Individual and Estate Planning Tax Changes: The Impact of the TCJA Sunset

While playfully referred to as “Taxmaggedon” and more technically known as the “TCJA cliff,” one thing is certain, many tax provisions introduced in 2018 are set to expire soon.

The Tax Cuts and Jobs Act (TCJA) was a comprehensive piece of tax legislation that brought sweeping tax reductions for individuals and businesses. Currently, individual taxpayers are faced with uncertainty as several of the TCJA provisions sunset next year – not to mention, the added uncertainty of the impact of the November elections on tax policy. On August 27, our tax consultants will discuss the impact of the expiring TCJA provisions on individuals. This article addresses several of the key individual tax provisions scheduled to expire. Unless Congress acts, these provisions will revert to the tax laws in effect in 2017. Below, we include tax planning items to consider.

Top TCJA Individual Provisions Scheduled to Change

Lower Individual Income Tax Rates

The TCJA lowered individual income tax rates across the board, including a reduction in the top marginal rate from 39.6% to 37%. This reduction benefited taxpayers in all income brackets. If this provision expires, tax rates will revert to their pre-2018 levels, leading to higher tax liabilities for most Americans.

Increased Standard Deduction

Under the TCJA, the standard deduction was nearly doubled, simplifying the filing process for millions of taxpayers. The standard deduction in 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Upon expiration, the standard deduction will be almost cut in half, potentially forcing more taxpayers to utilize itemized deductions to attempt to recoup the decrease in the standard deduction.

State and Local Tax (SALT) Deduction Cap

The TCJA limited the deduction for state and local taxes to $10,000, significantly impacting taxpayers in high-tax states. Without an extension, the SALT deduction cap will be lifted, allowing taxpayers to fully deduct these expenses again. This could reduce federal tax liabilities for some and increase the alternative minimum tax for others.

Alternative Minimum Tax (AMT) Exemption

One of the most significant TCJA changes impacting individual taxpayers is the alternative minimum tax (AMT). The tax law raised the AMT exemption to $109,400 for married couples (and similar amounts for single taxpayers), and the phase-out threshold on the AMT exemption was increased from $160,900 to $1 million. These two changes drastically reduced the number of taxpayers subject to AMT beginning in 2018. If the AMT exemption provision sunsets as scheduled, the occurrence of the AMT will increase dramatically.

Child Tax Credit Expansion

The TCJA expanded the Child Tax Credit, increasing it from $1,000 to $2,000 per qualifying child and raising the income threshold for phase outs. If the provision sunsets, the credit will revert to its pre-2018 amount and income limits, reducing the benefit for many families.

Estate and Gift Tax Exemption

The estate and gift tax exemption rose to its highest levels under the TCJA. It nearly doubled from $5.49 million in 2017 to $11.18 million in 2018. Factoring in inflationary increases, the federal estate and gift tax exemption amount increased to $13.61 million per individual (a combined $27.22 million for married couples) effective for 2024. The TCJA increase allowed high net worth individuals and business owners to transfer more wealth without incurring gift or estate taxes. If the provision expires, the exemption will drop to approximately $7 million per individual – a decrease of almost 50%.

Key Individual and Estate Tax Planning Recommendations

Should these tax provisions sunset as scheduled and Congress does not enact any tax legislation next year, there are many planning strategies individuals can consider.

Tax Rate Planning

With higher tax projected liabilities, it’s important to time income recognition and deduction events to optimize income tax levels based on estimated 2025 and 2026 tax rates. This may include accelerating income until the year with lower rates or delaying incurring deductible expenses until the year with higher rates. A similar approach should be used when determining whether to harvest a capital gain or loss.

Maximize Estate and Gift Tax Exemptions

Given the potential reduction in the estate and gift tax exemption, taxpayers should consider utilizing the lifetime exemption by making significant gifts before the provision sunsets in 2025. This strategy can save some taxpayers sizable amounts of future estate taxes.

Roth IRA Planning

Individuals can take advantage of lower tax rates by considering converting retirement funds to a Roth IRA in 2024 and 2025. This is in addition to the general benefits of a Roth IRA, such as tax-free growth, tax-free income distributions, and no required minimum distributions (RMDs).

Proactively planning for the TCJA sunsets by knowing what provisions will expire and how this affects you can allow you to properly and timely implement tax saving strategies. For help along the way, our tax consultants can guide you through the individual and estate planning changes, highlight the latest tax developments from Washington, and determine the best path forward for you. Contact us today.

Please join our tax consultants on August 27 for a webinar on the individual provisions that will sunset with the TCJA expiration (or watch our on demand recording of the business provisions overview).

About our Authors

Daniel Lutz, CPA, MPA, is a tax principal with nearly 15 years of experience advising private companies and high net worth families on tax strategies and helping them to make sound financial decisions. Dan provides tax compliance, planning, consulting, and related wealth management services to support individuals, closely held businesses, and tax-exempt organizations. He also has expertise in trust and gift taxation. You can contact him at dan.lutz@sikich.com.

Laura Culp, CPA, PFS, MT, CCIFP, is a director with over 35 years of experience working with the owners of privately held businesses to help them grow their wealth and implement tax saving strategies. She has dedicated, extensive experience serving construction and real estate companies. Her knowledge of the unique tax and financial issues that contractors and developers face is a valuable resource to her clients. You can contact her at laura.culp@sikich.com.