Broker Check

All Good Things MIGHT Come to an End

April 08, 2024

I am sure we have all enjoyed the lower tax rates introduced by the Tax Cuts & Jobs Act in 2017. However, many people may not be aware that the rules of the TCJA are scheduled to sunset at the end of 2025. Current tax brackets are expected to change when the TCJA expires which will create a potential shift in tax planning needs. The sunset does not apply to most business tax provisions, but individual and estate tax provisions are scheduled to expire after December 31, 2025. Let's review the key changes below.

 

  • Ordinary income, long-term capital gains, and trust tax brackets

 

Net investment income tax (NIIT) applies to interest, dividends, both short and long-term capital gains, and passive business income. TCJA lowered the tax-rate thresholds for dividend income and capital gains for higher income taxpayers. The tax brackets for long-term capital gains and qualified dividends will no longer be tied to ordinary-income tax brackets.

 

  • Standard deduction, the return of personal exemptions, and the personal exemption phaseout (PEP)

 

TCJA changed the structure of several key itemized deductions:

 

  • Limited state and local property tax claims,
  • Itemized deduction for total state and local taxes limits
  • Eliminated the index limit for inflation

 

The changes increased the standard deduction and limited the itemized deduction for total state and local taxes to $10,000 annually, for both single and joint filers. Personal Exemption Phaseout (PEP) was introduced by the Omnibus Budget Reconciliation Act of 1990 to raise taxes for high-income taxpayers. Many consider PEP a "back door" tax rate increase as an attempt to reduce income inequality. TCJA temporarily suspended personal exemptions. PEP rules are set to return in 2026 as the suspension sunsets.

 

  • Specific changes to itemized deductions (SALT, mortgage interest, deductibility of advisory fees, PEASE limitations, and other dependent tax credits

 

The state and local tax (SALT) deduction had a major impact on taxpayers in high-tax states because it set a temporary $10,000 maximum. The TCJA lowered the mortgage interest deduction from $1 million in home mortgage interest deduction to $750,000 of debt (for joint filers).

 

Named after the late Congressman, Donald Pease, PEASE limitation refers to the amount of tolerable itemized deductions according to adjusted gross income. TCJA repealed the limitation at or above $266,700 for single filers and $320,000 for taxpayers filing joint returns.

 

  • Alternative Minimum Tax (AMT)

 

The TCJA increased exemption amounts to minimize the AMT burden for taxpayers. This AMT exemption significantly reduced the number of taxpayers subject to payment. TCJA temporarily repealed personal exemptions and deductions for miscellaneous business expenses.

 

As a result of these changes, the number of AMT taxpayers fell from more than 5 million in 2017 to 200,000 in 2018. AMT provisions are set to expire at the end of 2025, affecting 7.6 million taxpayers by 2026.

 

  • Estate & Gift tax lifetime exemptions

 

The TCJA doubled the estate and gift tax basic exclusion amount to $11,180,000 in 2018, inflation adjusted. The 2023 exclusion amount was ballooned to $12.92 million for single filers and $25.84 for joint filers. Upon sunset at the end of 2025, the estate and gift tax provision is scheduled to be chopped all the way down to $5.49 million.

 

It is crucial for taxpayers with significant estates to take advantage of the TCJA's current elevated exclusions to prepare for the dramatic decrease. Specifically, taxpayers should spend this year and next year consulting with your tax advisor and focusing on the following:

 

Consult with your tax advisor(s) about

 

  • Making transfers to family members
  • Utilizing the spousal lifetime exemption
  • Creating a grantor retained annuity trust
  • Converting pretax retirement accounts to Roth (IRA and 401k)
  • Accelerating 529 account contributions
  • Contributing to Donor Advised Fund / Charitable giving

 

The TCJA sunset presents multiple planning opportunities to minimize income and estate taxes. It is very important to incorporate these changes into your financial planning conversations before your opportunities potentially ride off into the sunset on December 31, 2025. Be sure to stay informed and connected with your advisor as we approach the TCJA sunset.

 

Click HERE to download our TCJA comparison guide.