It’s the article you have all been waiting for. The conclusion of talking taxes…at least for now. Today we are going to talk about the sunsetting of the current tax rates that were all set up through TCJA in 2017. Let’s get to it.
TCJA stands for Tax Cut and Jobs Act. It was the big tax cut in 2017. The reason we are talking about this today is because unless something happens in the next few years, taxes are going to have a back to the future moment in a few years. The short version is when these tax cuts were passed, the cuts were made permanent for corporations but temporary for individuals. Mmm, guess we see who is of higher importance to our elected officials, but I digress.
Maybe I should take the more diplomatic approach to explain why these were only temporary cuts for individuals. It comes down to the cost of the bill. The Republican led House of Representatives, US Senate and the White House wanted a bill that cost no more than $1.5 trillion over 10 years. Through the construction and analysis of the bill it became apparent someone was going to get a permanent reduction while the other was getting the temporary one. Mmmm. Say no more. Instead, let’s hit the highlights of what is coming down the pike for us individuals.
- First off, tax brackets will be changing back. Fortunately, they should be adjusted for inflation, which will be roughly 20% higher.
- More importantly, the threshold to get into higher brackets is lower. This means you get into higher tax brackets faster.
- The rates for the individual tax brackets will be higher. The current 10, 12 and 22% brackets will revert back to 10, 15 and 25% brackets. On the higher end, the 32, 35 and 37% brackets will morph back into brackets of 33, 35 and 39.6%.
- Another important tax change to be aware of is the marriage penalty returns. Right now it is basically double the single rate. The gap narrows when the TCJA sunsets in 2026.
- Oh, just to be clear. The current individual tax changes will sunset on December 31, 2025. The new/old ones will be in place when you wake up on January 1, 2026.
- Standard deductions will also change. It will be cut in half to return to the old rates. This means lots of people who haven’t itemized deductions the last few years will be doing it again soon. Roughly 10% of tax filers are itemizing deductions now. This is estimated to triple after TCJA expires.
- SALT returns too. This is the State and Local Tax which used to be uncapped and was capped at $10,000.
- Charitable giving rates also decrease.
- Miscellaneous deductions and personal exemptions will also return.
- Here is some more fun news. The AMT (Alternative Minimum Tax) exemptions drop dramatically. On average it will be ¼ of the current exemption levels. It gets worse as your income goes up.
- Child tax credits will phase out sooner and the credits will be smaller.
- Just in case you were worried estate planning attorneys would have nothing to do, well, the exemptions will also sunset. This means they will be cut in half.
- Now, there are some things that will not change. They include capital gains brackets, credits, Social Security taxation, Net Investment Income and Self-Employment Tax.
One final thing to mention. It comes down to something I talk about with clients when it comes to things like Roth Conversions, especially at retirement. We always need to analyze whether taxes will be lower now while working or higher down the road in retirement. If these taxes do sunset there will be a bigger need to pay attention as we know rates will be going up.
Here is your official disclaimer. The 3.5 years between now and when TCJA is planned to expire is a lifetime in the world of elected officials. A lot can and will happen between now and the close of 2025. Odds are something will change. However, as a CFP who does a lot of tax planning, I have to focus on the rules that are in place now and planned to be there in the future. I know I am already having conversations with clients about 2026 and beyond. Hopefully your CFP is doing the same for you.