The Tax Cuts and Jobs Act of 2017 (TCJA) ushered in numerous changes to U.S. tax law, many of which are set to expire or “sunset” on January 1, 2026. This impending shift presents both challenges and planning opportunities for taxpayers. Here’s a detailed look at the key changes and strategic planning approaches to consider:
Key Changes
Marginal Tax Rates Will Increase: The TCJA lowered tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate decreased to 37% from 39.6%. These tax rates are set to sunset December 31, 2025. The top tax rate beginning January 1, 2026, reverts to 39.6%.
Standard Deductions Will Decrease: For 2024, the standard deduction amounts are $29,200 for married filing jointly, and $14,600 for single filers. Starting in 2026, the standard deduction will be about half of what it is currently, adjusted for inflation. Many more taxpayers will benefit from itemizing deductions.
State and Local Tax (SALT) Deduction Will No Longer Be Limited: The state and local tax (SALT) deduction was capped at $10,000, which had a significant impact on taxpayers in high-tax states. After 2025, this limitation will expire, allowing greater benefit from deducting taxes paid during the calendar year, including real estate taxes, state or local income taxes, and personal property taxes.
Mortgage Interest Deduction Will Increase: The TCJA generally suspended the home equity loan interest deduction. It limited the home mortgage interest deduction to the first $750,000 of debt (if married filing jointly) for any loan originating on or after December 16, 2017. Beginning in 2026, the mortgage interest deduction will revert to pre-TCJA levels, allowing interest to be deducted on the first $1 million in home mortgage debt and $100,000 in a home equity loan.
Miscellaneous Itemized Deductions Will Be Deductible Again: The TCJA temporarily eliminated most miscellaneous itemized deductions, such as investment advisory fees and legal fees. These deductions will once again be allowed, starting January 1, 2026, under the previous rules, to the extent they exceed 2% of the taxpayer’s adjusted gross income.
The Corporate Tax Rate Will NOT Change: The TCJA permanently changed the corporate tax rate structure, which previously had a top rate of 35%, to a flat 21% tax rate regardless of the amount of corporate taxable income.This provision is one of the few that will not expire at the end of 2025.
Qualified Business Income (QBI) 20% Deduction Will Go Away: Owners of passthrough businesses, such as partnerships and S corporations, as well as sole proprietorships, may currently claim a deduction of up to 20% of QBI. Beginning in 2026, the Sec. 199A QBI deduction will no longer be available.
Strategic Planning Approaches
Reconsider Timing of Deductions: Taxpayers anticipating higher tax rates when TCJA provisions expire should delay incurring deductible expenses until those higher rates come into play. This strategy applies to various deductions like business expenses, charitable donations, and SALT payments for 2025; especially since the SALT deduction will no longer be limited by the $10,000 ceiling starting in 2026. Additionally, with the scheduled reduction of standard deduction amounts, accelerating or bunching deductible expenses in certain years to surpass the standard deduction threshold can optimize deductions over multiple years.
Maximize Retirement Contributions: Contributing to retirement accounts such as 401(k) plans, individual retirement accounts (IRAs), or self-employed 401(k)s can reduce taxable income and lower tax liability. Individuals ages 70½ or older can also donate to charities from an IRA using a tax-free qualified charitable distribution.
Consider Roth Conversions: With tax rates expected to increase, consider accelerating Roth conversions into 2024 and 2025. Gradually converting a portion of traditional retirement savings into a Roth account over time can enhance the diversity of tax strategies for retirement — allowing individuals to gain improved control over their future tax obligations. For instance, during your lower tax brackets years, it might be prudent to withdraw from pre-tax sources and later, when facing higher tax brackets, tap into Roth sources.
Utilize Capital Gains Tax Rates: Long-term capital gains tax rates are typically lower than ordinary income tax rates. Consider realizing significant gains strategically before overall individual tax rates increase.
Rethink Business Structure: With the corporate tax rate of 21% available to C corporations not expiring, owners of entities taxed as partnerships or S corporations may want to consider converting to a C corporation if that is a more tax-effective entity structure.
Leverage the QBI Deduction (Sec. 199A): You can consult with your tax advisors to evaluate ways to structure their business to maximize this deduction before it expires.
Harvest Capital Losses: Consider tax-loss harvesting to offset capital gains with capital losses and reduce overall tax liability. Depending on your tax situation , it could make sense to hold off on harvesting losses until 2026 when the income thresholds for capital gains taxes will readjust, because capital gains at that time could be taxed at a higher marginal rate, making the losses more valuable in 2026.
Consider Optimal Timing of Charitable Giving: Charitable contributions can be deducted from taxable income and reduce income taxes but can also be used as a vehicle for estate tax planning. Consider donating appreciated assets to charity to avoid capital gains taxes and to receive a tax deduction. You may also want to consider charitable giving strategies like donor advised funds, charitable gift annuities, charitable remainder trusts, or private foundations. If you are thinking of making donations in 2025 rather than 2026, we can help you evaluate whether 2026 offers a more favorable scenario for deductions due to an anticipated increase in their tax rates.
Invest Health Savings Account (HSA) Contributions: If eligible, you can contribute to an HSA to reduce your taxable income and have tax-free withdrawals for qualified medical expenses (plus invest these contributions to grow tax-free for future medical expenses).
Evaluate Mortgage Debt Structure: Given that the mortgage debt limit for interest deduction is set to revert to $1 million (for debt incurred before December 15, 2017), reconsidering mortgage plans may be beneficial, particularly if you are expecting a mortgage balance between $750,000 and $1 million.
Reconsider Home Equity Loans: Evaluate home equity loans or lines of credit, keeping in mind that interest deductibility is tied to the loan’s use for home improvement. With the potential reversion allowing for a broader deductibility of home equity interest (up to $100,000, regardless of use), this could influence the timing and use of such credit lines.
Your Coldstream Wealth Management team is here to help navigate the intricate terrain of tax planning and consult with your CPA to provide personalized, strategic guidance and recommendations that align with your financial goals and tax situation.
