Karen Snodgrass

CPA | CK Principal

Here we are again, on the precipice of another round of significant tax changes. The last round of significant tax law changes occurred in 2018, with the Tax Cuts and Jobs Act (TCJA). Most of the tax changes made by the TCJA are not permanent and will expire (sunset) after 2025. With little time before December, 2025, we are encouraging all to review your 2024 and 2025 tax planning – NOW!

We’ll highlight some of the significant provisions deserving of everyone’s attention.

Estate Tax Exclusion – TCJA significantly increased the inflation-adjusted estate and gift tax exclusion. Before TCJA, the estate and gift tax exclusion was $5.49 million (meaning, estates with more than that level of assets faced the prospect of federal estate tax). Post TCJA, the 2024 exemption is dramatically higher at $13.61 million.

However, with the sunset of the TCJA, the exemption would revert back to pre-TCJA levels. Many estate planning professionals are advising clients to act now to reduce their taxable estate, usually through gifts to family members. Especially notable is t the IRS has indicated they will not challenge this strategy. According to the IRS, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”

With the additional clarification of the lifetime gift exclusion availability for future estates, wealthy donors should strongly consider ensuring that their gifting strategy maximizes future tax benefits.

Corporate Tax Rate/Qualified Business Income (QBI) Deduction – As part of TCJA, Congress changed the tax rate structure for C corporations to a flat rate of 21% instead of the former graduated rates that topped out at 35%. If allowed to sunset with TCJA, businesses organized as C corporations will face significant tax increases. In fact, the after-tax rate of corporate distributions will well exceed 50%.

Needing a way to equalize the rate reduction for all taxpayers with business income, Under the TCJA, Congress came up with a new deduction for businesses that are not organized as C corporations. This resulted in a new and substantial tax benefit for most non-C corporation business owners in the form of a deduction that is generally equal to 20% of their qualified business income (QBI). Notably for personal service industries (lawyers and accountants for example), the QBI was limited.

Given the potential increase in C corporation tax rates and the elimination of the QBI deduction, businesses may need to revisit their tax structure after 2025.

SALT Limits – SALT is the acronym for “state and local taxes”. TCJA limited the annual SALT itemized deduction to $10,000, which primarily impacted residents of states with high state income tax and real property tax rates, such as New York, New Jersey, and California. Several states have developed somewhat complicated work-a-arounds (called the pass-through entity tax, or PTET) to the limits that benefit taxpayers who have partnership interests or are shareholders in S corporations. The future of the PTET is uncertain with an expired TCJA.

Standard Deductions – The standard deduction is the amount of deductions you are allowed on your tax return without itemizing your deductions. The standard deduction is annually adjusted for inflation. In 2018, the TCJA just about doubled the standard deduction which generally benefited lower income taxpayers and retirees. The increased standard deductions also meant fewer taxpayers claimed itemized deductions – roughly 10% of filers now itemize versus 30% before TCJA.

Personal & Dependent Exemptions – Prior to 2018, the tax law allowed a deduction for personal and dependent exemption allowances. One allowance was permitted for each filer and spouse and each dependent claimed on the federal return. Under current law, there is no dependency exemption. It’s possible that in 2026, the tax benefits related to personal exemptions will come back into play.

Child Tax Credit – Prior to 2018 the child tax credit was $1,000 for each child below the age of 17 at the end of the year. With the advent of TCJA the child tax credit was doubled to $2,000 for each child below the age of 17 at the end of the year. This more than made up for the loss of a child’s personal exemption deduction for lower income families.

Home Mortgage Interest Limitations – Prior to the passage of TCJA, taxpayers could deduct as an itemized deduction the interest on $1 Million ($500,000 for married taxpayers filing separate) of acquisition debt and the interest on $100,000 of equity debt secured by their first and second homes. With the passage of TCJA, the $1 Million limitation was reduced to $750,000 for loans made after 2017 and any deduction of equity debt interest was suspended (not allowed). A return to pre-TCJA levels will tend to benefit higher income taxpayers with more expensive homes and higher mortgages.

Tier 2 Miscellaneous Deductions – TCJA suspended the itemized deduction for miscellaneous deductions for tax preparation and planning fees, unreimbursed employee business expenses, and investment expenses. Most notable of these is unreimbursed employee expenses which allowed employees to deduct the cost of such things as union dues, uniforms, profession-related education, tools and other expenses related to their employment and profession not paid for by their employer. Investment expenses included investment management fees charged by brokerage firms. These types of expenses were allowed only to the extent they totaled more than 2% of the taxpayer’s adjusted gross income. These expenses are currently not deductible.

Tax Brackets – TCJA altered the tax brackets and although most taxpayers benefited, higher income taxpayers benefited the most with a 2.6% cut in the top tax rate. A return to the pre-TCJA rates would have the largest negative effect on higher income taxpayers.

The tax changes to occur with the sunset of TCJA will be dramatically impacted by the November 2024 elections.

Depending upon your circumstances, these changes may impact your long-term planning such as your business structure, estate planning, buying a home, retirement planning, and other issues. It’s going to be an interesting year, for sure, and best to get planning now. Please contact Cray Kaiser at (630) 953-4900 with any questions.