The Tax Cuts and Jobs Act (TCJA) contains many provisions that have significantly changed the income tax landscape for our clients and is set to sunset, or expire, at the end of 2025. This means that unless Congress acts, our tax laws will revert to pre-TCJA provisions beginning January 1, 2026. Therefore, it is important to review your tax situation to determine what proactive steps you could take to minimize your tax burden before the TCJA expires. This may also include delaying certain actions until after 2025. While there are myriad TCJA provisions to consider for tax planning purposes, we will focus on three for this Q&A.
1. DECREASE IN INCOME TAX RATES
The TCJA reduced federal individual income tax rates across most income ranges, including the top rate at 37% vs. 39.6%. Further, the TCJA changed how qualified dividends and long-term capital gains were taxed, focusing on income dollar amounts instead of ordinary income brackets. To combat the return to higher income tax rates after the TCJA sunsets, you may want to consider accelerating income into 2024 and 2025 when practical. Examples of income acceleration could include discretionary wage or bonus payments, increasing your Roth IRA and Roth 401(k) contributions, considering Roth IRA conversions, taking Traditional IRA distributions before required minimum distributions (RMDs) kick in (including inherited IRA distributions delayed under the “10-Year Rule”), and selling appreciated non-qualified assets (i.e., home, land, rental property, securities).
2. INCREASE IN STANDARD DEDUCTIONS
Since the TCJA doubled the standard deduction, fewer taxpayers are itemizing. Further, those taxpayers who have enough deductions to itemize (i.e., medical expenses, charitable contributions, mortgage interest, state income taxes), may only receive a modest incremental tax benefit when compared to the standard deduction. Thus, we typically recommend that clients consider “bunching” deductions such as charitable contributions in alternating years when practical, to receive a larger tax benefit for those itemized deductions while taking the standard deduction in alternate years. While bunching is still a valuable strategy, you may want to consider delaying your charitable contributions and other deductible expenses to 2026, if possible, when the standard deduction is expected to be cut in half. If you are able to do this, you would take the standard deduction in 2024 and/or 2025, and then itemize in 2026. This would allow you to receive a larger tax benefit due to your itemized deductions exceeding the standard deduction by a wider margin while also being deducted from income that is subject to higher tax rates.
3. INCREASE IN THE ESTATE & GIFT TAX LIFETIME BASIC EXCLUSION AMOUNT
The current estate and gift lifetime basic exclusion amount is $13.61 million per taxpayer for 2024. As the TCJA doubled the exclusion amount (which is adjusted annually for inflation), this amount will revert to pre-TCJA levels, expected to be approximately $7 million per taxpayer in 2026. If the reduced exclusion amount may affect your estate in 2026 and beyond, we recommend you revisit your estate plan, update estate planning documents, and consider additional gifting strategies to accelerate the transfer of assets out of your estate. These may include irrevocable trusts, cash gifts to your heirs, etc., while the exclusion amount is higher.
CONCLUSION
With the expiration of the TCJA fast approaching, it is a good time to reach out to your CPA to evaluate your financial situation and what proactive steps you can take to manage your tax burden in upcoming years. Your CPA and estate attorney can provide guidance appropriate for your individual needs.
Author: Marc Verdi, CPA/PFS, CFP® | Director of Tax & Financial Planning
Written: June 30, 2024