When the sun sets on the year 2025, it may also mark the impending sunset of several key tax provisions introduced by the Tax Cuts and Jobs Act (TCJA). These changes will have a significant impact on taxpayers, and it’s crucial to be well-informed and proactive in your financial planning. Below are some of the key areas where tax deductions and rates will revert to pre-TCJA levels unless new legislation intervenes.
Estate and Gift Tax: The generous exemptions provided by the TCJA, allowing individuals to pass on nearly $13 million per person tax-free, will be reset to an estimated $6 million in 2026. To take advantage of the current high exemption amount, consider estate and gifting strategies, but do so with the guidance of your estate attorney and tax advisor as it can quickly become complex.
Income Taxes: The expiration of income tax cuts will lead to rate increases for many Americans. For instance, the top individual, estate, and trust income tax bracket will rise from the current 37 percent to 39.6 percent for taxable income over $471,000. Explore strategies to optimize your current lower brackets, such as accelerating income through options like Roth IRA conversions and capital gains harvesting.
Alternative Minimum Tax (AMT) Exemption: The AMT exemption for married filing jointly (MFJ) will drop from the current $1,156,000 to the previous level of $161,000. This change may have significant implications for taxpayers.
Separate Tax Rate Thresholds for Capital Gains: The separation of tax-rate thresholds for capital gains and dividend income from ordinary income will end in 2026, potentially affecting your investment strategy.
Deductions: Pre-TCJA deductions will be reinstated in 2026. For example, state and local property tax deductions (SALT) and mortgage interest deductions will return to their previous limits. Review these changes to plan your financial decisions accordingly.
Charitable Giving: While the TCJA preserved most charitable donation deductions, the annual limit for cash contributions to public charities will return to 50 percent of adjusted gross income (AGI) in 2026. Make the most of the current 60 percent deduction limit for significant contributions before it changes.
Qualified Business Income (QBI) Deduction: The QBI deduction, offering a 20 percent deduction on eligible business income, is set to expire in 2026. Evaluate your business structure and potential benefits of becoming a C-corporation in light of these changes.
It’s important to note that new tax legislation could alter these sunset provisions before 2026. Nevertheless, working closely with your team of advisors, including your financial advisor, attorney, and accountant, can help you create a plan that addresses both your current tax situation and the potential changes on the horizon.
If you require further information or assistance with planning for these forthcoming tax changes, please don’t hesitate to reach out to us at Accavallo & Company. You can contact our office at (203) 925-9600 or send an email to [email protected]. Our team is here to provide expert consulting and guidance to ensure you’re well-prepared for the evolving tax landscape.