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.
