4 Ways to Prepare for the Upcoming Tax Cuts and Jobs Act (TCJA) Sunset
One of the most powerful tax reforms of our lifetimes, 2017’s Tax Cuts and Jobs Act (TCJA) has many key provisions scheduled to sunset on December 31st, 2025. Although the news has been quiet on this front, the shift would influence every tax-paying citizen in America—so it’s important to prepare ahead of time.
The planned TCJA sunset would not only adjust current individual tax rates, but might also affect your home purchase and relocation plans, the best way to incorporate your business, and even the dollar amount passed down to your loved ones.
Of course, nothing is ever set in stone when it comes to congressional decision-making. And with the 2024 Presidential election just gearing up, plenty of policy shifts likely remain to be seen. Still, if the sunset does occur as written, it may come as an unpleasant shock to taxpayers—at least those who aren’t in the know.
That’s why I’ve gathered four of the most important steps to take to understand and prepare for this upcoming sunset. Ideally, if you play your cards right, the TCJA sunset can be as stress-free as a real one.
1. Get Ready for the New (Old) Tax Brackets
You probably feel like you pay more than enough in personal income tax—but the TCJA actually temporarily reduced the brackets. When it sunsets, chances are your rates will increase, and even a marginal shift in percentage can translate into big changes in your bank account: The reduced rates are estimated to have saved taxpayers about $1.2T over a 10-year period, or $12B per year.
|Current (TCJA) Brackets
|Post-Sunset Brackets (Proposed for 2026)
One good way to prepare? If you’re planning on a Roth conversion, do it sooner than later. Since the taxes on a Roth conversion are due in the year the conversion is made, you could stand to save some money by paying the current, lower rate. (Surviving spouses who inherit a traditional IRA can also benefit from making a Roth Conversion before the sunset.)
Fortunately, with three tax years left until this TCJA provision comes to an end, you’ve got plenty of time to make one or more conversions if they’re part of your financial plan.
2. Take a Second Look at Your Estate
One not-so-quiet secret of the TCJA is that it doubled the estate tax exemption—which allows Americans to transfer wealth to their heirs up to the specified amount without paying estate or gift taxes on the assets. With adjustments for inflation, the exemption amount for 2024 is $13.61 million per taxpayer and $27.22 million for married taxpayers.
Upon the sunset, however, the exemption is expected to revert to $6M per taxpayer, adjusted for inflation. That means that nearly $7.6 million of a benefactor’s $13.61 million estate would be subject to a flat estate tax of 40%—which totals about $3 million. Such a hefty tax bill could create financial hardship for your estate if you’re not quite liquid enough to cover it.
The takeaway: If you’ve got a higher net worth and expect your estate to exceed the after-sunset exemption amount, now might be the right time to consult an estate planning attorney. They can help you navigate the myriad ways to lower your gross estate.
3. Get Into Itemizing—and Consider A Move
Here are a few of the louder changes the TJCA introduced:
- Increases to the standard deduction
- A suspension of the personal exemption
- A reduction of the amount of mortgage debt that qualifies for the mortgage interest expense deduction
- A deduction limitation on state and local taxes (SALT), which include property and state income taxes, to $10k
- An elimination of the moving expense deduction for taxpayers not in the Armed Forces
With the TCJA sunset, each of these changes will revert back to their previous status, subject to inflation adjustments. That means that:
- The standard deduction will be cut by about half for all filing statuses
- The personal exemption of $4,150 per person will be reintroduced
- The mortgage debt that qualifies for interest expense deduction will rise from $750k to $1M
- The $10k deduction cap on SALT will be eliminated
- Taxpayers will once again be able to deduct moving expenses
That’s a whole lot of changes in a tax code ultimately designed to incentivize American citizens toward behaviors that aid the economy. But which of those behaviors will aid your wallet, as well?
For one thing, the slashed standard deduction means the sunset could be a good time to start tracking and itemizing your deductions, a habit that can take some strategizing to get into. And the increase in eligible mortgage debt for interest expense deductions means you might consider taking out a larger mortgage in 2026 than you would in 2024 or 2025. (That interest deduction can act as a tax shield against your income.)
Better yet, the reinstatement of the moving expense deduction means you might be better able to afford a move—just in time to sink into the new normal of digital-first, remote work environments.
The SALT deduction, however, will likely change taxpayer’s behaviors the most. States with higher income and property taxes, like California, New York, New Jersey, Maryland, and Illinois, may become less burdensome to live in—which means more people might choose to move to or remain in those states. This shift may be huge for not only taxpayers but also for the housing market: While it was in place, the $10k deduction cap shifted housing demand from high-cost, high-tax areas to low-cost, low-tax areas.
Of course, the tax code can be intricate, and these changes may come with income phaseouts and even disallowances. As always, it’s important to consult with your tax advisor before planning around these expected changes.
4. If You Own a Business, Consider How You’re Incorporated
The TCJA introduced an entirely new tax deduction known as the Qualified Business Income Deduction (QBI). This deduction allows taxpayers to deduct up to 20% of their income from a pass-through entity like an S-Corporation, partnership, sole proprietorship, or even an LLC taxed as an S-Corp or partnership. For example, if your qualified business income were $100k, under the TCJA you would receive a $20k deduction before arriving at your taxable income.
Many business owners may not have noticed this deduction, as you didn’t need to make an election to qualify for it. You most likely qualified automatically so long your income was under the threshold. Still, the QBI served as an impactful tax shield for many—and unfortunately, it, too, is scheduled to sunset by 2026.
While the QBI deduction will be eliminated, the corporate tax rate (i.e., the tax on a C-Corporation), which was reduced with TCJA, will remain at 21%—rather than returning to its previous rate of 35%. If you own a business, now’s a good time to do some math: See if it might make sense, after losing the benefit of QBI and with the shadow of higher personal income tax brackets looming, to elect the C-Corporation structure by 2026 to retain as much tax savings as possible. (Keep in mind, though, that C-Corporations are taxed twice: Once at the entity level and then again at the individual level when a distribution is made to an owner.)
The TCJA impacted many lives, and the sunset of its provisions will certainly do the same. (It’s also important to keep in mind that the TCJA is a federal Act—states may also have their own provisions, which may cause both complications and opportunities in planning.)
Here at Felton & Peel, we understand that your financial outlook can be very sensitive to these changes, and our wealth management advisors are here to help you build a strong financial plan and help you every step of the way. Schedule a consultation with us today to get started.