When the Tax Cuts and Jobs Act (TCJA) went into effect in December 2017, it enacted several major changes, including an increase in the estate tax exemption amounts and decreases in both individual and corporate tax rates. Now, many provisions of the Act are set to expire at the end of 2025 unless Congress makes them a permanent part of the tax code. Given the impact to your taxes and estate planning strategies, now is the time to start preparing for these anticipated changes. In this post, we’ll explore some of the key financial planning considerations you may want to start thinking about.
Over 65% of individuals’ and married couples’ income tax brackets were decreased when the Act was put into effect.[i] When the Act expires, all income tax rates will revert back to the 2017 rates, which are approximately 4% higher. Below is a summary of the current rates in 2024 vs. what the rates will return to in 2026 without further changes to the tax code:
|
2024 Rate Brackets |
2026 Rate Brackets |
|
10% |
10% |
|
12% |
15% |
|
22% |
25% |
|
24% |
28% |
|
32% |
33% |
|
35% |
35% |
|
37% |
39.6% |
Currently, the standard deduction for individuals is $14,600 ($29,200 for those married filing jointly). Starting in 2026, the standard deduction will revert to 2017 levels, roughly cutting the deductions in half. The $10,000 limitation on state and local taxes (state income taxes, real estate taxes, personal property taxes, etc.) will be removed. The removal of this limitation will be a significant benefit to taxpayers in high income tax states, such as California and New York. Mortgage interest will be deductible on debt up to $1 million, and home equity debt will be deductible up to $100,000. The personal exemption will return, but phaseout begins for individuals earning more than $261,500 and married couples filing jointly earning more than $313,800.
Many individuals did not have to itemize deductions due to the increase in the standard deduction with the TCJA. After the expiration, itemized deductions will be available once deductions exceed 2% of AGI. Miscellaneous itemized deductions, most notably unreimbursed employee expenses, will be allowed. Personal casualty and theft loss deductions will be reinstated. The Pease limitation will be reinstated at certain income levels, which puts a cap on total deductible itemized deductions for high-income taxpayers.
Currently, the Child Tax Credit is $2,000 per child. In 2026, it will revert to $1,000 per child with phaseouts at the $75,000 level for individuals and $110,000 for those married filing jointly.
Under TCJA provisions, the exemption amount is $85,700 for individual taxpayers with the income phaseout at $609,350. The exemption amount is currently $133,300 for those married filing jointly with the income phaseout at $1,218,700. After expiration at the end of 2025, these amounts will be lower, and more taxpayers will be subject to AMT.
TCJA capped the state and local tax deduction (SALT) at $10,000. There will be no cap once TCJA provisions expire. Phaseout begins for individuals earning more than $261,500 and for married couples filing jointly earning more than $313,800.
Beginning in 2026,the mortgage interest deduction limit will increase to $1 million of indebtedness from the current $750,000, and the home equity interest deduction will be available for interest on up to $100,000 of debt.
Today, cash gifts to charities are 100% deductible up to 60% of your adjusted gross income. After 2026, they will remain 100% deductible, but only up to 50% of your adjusted gross income. The limit for long-term appreciated securities remains at 30% of AGI.
The federal tax exemption for estate taxes is currently $13.61 million for individuals and $27.22 million for married couples. When the changes take place at the end of 2025, the exemptions will revert to pre-2018 levels (adjusted for inflation) and are estimated to be $7 million per individual and $14 million for married couples.
The lifetime gift and estate tax exemptions are also currently $13.61 million for individuals and $27.22 million for married couples. After December 31, 2025, the lifetime estate and gift exemption will be cut in half. Estates that exceed the exemption amount will be subject to a flat tax of 40%.
For a more in-depth analysis of the changes to the estate, gift, and GST exemptions, along with more estate planning considerations, check out this blog post.
When TCJA was enacted, corporate tax rates dropped from the highest rate of 35% to 21%. This was a permanent change and will not change when the TCJA provisions expire. Similarly, TCJA eliminated corporate alternative minimum tax (AMT), but this was also a permanent change.
Owners of pass-through business entities, including sole proprietorships, partnerships (e.g., LPs, LLPs), S-corporations, and limited liability companies (LLCs) were entitled to a 20% income tax deduction under TCJA. The deduction will be eliminated when TCJA sunsets.
No one can predict if there will or will not be changes until the official sunsetting of the Act’s provisions. There is always the possibility of legislative changes that could extend the current provisions or even make them permanent. However, relying on this uncertain future can be risky, and proactive planning remains advisable. If Congress does not act, the exemptions will revert to their pre-TCJA levels. So, prepare now!
As a starting point, it’s crucial to meet with your accountant/tax advisor and wealth manager so they can help review your current tax situation, income, deductions, and investments to see how the changes will affect your specific circumstances. Here are some additional considerations:
As always, if you are a client, please reach out to your Wealthspire team to see how we can help you prepare for the likely impending changes.