As the expiration of the Tax Cuts and Jobs Act (TCJA) of 2017 approaches, taxpayers need to be proactive in understanding the potential impacts on their tax, estate, and financial planning strategies. The TCJA, which introduced significant changes to the tax code, is set to expire at the end of 2025, bringing about a reversion to pre-2018 tax laws unless new legislation is passed.

Individual Income Tax Rates

One of the most notable changes under the act was the reduction in individual tax rates and the expansion of tax brackets. Upon the TCJA’s expiration, these rates will revert to pre-2018 levels. For example, the current top rate of 37% could increase back to 39.6%, and a portion of income levels that currently fall in the 22% and 24% tax brackets will instead be taxed at rates ranging from 25% to 33%.

Taxpayers should evaluate how this change would impact their overall future tax liability and consider income acceleration strategies such as a Roth IRA conversion to take advantage of the current lower income tax rates.

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Standard Deduction, Personal Exemptions, and State and Local Tax (SALT) Deduction

The TCJA nearly doubled the standard deduction, eliminated the personal exemption deduction, and limited the allowable SALT deduction to $10,000. The result of these changes made it more beneficial for many taxpayers to utilize the standard deduction in lieu of itemizing deductions. The expiration of the TJCA would result in a lowered standard deduction, return of personal exemption deductions, and removal of the limited deduction for state and local taxes. 

Taxpayers who have been using the standard deduction should prepare to begin tracking their itemized deductions more closely again. Many taxpayers will again find it beneficial to itemize deductions in order to reduce their taxable income and tax liability.

Mortgage Interest Deduction

The TCJA limited the mortgage interest deduction to the interest paid on the first $750,000 of home acquisition debt, down from $1 million. The expiration would re-instate the higher limits and impact the planning for home purchase decisions.

Child Tax Credits

The TCJA increased the Child Tax Credit from $1,000 to $2,000 per qualifying child and introduced a $500 credit for other dependents. Upon expiration, these credit amounts would revert to pre-2018 amounts, affecting families with children and dependents. Taxpayers should plan for reduced credits and consider adjusting their withholding or estimated tax payments accordingly.

Business Tax Provisions

The TJCA lowered business tax obligations by lowering the tax rate on corporate taxpayers and instituting the Qualified Business Income Deduction (QBID) for self-employed taxpayers and pass-through entity business owners.

Business owners will want to review their entity structures and tax planning strategies to account for the expiration of TJCA.

Alternative Minimum Tax (AMT)

The TJCA did not eliminate the AMT from the tax code, but it did significantly reduce the number of taxpayers subject to its provisions. The expiration of the TCJA will result in many taxpayers once again being impacted by AMT and, as a result, more complex planning will be required to ensure your strategy aligns with your priorities.

Estate and Gift Tax

The TCJA significantly increased the estate and lifetime gift exemption to the current exemption amount of $13.61 million per individual in 2024. After 2025, these exemptions are scheduled to revert to approximately 50% of the current amount.

Individuals with substantial estates may consider making larger lifetime gifts before the expiration to utilize the higher exemption amounts available now.

Proactive Planning Required for the TCJA Expiration

In summary, the expiration of the TCJA will bring substantial changes to the tax code, affecting individual taxpayers, families, and businesses. Your CCM team is ready to help you navigate the evolving tax environment and make recommendations that optimize your financial outcomes.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

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