Navigating the Income Tax Impact of the TCJA Sunset

The Tax Cuts and Jobs Act (TCJA) of 2017 reshaped the U.S. tax landscape. Some taxpayers benefited from reduced tax rates, increased standard deductions, and various other tax breaks while other taxpayers were negatively impacted, primarily due to the state and local tax cap (particularly taxpayers in high income tax states). It’s essential to understand that several provisions of the TCJA are set to expire or “sunset” over time, which could significantly impact your income tax liability in the future. Let’s delve into the implications of the sunset provisions and how they may affect your tax planning strategies.

Sunset Provisions of the TCJA:

The TCJA made numerous changes to the tax code, including individual income tax rates, standard deductions, itemized deductions, and the child tax credit. However, several key provisions are scheduled to revert to their pre-TCJA status in 2026 absent legislative action. These include:

• Individual Tax Rates: The TCJA lowered individual income tax rates across the board, with the highest marginal rate decreasing from 39.6% to 37%.
• Standard Deduction: The TCJA increased the child tax credit and expanded its availability to more taxpayers.
• Child Tax Credit: The TCJA nearly doubled the standard deduction for individuals and married couples filing jointly.
• Limitation on State and Local Tax (SALT) Deduction: The TCJA imposed a $10,000 cap on the deduction for state and local taxes, including property taxes and either income or sales taxes.

Impact on Tax Planning:

The sunset of TCJA provisions poses significant implications for taxpayers and necessitates careful tax planning. Here’s are a few things you should consider:

• Future Tax Liability: As the reduced individual tax rates and enhanced tax breaks of the TCJA expire, some taxpayers may face higher total income tax liabilities while others may face lower total tax liability (if they can deduct ALL their state and local tax). It will be crucial to anticipate these changes and adjust your tax planning strategies accordingly.
• Long-Term Financial Planning: The uncertainty surrounding the future of tax policy underscores the importance of long-term financial planning. Consider how potential tax law changes could affect your retirement savings, investment strategies, and estate planning.
• Roth Conversions: Even if you anticipate your total tax liability will be lower, the tax on each additional dollar you earn will be higher after the sunset. Now may be an opportune time to consider Roth conversions so you may want to consult with your financial advisor. Converting traditional retirement account assets to Roth accounts can lock in current tax rates and provide tax-free income in retirement.
• Charitable Giving: The temporary nature of certain tax incentives, such as the increased standard deduction and limitations on itemized deductions, may influence your charitable giving strategies. Explore tax-efficient ways to help maximize the impact of your charitable contributions.

Consult with Professionals:

Given the complexity of the tax code and the uncertainty surrounding future tax policy, consulting with tax and financial planning professionals will be essential for navigating the income tax impact of the impending sunset of TCJA provisions. A knowledgeable wealth advisor can work with your tax professional to help you assess your tax situation, identify potential tax planning opportunities, and develop a proactive plan tailored to your financial goals.

By staying informed, assessing your tax situation, and seeking professional guidance, you can effectively navigate the evolving tax landscape and help minimize your overall tax liability in the years ahead. If you have additional questions about the upcoming tax sunset or would like to review your financial plan, please feel free to reach out.