It’s One of the Smartest Tax Moves You Can Make.
Substantial changes to the tax code are on the horizon, meaning you should review your wealth management strategy now to prepare for potential consequences. The sweeping 2017 tax reform known as the Tax Cuts and Jobs Act (TCJA) catalyzed a seismic policy shift when it famously lowered individual taxes, doubled the standard deduction and slashed estate taxes. Now, the TCJA is approaching a critical juncture. By the end of 2025, many of its key provisions will sunset.1
The implications of this looming deadline are vast. Unless lawmakers decide on an alternative solution for the replacement of the expiring measures, all the TCJA’s personal tax breaks will revert to their pre-2017 (inflation-adjusted) levels starting in 2026. (Note: The large package of corporate tax changes, including the reduction of the corporate tax rate from 35% to 21%, will remain in place.)
Personal tax rates are probably going in one direction: Up.
You might soon face a far larger tax burden on what you earn, what you sell and what you give away.
If you’re not actively managing your tax situation, you need to reengage and recalibrate your plan. We recommend a complete evaluation of your tax-mitigation approach for income, investments and your legacy—otherwise you risk being unprepared for what lies ahead.
Why now?
Congress’ budget reconciliation process puts constraints on any provisions that increase the federal deficit outside a 10-year window, which includes several hallmarks of the TCJA.
Technically speaking, Congress could opt to renew all or a portion of the existing tax provisions beyond their expiration. However, because of financial concerns, there is currently little to no appetite for this. In its most recent national deficit projections, the Congressional Budget Office estimates that extending the TCJA in full would cost the nation a staggering $3.3 trillion,2 or $3.8 trillion with interest, through 2033.
The national debt and deficit, already at pronounced levels, make an additional $3 trillion financial commitment unpalatable. Political division in Washington, D.C., stifles cooperative policymaking, rendering consensus on major financial measures elusive. And a growing trend to target the “wealthy”—an ambiguously defined group that encompasses a broad income spectrum—creates an inhospitable environment for tax cut extensions.
While no one knows exactly where Congress will land on a new tax bill, the lack of interest in renewing key TCJA provisions punctuates the transience of the position we’re in at this moment. No matter how confident you are in your current tax strategy, it could soon be defunct.
Depending on your individual priorities and financial goals, the coming years could present opportunities—to pull forward income, prepare for the return of more itemized deductions, and maximize a temporary window of remarkable multigenerational wealth transfer opportunities. Otherwise, brace for considerable impact and regret in a few short years.
Let’s inspect four key tax planning opportunities to prioritize before the TCJA provisions in question expire.
1. Anticipate Higher Personal Taxes and Capital Gains
Unless Congress extends current provisions, individual tax rates will probably increase3 across the board. The top marginal rate could revert to 39.6%, up from today’s 37%. Your personal tax rate may never be more favorable than it is right now.
Capital gains are another consideration. The TCJA did not alter the tax rates for long-term capital gains4 (set at 0%, 15%, or 20% for the highest income threshold, which the TCJA made separate from ordinary income). However, the future of suppressed long-term capital gains is uncertain. One policy proposal published by the Brookings Institution, for instance, recommends increasing the long-term capital gains and dividend rates by 5 percentage points5 upon the sunset of the TCJA provisions.
Here are several strategic moves to contemplate as we edge closer to a potentially higher tax environment:
Roth conversions
When you convert funds from a traditional IRA to a Roth IRA, you pay income tax on the converted amount at your current tax rate. Future withdrawals from the Roth IRA, assuming they are qualified, are tax-free. By converting, you pay the tax now, at today’s rates, rather than in the future, when tax rates might be higher.
- Can pay the tax bill out of pocket
- Do not need converted Roth assets for five years
- Will be in the same or a higher tax bracket in retirement
- Can reduce your total tax liability at the time of conversion
Dividend acceleration
Business owners often connect personal income planning to business financial planning. If you own a business such as a legal, dental or health care practice, you might take dividends in the current year instead of deferring them to future years.
