It’s hard to believe 2017 was seven years ago, but it was! Back then, Congress passed the Tax Cuts and Jobs Act, which changed much about the tax code, including deductions, tax rates, gift limits, and more. However, not all of the changes were permanent, and many are due to expire in 2026. Let’s take a look at what is due to change, what that might mean for you, and possible mitigation strategies that you’ll want to start implementing this year and next year.
Tax Cuts and Jobs Act overview
The Tax Cuts and Jobs Act (TCJA) affected tax rates in a number of ways. First, it changed the tax brackets and reduced tax rates in those brackets. For example, prior to the TCJA, the highest bracket was single people earning $426,700 or more, or married filing jointly people earning $480,000 or more, paying a rate of 39.6%. After the passage of the TCJA, the highest bracket became single people earning $500,000 or more, or married people filing jointly earning $600,000 or more, and the tax rate dropped to 37%.
Deductions also changed due to the TCJA. The act repealed personal deductions and increased the standard deduction. It also repealed the dependent deduction and instead increased the child tax credit. In addition, the TCJA increased the lifetime estate and gift tax exemption.
However, the bill also set a time limit on these changes, with the personal tax changes due to expire in 2026. Congress could still act to extend the provisions in the TCJA past 2025, but if they don’t, you will likely see changes in your tax bill.
Income tax changes
All personal income tax brackets are set to revert to 2017 levels. In addition, the standard deduction amount will be cut roughly in half, and the child tax credit will be cut. The personal exemption will return.
What does all of this mean? Well, it means taxes will likely rise for most middle to higher income people.
One recommendation I have for people facing potentially higher taxes is to convert a portion of your IRA to a Roth IRA. With a traditional IRA, you pay taxes when money is withdrawn, while with a Roth IRA, you never pay taxes on withdrawals. When converting a traditional IRA to a Roth IRA, you pay income taxes on money moved, so it makes sense to move that money under the lower tax rates of the TCJA. Then, you will be able to withdraw that money in your retirement without being taxed on it.
One quick caveat: there is a five-year waiting period to use these funds, so take that into account as you’re planning. If you want to retire next year, the money you move to the Roth IRA will not be available immediately to you.
When the TCJA expires, the lifetime estate and gift tax exemption is expected to drop by about half – from $13.6 million to an estimated $7 million per individual. If we double those amounts for married couples, it will go from $27.2 million to an estimated $14 million. That means that your heirs could be taxed more than you anticipated on your estate.
There are two possible options here. One is to gift money before these limits decrease. So, if you know you want to give $10 million to your heirs and/or charity, you can still do so and be under the tax limit. If you wait until 2027, for example, that limit will be lower and you will only be able to donate $7 million tax free.
Another option is to create a trust, which has different tax laws and exempts your money from the estate and gift tax limits. There are a lot of different options for trusts, depending on your goals, so make sure to talk to your financial advisor about what option best meets your needs.
Gifts are a part of the lifetime estate and tax exemption (so the more you gift, the less of your estate will fall under the exemption). That’s not necessarily a bad thing! It just means you need to be aware of your total gifts and estate to ensure you’re taking the steps you want.
One option is to take advantage of the annual gift tax exclusion limits; in 2024, that limit is $18,000 (up from $17,000 in 2023). That is the amount you can gift before you owe federal taxes. Contributing to a 529 account can be a good way to take advantage of the annual gift tax exclusion. A 529 account is used for educational purposes, so if you have grandchildren or anyone else in your life facing education expenses, whether it’s K-12 or higher education, this can be a great way to contribute and reduce your tax burden.
Yet another potential change is the amount you can deduct for charitable contributions. The TCJA raised the annual deduction limit to 60% of AGI for cash contributions, and when the act expires, the deduction limit will go back down to 50% of AGI.
My suggestion here is if you are planning to donate a significant amount of cash (more than the 50% limit), to do so before the TCJA expires.
It’s hard to predict the future, and it’s possible not all of these changes will come to pass. And of course, every person’s situation is unique. While we gave some suggestions above, my best advice to you is to talk to your financial planner, your CPA and your estate attorney as appropriate. Starting with your financial planner is a good way to begin. We know your goals and can help you come up with a personalized plan to make sure no matter the tax environment, you stay on track.
Mallory is a Wealth Manager and Shareholder. She listens deeply and helps simplify complex financial situations to help clients move into an easier, clearer future. She aims to give financial advice that is compassionate, wise, and easy to understand.