When the sun sets on December 31, 2025, a substantial amount of tax legislation could go with it. In 2017, the United States Congress enacted the Tax Cuts and Jobs Act (TCJA). This bill significantly changed the US Tax Code, benefiting corporations and individuals. However, the bill was only scheduled to be effective until the end of 2025.
Income Tax Brackets
Under the TCJA, tax rates were lowered across several income brackets, providing temporary relief for middle-income earners and additional savings for high-income households. If these provisions expire, tax rates will revert to the 2017 ranges, which will increase the tax burden on individuals. The current brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Without action, the rates return to their pre-TCJA amounts of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The income brackets associated with those rates will also change relative to inflation.
No one knows what the tax brackets will look like in 2026. Still, if you are expecting a high-income year(s) after 2025, it will be important to talk with your financial planner and tax advisor to determine if there are any actions you should take now to manage future taxable income.
Deductions
If you compare your tax returns from 2017 and 2023, you might see a big difference in your deductions. The TJCA significantly increased the standard deduction for all filing statuses. For example, in 2017, the standard deduction for married filing jointly was $12,700 and $6,350 for a single filer. The 2024 standard deductions have increased to $29,200 and $14,600, respectively. If these provisions sunset, you will see a decrease in your standard deductions for 2025.
Related to the increase in the standard deduction amount, the TCJA eliminated personal exemptions. Depending on their Adjusted Gross Income (AGI), taxpayers could deduct personal exemptions for themselves, their spouse, and their dependents. In 2017, the personal exemption amount was set at $4,050. The intent of increasing the standard deduction and eliminating personal exemptions was to simplify tax filing.
The TJCA also limited the amount of state and local taxes (SALT) and mortgage interest that could be deducted. SALT deductions are currently capped at $10,000 and have not been increased for inflation. Before 2018, the tax filers could deduct the full amount of their SALT. The current deduction for mortgage interest is limited to interest incurred on the first $750,000 of a home mortgage. The TJCA also eliminated the ability to deduct interest on home equity loans unless the loan was used to buy, build, or improve the taxpayer's home. These limitations would revert to 2017 rules without action.
Charitable gifts are still deductible on Schedule A, but fewer individuals can itemize given the higher standard deduction amount. If the standard deduction decreases, charitable giving may again become a larger part of an individual's tax planning. If you're considering making a larger gift to charity(ies), it would be beneficial to consider the impact of making those gifts before versus after the sunset.
Estate and Gift Taxes
In 2017, the estate and gift tax exemption amount was roughly $5,000,000 per individual. The TCJA increased this amount substantially, currently $13,610,000 (2024) per person. The sunset would bring the exemption amount back to $5,000,000, adjusted for inflation (estimated to be in the $6.5 million range per person). Individuals with taxable estates exceeding the post-sunset value and considering significant gifts to charity or family should now discuss their goals with their professional advisors (estate attorney, financial planner, and tax advisor) to ensure sufficient time for implementing these goals before December 31, 2025.
Next Steps
Any or all of the TCJA provisions could be extended or even made permanent. Many, many more components of the TCJA that will have an impact on individuals and corporations aren't discussed here. At this point, it's best to understand how your personal situation may be impacted, keep an open dialogue with your advisors, and be ready for whatever the sunset looks like on December 31, 2025.
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We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.
The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
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