Navigating Potential Tax Law Changes: What You Need to Know

In less than 18 months, the amount you pay in taxes may shift significantly. Many changes that were enacted under the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to sunset after 2025, and unless Congress takes action (along with the President signing into law) they will expire. Provisions such as the doubling of the estate tax and gift tax exemption limits, personal income tax rates and brackets, increases to the standard deduction, and others will revert back to what was in place prior to those changes. This article outlines several of the key changes and their potential impact if no action is taken by Congress. It is intended to keep you informed, however, it should not be construed as tax or legal advice. We strongly advise you to reach out to your team of professionals, your Financial Advisor, your accountant and your attorney to discuss how these potential changes may impact your unique situation.

In 2017, the TCJA doubled the estate and gift tax exemption. In 2024 your estate is able to transfer up to $13.61 million per individual ($27.22 million for married couples) without incurring federal estate or gift taxes. Should the current code sunset, changes will significantly impact estate planning strategies by reverting exemptions to pre-TCJA levels (adjusted for inflation) of approximately $7 million per individual. To address this, you should review and update your estate plan to account for the lower exemption thresholds and consult with your financial advisor to consider strategies to minimize estate taxes. Many of these strategies will allow you to take advantage of the current higher exemption levels, but they must be in place prior to December 31, 2025, requiring your attention sooner rather than later.

Fortunately, the IRS has clarified that individuals who do take advantage of the higher current exemption levels will not be subjected to any claw-back taxes after 2025 when the law sunsets.

Income tax brackets have been adjusted for inflation and to reflect changes in income distribution, and will likely revert to pre-TCJA levels if laws sunset, increasing taxes for most taxpayers:

• When the TCJA became law most tax rates were lowered, including the top marginal rate from 39.6% to 37%. In addition, the income thresholds (or bands) also changed. For example, a single person making $100,000 in 2017 would have found themselves in the 28% bracket. That same person with the same income in 2024 would be in the 22% bracket.
• Another example is a married couple filing jointly making combined $350,000 in 2017 would have been in the 33% bracket. That same couple with the same income in 2024 would find themselves in the 24% bracket.

Should these changes take place, consider converting Traditional IRA assets to Roth IRA assets. If you know or believe you will be in a higher tax bracket when you anticipate withdrawing from your IRAs, perhaps it may be advantageous to convert some IRA assets to Roth, pay the taxes now while you are in a lower rate, and then appreciate tax-free withdrawals when in a higher tax bracket. Surviving spouses who have inherited a traditional IRA can also reap a benefit from making a Roth conversion before the sunset if they rolled the inherited IRA into a spousal IRA.

One of the most notable changes for individual taxpayers under TCJA was the increase in standard deduction, which nearly doubled to $12,000 for single filers and $24,000 for those married and filing jointly, while eliminating personal exemptions. If laws sunset, the standard deduction will decrease, and personal exemptions will be reinstated. This change will impact how taxpayers calculate their taxable income, potentially increasing their tax liability.

A potential benefit for taxpayers in high income tax states will be the removal of $10,000 limitation on both state and local taxes, including state income taxes, real estate taxes, personal property taxes, and more. This is commonly referred to as SALT. Miscellaneous itemized deductions, most notably unreimbursed employee expenses, will also be permitted, and personal casualty and theft loss deductions will be reinstated.

Under current law, you can deduct up to 60% of your adjusted gross income for charitable cash contributions. If the laws sunset, the threshold reverts to 50% of AGI. Those who are planning to make charitable contributions should make any significant gifts while the current law is in effect, allowing them to deduct more of their contributions from their taxable income provided that they itemize expenses on Schedule A instead of taking the standard deduction.

While the personal exemption will return, the child tax credit (CTC) will revert to pre-TCJA standards if the laws sunset, meaning taxpayers will be qualified to claim a credit for up to $1,000 per child under 17 years of age, with the credit being reduced by 5% of adjusted gross income over $75,000 ($110,000 for married couples). If the credit surpasses the amount of taxes owed, taxpayers will be eligible to receive the balance as a refund, or additional child tax credit (ACTC), which will be limited to 15% of earning exceeding $3,000.

The corporate income tax rate will increase from 21% to 28%, raising domestic corporate alternative minimum tax from 15% to 21% and adding 25% minimum income tax for taxpayers in the highest bracket. This change is expected to impact large corporations the most, while small businesses may see targeted tax relief measures to offset the increase.

It is important to remember; the future of these provisions and other future tax law changes are in the hands of the United States Congress. The initial TCJA was passed by a Republican House and a Republican Senate and signed into law by a Republican President in that of President Donald Trump. What does the future of this law look like if power in Washington is divided between two parties? We won’t be able to answer those questions until November. But however the chips may fall, the President and soon-to-be 119^th Congress will need to address the expiring tax changes. They may do nothing and let the law expire; they may renew some measures and let some expire, and of course, they may extend the entire law. This is true, regardless of which party controls whichever branch of government or whichever chamber of Congress.

With these substantial changes potentially on the horizon, it’s crucial for taxpayers to plan ahead. By staying informed and proactive, you will be able to mitigate risk and maximize your tax benefits while remaining compliant with the possible new regulations. Reach out to an Oppenheimer financial professional for guidance on how to navigate the potential upcoming tax law changes with confidence.