The Tax Cuts and Jobs Act of 2017 expires at the end of 2025, requiring both taxpayers and preparers to prepare for significant tax changes. The expiration of these provisions will result in higher tax rates, fewer deductions and increased tax liabilities for many individuals.

The debate over making permanent the provisions of the Tax Cuts and Jobs Act involves a variety of economic, fiscal and social issues.

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Proponents argue that permanent tax cuts provide stability and predictability, which are essential for long-term economic planning and growth. They argue that lower tax rates increase disposable income for individuals and raise capital for businesses, spurring investment, job creation, and overall economic expansion. In addition, maintaining higher estate and gift tax exemptions supports wealth transfer planning and reduces the tax burden on families and businesses.

Opponents of making the tax law permanent argue that the TCJA's tax cuts disproportionately benefit higher-income individuals and corporations, exacerbating income inequality. They argue that the loss of revenue from these tax cuts could lead to larger budget deficits and national debt, requiring cuts to essential public services and social programs. Critics also worry that permanent tax cuts could limit the government's fiscal flexibility to respond to future economic crises and infrastructure needs.

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Below is an in-depth examination of key sunset provisions, their potential impacts and strategic measures recommended by tax advisors to mitigate these effects.

Key provisions expiring in 2025

• Individual income tax rates: The TCJA lowered individual income tax rates in different brackets. These rates will return to pre-2018 levels, resulting in higher taxes for most taxpayers.

• Standard discount: The TCJA nearly doubled the standard deduction, but it will revert to lower levels, reducing the amount of income that is tax-free.

• Child tax credit: The credit increased from $1,000 to $2,000 per child with a higher removal threshold. This will revert to the previous lowest amount and threshold.

• State and local tax deduction: Currently limited to $10,000 by the TCJA, this will expire, potentially allowing higher deductions for taxpayers in high-tax states.

• Exemption from estate and gift tax: The exemption amount doubled under the TCJA, but will return to its pre-2018 level, significantly reducing the amount of tax-free transfers.

• Alternative minimum tax: The increased exemption amounts and exclusion thresholds for the AMT will be rolled back to lower levels, potentially subjecting more taxpayers to this tax.

• Deduction of qualified business income (Section 199A): This 20% deduction for pass-through business income will expire, increasing the effective tax rate on this income.

With these changes looming, it is essential that individuals and advisors stay informed and proactively plan for a smoother transition.

Impact on Taxpayers

• The highest tax rates: Most taxpayers will face increased tax rates, resulting in higher tax liabilities.
• Reduced Standard Deduction: More taxpayers may need to itemize deductions, complicating tax filings and potentially increasing taxable income.
• Child tax credit reduction: Families with children will experience a reduction in their tax credits, increasing their overall tax burden.
• Estate planning: The lower estate and gift tax exemption will require more careful estate planning to minimize tax liabilities.
• Increased AMT exposure: A larger number of taxpayers may become subject to the alternative minimum tax, increasing their tax liabilities.

Impact of Inflation

Inflation can affect the effects of these expiring provisions in several ways:

• Dragging the brackets: As incomes rise with inflation, taxpayers may find themselves in higher tax brackets, exacerbating the impact of higher tax rates.
• Standard deduction and credits: If the standard deduction and credits do not keep pace with inflation, their real value is reduced, leading to higher effective tax rates.
• Exemption from property taxes: The real value of the estate tax exemption will decrease with inflation, potentially subjecting more estates to taxation.

Recommended actions for customers

Estate and gift tax planning

• Maximize the raised exception: Take advantage of the current estate and gift tax exemption, which is significantly higher than it will be after 2025. Advisers may consider recommending making substantial gifts now to take advantage of the higher exemption, the which will return to pre-TCJA levels (approximately $5 million, adjusted for inflation) in 2026. However, remember the lessons from 2011, when expected estate tax periods were extended. Those who made irrevocable gifts without contingency plans regretted their decisions.
• Create and fund Trusts: Consider creating and funding funds to take advantage of the current high exemption amounts. This may include amending existing gift trusts, revoking grantor-grantor trust notes, or creating new gift trusts.

Income tax planning

• Accelerate your income: With individual tax rates poised to rise, accelerating income in current lower tax years can be advantageous. Strategies include converting traditional IRAs to Roth IRAs, which will be taxed at lower current rates.
• Roth IRA Conversions: Completing Roth IRA conversions before sunset ensures that current lower tax rates are locked in on the converted amounts, providing tax-free growth and future withdrawals.
• Charitable contributions: Make large charitable contributions now to take advantage of the higher deduction limit (60% of AGI), which will revert to 50% after 2025.

Business tax planning

• Deduction of qualified business income (QBI): Broadcasting entities should maximize the QBI deduction, which provides a 20% deduction on qualified business income. This discount will end after 2025.
• Bonus depreciation: Businesses must capitalize 100% bonus depreciation available until 2025 on qualifying property. This benefit will begin to be phased out in 2026.
• Consider changes in the structure of the economic entity: With the expiration of the QBI deduction, some business owners may benefit from restructuring their business as a C corporation while continuing to benefit from the flat 21% corporate tax rate.

Itemized deductions and AMT

• Detailed discount plan: With the standard deduction set to drop significantly, taxpayers are more likely to need to itemize deductions. Strategic planning for this change can optimize tax benefits.
• State and local tax deduction: The $10,000 limit on the SALT deduction is set to expire, potentially allowing larger deductions for taxpayers in high-tax states. This should be taken into account in tax planning.
• Alternative minimum tax: The AMT exemption amounts will return to lower levels, possibly subjecting more taxpayers to the AMT. Planning ahead for this change can help mitigate its impact.

By taking these proactive steps, advisors can help clients better navigate the complexities of the TCJA sunset and potentially reduce their overall tax liabilities. As the 2025 deadline approaches, it is essential to review and adjust financial and estate plans to ensure they are aligned with future changes.