4 Key Impacts of the Tax Cuts and Job Acts Sunsetting in 2025
Let’s go back in time to 2017. Do you recall the tax landscape at that time, and do you remember the new tax bill that was introduced? That bill became the Tax Cuts and Jobs Act, which was passed in 2017 and went into effect in the 2018 tax year. In 2018, many of our clients believed taxes had increased due to how the act would impact withholdings on their paycheck. However, at the end of the year these clients were treated to a very pleasant, and surprisingly large, tax return. For many, this new bill created significant tax savings and, as it stands right now, these tax cuts are set to sunset after 2025.
Unless congress acts to extend or change the tax laws, the Tax Cuts Jobs Act (TCJA) will expire in 2025 and beginning in 2026, we will automatically revert to the previous tax landscape. For most, this will mean higher taxes ahead. However, there may be some ways to reduce your taxes before the flip switches in 2026. Below, we cover the 4 key areas that are impacted by the sunset of the Tax Cuts and Jobs Act in 2025.
Income taxes
For many, it is likely that taxes will go up in 2026, and at a significant rate. Below, you will find the tax brackets for single and joint filers from 2017 (before the TCJA) and today in 2024:
Now please do keep in mind that even in the event of the sunset occurring, the original tax brackets will most likely be adjusted for inflation. That said, many are likely to be subject to higher taxes in 2026, assuming the same taxable income. Most notably, those in the 24% could be pushed into the 28% or 33% brackets. Those at the very top could be put back into a new higher top tax rate at 39.6%, whereas the current tax brackets cap out at 37%. Those who find themselves in the sweet spot, around the top ends of the 22-24% brackets today, may experience the largest increase in taxes ahead. So, if you expect taxes to increase in 2026, you may want to use these years to pay slightly more in taxes to reduce much higher taxes later.
Some strategies that may help to reduce future taxation now include:
Contributing to retirement plans
Exploring Roth conversions
Planning larger gifts before 2026
Giving larger charitable contributions now vs. spreading out into 2026
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Standard deduction and credits
Tax bracket changes may not even be the largest impact. The standard deduction was nearly doubled as a result of the TCJA as well. Right now, the standard deduction for married filing jointly households stand at $29,200 and $14,600 for single taxpayers. Assuming we do revert back you can expect this to be cut nearly in half. The standard deduction applies to those whose itemized deductions do not exceed the standard deduction – therefore taking the standard deduction creates a larger reduction and lower tax bill. So, if we do revert back, itemizing may become more prevalent again and proper accounting may become even more important.
The TCJA also created a couple other more nuanced considerations, including qualifying medical expenses and the Child Tax Credit. With the bill, at present, there is a lower threshold for qualified medical expenses. Additionally, the Child Tax Credit doubled because of this act for each qualifying child.
Estate Tax exemptions
Another large potential impact is the change in the estate tax exemptions. Estate taxes are applied at the Federal level if your estate (all of your belongings, accounts, insurance proceeds, home, assets, etc.) exceed certain thresholds. As it stands in 2024, this estate tax exemption stands at roughly $13.61M. However, this also roughly doubled as a result of the TCJA, and if the bill sunsets, the estate tax exemption is estimated to reduce to slightly below $7M at that time (the prior exclusion adjusted for inflation). Depending on the structure of your assets, your beneficiaries may be subject to the estate tax, as well as capital gains and/or ordinary income taxes on the assets themselves, if distributed. These next few years could be an important time to consider strategies to reduce your estate while the estate and lifetime gift tax exemption remain higher. Generally, the exclusion amounts listed can be viewed as the total amount you can pass to others either at death or during your lifetime. Especially for those with estates around $7M and up, 2024 and 2025 calendar years create a unique opportunity to explore. For those in Washington state, or those with state estate taxes, it is also important to understand that often Federal and State estate taxes are additive. This means that if your estate exceeds certain thresholds you may need to pay both the Federal Estate Tax and State Estate Tax on all dollars above the exclusion amounts.
If you find yourself in this position, estate planning strategies should be explored and can be quite complex. Although there are many strategies to explore, and each should be discussed in totality to determine what may be best in your specific situation.
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That said, there are a few general estate planning concepts that may provide a good starting point, such as:
Gifting
There are annual gifting limits, but these limits don’t mean you cannot give above and beyond these figures. It is important to first take full advantage of annual limits to create opportunities without impact to your lifetime gifting and estate exclusion. But gifts above these limits are also a great strategy to explore if you are looking for ways to reduce your estate while the exemption is higher.
Trust strategies
With certain types of trusts, the assets placed into the trust may no longer be considered part of your estate. Therefore, for estate tax exemption calculation purposes, if structured correctly these assets may reduce your taxable estate and make a larger impact to your beneficiaries.
Marital deduction
Married couples may have many more options. As it stands today, there is an unlimited marital deduction which can create great opportunities to strategize on how to apply this between married individuals to make the most of the landscape.
Charitable giving and Donor Advised Funds
By gifting assets to a charity or Donor Advised Fund, these gifts may also qualify for an unlimited deduction. With that said, to make the most of these charitable contributions before 2026, you may want to explore lump sum gifting to also receive the largest tax benefit in the year of the gift. Since the standard deduction was raised, larger charitable contributions may allow you to itemize and create the largest tax benefit. Donor Advised Funds (DAFs) may be a great way to help with this because you can make large gifts without actually allocating the money to a specific charity at the time of the gift, while still receiving the tax benefits in that year. With DAFs, you can then later determine the timing and specific charities you would like to distribute these funds to as you see fit – or even the next generation sees fit.
Market impacts
Finally, although we won’t go into too much detail in this article, it is also important to note that a significant change in the tax landscape may also impact the markets. If higher taxes are on the horizon, this could impact markets ahead. However, the general economy in 2026 will be the primary driver and any tax changes may simply impact the momentum of the markets at that time.
The Tax Cuts and Jobs Act did create tax savings for many individuals beginning in 2018. Although it is a possibility that Congress either extends the TCJA or approves a new tax bill, in lieu of any change, the bill will sunset. So, exploring options now is important. By preparing early, you can create strategies that may allow for flexibility and be prepared for whatever may come next. Tax and estate planning is very complicated, and the type of assets used in each strategy outlined all play a role in the effectiveness of each approach.
Although we shared some concepts today, proper planning should be looked at from all angles to ensure alignment of any changes with your overall plan and to evaluate the best options for you. If you would like to discuss how these changes may impact your situation, please reach out and a member of our team can evaluate your potential impacts and provide strategies to prepare for these changes.
Advisory services offered through Mainsail Financial Group, LLC, a Registered Investment Adviser. For informational purposes only, not intended as tax advice. Please consult a tax professional when appropriate.