The Tax Cuts & Jobs Act (TCJA), passed by former President Trump at the end of 2017, was the first major piece of tax legislation since 1986. Intended to reduce tax rates for both businesses and individuals, the thinking behind TCJA was that if it’s cheaper for businesses to operate in the United States, there would be more investment here. And while the tax rate on each dollar would be cheaper, the amount of taxable income in the U.S. would be higher, which could offset the cheaper tax rates.
We’ll leave those calculations to the macroeconomists who are better suited to look at these effects, but this debate on who the changes ultimately benefit is important context for where we are today. Many of these changes signed into law in 2017 are set to expire at the end of 2025.
As we approach the deadline, it’s important to set yourself up to take advantage of provisions in the current law that may expire at the end of next year. We recommend having this conversation in tandem with your tax preparer, financial planner, and in some cases, your estate planning attorney, because while some changes are set to expire, it’s unclear which provisions Congress will extend or let terminate before then. Hindsight is always better than foresight, so it’s important to strike the balance between making a change too early and too late.
Key Provisions
Tax Rates
The marginal tax rates are set to increase in five of the seven current tax brackets as shown in the table below. The tax rates are just one piece of the puzzle and it’s not necessarily true that your overall tax liability will be higher just because the tax rates are increasing.
| Current | Projected |
| 10% | 10% |
| 12% | 15% |
| 22% | 25% |
| 24% | 28% |
| 32% | 33% |
| 35% | 35% |
| 37% | 39.6% |
- What does this mean? Taxpayers will pay more tax on each dollar of taxable income.
- Who does this affect? Individuals with taxable income currently over $11,600 or couples over $23,200.
Deductions
Taxpayers can deduct an amount from their income that results in the greatest reduction to their tax bill through the standard or itemized deductions.
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- Standard deduction – Often an easier deduction to take as it doesn’t require any recordkeeping requirements, but it doesn’t always offer the best benefit to taxpayers.
- Itemized deduction – This requires taxpayers to keep track of certain expenses throughout the year but can be more beneficial for some in reducing their taxable income.
The standard deduction, which is meant to simplify the tax filing process, was increased while certain itemized deductions were eliminated or subject to restrictions to incentivize more taxpayers to claim the simpler, standard deduction. The standard deduction amount, which has nearly doubled, is set to revert to the former, lower levels.
- What does this mean? More taxpayers will itemize their deductions, requiring them to keep better track of their expenses to ensure they don’t miss out on some of the temporarily disallowed miscellaneous deductions like unreimbursed business expenses, tax preparation fees, and certain investment expenses.
- Who is this most important to? While not all expenses can be deducted, it generally will affect taxpayers with lower expenses. The lower standard deduction is something that hurts taxpayers when looked at from an individual level because you get it for free. No matter what, you can always claim the standard deduction. In particular, it affects those who have lower itemized deductions: renters, states and localities with no or low income taxes, and those who don’t have significant medical expenses.
There will no longer be a cap on the deductibility of state and local taxes.
- What does this mean? Often abbreviated as SALT, you are only able to deduct up to $10,000 for taxes you pay at state and local levels under current law.
- Who is this most important to? Those in higher tax states like California, Hawaii, New York, and New Jersey. States like Maryland can often get left off these lists because their state tax rate is lower, but when combined with local tax rates, the total tax rate can approach 9%.
Estate Taxes
The lifetime gift and estate tax exemption are decreasing back to lower levels.
- What does this mean? For certain people, it will be much more expensive to gift than it is currently. The current exemption limit is $13.61 million for individuals ($27.22 million for couples), meaning that as long as you don’t make gifts in excess of this amount throughout your lifetime, there will be no Federal taxes on the transfer of your wealth. This amount is indexed for inflation, and it’s assumed that it will be cut in half in 2026. While there are ways to gift more than the exemption limit without being subject to tax, the drastic change in the limit will make it more difficult to transfer wealth tax free.
- Who is this most important to? Those with net worths in excess of $6.8 million ($13.6 for couples). It’s also important to recognize that even if your net worth is less than this now, that’s not to say that it won’t be in the future. Estate tax rates quickly jump to 40% for amounts above this limit, so there are significant consequences to not having a plan in place. If this is something that will affect you, it’s a good idea to start planning for it now to make sure that your attorney will have enough time to put the pieces in place for your plan.
Child Tax Credit
The restrictions on who is eligible to receive the credit and how much they can receive are going to be significantly increased.
- What does this mean? The amount of the credit is going to be decreased to a maximum of $1,000 per child under 17 years old from its current level of $2,000. It also will prevent some taxpayers from claiming the credit altogether as the income phaseout was increased by over 2.5 times its pre-TCJA level.
- Who is this most important to? As the name implies, those with children should take note, particularly individuals with incomes around $200,000 or couples around $400,000. The lower income thresholds are likely to exclude many of these taxpayers from claiming the credit.
Alternative Minimum Tax
While only affecting certain taxpayers, the TCJA repealed or scaled back certain preference items in the tax code. The alternative minimum tax (AMT), while not a punishment, does establish a separate tax calculation, requiring the taxpayer to pay the greater of the two amounts. It’s meant to act as a safeguard to ensure that such taxpayers pay a minimum level of tax, even if they would otherwise benefit from significant tax breaks.
- What does this mean? If the law doesn’t change, more taxpayers will be subject to AMT, making tax planning more complex for certain individuals and potentially subjecting taxpayers to a higher tax bill. Preference items such as personal exemptions, the state and local tax deduction, and miscellaneous deductions subject to the 2% of adjusted gross income floor will all be added back to the calculation.
- Who is this most important to? Typically, high-income individuals who have substantial deductions, credits, or other tax preferences. For 2024, the exemption is $85,700 for single filers and $133,300 for couples filing jointly, so only taxpayers over the exemption limits are likely affected. Those with incentive stock options (ISOs) may also be affected. It may be more beneficial to exercise your options now before these changes revert back in 2026, but it’s not something that can be recommended without first reviewing your individual situation.
Planning for the Future
Congress could extend some provisions, but uncertainty remains about what will be agreed on. Particularly with such a major piece of legislation, we may not know what will change until the last minute. By then, it could be too late to plan. So, having conversations now with your team are critical to being ready for whatever will happen before the end of next year. Despite the uncertainty, proactive planning can help mitigate adverse effects and maximize tax savings. It is important to stay informed, regularly monitor updates from reliable sources such as the IRS, and continue to record and organize your tax filing documents throughout the year.
Commonwealth Financial Network® and Armstrong, Fleming & Moore do not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.