Upcoming Tax Changes for the 2025 Tax Sunset

Issue# 1119

As we approach the end of 2025, taxpayers face a significant transition. Several provisions introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire, potentially reshaping the tax landscape for individuals, families, and businesses. This issue provides a brief overview of the expected changes, the broader economic implications, and practical steps to prepare for the sunset of TCJA provisions.

Overview of Expiring Provisions

We have often heard that the TCJA introduced numerous tax cuts and reforms aimed at reducing tax burdens across income brackets and supporting business growth. However, many of these provisions were designed to sunset by the end of 2025. Key changes include:

• Individual Income Tax Rates: Reduced tax rates across income brackets will revert to pre-TCJA levels, leading to higher tax rates for most filers.

• Standard Deduction: The nearly doubled standard deduction will decrease, potentially increasing taxable income for many households.

• Child Tax Credit: Enhanced provisions for the child tax credit will revert to lower amounts, reducing benefits for families with dependents.

• Section 199A Deduction: The 20% deduction for qualified business income (QBI) for pass-through entities, such as S-corporations and sole proprietorships, will expire.

• Estate Tax Exemptions: The increased estate tax exemption thresholds will decrease, subjecting more estates to federal taxation.

• State and Local Tax (SALT) Deduction Cap: The $10,000 cap on SALT deductions will expire, which could either increase deductions or remain subject to new legislation.

Legislative Landscape and Potential Outcomes

The expiration of these tax provisions is likely to spark significant legislative debate. Key points include:

• Bipartisan Negotiations: With a divided government, bipartisan support will be essential to address expiring tax cuts. The handling of the 2010 Bush-era tax cut extensions highlights how bipartisan efforts can lead to durable solutions.

• Economic Considerations: Extending these provisions could result in substantial federal revenue losses. According to the Joint Committee on Taxation, extending the individual tax cuts alone could lead to a revenue loss of $346 billion in fiscal year 2027.

• Political Dynamics: The 2024 election outcomes will influence how expiring tax cuts are approached. Republicans are likely to push for the extension of cuts, while Democrats may focus on deficit reduction and increased progressivity in the tax code.

Economic Analysis of the TCJA Era

The TCJA era has yielded mixed economic results, affecting various sectors:

• GDP Growth: Nothing exciting. GDP growth has been slightly above pre-TCJA rates, averaging 2.65% annually compared to 2.52% in prior years.

• Investment Patterns: Despite expanded bonus depreciation, business investment growth has lagged behind pre-TCJA trends.

• Employment and Compensation: Employment growth accelerated post-TCJA; however, total compensation, measured by the employment cost index, has slowed, raising questions about TCJA’s impact on real wages.

Strategic Considerations for Taxpayers

In light of the upcoming sunset, we have developed proactive strategies for our clients to mitigate the potential impacts of these changes:

1.    Individual Tax Planning

With possible increases in tax rates and reductions in deductions, individuals should explore ways to manage their tax exposure. Accelerating income and deductions before 2026, maximizing retirement contributions, and making charitable donations can reduce taxable income.

2.    Estate and Gift Tax Planning

High-net-worth individuals may benefit from taking advantage of the current estate tax exemption amounts before they revert to lower thresholds. Leveraging estate planning strategies, such as setting up trusts, can help manage potential tax liabilities.

3.    Business Structuring and QBI Deduction

With the expiration of the Section 199A deduction, business owners should consider strategies to optimize QBI deductions while available. Restructuring income timing, accelerating expenses, or increasing retirement contributions could help minimize taxable income.

4.    SALT Deduction Planning

If the SALT cap expires, taxpayers who itemize deductions may experience a favorable increase in deductible expenses. This can be especially valuable for taxpayers in high-tax states.

Practical Takeaways

To make the most of the current tax structure and prepare for 2025 changes, here are some ideas:

• Stay Informed: Tax changes can have a profound effect on personal and business finances. Keeping informed and consulting a tax professional can ensure proactive adjustments.

• Maximize Current Benefits: Make full use of TCJA provisions, such as the higher standard deduction and QBI deduction, while they are available. Taxpayers should take advantage of any benefits they are eligible for before they expire.

• Timing of Income and Deductions: Accelerating income to benefit from lower tax rates and timing deductions strategically can help reduce tax liability. Consider shifting expenses and deferring deductions where possible to minimize tax impact over time.

• Regular Estate Plan Reviews: Given the upcoming reduction in estate tax exemptions, high-net-worth individuals should reassess estate plans to maximize benefits under current law. Setting up trusts or making gifts while exemptions are high could protect wealth.

• Retirement Contributions: Making contributions to retirement accounts, such as 401(k)s and IRAs, can provide significant tax savings. Maximizing these contributions supports long-term financial planning while reducing current taxable income.

The 2025 tax sunset presents a complex challenge for taxpayers, with significant changes to income tax, estate tax, and business deductions. However, with careful planning, individuals and businesses can navigate these changes effectively. Proactive strategies, combined with regular consultation, can help mitigate the impact of the expiring provisions. Staying informed, maximizing current benefits, and timing income and deductions strategically are essential steps to ensure financial stability as we transition into this new tax landscape.

If we have not yet met to finalize your Tax Plan for 2024-25, please email Frances Gallegos at f.gallegos@aybassam.com for an appointment. She will make sure you are taken care of.

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Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. It is always recommended to consult with a qualified professional or financial advisor to make decisions regarding your individual financial situation. The information provided in this article is based on the laws and regulations in effect as of 2023 and may be subject to change. Ahmad Yama Bassam, the author of this article, is the managing partner at A.Y. Bassam & Co. LLP, A Professional Tax, Accountancy, Business Advisory & Payment Solutions Firm, based in California.

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