THE END OF AN ERA:
Preparing for the Sunset of the Tax Cuts and Jobs Act
By: Karl Schlabach, CLU®, ChFC®, CFP®, CExP™ – Lead Financial Advisor
As the Tax Cuts and Jobs Act (TCJA) of 2017 approaches its sunset at the end of 2025, taxpayers and businesses alike are preparing for significant changes. The TCJA brought about some of the most substantial revisions to the US tax code in decades, aiming to stimulate economic growth and simplify tax filing. However, with its expiration on the horizon, the landscape is set to shift dramatically. This article delves into a few key aspects of the TCJA, its impending sunset, and the potential impacts on businesses, individuals, and estates. We will also explore several proactive strategies to help mitigate these effects, ensuring you are well prepared for the changes ahead.
WHAT IS THE TAX CUTS AND JOBS ACT?
The TCJA, enacted in December 2017, introduced sweeping changes to the US tax code. Key provisions included reduced individual and corporate tax rates, an increased standard deduction, and a doubled estate and gift tax exemption [1]. These changes were designed to stimulate economic growth and simplify the tax filing process.
BUSINESS IMPACT
For businesses, the TCJA brought several benefits, including a reduction in the corporate tax rate from 35% to 21% and the introduction of the Qualified Business Income (QBI) deduction, which allowed pass-through entities to deduct up to 20% of their income [2]. However, with the sunset, the QBI deduction will expire, and corporate tax rates may increase, affecting profitability and cash flow for many businesses [3] may increase, affecting profitability and cash flow for many businesses [3].
Example: A small business owner who operates as a sole proprietor and currently benefits from the QBI deduction will see their taxable income increase by 20% once the deduction expires. This could result in a higher tax liability and reduced funds available for reinvestment in the business [4].
PERSONAL IMPACT
Individuals will also feel the effects of the TCJA sunset. The individual tax rates, which were lowered under the TCJA, are set to revert to higher pre-2018 levels. The standard deduction, which was nearly doubled, will be reduced, potentially increasing taxable income for many taxpayers [5]. Additionally, the child tax credit will decrease from $2,000 to $1,000 per qualifying child [6].
Example: A married couple with two children currently benefits from a $30,000 standard deduction and a $4,000 child tax credit. After the sunset, their standard deduction will decrease to approximately $16,600, and their child tax credit will be halved to $2,000. This change could significantly increase their taxable income and reduce their overall tax savings [7].
ESTATE IMPACT
One of the most significant changes will be the reduction of the estate and gift tax exemption. As of 2025, the federal estate tax lifetime exemption is $13.99 million per individual. This means that individuals can transfer up to this amount to their heirs without incurring federal estate tax. For married couples, the combined exemption is $27.98 million. After the TCJA sunset at the end of 2025, the federal estate tax lifetime exemption is expected to be reduced to approximately $6 million per individual. For married couples, the combined exemption will be around $12 million. This reduction means more estates will be subject to federal estate taxes, potentially reducing the inheritance left to heirs.
Example: A couple with an estate valued at $15 million who passes away before the TCJA sunset can transfer their entire estate tax-free. However, if they pass away after the sunset, their estate will be subject to federal estate taxes on the amount exceeding the new $12 million exemption, potentially resulting in a tax liability of approximately $1.2 million.
TIPS FOR LIMITING THE EFFECTS OF THE SUNSET
Predicting Congressional decisions is challenging — will they extend, modify, or let the provisions expire? Staying informed and planning ahead is crucial. Below are some strategies to consider regardless of the outcome.
REVIEW YOUR ESTATE PLAN
It’s essential for everyone to ensure that your entire estate passes to your intended beneficiaries efficiently and with as little administrative hassle as possible. Taking a few steps now can have a tremendous impact.
• Review your beneficiary designations and your essential legal documents (will, powers of attorney, healthcare directives, trusts, etc.).
• Update your personal financial statement. Often, individuals do not fully value their business or real estate holdings.
• If your net worth exceeds $10 million, discuss the potential impact of the TCJA sunset with a financial advisor and estate planning attorney.
• For those with a net worth over $30 million, it’s vital to review now to potentially maximize current opportunities.
EXPLORE TAX-MANAGED INVESTMENT STRATEGIES
• In 2024, many equity mutual funds distributed significant capital gains, with averages of around 5% and some funds exceeding 10%. These distributions can result in unexpected tax liabilities for investors [8] [9] [10].
• Consider using more tax-efficient investment vehicles, such as ETFs or individual securities, with a tax management overlay for a tax smart, personalized portfolio.
REVIEW RETIREMENT PLAN DESIGNS TO MAXIMIZE CONTRIBUTIONS
• Retirement plan contribution limits have continued to rise.
• Significant contribution limits are available depending on your specific plan design. Contributions can help maximize retirement savings and potentially provide considerable income tax deductions.
CONSIDER STRATEGIC CHARITABLE GIVING
• Donating appreciated assets rather than cash can provide a double tax benefit.
• This strategy allows you to claim a charitable deduction, avoid capital gains tax, and rebalance your investment portfolio
Talk with your trusted professionals to identify potential opportunities for your situation. Regardless of the outcome this year, our advisors are available to collaborate with you to create a clear path forward.
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