Pass-through business income
The TCJA introduced a significant tax deduction for owners of pass-through businesses, such as sole proprietorships, partnerships, S corporations and LLCs. Specifically, the law allowed qualifying business owners to deduct up to 20% of their business income6 before calculating their tax liability. Consider maneuvering your business’s income, deductions and distributions so that you recognize more income before the pass-through business tax break potentially vanishes.
Capital gains harvesting and repurchase
If you’re contemplating selling assets with accrued gains, such as stocks, bonds, business assets, or even art and collectibles, you might find it advantageous to expedite the sale. Though you’ll incur taxes on these gains, the tax rates may be lower now than in the future. This can be especially beneficial if you believe your capital gains taxes will increase down the line. Subsequently, you can repurchase the investments to reset the cost basis, potentially minimizing future tax liabilities. This approach, known as a buyback strategy, allows you to potentially mitigate higher taxes while maintaining a position in the investment.
2. Optimize Itemization Strategies in Light of Expected Standard Deduction Rollback
To simplify the tax code, the TCJA doubled the standard deduction and restricted or removed many itemized deductions. Today, standard deduction caps7 have reached an inflation-adjusted $13,850 for individuals and $27,700 for married couples. Alongside the raised standard deduction, the TCJA set a limit of $10,000 per year ($5,000 for married couples filing separately) on the amount of state and local tax (SALT) deductions taxpayers could claim on federal returns.
At the end of 2025, the standard deduction will probably revert to lower amounts, or roughly half of what it is now. The personal exemption will return8 and the child tax credit,9 which the TCJA doubled to $2,000, will get cut. The SALT cap will also expire.
Although you likely continued to itemize deductions post-TCJA, the inflated standard deduction had a modest cooling effect on itemization among top earners. The percentage of taxpayers with an AGI of $1 million or more who itemized dropped from over 90% pre-TCJA to under 80%10 post-TCJA, according to a study by SmartAsset. In an environment that is likely to see rising taxes, strategic itemization is more important, and it’s possible that pre-TCJA itemized deductions will return.
SALT tax deferral
Taxpayers in high-tax states such as California, Hawaii, New York and New Jersey may welcome the expiration of the $10,000 cap on SALT deductions. Originally implemented to offset reductions in federal tax rates, this cap has predominantly impacted taxpayers in states with high income and property taxes. To strategically navigate this shift, you might defer certain state and local tax payments11 where possible, with savings dependent on state laws and underpayment penalties.
Broadening your approach to itemization
The sunset of the TCJA provisions could also bring back 2% miscellaneous itemized deductions,12 providing high-earning taxpayers with additional avenues to minimize their taxable income. This includes the ability to deduct unreimbursed employee business expenses, investment management fees and tax preparation fees—areas that are often overlooked. It could be wise to reevaluate and broaden your approach to itemizing in anticipation of this change, ensuring that you accurately document eligible deductions, especially those related to employment and tax planning costs.
Aligning withholding and estimated tax payments
Maintaining a close watch on your tax payments throughout the year is always crucial. This is critical after the tax code changes. You might want to adjust how much money is being held back from your paychecks or tweak your estimated tax payments.13 The goal is to spread out your tax payments evenly so you don’t get hit with penalties for paying too little. To help you navigate tax payments and avoid surprising bills, monitor any changes in your income and follow safe harbor rules, which are like guidelines to help you avoid underpayment penalties.
3. Use Higher Tax Breaks To Pass On Your Net Worth
The TCJA brought substantial modifications to estate tax exemptions.14 Prior to its enactment, individual exemptions stood at $5.49 million. With the TCJA, this soared to nearly $13 million (or close to $26 million per married couple). However, as the sunset nears, these exemptions will probably shrink, landing somewhere between $6 million to $7 million per individual.
The looming shift carries the implication of a more formidable estate tax liability for heirs inheriting estates that exceed the future thresholds.
Prioritize wealth transfer through 2025
Think of the current estate tax breaks as a limited-time offer.
Right now, you can give away a lot more money or assets to your heirs without triggering a big tax bill—or potentially any tax bill at all. So, if you give while the tax breaks are still at their elevated limits, you and your heirs could save money in the long run.
