WDW Financial

The 2017 Tax Cuts and Jobs Act made several significant changes to the U.S. tax code, some of which are set to expire or revert after 2025. Many families can expect to look at more complex tax filing, and a possible increase in their tax bracket.

It’s important for taxpayers to understand which tax changes will “sunset” and how they impact them individually. News outlets and politicized reporting often makes it seem like these tax changes are all doom and gloom, but the truth is that, in this specific situation, proactive planning can make a world of difference.

We’re here to help highlight the upcoming changes you need to be aware of, and walk you through how they’ll affect the average investor.

Individual Tax Rates

The Tax Cuts and Jobs Act lowered individual income tax rates across all tax brackets. However, these lower rates are temporary and are currently set to expire after December 31, 2025. The rates will revert to pre-2018 levels unless Congress acts to extend them.

Here’s a quick side by side comparison of pre-2018 rates versus the rates we’ve grown accustomed to with the TCJA:

While these tax rate jumps may inspire anxiety in investors, especially those whose income has increased in the past few years as they’ve grown their career, there’s something important to keep in mind:

Not all your income is taxed at the same rate.

The United States operates on a marginal tax rate system. In other words, your taxable income is taxed in a tiered way. For example, if your household income as a married filing jointly couple is $250,000, your income would be taxed in the following way for the 2024 tax year:

  • The first $23,200 of your income would be taxed at 10%
  • $23,201-$94,300 would be taxed at 12%
  • $94,301-$201,050 would be taxed at 22%
  • $201,051-$250,000 would be taxed at 24%

So, as the tax rates increase when the TCJA cuts phase out, keep in mind that only a portion of your total income will be taxed at these increased levels.

Increased Standard Deduction

The TCJA nearly doubled the standard deduction amounts, but these increased amounts will expire after 2025, reverting to lower pre-2018 levels. Right now, standard deduction rates are:

  • $12,000 for single filers
  • $24,000 for couples who are married filing jointly

Starting in 2026, these standard deduction levels are set to be halved (approximately). This may not have a dramatic impact on your overall tax savings, but it may mean a more complicated tax filing process if you choose to itemize deductions instead of taking the standard deduction.

Elimination of Personal Exemptions

The TCJA eliminated personal exemptions in favor of the higher standard deduction. However, it is set to return in 2026 to allow a fixed amount of income to be exempted from taxable income per taxpayer or dependent listed on the return. This may be helpful for taxpayers who are looking to lower their tax bill once tax rates increase.

State and Local Tax (SALT) Deduction Cap:

In 2026, for taxpayers making itemized deductions, 100% of a taxpayer’s eligible State And Local Taxes (SALT) payments will be able to be deducted on Schedule A, rather than being limited to $10,000 as they are today. Additionally, TCJA’s expiration will raise the cap on home mortgage interest deductibility to the interest on the first $1 million of debt principal (from the current $750,000) and restore the deductibility of home equity indebtedness which was eliminated entirely by TCJA.

Child Tax Credit Changes

Under TCJA, the child tax credit increased from $1,000 to $2,000 per qualifying child (age 16 and under) – and raised the income limits for the credit. These changes are set to expire after 2025, which means a reduced child tax credit and a lower phase-out limit for high-income families. However, these amounts and changes are marginal and likely won’t have a dramatic impact on tax filers.

Qualified Business Income Deduction

Currently, eligible businesses—such as sole proprietors, S Corps, partnerships, and some estates/trusts—can leverage the Qualified Business Income (QBI) Deduction for tax years from December 31, 2017, to December 31, 2025. The QBI Deduction allows business owners of qualifying entities to deduct up to 20% of their qualified business income on their taxes, provided they fall within the approved income limits ($191,950 for single filers and $383,900 for joint filers in 2024). This deduction offers a significant tax break for small business owners.

However, this deduction is set to phase out at the end of 2025, along with many other TCJA provisions. Small business owners should take advantage of it while they can and plan to adjust their tax strategy for 2026 and beyond.

Will These Changes Be Extended?

Unless Congress takes action to extend or modify these provisions, many of the individual tax changes made by the Tax Cuts and Jobs Act will revert to pre-2018 rules after December 31, 2025. Since 2024 is an election year, it’s uncertain what changes, if any, will occur.

For now, the best approach for taxpayers is to make proactive plans to take advantage of the deductions they qualify for and to develop a strategy assuming these provisions will sunset in 2025.

Action Items

Wondering what to do about these changes? Here’s what you can focus on:

  1. Be aware of how your individual tax bracket may change. Now is the time to pay attention to how your salary may change in the next few years, and how your tax bracket may shift accordingly. Making adjustments to how you withhold taxes, or how you plan to itemize, as these changes sunset may make sense depending on your unique circumstances.
  2. Take advantage of the increased standard deduction while you can. If the standard deduction still makes sense for your family, take advantage of the increased deduction while you can. Complicated tax filing may be around the corner if you need to shift to itemized deductions in 2026 and beyond.
  3. Consider future tax planning opportunities. Have you been taking the standard deduction under the TCJA? Now is the time to brainstorm future deduction opportunities to lower your taxable income. Increase contributions to pre-tax accounts, bunching charitable gifts, and research any additional deductions or tax credits you may be eligible for.
  4. If you’re a business owner, take note of the changes to the QBI deduction. The QBI deduction has been beneficial for small business owners looking to lower their taxable income. As this provision phases out, business owners may need to strategically plan tax-deductible expenses and allocate resources appropriately to account for the increase in taxes.

The WDW Financial team focuses on incorporating forward-thinking tax planning into all of our clients’ financial plans. Whether you’re a WDW client or just wondering how these tax law changes will impact you, we’d love to address any questions you have. Reach out to us today by scheduling a conversation – we’re here to help!

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