In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. It was the largest tax code reform in nearly three decades. The Senate passed the bill on a party-line vote of 51 to 49, and the House passed the bill with a similarly tight margin. The tax laws became effective January 1, 2018, and many provisions were set to expire eight years later at the end of 2025. Well, it’s already 2024 and 2025 will be here before we know it. From a finance perspective, it may be in your best interest to know what will change in case you need to make adjustments before the tax code shifts again.
Tax Cuts and Jobs Act Highlights (not inclusive)
- Kept the 7 tier income tax table, but lowered most income tax brackets
- Doubled the standard deduction, eliminated the personal exemption, doubled the child tax credit, capped state and local tax deductions (SALT) at $10,000, tightened limits on mortgage and home equity interest deductions
- Increased the tax deductible amount of charitable contribution tax deductions from 50% to 60% of adjusted gross income (AGI)
- Doubled the lifetime estate and gift tax exemption
- Cut the Corporate tax rate from 35% to 21% and repealed the Corporate Alternative Minimum Tax (AMT)
If, or when, the Tax Cuts and Jobs Act expires, we might expect to see income taxes go up for most Americans and see the standard deduction go down. A lower standard deduction would allow for more itemized deductions, especially with the expiration of the $10,000 SALT cap which severely limited tax deductions for high-tax states like California, New York and New Jersey.
The Tax Policy Center (TPC) estimates that about 53.4% of taxpayers will face a tax increase upon the expiration of the TCJA. 69.7% of those expected to increase higher income taxes are in the middle quintile (40th to 60th percentile), compared to just 8% of the highest-earning 0.1%.[i] The Joint Committee on Taxation echoed this conclusion, estimating that the 22,000 households making $20,000 to $30,000 will collectively pay 26.6% more in 2027, than they would under the previous statute in that year.
The next two points have less effect on mainstream Americans. However, the tax deductible amount of charitable gift deductions would be reduced from 60% of your annual income (AGI) to 50%. Finally, the lifetime gift tax exemption would be cut in half from the current $13.6 million per person to approximately $7 million. However, for most Americans, gifting $7 million ($14 million for a couple) tax free to our heirs is more than sufficient.
Understanding the facts, you may want to consider what actions you may want to take before the tax code change at the end of December 2025.
Similar to how you might stock up on a good you know you will use if it goes on sale at the grocery store, you might want to consider the timing of your retirement account distributions. While withdrawing the whole balance will put you into the highest tax bracket and work against your best interest, if you know you have an expense coming due, you may want to consider withdrawing up to the top of your current tax bracket this year or next. This avoids pushing you into a higher tax bracket, but could allow you to save 2% on the same theoretical withdrawal after 2025.
If you were planning to convert your traditional pre-tax IRA savings to an after-tax Roth IRA where the gains will be tax free to you or your heirs in the future, you may want to consider doing so now, before tax brackets go up. Consult your CPA to fully understand the tax implications before executing this tax transaction.
Gift and Estate Planning
For those with very large estates, who may be considering gifting a large real estate portfolio or highly appreciated business, that would otherwise subject them to lifetime gift tax exemptions, you may want to consider meeting with an estate planning attorney or financial advisor to consult on the gifting strategies available and the tax implications of such gifts.
While the Tax Cuts and Jobs Act expires in 2025 for almost all personal tax provisions, most of the corporate tax provisions are permanent. In other words, at expiration, corporate taxes are not predicted to go up to 35%, the rate prior to 2018.
If you think your financial planning strategy could use a review before the Tax Cuts and Jobs Act sunsets in December 2025, reach out to your Certified Financial Planner™ to plan ahead and ensure you’re taking full advantage of the current tax benefits before they disappear.
Tax Policy Center. “Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act,” Page 8.
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