The sunsetting of the Tax Cuts and Jobs Act (TCJA) is fast approaching, and with it comes the expiration of many of the provisions that have been in place since the act was passed in 2017. One of the most significant changes that will occur when the TCJA sunsets is an increase in tax rates for many taxpayers.
Under the TCJA, the income tax rates for taxpayers were generally reduced. However, these reduced rates were only in place for a limited time and are set to expire at the end of 2025. This means that, unless further action is taken, tax rates will revert back to their pre-TCJA levels in 2026. Additionally, other tax benefits will expire such as the qualified business income deduction which was intended to help small businesses with a 20% deduction against their qualified business income.
For many taxpayers, this means that their taxes could go up when the TCJA sunsets. For example, the top marginal tax rate is currently 37%, but it is set to increase to 39.6% when the TCJA sunsets. Similarly, the tax rate for most other tax brackets is also set to increase.
While the sunsetting of the TCJA may result in higher taxes for many taxpayers, there are steps that can be taken now to mitigate the impact of these rate hikes. One of the most effective ways to do this is engaging in long-term tax planning with a trusted tax advisor.
Few tax professionals engage in frequent tax planning with their clients, but fewer still actually consider the longer term, big picture tax planning issues for their clients. Long-term tax planning involves looking at your overall financial situation and making decisions with the goal of minimizing your tax liability in the long run. This can involve strategies such as taking advantage of tax-advantaged investment accounts, maximizing the timing of deductions and credits, and structuring your income in a way that takes advantage of lower tax rates.
With the TCJA expected to sunset in 2026, all else being equal, you may want to consider accelerating income and deferring deductions until 2026 – something that viewed in isolation would be considered bad tax planning. For example, converting traditional retirement accounts to Roth retirement accounts over the next few years may be a wise tax planning strategy. Those conversions may be taxable in the years converted but may be taxed at lower rates now compared to 2026 and beyond, depending on your situation.
While it is unknown whether the TCJA will expire since future legislation could extend its tax provisions, taxpayers should consider hedging against that risk by taking certain tax planning actions now to prepare for that outcome.
To get started on your long term tax plan, call us at (910) 275-5147 or visit our website to schedule an initial meeting.