Significant estate and income tax changes are on the horizon. The 2018 Tax Cuts and Jobs Act (TCJA) created many tax changes for businesses and individuals. While the corporate changes are permanent, several of the individual updates are set to expire after the 2025 tax year. 2024 is also an election year, which further complicates the tax landscape.
In this blog, we’ll review the upcoming tax law changes and how you can adapt your financial plan to ensure that you stay on track.
Overview of Upcoming Tax Law Changes
It’s possible that Congress could extend TCJA for individuals or implement an entirely new tax law altogether, but we can only plan for what we know now. Today, here’s what taxpayers can expect once TCJA expires at the end of 2025.
2025 Sunset and Its Impact
Here are the highlights of the 2025 TCJA sunset:
- Individual income tax rate: Individual income tax rates will revert to 2017, or pre-TCJA, amounts, so you can expect a tax rate increase. For example, the middle tax bracket will jump from 24% to 28%, and the top tax bracket will jump from 37% to 39.6% starting January 1, 2026. If you anticipate your income to be lower in 2026, consult with your financial advisor to learn how to take advantage of the lower rates and accelerate income with a Roth IRA Conversion.
- Estate Tax: In 2026, the estate and gift tax exemption will be cut in half for taxpayers. It’s expected to be about $7 million instead of the current $13.16 million.
- Deductions: The TJCA increased the standard deduction. In 2024, the standard deduction is $29,200 for couples filing jointly and $14,600 for individuals. In 2026, the standard deduction will likely decrease by half, which will likely require individual taxpayers to itemize their deductions.
- State Taxes vs. SALT Deductions: The SALT deduction cap significantly impacts West Coast residents by limiting their ability to deduct high state and local taxes (especially in California and Oregon with their high state income taxes) to $10,000, thereby increasing their federal tax burden, while Washington residents are less affected due to the absence of a state income tax. The change in the SALT cap means that taxpayers can only deduct up to $10,000 of eligible state and local income, sales, property taxes, and foreign income taxes.
Strategies for Adapting to Tax Law Changes
There will be several changes to tax provisions once TCJA ends, but you can be proactive and optimize your tax situation amidst evolving tax laws. Some best practices include:
- Know your tax bracket: Before creating a successful tax plan, you need to know your tax bracket. You can view the 2024 tax brackets and income tax rates here.
- Understand the difference between credits and deductions: Both reduce your tax bill but in different ways. Tax credits reduce the amount of taxes owed, and tax deductions reduce your taxable income.
- Consult with a tax professional: No one knows the industry better than a tax professional, and you’ll save time, money, and stress by getting professional advice.
Taxes can be overwhelming, and the changes in 2025 further complicate how individuals should approach tax planning. But it doesn’t have to be a stressful process! Hiring a tax professional can take the burden of tax planning off your shoulders and ensure that your financial goals don’t get off track.