Adjustments to Federal Reserve policy and the election of a new president were two events widely covered by media outlets that will help shape the financial landscape in 2025. Another event that’s received less attention—but that’s likely to have a significant effect on your personal finances this year—is the potential sunsetting of the Tax Cuts and Jobs Act of 2017 (TCJA).
The TCJA was a windfall piece of legislation for personal wealth planning, and since its passage, it has generated substantial tax savings for millions of Americans. Its key components included:
- A decrease in marginal income tax rates, including cutting the top tax rate from 39.6% to 37%Disclosure 1
- An increase in child tax credits from $1,000 to $2,000 for each dependent under the age of 17Disclosure 1
- The increase of Alternative Minimum Tax (AMT) exemptions for married couples from $84,500 in 2017 to $126,500 in 2023Disclosure 2
- A doubling of the estate tax exemption, meaning fewer households would be subject to the taxDisclosure 3
There is, of course, a possibility that some components of the legislation could be salvaged through new laws, even if the act is allowed to sunset. Moreover, the November election results now favor the likelihood that most if not all of these provisions will be extended. However, to mitigate any potential downside if the act isn’t renewed, we’ve brought in Truist Senior Wealth Strategist Victor Santiago and Wealth Strategist Erich Stroupe to explain the impacts of a potential sunset as the new year dawns.
When the TCJA was signed into law on New Year’s Day 2018, it created substantial modifications to the federal tax code. “It’s difficult to overstate the impact of the TCJA,” says Stroupe. “It significantly altered estate and income tax rules and changed a variety of tax conditions that affect business owners in ways that are huge for personal wealth planning.”
Just how significant were these alterations? To start, taxpayers received the largest standard deduction available in American history. And while some of the TCJA’s provisions—like a reduction in corporate tax rates—are permanent, many of the changes with the greatest potential for positive outcomes on personal wealth planning aren’t.
“If it doesn’t get renewed, we’re looking at big changes to the tax code and, by extension, personal wealth planning,” says Santiago. “The best way to prepare for that possible outcome? Adopt a ‘use-it-or-lose-it’ approach to the TCJA from now until the end of 2025.” In practical terms, that means taking stock of your wealth strategy and adjusting it to maximize any benefits and minimize potential downsides ahead of any potential sunset, which would go into effect on Jan. 1, 2026.
While the exact strategy for achieving both of those aims will vary depending on your individual circumstances, Santiago and Stroupe have distilled the TCJA into four key points of focus. These provisions stand the biggest chance of having a ripple effect across the world of personal wealth planning. Familiarizing yourself with each of these points ahead of a conversation with your wealth advisor is the first step in fine-tuning your wealth plan to compensate for any tax code changes.
- Reduction of estate tax benefits. Without a renewal, the TCJA’s $13.99 million per person exemption in 2025 on the federal estate tax would effectively be cut in half at the start of 2026—a change that could create downstream consequences for virtually everyone with a wealth plan. “Simply knowing about this puts spouses with a combined worth of $30 million in an excellent position to adjust accordingly,” says Santiago. “Even spouses with less than $30 million may find value in using the higher exemption amounts. Bring it up to your wealth advisor, and we can work with you to use that exemption before any possible sunset scenario.”
- Alterations in tax bracket designation. If allowed to expire, households in the top quintile of income could see their taxes increase by $8,920, according to one estimate, which would represent about a 2.2% reduction in after-tax income.1 “If those brackets are altered, designations to the top marginal rate will elevate, which will push you into higher brackets a lot quicker over the coming years,” says Stroupe. “Aside from filing at higher rates, that could also potentially create a ripple effect that alters the window for when you should recognize income annually, and possibly even affect the use and timing of retirement decisions like Roth IRA conversions.”
- Termination of certain benefits for small business owners. Another component of the TCJA that could sunset would result in the elimination of benefits like bonus depreciation and Section 199A qualified business income (QBI) tax deductions. “Most small businesses in America will now lose the ability they’ve had for the last 10 years to deduct up to 20% of their annual business income,” says Santiago.
- Increase of claimable deductions on mortgage interest. Not every outcome from a potential expiration of the TCJA will necessarily produce a negative impact. “Currently, you’re only able to deduct up to the first $750,000 of mortgage indebtedness, but if Congress doesn’t renew there’s a good chance that amount will revert to the pre-TCJA level of $1 million—which is all the more reason why you should plan ahead to make the most of it if that happens,” says Stroupe. The TCJA also capped the state and local tax deduction at $10,000. If that goes away, taxpayers in states with high property tax rates could benefit with a larger deduction.
Politics, possibilities, and planning
With the TCJA’s extension dependent on politics, knowing exactly what will happen to the tax code is difficult. Congress may renew the legislation but with changes that remove some of the current provisions or enact an entirely new piece of legislation related to the tax code. Congress might also delay action until much later in the year, leaving families with less time to assess the new law and adjust accordingly.
“Solutions for a problem that may or may not occur are a bit tricky,” says Stroupe. “That’s why the best course of action is to get informed about what may happen if the legislation sunsets and discuss these changes with your tax advisor. Then resolve to set up a review of your current finances and wealth plan with your advisor or strategist. Together, we can get the context we need to make a plan that positions you to deal with what you and your tax advisor think will happen in 2025.”
Any comments or references to taxes herein are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.
