Get a step ahead of tax changes
As Congress debates proposals in 2025, learn what’s at stake.
Article published: December 13, 2024
In this article:
- Our current tax law expires at the end of 2025.
- Prepare yourself by knowing about the key tax changes that are on the table.
- Potential changes could end up benefitting you.
There’s a good chance that our tax regime is going to change. Why? First, the Tax Cuts and Jobs Act of 2017, which dictates our current taxes, sunsets at the end of 2025. And second, we have a new president and a new Congress that want to make their mark.
Is there reason to worry? No. Changes aren’t imminent, and there’s a way to get a head start on changes that could occur.
Knowledge is power
Two things you need to know right off the bat.
- There’s no way of predicting with certainty if and when a new tax bill will pass and what it will look like.
- Congress could buy itself more time and extend the TCJA into 2026 until a bill is hashed out and signed into law.
It’s always a minor miracle when any legislation passes, not only because of major disagreements between the parties but also because of serious intraparty fractures. Also, final law usually looks very different from what was originally proposed.
As Congress debates and wrestles with its dysfunction, educate yourself on the parts of the current tax regime that could be at stake, so you’re prepared if a new tax bill becomes law.
It’s unlikely that Congress would pass anything in early 2025, so there is time next year to talk with your planner and accountant to get to know the facts as they stand.
— Lisa Eitzel, Executive Director, Financial Planning
“Once we have a definite sense of what may happen, that’s when we can start seriously discussing if there are any changes that need to be made to your plan – and there may not be,” Eitzel adds.
Be smart not scared
There is a wide spectrum of possibilities for a new tax structure. But the spectrum itself is bookended by two definite scenarios.
- On one end, and as mentioned, Congress could extend current tax law until it agrees on a new tax bill.
- On the opposite end, if it’s not extended and no changes are signed into law, the tax act dictates that provisions of the current tax regime revert to what it was before the TCJA was enacted, accounting for inflation.
“Even if we go back to 2017 levels, taxes would be still historically low,” says Eric Bronnenkant, Head of Tax/Director of Tax Advisory and Planning at Edelman Financial Engines. “What you don’t want to do is get caught up in media hype and hearsay about possible changes because the reality of what actually could happen is likely a lot less scary.”
If you change your portfolio now due to rumors or proposals, it could seriously harm your retirement goals if those tax changes don’t occur.
We believe that worries about potential changes to certain other tax provisions may be overblown. Take the lifetime estate tax exemption, for example.
The TCJA of 2017 provided for a very large lifetime exemption, which will stand at $13.99 million for individuals and $27.98 million for married couples in 2025. Let’s face it, for most, a decrease from such a high level won’t matter much. If the TCJA sunsets, the exemption could revert to a still very generous $7 million (an inflation adjusted estimate).
Bottom line: Don’t give away large parts of your estate now to get ahead of a possible exemption decrease that may not materialize, especially as you don’t know how long you will live and what money you will need until then.
Changes could be a good thing for some
Don’t assume all changes to TCJA will be a bad thing. The TCJA wasn’t a boon for those living in populous states with high income and property taxes, such as California, New York and New Jersey. That’s because the TCJA capped the state and local income/real estate tax deduction at $10,000.
- The cap on the state and local income and real estate tax deduction could be lifted under a new tax law after a big outcry from those high-tax states. Also, it could be lifted anyway if the TCJA sunsets with a new law to replace it.
- The TCJA also eliminated personal exemptions as well as miscellaneous itemized deductions, like your investment advisory fees. So, they could make a comeback too.
One fly in the ointment for some could be the alternative minimum tax. The AMT has a broader definition of income, with tax rates (26% and 28%) that kick in when certain income exemptions are exceeded. The TCJA vastly limited the number of taxpayers subject to the AMT, so if it sunsets, more could be on the hook.
Dive a little deeper into what’s at stake – good and bad – with the table below.
As always, please consult your planner as well as a tax professional to get more in-depth guidance. We’re here for you.
Tax Cuts and Jobs Act: Key provisions at stake
| TCJA (Reflects 2025 Levels) | If TCJA sunsets | |
|---|---|---|
Income tax rates | Seven brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37% | Seven brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6% |
Long-term capital gains and qualified dividends | Tax rates: 0, 15% and 20% | Tax rates: 0, 15% and 20% |
State and local income tax deduction (includes real estate, personal property and state income taxes) | $10,000 cap | No cap |
Standard deduction | $15,000 for single filer $30,000 for married filing jointly | Could be $8,350 for single filer, $16,700 for married filing jointly (estimate, adjusted for inflation) |
Personal exemption deductions | Eliminated | Reinstated for filers and for dependents, could be up to $5,300 (estimate adjusted for inflation) |
Miscellaneous itemized deductions | Unless an exception is granted, a large group of personal and professional service expenses can no longer be deducted | Reinstated, including investment advisory fees |
Mortgage interest deduction | Limited to $750,000 of debt related to purchase, home improvement or construction of a primary or secondary residence | Limit rises to $1 million plus $100,000 of home equity debt |
Estate tax | $13.99 million individual lifetime exemption in 2025, inflation indexed $27.98 million for a married couple | Could be $7 million for an individual and $14 million for a married couple (estimate, adjusted for inflation) |
Pass-through business income deduction | 20% | Eliminated after sunset |
Source: IRS.gov
Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.
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