Start Planning Now for Expiring Provisions of The TCJA
Taxes, the ever-evolving puzzle of finance, are gearing up for a substantial transformation. The Tax Cuts and Jobs Act of 2017 (TCJA) – a seismic shift in the tax landscape – introduced alterations to tax brackets, deductions, and estate planning. Now, the clock is ticking towards a momentous juncture.
In less than 26 months, nearly two dozen TCJA provisions are slated to expire unless Congress intervenes. The ramifications? We stand at the brink of one of the most impactful tax reconfigurations in recent memory. Let's unpack what's on the horizon:
Brackets Reset: One of the most conspicuous changes will be the reset of income tax brackets. These adjustments are set to revert to pre-2018 levels, potentially altering your income tax rates significantly. The current brackets, ranging from 10% to 37%, will transition back to their earlier standings: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Standard Deduction & Personal Exemption: The TCJA increased the first and did away with the second. These two amounts revert to pre-2018 levels after the 2025 sunset of the TCJA, with the standard deduction being about half of what it is now.
Itemized Deductions: Good news! Some deductions that went MIA with the 2017 tax act are making a comeback, like those employee expenses and tax preparation fees. Now, why does this matter? Well, with the standard deduction likely to get smaller, it might be a smart move to think about itemizing your deductions after 2025.
Charitable Deductions: Generosity might get a bit more complicated. Post-2025, the limit for charitable donations is heading south, back to half of your adjusted gross income. If you're planning on being a super donor, you might want to think about making those big donations before the deadline hits to snag the maximum deduction.
Mortgage Interest & SALT: Homeowners, listen up! Remember those caps on mortgage interest and property tax deductions? Well, those limitations set by the TCJA are set to reset in 2026. That might affect how you itemize and claim deductions for your humble abode.
Qualified Business Income (QBI): Got a business? The 20% deduction you've been enjoying for QBI is taking a bow. It might be a smart move to look into accelerating your QBI into 2023 2025 to use those tax benefits before they bid farewell.
Child Tax Credit (CTC): Parents, be aware -- the doubled credit for kiddos under 17 will shrink back to $1,000 per child post-2025. If you've been enjoying this break, think ahead and plan for the changes.
Alternative Minimum Tax (AMT): Brace yourself for a potential AMT comeback! After the TCJA, fewer folks were hit by this surprise tax. But after 2025, it might rear its head again, potentially affecting more taxpayers than before.
The Estate Tax: The historically high federal estate tax exemption, currently at $12.92 million per person, is set to drop drastically on Jan. 1, 2026. The federal estate tax, topping out at a hefty 40% for any value above the exemption amount, can have substantial implications for larger estates.
Time-Sensitive Strategies for Financial Fortification
These likely shifts in the tax world are a big deal. Planning ahead could save you some serious bucks, and there are many possible ways you can navigate these changes to your advantage.
1. Income Strategy Playbook:
Plan strategically by considering actions such as converting a traditional IRA to a Roth IRA before potentially higher tax rates take effect. This conversion could save you considerable taxes in the future if you expect to be in a higher tax bracket post-TCJA.
2. Deduction Optimization:
Given the changing deduction landscape, evaluate and plan for itemized deductions that may become more valuable post-2025. The strategic timing of deductions can significantly impact your taxable income.
3. Estate Protection Measures:
Explore tools like trusts, which can shield your estate from increased tax burdens. From generation-skipping trusts to charitable trusts, these instruments offer options for safeguarding your wealth and assets for future generations.
4. Collaborate with Experts: Constructing Your Financial Shield
Creating a robust plan involves assembling a team of professionals. Appraisals, document drafting, and reviews might be necessary, and these processes can take time, potentially up to a year or more.
Embrace Proactive Planning for Financial Security
The time to act is now. As the sunset of these provisions looms, don't delay in setting your financial strategies in motion. The uncertainty of whether these provisions will be extended further heightens the urgency for proactive planning. Ensuring your financial stability demands strategic foresight and collaboration with seasoned professionals.
For a more detailed dive into these strategies and personalized guidance tailored to your financial situation, let's connect and navigate these impending changes together. As your tax planner, I’m committed to guiding you through this transition to secure your financial future and maximize available tax benefits.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors