Written by: Stephen Candelario, CPA
As key provisions of the Tax Cuts and Jobs Act (TCJA) approach sunset, high-income earners find themselves at a pivotal moment. Post-2025, several advantageous provisions are set to expire. This article explores the significant changes and offers strategies to optimize financial outcomes in light of these impending expirations. While Congress has the option to prolong some or all of these provisions, understanding these dynamics empowers taxpayers to be proactive and prepared.
Individual Tax Rate Changes
The TCJA reduced tax rates across most income brackets, a relief set to revert to pre-TCJA levels after 2025. In anticipation of a higher tax environment, there lies an opportunity to leverage the current lower brackets. Accelerating income is a strategy worth considering. For instance, executing a Roth IRA conversion now can lock in the lower rates before they rise. Such maneuvers require careful planning but promise substantial long-term benefits.
Standard Deduction and Personal Exemptions
The TCJA’s significant increase in the standard deduction simplified tax filing for numerous taxpayers, yet removing personal exemptions introduces a nuanced scenario. These modifications are also set to reverse in 2026, altering the tax environment once more. For income earners, this upcoming change mainly serves as a point of information, necessitating no direct action but a heightened awareness for strategic planning in the future.
Child Tax Credit
Expanding the Child Tax Credit (CTC) to $2,000 per qualifying child and the increased income thresholds under the TCJA enhanced eligibility for many families. The CTC is set to revert to its previous parameters post-2025. For high-income earners, while the CTC may not significantly impact their tax burden, it remains an essential consideration for comprehensive family tax planning.
Estate and Gift Tax Exemptions
For individuals with sizable estates, the TCJA’s expansion of estate and gift tax exemptions has been a major advantage, cutting the number of taxable estates in half. But as the expiration looms, these exemptions are set to halve, making strategic gifting crucial. In 2024, the federal estate and gift tax threshold is $13.61 million for individuals and $27.22 million for married couples. However, with the TCJA’s end, it’s expected to drop to $6.8 million for individuals and $13.6 million for married couples.
Engaging with tax advisors and estate attorneys is imperative to leverage this fleeting window effectively. Strategic gifting can significantly reduce the taxable estate, ensuring that your legacy is preserved according to your wishes rather than being diminished by taxes. The key is to act swiftly and decisively, as waiting until the eleventh hour could limit your options and impact the effectiveness of your strategy.
Pass-Through Business Deduction
The TCJA’s introduction of a 20% deduction for certain pass-through business income (QBI) was a boon for many business owners. However, this deduction is on the sunset path, set to expire at the end of 2025. For those benefiting from this deduction, the time to prepare is now. Exploring alternative structures or strategies to mitigate the impact of this expiration is crucial for maintaining financial efficiency and minimizing tax liability.
Start Preparing Now
As we approach the twilight of these tax provisions, remember that preparation and early action are your best allies. By acting now, you can ensure that you can confidently navigate the upcoming changes, securing your financial legacy for the future.