By Michael Russo
Many provisions from the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire in 2025. Should you take action now? Unless Congress intervenes, key aspects of the TCJA will sunset on December 31, 2025.
Now is the ideal time to assess your estate plan and tax strategy to preserve and boost your savings before the changes take effect. Although future legislation could modify or extend these provisions, it’s crucial to stay ahead of potential shifts and explore wealth transfer and income tax planning opportunities.
Continue reading to prepare for the adjustments and keep your financial goals on track with your plan.
The Impact on Individual Taxes
Let’s start with an explanation of how the 2025 Tax Sunset could affect individual taxpayers.
- Lower income tax brackets: The lower tax brackets that were put in place by the Tax Cuts and Jobs Act (TCJA) will revert to pre-2017 levels. That means that millions of taxpayers could potentially be pushed into higher tax brackets.
- Decreased standard deductions and personal exemption: By decreasing both standard deduction amounts and personal exemptions, the 2025 Tax Sunset could cause higher taxable income for individual filers.
- Child tax credit: Currently, the child tax credit provides a dollar-for-dollar reduction of your tax liability for each qualifying child; this allowance would expire under current regulation.
- State and local tax (SALT) deduction cap: If the current $10,000 cap on deductions for state and local taxes expires, residents in high-tax states like California, New York, and New Jersey could benefit. The downside is that eliminating the deduction cap could potentially shift the tax burden to the federal government.
Potential Changes for Business Taxes
Here’s a snapshot of how the 2025 Tax Sunset could impact business taxes:
- Full expensing of deductions: This temporary condition that allows instant expensing of business expenses would expire. For affected businesses, the result would be increased taxable income.
- Pass-through business income deductions: This tax provision allows the deduction for income from pass-through businesses like partnerships and S corporations. When this law expires, the tax liability for many small businesses could increase.
- Bonus depreciation: Businesses that invest in equipment and machinery will be impacted when this deduction for specific depreciable property disappears.
Opportunities to Consider
Even though the uncertainty of these changes can feel unsettling, there are opportunities to consider, like Roth conversions and estate planning, to take advantage of the current favorable tax rates and exemptions. Taking action now could help you enhance your financial position before these changes occur.
Roth Conversions
If you anticipate lower income before 2026 due to retirement or other changes, consider accelerating income through Roth conversions to benefit from lower tax rates. This strategy is particularly beneficial if you’re married, as the marriage penalty will significantly increase in the 25% and higher tax brackets after the sunset.
A Roth conversion allows you to convert pre-tax retirement funds into a Roth IRA by paying taxes now, ideally at a lower rate than in the future. If the current tax rates do expire after 2025, completing a Roth conversion in the next two years could potentially save you a significant amount in future taxes.
Estate Tax Exemption
Before the 2025 sunset, it’s wise to consider the increased estate and gift tax exemption if you have a sizable estate. The exemption amount will be reduced by half in 2026, potentially subjecting estates in the $7-$13 million range to taxation. Making lifetime gifts now can help you take advantage of the current higher exemption, removing assets and their future appreciation from estate taxation. Also, regulations mean that gifts made during this period won’t be subject to a clawback, allowing your estate to benefit from the exemption amount at the time of the gift.
Act Now and Stay Ahead
A smart way to prepare your finances for the upcoming 2025 Tax Sunset is by consulting with a professional financial advisor. At Millstone Financial Group, we review your income tax details, spending habits, and how your investment decisions may affect your present and future tax liabilities. If you prefer, we can also work with your tax advisor to align your financial plan with the upcoming changes.
Whether you’re an individual taxpayer or a business owner, if you’re ready to get your finances in shape for the 2025 Tax Sunset, we’re here to help. Schedule a complimentary consultation by calling (732) 385-8544 or emailing [email protected].
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company. Millstone Financial Group Limited Liability Company is not affiliated with or endorsed by the Social Security Administration or any government agency.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
