Preparing for Changes in the Tax Code Requires Knowing Your Situation and Planning

Key Takeaways:
  • Significant tax changes are set to occur at the end of 2025 as key provisions of the Tax Cuts and Jobs Act (TCJA) potentially sunset.
  • Proactive planning, including income timing, retirement contributions and estate strategies, is important to minimize the impact of these changes.
  • Business owners should assess opportunities to optimize deductions, restructure debt and consider entity changes ahead of the QBI deduction’s expiration and shifting tax rates.

 

When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, the sweeping tax measure included numerous provisions – many of them major features of the law – that were scheduled to expire at the end of 2025.  

Congress made certain provisions temporary in order to limit the 10-year revenue cost of the TCJA to the amount authorized in the Congressional Budget Resolution ($1.5 trillion) and to comply with Senate budget rules that required no increase in the federal budget deficit after the tenth year. 

As a result, the expiration date of Dec. 31, 2025, has come to be known as the “sunset” date for many of the law’s provisions, and taxpayers who will be impacted by the sunsets should be engaging in tax and estate planning now to ensure that they are not negatively affected.  

It is important to note that Congress could act in the next year to extend some or all these sunsets. But for now, they remain in place. 

Following are some of the most significant provisions scheduled to sunset on Dec. 31, 2025. The assumption as we write is that all the sunsets will remain in place. 

Individuals 

  • How will individual tax rates be affected by the sunsets? Individual tax rates will revert to pre-TCJA levels. Hence, individual taxpayers will see an overall tax increase. Additionally, the “marriage penalty” that affects certain taxpayers will increase. One of the biggest changes will be the reduction of the standard deduction – nearly by half – which will drive up the amount of income tax subject to tax. Under TCJA the standard deductions today (for the 2024 tax year) range from $14,600 for single filers, to $21,900 for heads of households and $29,200 for married couples filing jointly. For some taxpayers, these negative impacts of the reduction in the standard deduction may be offset by the return of the personal exemption in 2026, which will reappear at a rate of $4,700 per taxpayer and qualified dependents, although the exemption phases out at higher income levels. Another positive is that the $10,000 cap on state and local tax (SALT) deductions will disappear, benefiting taxpayers in high-tax states. There will be further opportunities for saving taxes as additional state and local taxes become deductible for taxpayers who itemize. 
  • How will itemized deductions be impacted? Miscellaneous deductions will return to pre-TCJA levels, so taxpayers who want to take deductions for such items as unreimbursed costs for work uniforms, charitable deductions and unreimbursed dental expenses will be able to do it again. Additionally, the limit on deducting home mortgage interest was modified to $750,000 under TCJA, but will return to $1 million after the sunset. For charitable deductions, the TCJA raised the percentage of adjusted gross income (AGI) you could deduct to 60%, but it will revert to 50% after the sunsets. 
  • What will happen with the child tax credit? The child tax credit, which was doubled to $2,000 per child by TCJA, will revert to $1,000 after the sunsets. 
  • What planning strategies should taxpayers be considering? Assess your income level, which will significantly influence how these sunsets will impact you. Consider whether you should accelerate income or expenses into 2025 to avoid any negative tax implications for the post-sunset world. Explore the idea of increasing retirement plan contributions, and consider converting a Roth IRA now if you expect to be paying higher taxes in the future. Review your investment strategy, being mindful of capital gains, which could rise for some individuals. It may be advantageous to realize some of the gains now. For charitable giving, it may be a good idea to bundle some contributions and take the deduction now, although that strategy could cut either way. Regarding SALT taxes, if you have been maxing out the $10,000 cap, push some tax payments into 2026 when you’ll be able to deduct the full value again, but do the strategy planning in 2025. 
  • How will the sunset affect estate and gift taxes? Timing is going to be very important for business owners because of the increase in the capital gains tax. Some clients may have the opportunity to sell stock on the installment method. The default for taxation is that you are taxed as you collect payment increments, but if you can plan around the installment method, you can realize all the capital gains in the first year of sale. This can eliminate the risk of this sale being subject to potentially higher capital gains rates in the future.  The timing and structure of these transactions are very important with these sunsets coming. 
  • What can individuals be doing today to prepare for these changes? The No. 1 thing is being aware of what changes will happen and how they will affect you. You need to look at your personal situation, and that includes being aware of your forward-looking financial outlook. If any life changes are going to cause your income to increase or decrease, talk to your tax advisor and estate attorney. If you currently contribute to a traditional IRA, you may want to change to a Roth if you’re anticipating higher taxes in the future and you don’t need the deduction in the current year that the traditional IRA will give you. The key is knowing where you’re at, not only in terms of personal finance but also your income tax situation. Put that long-term plan in place. 

Businesses 

  • What are the implications for business owners? The biggest implications have to do with bonus depreciation on qualified business property. Bonus depreciation, which started out at 100% under TCJA, has already started phasing out by 20% each year. For 2024, it stands at 60% and will drop to 40% in 2025. The second significant impact for businesses will be the disappearance of the Qualified Business Income deduction (Sec. 199A deduction). The QBI deduction allows owners of pass-through entities – which account for more than 90% of U.S. businesses – to take a deduction of 20% off their qualified business income or qualified publicly traded partnership income. With individual tax rates increasing, owners of pass-through businesses will be hit from both sides. Moreover, owners with a lot of debt in their businesses should be aware that the limitations on deducting business interest will change. There are opportunities in the coming year to restructure debt and get into a better position to utilize interest deductions, but the planning should start now. 
  • While the QBI deduction will expire, the 21% corporate tax rate on C corporations was written into the law as a permanent change. Moreover, President-elect Donald Trump has mentioned lowering it even further. Are pass-through business owners considering changing to a corporate entity because of this? We’ve had conversation with some S corporation owners. In some cases, it may make sense to revoke that S election and go to a C corporation structure. 
  • How should owners of pass-through businesses prepare today? Use the same strategies as individuals if it appears your income tax will go up. Defer expenses – maybe forego accelerated depreciation and preserve those depreciation deductions for higher-tax years in the future. Maybe consider opting for C corporation status. If you are reorganizing, this is a great time to take a look at how it will affect your estate plan, exit and transition planning. Look at voting and non-voting stock so you can maximize discounts for estate planning purposes and keep control in the right hands. 
  • How should corporations be preparing? The same methods would apply. Accelerate income into current year and defer expenses if you expect taxes to go up. Look at how your corporate operating agreement is structured and consider whether it should be changed. Look at valuation of stock – that’s where voting and non-voting shares come into play. Consider buying assets – do you want to take advantage of the abbreviated bonus depreciation that is still available? The options are to accelerate asset purchases to take advantage of current tax incentives or push off so you preserve those deductions for future higher tax rate years. 

Political Landscape 

Now that we are past the presidential election and we have a unified one-party government, with Republicans in control, it’s likely we’ll see lower tax rates for individuals and businesses, but this would require new legislation before the TCJA sunsets occur in December 2025. Other than tax rates, it is likely that Congress would act to extend some other popular provisions of TCJA that are slated to sunset. Additionally, there is discussion of lowering the maximum corporate tax rate even further to 15%. 

If you would like to discuss your tax situation, contact an Adams Brown advisor.