When you hear the term “sunset” you probably envision the beautiful colors of the sun setting beyond the horizon near the end of a day. Well, in a short time from now, a different type of sunset will affect many taxpayers and decisions they need to make. In 2017, the Tax Cuts and Jobs Act (TCJA) was passed and with it brought significant changes to the tax code. Collectively, these changes included a decrease in tax rates, larger lifetime estate and gift tax exemptions, and increased deduction amounts. If Congress does not act before the end of 2025, these provisions will “sunset”, and revert back to pre-TCJA levels. It is imperative that taxpayers are prepared.
Starting in 2026, marginal tax brackets will increase back to pre-TCJA levels. The 12% bracket will increase to 15% and so on down the line, up to the highest bracket moving from 37% to 39.6%. If you have not already started, a series of Roth conversions over a period of time is a great way to pay less tax now as opposed to withdrawing taxable funds when rates are higher. Accelerating income by taking more than your Required Minimum Distribution (RMD) from traditional retirement accounts is another great way to take advantage of lower tax rates in the short term. If you are charitably inclined, making a tax-free Qualified Charitable Distribution (QCD) from a taxable IRA now is an efficient way to lower required taxable amounts you may be subject to withdraw in the future.
Gift and Estate Tax
For those with larger estates, tightening up your estate plan prior to the sunset in 2025 is a must. The TCJA doubled the lifetime estate and gift tax exemption which is currently at $12.92 million for individuals or $25.84 million for married couples. In January 2026, adjusted for inflation, these numbers will be in the neighborhood of $7 million for individuals and $14 million for couples. The IRS has made it clear that gifts made in excess of future reduced exemption amounts will not be taxed. With that being said, taking advantage of record high exemption levels may be a great way to avoid future estate tax.
The enactment of the TCJA has allowed taxpayers to utilize many favorable deductions to offset taxable income. Perhaps the most common being the standard deduction which for 2023 is $13,850 for single filers and $27,700 for those who are married and file jointly. These amounts will continue to adjust for inflation until 2026 where they will, you guessed it, revert back to pre-TCJA levels which will be roughly half of their respective 2025 amounts. Now is the time to get into the habit of keeping up with items that may qualify as itemized deductions to provide to your tax preparer come filing season. These might include a certain percentage of unreimbursed medical and dental expenses, property and sales tax paid, mortgage interest paid, casualty losses, and charitable deductions.
Business owners need to set their sights on the sunset as well. The Qualified Business Income (QBI) deduction was created with the TCJA. This allows those with certain self-employment income, as well as income from an S-Corporation or LLC to deduct up to 20% of business income, barring certain thresholds. This has provided a great benefit to small business owners and is too set to expire in 2025.
It is difficult to predict what Congress may propose or enact, but it is critical to prepare for what is currently on the docket with the reversal of the TCJA. Tax planning is no one’s favorite pastime, but it is a critical component of a well put together financial plan. Contact your trusted Certified Public Accountant, CERTIFIED FINANCIAL PLANNER™ professional, or attorney if you feel you need advice on planning for the upcoming changes. Don’t let the sun set on your plan!
Published in the Victoria Advocate
Hayden Schilling, CPA is a staff accountant for Keller & Associates CPAs, PLLC.