As we approach 2025, a significant tax shift looms on the horizon. The Tax Cuts and Jobs Act (TCJA), implemented in 2017, brought numerous changes, particularly in income and estate taxes. However, these changes were not permanent and are set to expire—or “sunset”—at the end of 2025.
This article explores the background of these changes, what you can expect with the tax law sunset, and steps to take now to help prepare for this transition.
Background: The Tax Cuts and Jobs Act of 2017
The TCJA aimed to stimulate economic growth through tax cuts and other incentives. Key provisions included lower individual income tax rates, a nearly doubled standard deduction, and reduced rates for corporations. The act also significantly increased the estate and gift tax exemption, allowing high-net-worth couples and individuals to transfer more wealth without incurring taxes.
These changes were designed to sunset after 2025, meaning the tax code will revert to its pre-2018 state unless new legislation is enacted. Congress has until the end of 2025 (or even into 2026) to address the sunset. It remains to be seen how or if lawmakers will respond.
Without congressional action, however, this impending sunset has implications for both income and estate taxes.
What Changes Are Coming in 2025?
Income Taxes:
Americans should expect a range of changes, among them:
Tax rates: Tax rates will revert to their pre-TCJA levels. This means higher rates for most income brackets, increasing the tax burden for many Americans.
Standard deduction: The nearly doubled standard deduction will decrease, leading more taxpayers to itemize their deductions.
Child tax credit: The expanded child tax credit will decrease, reducing the financial relief for families with children.
Mortgage Interest Deduction: The cap on mortgage interest deduction will be lowered, affecting homeowners with large mortgages.
Alternative Minimum Tax (AMT): The exemption amounts for the AMT will decrease, potentially subjecting more taxpayers to this parallel tax system.
Estate and Gift Taxes:
One of the most significant changes for high-net-worth individuals involves the gift and estate tax exemption. Under the TCJA, the exemption was doubled to its current $13.67 million per individual for 2024.
In 2025, this exemption will be roughly halved, significantly reducing the amount that can be passed on tax-free.
What to Do Now: Proactive Steps to Consider
With these changes on the horizon, you’ll want to consider how to mitigate tax liabilities to help ensure your financial plan remains robust. Here are steps to consider:
1. Review and Update Your Estate Plan:
Given the impending reduction in the estate and gift tax exemption, now’s the time to review your estate plan with a financial advisor or estate planning attorney.
They may recommend strategies based on your situation, such as making direct gifts; setting up certain trusts, such as irrevocable life insurance trusts (ILITs); and reorganizing family businesses, such as creating a family limited partnership. Talk with a fiduciary professional to help determine what is right for you.
2. Get Strategic
Consider accelerating your income to take advantage of the lower tax rates before they increase in 2026. For example, retirees might withdraw more than their required minimum distributions from retirement accounts. This strategy may allow you to benefit from the current lower rates.
Meanwhile, if you anticipate higher tax rates in the future, consider deferring certain deductions to post-2025, such as for charitable contributions. By deferring, you may reduce your taxable income when rates are higher, potentially providing greater tax savings.
Talk with a tax professional to determine your best course of action.
4. Consider Roth Conversions:
With potentially higher tax rates in the future, converting traditional IRA assets to a Roth IRA may be advantageous. While you’ll pay taxes on the conversion now, the rate will potentially be lower. Plus, future withdrawals from the Roth IRA will be tax-free, providing tax-free income during retirement.
5. Avoid Procrastination:
One of the most important pieces of advice is to avoid procrastination. Delaying action could result in higher tax liabilities and missed opportunities. It’s a good idea to expect your tax and estate planning professionals to be swamped—and plan accordingly now. Begin discussions with your financial advisor to go over strategies that align with your goals and the upcoming changes.
6. Stay Informed:
Tax laws can change, and staying informed about potential legislative developments can keep your strategies on track. Regularly consult with your financial advisor and keep abreast of any new legislation affecting your financial plan.
Conclusion
The sunsetting of the Tax Cuts and Jobs Act in 2025 represents a significant shift in the tax landscape. By understanding these changes and taking steps now, you set yourself up to navigate this transition smoothly. Review your estate plan, get strategic, and avoid procrastination. Acting now can help you mitigate potential tax burdens and preserve your wealth for future generations.
Schedule a complimentary consultation with one of our fiduciary, fee-only financial planners to discuss your personal situation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.