Overview
The Tax Cuts and Jobs Act (TCJA), which introduced several tax benefits starting in 2018, is scheduled to sunset on December 31, 2025. This guide aims to help individuals and businesses prepare for these upcoming changes by understanding the implications of the sunset provisions.
Individual Provisions
Individual Income Tax Rates
- Tax rates have been reduced for most brackets but will revert to pre-TCJA levels after 2025.
- Current (2018-2025): 10%, 12%, 22%, 24%, 32%, 35%, 37%
- Post-2025: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
Key Changes for Individuals
- Standard Deduction: Increased under TCJA but will decrease post-sunset.
- Personal Exemptions: Suspended under TCJA; will be reinstated.
- Child Tax Credit: Doubled under TCJA but will revert to $1,000 per child post-sunset.
- AMT (Alternative Minimum Tax): Exemption increased; will revert to lower exemption amounts.
- Miscellaneous Deductions: Many were suspended under TCJA; will be reinstated.
Business Provisions
Opportunity Zones
- Timeline for investment benefits and deferral recognition laid out, with key dates in 2026 and 2028.
Excess Business Losses
- The limitation on excess business losses applies for taxpayers exceeding $500,000 in income (MFJ); sunsets after 2025.
Bonus Depreciation
- 100% bonus depreciation is phased out, starting in 2023 and ending in 2026.
IRC §179
- Increased deduction limits under TCJA ($1,000,000); these changes are permanent and will not sunset.
Qualified Business Income Deduction (QBI)
- 20% deduction on qualified business income, limited by various factors.
- Sunsets after December 31, 2025, significantly impacting small businesses.
Strategies for Sunset Planning
Roth Conversions
- TCJA repealed the ability to recharacterize Roth conversions permanently.
- Consider converting to Roth IRAs while the tax rates are lower to avoid higher taxes post-sunset.
Estate and Gift Taxes
- Exemption amounts doubled under TCJA but will revert post-sunset.
- No clawback provisions for gifts made before the sunset but where the donor dies after.
- Utilize the increased exemptions before the sunset to maximize estate planning benefits.
Conclusion
The TCJA provided several tax benefits, but with the sunset provisions approaching, taxpayers need to prepare for a reversion to previous tax laws. Early planning and strategic actions can mitigate the impact of these changes, ensuring a smoother transition and potential tax savings.
For further details and personalized advice, consult with a Tax Professional.
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