The Tax Cuts and Jobs Act (TCJA) has been a cornerstone of tax planning since its enactment. However, as we approach the sunset of several of its provisions in 2026, understanding the impending changes and their implications is crucial. This guide delves into the specifics, using the "TCJA Sunset Provision Comparison Guide 2024" as a basis to offer a granular look at what’s changing and how you can prepare. Download your copy of the guide here.
Under the TCJA, the ordinary income tax brackets for married filing jointly (MFJ) range from 10% on incomes up to $23,200 to 37% on incomes over $731,200. For single filers, the brackets start at 10% for incomes up to $11,600, stretching to 37% for incomes above $609,350.
Post-TCJA, we're set to revert to pre-TCJA (2017) numbers, adjusted for inflation to 2024 dollars. This adjustment will see the top marginal rate increase to 39.6% for incomes over $583,750 for MFJ and similarly high thresholds for single filers. This significant shift underscores the need for strategic income tax planning as the brackets tighten.
The long-term capital gains tax brackets will also see adjustments, although the changes are less dramatic. Currently, a 0% rate applies to MFJ incomes up to $94,050, shifting to 20% for incomes over $583,750. Post-TCJA, the same rates apply, but the thresholds for moving from 0% to 15%, and then to 20%, will adjust slightly, impacting investment income taxation.
One of the most notable changes will be the removal of the $10,000 cap on State and Local Taxes (SALT) deductions, which will revert to unlimited deductions. Additionally, the mortgage interest deduction limit will increase from $750,000 to $1,000,000, and the deductibility of financial advisory fees, among other miscellaneous itemized deductions, will return, subject to a 2% AGI floor.
The Pease limitation on itemized deductions, eliminated under the TCJA, will make a comeback, potentially reducing deductible amounts for high-income taxpayers. Charitable donations made in cash will see a shift from a 60% to a 50% AGI limitation, affecting high-value donors.
With the detailed tax bracket and deduction changes in mind, consider accelerating income or deductions to leverage the more favorable TCJA provisions. For example, evaluating retirement contribution strategies, estate planning, and gifting can yield significant tax savings before the brackets and deductions revert.
Examine how your tax rates, including marginal and effective rates, may increase post-2026. This understanding is crucial as it affects various aspects of your financial plan, from retirement contributions to cash flow management.
With the impending changes, revisiting your retirement account contributions becomes essential. Determine whether shifting your approach between Roth and pre-tax contributions could offer tax advantages in light of the expected rate increases.
For those with retirement accounts subject to Required Minimum Distributions (RMDs) or inherited IRAs under the "10-Year Rule," consider whether accelerating distributions or adopting a Roth conversion strategy might reduce future tax liabilities.
If you're contemplating selling assets or making significant business purchases, assess the timing. Selling before the sunset or accelerating purchases to capitalize on current tax benefits could be advantageous.
With the estate and gift tax exemption expected to decrease, accelerating your gifting strategies now can help leverage the higher exemption limits available.
After the sunset, it will be crucial to reassess non-qualified portfolio allocations, potentially shifting towards investments with favorable tax treatments like municipal bonds. The anticipated changes to deductions, including SALT and mortgage interest, should prompt a review of itemized deductions to maximize tax benefits.
Post-2026, the need to review non-qualified portfolio allocations will be paramount. Shifting towards investments with favorable tax treatments could help manage increased tax liabilities. I wrote more about the general importance of tax-efficient withdrawal strategies in retirement another post.
An anticipated lift on the SALT deduction cap may offer new opportunities to reduce taxable income. Understanding how this change affects your ability to itemize deductions is critical.
Post-sunset, the deductibility of interest from home equity loans or lines of credit will broaden. Consider how this can be a strategic source of liquidity for managing expenses.
With the sunset provision likely increasing the viability of itemizing deductions, reevaluating your charitable giving strategies to optimize tax benefits will be essential.
The sunset of the TCJA provisions presents both challenges and opportunities. By understanding the specific tax bracket and deduction changes outlined in the TCJA Sunset Provision Comparison Guide 2024, taxpayers can better navigate the shifting landscape. Strategic planning, both before and after the sunset, will be key to optimizing tax outcomes.
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