🚩 Red Flag | TCJA Sunset Edition! | TaxGPT's Newsletter

As we move into the end of our current administration, on the top of everyone's minds is the potential sunsetting of the Tax Cuts & Jobs Act. While there is no certainty if Congress will allow the TCJA to sunset - either partially or in full - tax advisors should still be aware of how the tax landscape may change, and how they can work with clients to prepare.

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Key Provisions Set to Sunset:

1. Individual Income Tax Rates: The TCJA lowered income tax rates across several brackets. If these provisions expire, taxpayers will revert to higher pre-TCJA rates. For example, the top marginal tax rate is set to increase from 37% back to 39.6%.

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2. Standard Deduction: The TCJA nearly doubled the standard deduction, raising it to approximately $30,725 for married couples filing jointly. If the law sunsets, this amount will drop to about $16,525 in 2026, along with the reinstatement of personal exemptions.

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3. Child Tax Credit: The child tax credit was increased from $1,000 to $2,000 per child under 17. Upon expiration of the TCJA, this credit will revert to $1,000 and will not be indexed for inflation, diminishing its value over time.

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4. State and Local Tax (SALT) Deduction: The TCJA capped the SALT deduction at $10,000. If this cap expires, taxpayers will be able to deduct all state and local taxes paid, which could significantly benefit those in high-tax states.

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5. Estate and Gift Tax Exemption: The estate tax exemption was doubled under the TCJA, allowing individuals to transfer up to approximately $13.61 million without incurring estate taxes in 2024. This exemption is projected to revert to around $7 million per individual in 2026.

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6. Qualified Business Income Deduction: The TCJA introduced a 20% deduction for qualified business income from pass-through entities. This provision will also expire at the end of 2025.

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7. Alternative Minimum Tax (AMT): The AMT exemption amounts were increased under the TCJA. If these provisions sunset, more taxpayers may find themselves subject to AMT once again as exemption levels revert to previous thresholds.

Planning Strategies to Consider

Income Acceleration:

If clients anticipate being in a higher tax bracket after the TCJA expires, consider accelerating income into 2024 or 2025 to take advantage of the current lower rates. This could include:

• Recognizing business income in 2024 or 2025 rather than later years to maximize the 20% qualified business income (QBI) deduction before it expires.
• Accelerating the sale of assets with large capital gains to lock in the current 20% long-term capital gains rate.
• Converting traditional IRAs to Roth IRAs to pay taxes at the current lower rates and avoid future RMDs.

Deduction Maximization:

With the potential reduction in the standard deduction and return of the personal exemption in 2026, consider strategies to delay deductions before the TCJA sunsets:

• Bunching deductible expenses like charitable contributions and medical expenses after 2025 to take advantage of the lower standard deduction.
• Delaying state and local taxes over the $10,000 SALT deduction limit to get a larger deduction after the cap expires.

Estate Planning:

The doubling of the estate and gift tax exemption under the TCJA is set to expire at the end of 2025. To take advantage of the higher exemption, consider:

• Making large gifts to irrevocable trusts in 2024 or 2025 to use the increased exemption.
• Transferring appreciating assets to trusts to lock in the higher exemption and remove future appreciation from your taxable estate.
• Reviewing your estate plan to ensure it is optimized for the post-2025 exemption levels.

Business Structure Evaluation:

The potential changes to pass-through business taxation and the corporate tax rate may warrant a review of your business structure:

• Corporations may want to evaluate whether to maintain pass-through status or convert to a C corporation depending on the relative tax rates.
• Planning for new entities should take into consideration the expiration of the Section 199A deduction, increased corporate tax rate, and increased individual tax rates.