TCJA Provisions Set to Sunset After 2025: What You Need to Know
Written by: Matt Roetcisoender, CPA, CVA
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the tax landscape, benefiting many taxpayers, particularly business owners. However, these provisions are set to expire after 2025, which means strategic tax planning is crucial to maximize current benefits and prepare for the upcoming changes. This article will cover the most impactful provisions that will sunset and require proactive planning.
Estate and Gift Tax: The Most Impactful Change
The estate and gift tax is one of the most critical areas requiring attention as the TCJA provisions sunset. The estate tax exemption is at an all-time high, allowing individuals to gift up to $13.61 million (as of 2024) without incurring federal estate taxes. After 2025, this exemption amount is set to be cut in half, drastically reducing the amount you can transfer tax-free.
Planning Considerations:
- Maximize Gifting Now: High-net-worth individuals should consider making significant gifts before the exemption decreases.
- Washington State does not have a state gift tax, it may be advantageous to gift assets while still living to avoid the Washington estate tax.
- Leverage Valuation Discounts: If you are considering gifting business interests, business valuations are crucial to maximize the benefits. VSH CPAs offer business valuation services to assist you in this process. We have two Accredited Business Valuation Specialists on our team.
Impact on Individual Tax Rates
The TCJA lowered individual income tax rates across the board, but these rates will revert to higher pre-TCJA levels after 2025. This change impacts all taxpayers, especially high-income earners.
Key Points:
- Current Top Tax Rate: 37%
- Post-Sunset Top Tax Rate: 39.6%
- Standard Deductions and Itemized Deductions: The higher standard deductions will revert to lower amounts; however, the cap on state and local deductions will be eliminated and miscellaneous itemized deductions will be reinstated.
Individual Provisions: What to Expect
- Tax Rates: All income tax rates are set to increase, affecting everyone from low to high-income earners.
- Standard Deductions: The standard deduction will decrease, reducing the amount of income that is tax-free.
Qualified Business Income Deduction (QBID)
For business owners, the sunset of the TCJA provisions means the potential loss of the 20% qualified business income deduction (QBID). This deduction has been a significant tax saver for many pass-through entities, such as S corporations, partnerships, and sole proprietorships.
Action Steps:
- Evaluate the Impact
Assess how the loss of QBID will affect your tax situation and explore alternative tax-saving strategies.
- Proactive Planning for the Sunset of TCJA Provisions
The upcoming sunset of the TCJA provisions means taxpayers will lose various tax benefits, making proactive planning essential. Here’s what you should consider now:
- Review Your Estate Plan
With the estate tax exemption set to decrease, reviewing and possibly updating your estate plan is crucial.
- Gift Assets Strategically
Determine what assets to gift and the timing of those gifts. Consider whether now is the right time for business owners to gift business interests.
- Business Valuations
Accurate business valuations are essential if you plan to gift business interests. VSH CPAs can help with professional business valuation services.
Wrapping Up
The sunset of the TCJA provisions after 2025 presents both challenges and opportunities for taxpayers, especially business owners. Proactive planning is vital to maximize current benefits and prepare for future changes. At VSH CPAs, we are here to help you navigate these complex changes and develop strategies tailored to your unique situation.
