Chris’ Client Corner - TCJA

To build upon the podcast we released last month, I want to highlight several key points regarding preparation for the tax sunset and outline major changes to be aware of. As mentioned in the podcast, 2025 will mark the final year that the Tax Cuts and Jobs Act (TCJA) remains in effect. Beginning in 2026, income tax brackets will change, alongside some critical factors to consider when deciding whether to opt for the standard deduction or itemize deductions.

Key Changes:

Tax brackets are set to increase, leading to higher taxes for many individuals. For example, a couple earning $300,000 in 2024 falls into the 24% tax rate, but by 2026, they would fall into the 28% tax rate.

There will be a significant decrease in the estate tax exemption. Currently around $13.6 million, the exemption will decrease to $6.2 million, impacting estate planning strategies.

The standard deduction will be cut in half, necessitating a careful evaluation of whether to take itemized deductions or the standard deduction. Certain limitations on itemized deductions will be removed or increased, making itemized deductions more favorable.

To prepare for these changes, consider the following strategies: 

Roth conversions offer a way to convert pre-tax retirement funds to Roth funds by paying income tax on the converted amount. This can be advantageous, especially with lower tax rates now and the anticipation of higher income in 2026.

Review estate plans to assess gifting strategies, particularly for those nearing or below the current exemption amounts. Trust planning may also be necessary to reduce taxable estates effectively.

Understand which itemized deductions are available. Mortgage interest will remain deductible up to $1 million in debt (currently $750k), and miscellaneous itemized deductions will be allowed. Charitable giving can further increase itemized deductions, offering potential tax benefits.

While this isn't an exhaustive list of changes, it's crucial to realize how the TCJA sunset will impact your taxes. Consider consulting with an accountant to further prepare for potential increases in your tax liability.

Best,
Chris Klein, CFP®