How to Prepare for the Tax Cuts and Jobs Act Expiring
It’s crucial to stay informed about the ever-changing landscape of tax laws and regulations. One of the most significant changes in recent years was the 2017 Tax Cuts and Jobs Act (TCJA). This landmark legislation introduced several key alterations to the tax code, aimed at stimulating economic growth. However, it's essential to understand that many of these provisions are set to revert to their pre-TCJA status by 2026. We will provide a comprehensive overview of the TCJA, its implications upon expiration in 2026, and financial planning opportunities for clients who need to prepare for these changes.
Background on the 2017 Tax Cuts and Jobs Act (TCJA)
The TCJA was signed into law on December 22, 2017, making sweeping changes to the U.S. tax code. Its primary objectives were to reduce tax rates for both individuals and corporations, simplify tax brackets, and encourage economic growth. Some of the most notable provisions of the TCJA included:
- Reduction of Individual Tax Rates: The TCJA lowered individual tax rates across the board, resulting in lower tax liabilities for most Americans.
- Increased Standard Deduction: The standard deduction was nearly doubled, which simplified the tax filing process for many taxpayers who no longer needed to itemize deductions.
- Changes to Itemized Deductions: Several deductions were limited or eliminated, including the state and local tax deduction (SALT) and miscellaneous itemized deductions.
- Estate Tax Exemption Increase: The TCJA increased the estate tax exemption, reducing the number of estates subject to federal estate tax.
- Corporate Tax Rate Reduction: The corporate tax rate was significantly lowered, making the United States more competitive on the global stage.
Implications Upon Expiration in 2026
While the TCJA brought immediate benefits to many taxpayers, it's important to recognize that several of its provisions are temporary and will revert to their pre-TCJA status in 2026. Here are some key changes that will occur upon the expiration of the TCJA:
- Individual Tax Rates: Tax rates will revert to their previous, higher levels, potentially resulting in higher tax liabilities for individuals.
- Standard Deduction: The standard deduction will return to its pre-TCJA amount, which may require more taxpayers to itemize deductions for potentially greater tax savings.
- State and Local Tax Deductions: The limitation on SALT deductions, which capped deductions at $10,000, will be removed, potentially benefiting taxpayers in high-tax states.
- Estate Tax Exemption: The estate tax exemption will decrease, potentially subjecting more estates to federal estate tax.
Financial Planning Opportunities
People who are not actively preparing for the expiration of the TCJA in 2026, there are several financial planning opportunities to consider:
- Tax-Efficient Investing: Focus on tax-efficient investment strategies to minimize the impact of higher tax rates. Utilize tax-advantaged accounts such as IRAs and 401(k)s to maximize tax deferral.
- Rethink Deductions: Analyze your itemized deductions and consider strategies to maximize deductions before they potentially become more limited after 2026.
- Estate Planning: Review your estate plan to ensure it aligns with the changing estate tax exemption. Consider gifting strategies and trusts to minimize potential estate tax liabilities.
- Income Shifting: Explore opportunities to shift income to family members in lower tax brackets to reduce your overall tax liability.
- Retirement Planning: Accelerate retirement savings to take advantage of the current tax rates. Roth conversions and other retirement planning strategies can be beneficial.
- Charitable Giving: Evaluate charitable giving strategies, including donor-advised funds and charitable trusts, to maximize deductions and support causes you care about.
It’s imperative to work closely with your financial advisor and tax advisors to navigate these changes effectively and take advantage of the financial planning opportunities available to you. By staying proactive and well-informed, you can ensure that your financial plan remains resilient in the face of evolving tax laws and regulations.