The Tax Cuts and Jobs Act (TCJA) was a significant piece of tax legislation that was passed in 2017. It affected many aspects of individual, corporate, and estate taxes. Most of the TCJA’s provisions are set to ‘sunset’ at the end of 2025, unless Congress extends it or makes it permanent. Whether that happens depends on which way the political winds are blowing. There are some tax planning strategies for tax changes due to TCJA sunset in 2025
Some big changes by the TCJA, which are important for tax planning pertain to marginal tax rates. In most cases, the act reduced marginal tax rates as well as the tax brackets for various income levels. The one exception where it increased tax rates is for single filers with taxable income around $200,000. At the same time, it almost doubled the standard deduction, while doing away with personal exemptions. The act further capped deductions for state and local taxes to $10,000, affecting many people who paid significant state income and property taxes.
For business owners operating pass-through entities such as LLCs, partnerships and S corporations, the act included a Qualified Business Income (QBI) deduction of up to 20% of the lesser of taxpayers’ QBI or their taxable income.
A big change brought about by the TCJA was a significant increase in the lifetime exemption for estate and gift tax, which will revert back to the lower level if the act sunsets in 2025.
Here is a comparison guide of the TCJA provisions with the post-sunset situation. CLICK HERE
While the sunset of the provisions is uncertain and based on politics, it is advisable to plan for the possibility while also being flexible in case the provisions are extended. One such strategy involves accelerating or delaying income and deductions such that income is higher (and deductions are lower) in the years when taxes are expected to be lower and vice versa. For example, this can be done by business owners who tend to have some flexibility on timing of income or making large purchases. It can also be done by timing some strategies such as Roth conversions or retirement accounts contributions.
High net worth individuals have a host of options for estate planning to take advantage of the act before the sunset, such as accelerated gifting, use of certain irrevocable trusts such as a Spousal Lifetime Access Trust (SLAT) or estate freezing techniques.
Here is a checklist of what issues you should consider before and after the TCJA sunset provisions occur. CLICK HERE
Please reach out if you have any questions or would like to discuss planning strategies in light of the above discussion.