The looming expiration of the Tax Cuts and Jobs Act could significantly impact your taxes.
As 2025 approaches, many individuals and business owners are facing uncertain tax changes that could affect their finances. Understanding the possible changes arising from the end of the Tax Cuts and Jobs Act (TCJA) and taking proactive steps will be crucial for taxpayers aiming to safeguard their financial welfare.
Key Individual Taxpayer Changes
Potential increases in individual tax rates could affect your net income. The tax landscape splits into two significant shifts: a return to marginal rates and adjustments to deductions. If the TCJA provisions expire, individual tax rates may revert to pre-TCJA levels, raising the highest bracket rate to 39.6% from 37%. This change necessitates a closer look at strategies like maximizing contributions to your 401K. By deferring salary up to the new maximum of $23,500 for 2025, individuals can lessen the blow of increased taxation on their income.
The standard deduction also faces significant adjustments. Single and joint filers currently enjoy a standard deduction nearly double pre-TCJA levels. If these provisions lapse, expect the standard deduction to revert to prior levels, adjusted for inflation. The decrease in the standard deduction makes it more advantageous for many filers to consider itemizing their deductions. Key items to track include
- Mortgage interest
- Property taxes
- State and local income taxes
- Gifts to charities
- Medical expenses
Optimizing your expenses in these categories may help mitigate the repercussions of the new tax structure in 2026.
Child Tax Credit Reduction
The maximum Child Tax Credit (CTC) was significantly raised to $2,000 per qualifying child under the TCJA, with enhanced eligibility thresholds. Post-expiration, however, the CTC is set to revert to $1,000, with the income limit tightening to $75,000 for individuals. While this change isn't universally accepted across party lines, it remains essential to plan ahead as alternatives to offsets comes complicated and uncertain.
Key Business Tax Changes
For business owners, the impending loss of the 20% Qualified Business Income (QBI) deduction raises substantial concerns. With over 4 million S Corporations across the U.S., the expiration of this provision means small business owners must engage in careful strategic planning. The resulting tax burden could undermine profits unless owners actively consult with CPAs to cultivate a tax mitigation plan. Here’s how the change could affect a business with $1M in qualified business income: The 20% deduction enabled these businesses to reduce their taxable income by $200,000, significantly lowering tax liabilities.
Another substantial change for business owners is the reduction in the depreciation deduction. Under TCJA, businesses enjoyed a 100% bonus depreciation on qualified capital investments, allowing them to deduct the entire cost in the year of purchase. The previously mentioned laws state that failure to amend will lead to a decrease in this bonus depreciation to 50% in 2025, eventually phasing out by 2027. Business owners should prioritize capital investments in 2025 to maximize this benefit.
Capital Investment Strategy
In light of the potential changes, businesses must consider accelerating capital expenditures to capitalize on the 100% bonus depreciation deduction. Timely investments can significantly reduce future tax liabilities. Equipment purchases, vehicle upgrades, or technology enhancements in 2025 may be judicious moves that leverages the bonus depreciation before its subsequent reduction.
What Lies Ahead for the TCJA
A crucial point of contention surrounding the TCJA’s future is its projected cost. The Congressional Budget Office (CBO) indicates that extending its provisions could add roughly $4.6 trillion to federal debt over a decade. This highlights the need for lawmakers to find a more pragmatic approach while balancing public interest. Both parties recognize the urgency but diverge in strategies on the specifics of tax policy and potential renewals.
Let’s look into some opinions surrounding these evolutions
- Jason Smith, Chair of the House Ways and Means Committee, promotes making the tax cuts permanent amidst concerns about increasing taxation amid economic recovery efforts.
- Elizabeth Warren, Senate Finance Committee member, advocates for a reassessment that aligns with fiscal responsibility, arguing that the current improvements for low- and middle-income groups aren’t adequate enough to justify extending the TCJA.
Navigating the upcoming tax landscape requires proactive approaches and informed discussions with financial advisors. Taxpayers must remain vigilant and engaged in policy discussions affecting their fiscal responsibilities moving forward. Preparing for potential adjustments outlined above can provide a more stable financial path for both individuals and businesses with uncertain tax environments ahead. With strategic planning and attentive action, the impending tax changes could become manageable hurdles instead of overwhelming challenges.