Key Insights: Preparing for Potential Tax Changes

As we stand on the precipice of potential tax reform driven by the expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) in 2025, individuals and business owners alike should brace themselves for significant tax changes. Understandably, there exists a cloud of uncertainty as we transition into a new presidential term; however, one aspect remains crystal clear—new tax realities are approaching. This article delves into the implications of these changes on your personal and business finances while providing guidance on how to navigate this shifting landscape.

The Tax Cuts and Jobs Act (TCJA) Overview

The TCJA, which took effect in 2018, fundamentally altered the tax landscape for both individuals and businesses. Among its many provisions were reduced tax rates and various deductions designed to stimulate economic growth. However, these changes were designed as temporary measures, with a sunset clause putting most of them in jeopardy by the end of 2025.

Major Expiring Provisions

As the year 2026 looms closer, it’s essential to grasp what provisions face expiration:

1. Individual Tax Rates: Currently, individual tax rates are progressively lower thanks to the TCJA. However, these rates are scheduled to revert to the higher pre-2018 levels. Such a shift means taxpayers will encounter increased tax burdens unless Congress intervenes.

2. Qualified Business Income (QBI) Deduction: One significant item on the chopping block is the QBI deduction, which allows pass-through business owners to reduce their taxable income by up to 20%. If this provision is not extended, those in the maximum tax bracket may see their effective tax rate on business income escalate by nearly 10%.

3. Itemized Deductions: Various itemized deductions—including mortgage interest and charitable contributions—face restrictions if the TCJA sunsets, potentially limiting taxpayers’ options for reducing taxable income.

4. Estate Tax: The TCJA significantly raised the estate tax exemption. Post-2025, however, the exemption amount is poised to be slashed in half, impacting wealth transfer strategies for many families.

Navigating the Potential Changes

Given the impending changes, it’s crucial to adopt a proactive approach to tax planning. Here are specific areas to focus on:

Review Individual Tax Strategies

1. Timing of Income and Deductions: With tax rates likely increasing, consider accelerating income recognition to 2025 to take advantage of lower rates. Conversely, deferring deductions until 2026 could be strategically beneficial.

2. Plan for Strategy Adjustments: Engage with a tax professional to reassess the potential impact of reverted tax rates on your overall financial plan—especially as it relates to retirement and investment strategies.

Business Tax Planning

1. Pass-Through Income Management: Given the potential loss of the QBI deduction and how it affects pass-through entities, business owners should evaluate methods to accelerate income into 2025 to capitalize on current tax advantages.

2. Entity Structure Evaluation: For businesses contemplating converting from an S corporation to a C corporation, conducting an analysis may reveal potential cost savings before law changes take effect.

Itemized Deductions Strategy

Among the adjustments anticipated with the sunset of the TCJA, the standard deduction will decrease, and the limitations on state and local tax deductions (SALT) will create challenges for higher-income earners.

1. Maximize Charitable Contributions: Plan your charitable giving in alignment with new cash contribution limits; consider bunching donations into one tax year to take full advantage of deduction limits.

2. Income Planning: Since itemized deductions for individuals may phase out at higher income thresholds, scrutinize your income levels to ensure you can optimize your deductions effectively.

Estate and Gifting Strategies

The upcoming reduction in the lifetime gift and estate exclusion mandates revisiting your estate planning strategies.

1. Assess Current Situations: Given the proposed halving of the exclusion amount, prioritize gifting strategies now to maximize the advantages before potential reductions in 2026.

2. Plan for Valuations and Documentation: Early preparation can help ensure you leverage the higher exclusion before it diminishes.

What Stays the Same?

While the TCJA introduced significant changes that the expiration clause will affect, some provisions will remain untouched, including:

• C Corporation Tax Rate: The decreased rate of 21% will continue to apply.
• Net Operating Loss Limitations: Businesses will continue facing restrictions on deductibility.

These unchanged provisions offer tactical planning opportunities worth exploring with your CPA.

How CLA Can Assist

Given the complexities surrounding the potential expiring provisions of the TCJA, uncertainty can become overwhelming. CLA’s tax professionals understand these issues inside and out and can assist in preparing tailored strategies.

By engaging in proactive scenario planning, CLA can help you visualize and model your financial picture around these impending changes.

Take Action

Initiate your tax strategy planning today to ensure preparedness for future changes. Complete the contact form on CLA’s website to connect with our tax strategy team and create a customized approach to guide you through these uncertain times.

The expiration of TCJA provisions represents a critical moment for individuals and business owners alike. Staying informed, reassessing your strategies, and working with professionals can help shield you from potential pitfalls and leverage available opportunities in a rapidly evolving tax landscape.