The Tax Cuts and Jobs Act (TCJA) of 2017 ushered in significant changes to the U.S. tax system, from reduced income tax rates to higher estate and gift tax exemptions. However, many of these provisions are set to expire at the end of 2025. While it remains uncertain whether lawmakers will extend these changes, it’s important for individuals to understand how the expiration of the TCJA could affect their financial situation and tax planning.
Income Tax Rates: A Return to Pre-TCJA Levels?
The TCJA lowered tax rates across most income brackets, with the highest marginal tax rate set at 37%. In addition, taxpayers were placed into a series of lower brackets, ranging from 10% to 32%. However, unless Congress intervenes, these lower tax rates will revert to pre-TCJA levels in 2026. For example, the highest tax rate will rise from 37% back to 39.6%, and other brackets will return to their former rates as well, with the 28% bracket replacing the 24% bracket, and the 22% rate increasing to 25%.
For taxpayers considering Roth conversions — where assets are transferred from tax-deferred accounts into Roth IRAs — it may be beneficial to act before the end of 2025. Converting assets while tax rates are lower could potentially save on future taxes, making this a critical strategy to consider before the rate changes take effect.
Capital Gains Taxes
Currently, long-term capital gains and qualified dividends benefit from preferential tax rates, which remain intact even after the TCJA expires. The 3.8% net investment income tax, which applies to high earners, will also stay in place. However, a key change comes in 2026, when the TCJA’s separation of tax-rate income brackets for capital gains and ordinary income will end. As a result, taxpayers could face higher capital gains taxes depending on their income tax bracket.
For those who have significant appreciated securities, selling them before the tax changes could be a strategic move. While selling these assets will trigger taxable gains, doing so before the tax laws change could minimize the amount of tax owed on those gains. Planning ahead could help reduce your future tax burden.
Estate and Gift Taxes
Under the TCJA, the estate and gift tax exemption was significantly increased, allowing individuals to pass on more assets without incurring estate or gift taxes. In 2024, the exemption stands at $13.61 million for individuals and $27.22 million for couples. However, in 2026, the exemption will revert to pre-TCJA levels, effectively cutting the exemption in half.
If you have a taxable estate that approaches or exceeds the new exemption limit, it’s crucial to explore estate planning strategies to minimize the potential impact of these changes. For instance, the annual gift tax exclusion in 2024 allows individuals to give up to $18,000 per recipient without triggering any tax consequences. Additionally, you can contribute to 529 education savings accounts, with the opportunity to gift up to $90,000 for each recipient, spreading it out over five years. These strategies could help reduce the size of your taxable estate and take advantage of the current higher exemption limits before they decrease.
The Future of Tax Legislation
The expiration of many TCJA provisions at the end of 2025 creates uncertainty, especially with respect to income tax rates, capital gains taxes, and estate and gift tax exemptions. While it’s unclear what action Congress will take, it’s important to start preparing for the potential changes. Whether through Roth conversions, selling appreciated assets, or employing estate planning strategies, being proactive can help minimize your tax burden in the face of possible tax law changes.
It’s advisable to discuss potential strategies with a tax professional or financial adviser to navigate the upcoming changes effectively. By staying informed and prepared, you’ll be better positioned to manage your financial future, no matter what tax policy decisions come next.
