Jen Lindstrom
Dec 9, 2024
The Tax Cuts and Jobs Act, passed in late 2017, was a historic tax overhaul that provided economic benefits to individuals and businesses. The TCJA brought about significant changes, such as lowering individual income tax rates, increasing the estate and gift tax exemption, and introducing the Qualified Business Income Deduction. Many of these provisions are set to expire, or “sunset,” after Dec. 31, 2025.
As the 2025 deadline approaches, taxpayers have an opportunity to “use up the sunshine” and optimize their tax situations before these provisions revert to their pre-TCJA form. Here’s how individuals and businesses can plan for the upcoming shift in the tax landscape.
Before the individual income rates climb to their pre-2017 levels, it might be advantageous to recognize income in the years leading up to 2026 when rates are lower. This could include strategies like exercising stock options or electing to receive bonuses in advance.
For those with traditional IRAs, converting to a Roth IRA could be beneficial, paying tax at current lower rates in exchange for tax-free growth and withdrawals later.
Estate planning is another area where action is crucial. The TCJA doubled the estate and gift tax exemption, which allows individuals to transfer up to $13.61 million in 2024 without incurring federal estate tax. This amount is set to revert to about half that value post-2025.
Therefore, high-net-worth individuals might consider making large gifts now or restructuring their estates to take advantage of this higher exemption, potentially saving millions in future estate taxes.
Charitable giving strategies should also be reassessed. Currently, taxpayers that itemize can deduct cash contributions to public charities up to 60% of their adjusted gross income (AGI). With this provision set to revert to 50%, those inclined to philanthropy might consider “bunching” donations into one year to exceed the standard deduction, which will be halved without legislative action.
Finally, all taxpayers should keep an eye on legislative developments. Although the TCJA’s sunset is scheduled, will the return of former President Donald Trump and a Republican-held Congress usher in a sunrise? Any extension or reform of these tax provisions could change the planning horizon significantly.
In conclusion, “using up the sunshine” involves proactive tax planning to harness the benefits of current tax laws before they expire. Whether through income acceleration, estate planning, business restructuring, or strategic charitable contributions, the focus should be on optimizing tax outcomes in the time remaining. As the clock ticks towards 2026, the urgency to act becomes more pronounced, emphasizing the need for tailored strategies to navigate this tax transition effectively.