 2025. If the TCJA sunsets, the standard deduction would essentially be cut in half (~$8,000 for single filers and ~$16,000 for joint filers depending on inflation). The personal exemption would be reintroduced upon the TCJA sunsetting and is currently anticipated to be ~$5,300 per person (though it’s important to note that personal exemptions have income phaseout limits).
Child
The TCJA increased the child tax credit from $1,000 to $2,000 per child under the age of 17. Currently, the credit decreases by 5% of adjusted gross income (AGI) over $200,000 for single filers ($400,000 for married couples). Pre-TCJA, this credit began to phase out (at the same 5% rate) at much lower AGI thresholds – $75,000 for single parents and $110,000 for married parents. The TCJA also affected the refundability of the child tax credit. In 2024 and 2025, if the credit exceeds the taxes owed, filers can receive up to $1,700 as a partial refund (limited to 15% of earnings above $2,500). Pre-TCJA, taxpayers could receive the full credit amount as a refund if no taxes were owed (limited to 15% of earnings over $3,000).
Home/Mortgage
Before the TCJA was passed, taxpayers could deduct mortgage interest payments per the first $1M of debt on a primary or secondary residence and deduct interest paid on home equity loans up to $100,000. After the passage of the TCJA, deductibility was limited to the first $750,000 on principal value and suspended the deductibility of interest on home equity debt unless the debt is used to buy, build or substantially improve the home that secures the loan.
State and Local Tax (SALT)
Another itemized deduction affected by the TCJA is the state and local tax (SALT) deduction, which the TCJA capped at $10,000. Previously there was no “true” cap on this, but alternative minimum tax and the overall limit on itemized deductions (aka the Pease limit) functionally rendered a limit on how much SALT a person could deduct from their federal taxable income.
Charitable Giving
The annual deduction limit for cash contributions to public charities was increased from 50% of Adjusted Gross Income (AGI) to 60% with the TCJA, and this will sunset back to 50% in 2026.
Eligible 529 Expenses
Prior to the TCJA, tuition payments for elementary or secondary schools were not considered a qualified high education expense. The TCJA now permits parents to use a maximum of $10,000 per year tax-free for K-12 education tuition at a public, private, or religious institution. The SECURE Act in 2019 expanded this allowing account holders to withdraw funds for a beneficiary’s apprenticeship (if registered with the Department of Labor).
The Bottom Line
Most tax changes were more favorable post the TCJA passing, so we will monitor developments in the New Year, to see if Congress plans to extend it.
This focus should help taxpayers make the most of their income, charitable giving, and major purchases (such as a home). Other provisions such as the elimination of the estate income tax associated with federal or private student loan debt relief might also re-surface, as well as pass-through business owner deductions and idiosyncratic rules for professional services (lawyers, doctors, and consultants).
Preparing early and working with a team of advisors including your financial planner, and the team that surrounds them (tax professional, estate attorney, insurance professional, etc.) to proactively plan for various scenarios could have a material effect on your wealth.
Please reach out to us if you would like our help in assembling the team to make the most of your financial decisions. Importantly, we recommend meeting on taxable estate matters not later than the first half of 2025, to allow ample processing time for any decisions/changes you wish to put into effect.
We look forward to partnering with you on this and other strategic planning opportunities, and we welcome your feedback and updates as you think through how to move forward.