Have you heard the news? Many provisions from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire in 2025. And unless Congress steps in, many of these changes will sunset on December 31, 2025.
Now is an excellent time to reassess your estate plan and personal tax strategy to help increase your tax savings before these changes take effect. While future legislation could extend or modify the current laws, staying proactive and informed about tax planning and wealth transfer opportunities is key to supporting your financial well-being.
Keep reading to learn how you can prepare for the upcoming shifts and align these changes with your long-term financial goals.
The Impact on Individual Taxes
Let’s start with an explanation of how the 2025 Tax Sunset could affect individual taxpayers.
- Lower income tax brackets: The lower tax brackets that were put in place by the Tax Cuts and Jobs Act (TCJA) will revert to pre-2017 levels. That means that millions of taxpayers could potentially be pushed into higher tax brackets.
- Decreased standard deductions and personal exemption: By decreasing both standard deduction amounts and personal exemptions, the 2025 Tax Sunset could cause higher taxable income for individual filers.
- Child tax credit: Currently, the child tax credit provides a dollar-for-dollar reduction of your tax liability for each qualifying child; this allowance would expire under current regulation.
- State and local tax (SALT) deduction cap: If the current $10,000 cap on deductions for state and local taxes expires, residents in high-tax states like California, New York, and New Jersey could benefit. The downside is that eliminating the deduction cap could potentially shift the tax burden to the federal government.
Potential Changes for Business Taxes
Here’s a snapshot of how the 2025 Tax Sunset could impact business taxes:
- Full expensing of deductions: This temporary condition that allows instant expensing of business expenses would expire. For affected businesses, the result would be increased taxable income.
- Pass-through business income deductions: This tax provision allows the deduction for income from pass-through businesses like partnerships and S corporations. When this law expires, the tax liability for many small businesses could increase.
- Bonus depreciation: Businesses that invest in equipment and machinery will be impacted when this deduction for specific depreciable property disappears.
Opportunities to Consider
Even though the uncertainty of these changes can feel unsettling, there are opportunities to consider, like Roth conversions and estate planning, to take advantage of the current favorable tax rates and exemptions. Taking action now could help you enhance your financial position before these changes occur.
Roth Conversions
If you anticipate lower income before 2026 due to retirement or other changes, consider accelerating income through Roth conversions to benefit from lower tax rates. This strategy is particularly beneficial if you’re married, as the marriage penalty will significantly increase in the 25% and higher tax brackets after the sunset.
A Roth conversion allows you to convert pre-tax retirement funds into a Roth IRA by paying taxes now, ideally at a lower rate than in the future. If the current tax rates do expire after 2025, completing a Roth conversion in the next two years could save you thousands in taxes and allow your money to grow tax-free.
Estate Tax Exemption
Before the 2025 sunset, it’s wise to consider the increased estate and gift tax exemption if you have a sizable estate. The exemption amount will be reduced by half in 2026, potentially subjecting estates in the $7-$13 million range to taxation. Making lifetime gifts now can help you take advantage of the current higher exemption, removing assets and their future appreciation from estate taxation. Also, regulations mean that gifts made during this period won’t be subject to a clawback, allowing your estate to benefit from the exemption amount at the time of the gift.
Act Now and Get Ahead
A smart way to prepare your finances for the upcoming changes due to the 2025 Tax Sunset is to consult a skilled and experienced financial advisor. At Premier Planning Group, we review your income tax details, expenses, and how your investments impact both your current and future tax liabilities. If you prefer, we can also work alongside your tax advisor to align your financial plan to these adjustments.
Whether you’re filing as an individual or managing a business, we’re here to help you get ahead of the 2025 Tax Sunset. Reach out to us and call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.