Advance your estate planning
Strategic planning solutions like spousal lifetime access trusts (SLATs) and other trust structures can help to shield you from future tax vulnerabilities. For instance, SLATs allow a spouse to move assets out of their estate and into an irrevocable trust while retaining access to the funds. This setup enables them to use the current exemption without relinquishing financial control. Meanwhile, alternative trust structures might be used to focus on goals such as protecting assets from creditors or directing assets precisely per the grantor’s wishes, which provides a dual benefit of tax planning and enhanced financial security.
4. Ramp Up Your Charitable Giving
Currently, deductions for donations to public charities are permissible up to 60% of AGI. Post-2025, this allowable deduction will revert to 50% of AGI unless Congress sets up a different threshold. That means now may be the best time to quickly and strategically reevaluate your charitable contributions.
Boost charitable giving through 2025
To take full advantage of tax benefits before the higher deduction dips, you might consider increasing your giving in the run-up to 2025.
Set up donor-advised funds
Think of donor-advised funds (DAFs) as special savings accounts just for charity. You can put in money, stocks or other assets as a donation now and take a tax deduction for the current year—before the laws change. And you don’t have to decide which charities get the money, either. You can take your time and choose later on. So, DAFs let you grab today’s bigger tax breaks but give to your favorite charities at your own pace in the future.
Protect your wealth from future tax changes
The TCJA has been the law of the land long enough to see a new presidency, a global pandemic, historic interest-rate volatility and a revolutionary artificial intelligence boom. But don’t let what feels like a lifetime of tax filings distract you from the impermanence of your tax situation.
The current tax code has an expiration date, and the sunset is approaching faster than a filibuster in a contentious Senate debate.
While there’s a remote possibility of the expiring provisions being extended, whatever happens is likely to be influenced by the outcomes of the 2024 elections, various legislative acts and other factors. The only certainty is that the tax code will change soon.
The only way to ensure you’re fully prepared is to work with a team of advisors, CPAs and tax practitioners who can empower you to make the best decisions that align with your broader goals.
Our advisors not only provide a comprehensive overview of your financial circumstances, but they also analyze previous tax returns and offer targeted advice to potentially lower your tax obligations.
We can give you a scenario analysis to pinpoint key income thresholds. This analysis can uncover tax planning opportunities such as Roth conversions, tax-efficient retirement income withdrawals, charitable contributions and more. We can help project your potential tax liabilities following the expiration of TCJA provisions.
Talk with one of our seasoned financial advisors, engage with our team of tax professionals and act now to protect more of your wealth from the IRS.
Sources:
1 Buckle Up. 2025 Promises To Be An Historic Year In Tax And Budget. (2023, June 7). Tax Policy Center.
2 Tax cut extensions cost over $3.3 trillion | Committee for a Responsible Federal Budget. (2023, August 14). Committee for a Responsible Federal Budget.
3 Greenberg, S. (2023, August 23). Tax reform isn’t done. Tax Foundation.
4 How are capital gains taxed? Tax Policy Center.
5 The coming fiscal cliff: A blueprint for tax reform in 2025 | Brookings. (2023, September 27). Brookings.
6 Qualified Business Income Deduction | Internal Revenue Service.
7 Publication 505 (2023), Tax Withholding and Estimated Tax | Internal Revenue Service.
8 Walczak, J. (2023, July 24). The status of state personal exemptions a year after federal tax reform. Tax Foundation.
9 Fíonta, & Fíonta. (2023, July 24). Temporary policies complicate the child tax credit’s future. Tax Foundation.
10 Cepf, S. H. (2021, March 30). How did the Trump tax bill affect itemized deductions? – 2021 study.
11 Ebeling, A. (2021, August 11). Senate Calls For Revamped SALT Tax Break; Skip September State Estimated Tax Payment To Save Big. Forbes.
12 Publication 529 – Miscellaneous Deductions. (2020). Internal Revenue Service.
13 IRS reminds taxpayers to adjust tax withholding to pay the right tax amount | Internal Revenue Service.
14 Estate tax | Internal Revenue Service.
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