The Tax Cuts and Jobs Act (TCJA), passed in 2017, was one of the most extensive pieces of tax legislation in the last 30 years, affecting various aspects of individual, corporate, and estate tax. However, most of TCJA’s provisions are set to sunset at the end of 2025, an event that could have as much impact as the initial passage of the TCJA. Let’s examine how this might affect you and whether you should take any planning action today.

Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful, stress-free retirement while helping you spend wisely and avoid excessive taxes. The Tax Cuts and Jobs Act modified the tax code in numerous ways, including changes to standard deductions, marginal income brackets, and qualified business income deductions. With it being an election year and the TCJA set to sunset in 2025, there is no clear indication of whether it will be extended or will sunset as planned.

When looking at the marginal income brackets, the exact brackets are uncertain. However, we can examine the numbers prior to TCJA and incorporate inflationary assumptions. The seven brackets of marginal rates will shift upward by about one to four percent, except for a couple. The income thresholds at which those brackets increase remain relatively similar unless you reach higher income levels in the 24%, soon to be 28%, bracket. For example, a married couple earning between $291,000 and $384,000 in income in 2024 will see their tax bracket rise from 24% to 33%, due to both percentage changes and income threshold changes.

Interestingly, there are income ranges, particularly for single filers, where taxpayers will find themselves in a lower tax bracket after the TCJA sunsets. This means that accelerating income, such as through a Roth conversion to take advantage of today’s lower tax rates, could result in a higher tax rate on that income today for many individuals whose tax rates will actually be lower after the TCJA sunsets.

In addition to changes in marginal rates, taxpayers will also see their standard deduction decrease. The standard deduction is a fixed dollar amount that the government allows every individual to deduct on their tax return. This applies to most people. For instance, someone working a W-2 job whose only tax deduction for the year is a $100 check made to charity will find that check ineffective, as the current standard deductions of $14,600 for single filers and $29,200 for married filers exceed the value of that donation. Of course, tax breaks shouldn’t be the sole reason for charitable giving.

Once the TCJA sunsets, the standard deductions will drop to $7,850 for single filers and $15,750 for married filers. This change will effectively mean a larger tax bill, whether through a smaller tax refund or an amount owed at the end of the year. For those who may fall into the alternative minimum tax category—such as individuals exercising stock options—the threshold for hitting AMT will decrease.

For those with more deductions than the standard deduction, 100% of state and local tax payments will be deductible on Schedule A rather than limited to the current $10,000 cap. Miscellaneous deductions above 2% of the taxpayer’s adjusted gross income (AGI), which include unreimbursed employee expenses and investment management expenses, will also be allowed again after being suspended by the TCJA. Additionally, the expiration of the TCJA will raise the cap on home mortgage interest deductibility. With these changes, more people may find it beneficial to itemize deductions instead of taking the standard deduction, so it’s wise to keep track of your receipts.

Before the TCJA, taxpayers who took personal exemptions or itemized deductions had to be mindful of a phase-out threshold. The personal exemption phase-out (PEP) reduced personal exemptions by 2% for every $2,500 of AGI above the threshold. Consequently, all personal exemptions would be completely phased out after reaching $122,501 in income above the threshold, which is estimated to be between $389,000 and $511,000 for married filing jointly, and $329,000 and $446,000 for single filers. This change results in fewer available personal exemptions.

Many businesses benefited from the TCJA through the Qualified Business Income (QBI) deduction, which allowed certain businesses to deduct a portion of their income. This deduction will be eliminated following the TCJA sunset. Conversely, larger families could see a benefit after the TCJA sunsets due to renewed eligibility for personal exemptions for dependents.

A significant factor to consider today is the estate and gift tax exemption, which currently stands at over $13 million but is estimated to drop to about $6.8 million. Ultimately, predicting the exact state of U.S. tax law at the beginning of 2026 may not be worthwhile, as the outcome depends on the elections in late 2024 and the legislative negotiations that will likely extend into 2025.

Does the political uncertainty surrounding the TCJA sunset provisions make it impossible to conduct any tax planning before the situation is resolved? While we don’t know the exact numbers yet, it makes sense to consider your filing status, current income bracket, QBI status, and number of deductions when deciding whether to accelerate or delay income today.

Here are some actions you can take:

1. Consider whether to accelerate income or Required Minimum Distributions (RMDs) or if you should further delay them.
2. If you are contemplating selling a non-qualified asset in the future, evaluate that timeline as it could affect your AGI and push you into higher brackets.
3. Review stock option schedules.
4. Review your cash flow strategies in light of potential tax rate changes.
5. Consider shifting or reducing your taxable estate.
6. Subscribe to our YouTube channel.

I’m Hunter Brockway, founder of Boca Retirement Strategies. If you have any financial questions, feel free to reach out at contact@BocaRetirement.com. Enjoy your successful retirement, and thank you for watching. Goodbye.