As we approach the end of 2025, several significant tax breaks introduced by the 2017 Tax Cuts and Jobs Act (TCJA) will expire. While some corporate tax cuts are permanent, individual tax rates are set to revert to their pre-TCJA levels, pending the outcome of political changes in Washington.
The future of the tax code hinges on which party controls the White House and Congress after the 2025 inauguration. Whether Republicans can retain tax cuts, Democrats rewrite tax rates, or a divided government seeks bipartisan compromise, these changes will impact taxpayers across the political spectrum.
Julio Gonzalez, CEO and Founder of Engineered Tax Services, Inc., emphasizes the challenging reality facing Congress. He warns that allowing the non-permanent provisions of the TCJA to expire could have severe repercussions for the economy and working families.
Here are three key tax adjustments to consider before they potentially revert at the end of 2025:
1. Income Tax Rates
The TCJA made significant changes to income tax rates. It retained seven income brackets but lowered tax rates and adjusted bracket spans, making them more favorable. The majority of taxpayers saw a reduction in their tax rates when the TCJA took effect. For instance, the top individual tax rate dropped from 39.6% to 37% for single filers earning over $578,126.
If these changes are not extended, revised, or made permanent, every American will need to reassess their spending and tax returns. This could result in a 1% to 4% increase in personal taxes for most individuals.
2. Standard Deduction
The TCJA nearly doubled the standard deduction for all filing statuses for tax years between December 31, 2017, and January 1, 2026. Before the TCJA, standard deduction amounts were $6,350 for single filers, $9,350 for heads of household, and $12,700 for married couples filing jointly.
However, after the TCJA (from 2018 to 2025), these amounts increased significantly. For the 2023 tax year, they are $13,850 for single filers or married individuals filing separately, $27,700 for married couples filing jointly or surviving spouses, and $20,800 for heads of household.
The goal was to simplify tax filing for many individuals and families, with an estimated 90% of taxpayers choosing the standard deduction. This change reduced the need to itemize deductions, potentially lowering taxable income.
3. Estate Tax Exemptions
The TCJA doubled the estate and gift tax exemption for individuals from $5.49 million in 2017 to $11.18 million in 2018. Adjusted for inflation, the exemption reached $12.06 million in 2022 and increased further to $12.92 million in 2023. This means that individuals can pass on assets up to $12.92 million without federal estate or gift taxes.
For married couples, this effectively allows a combined exemption of $25.84 million. Estate planning becomes crucial for those with substantial estates to navigate potential tax implications for their beneficiaries.
In conclusion, the fate of these tax provisions hinges on future political developments. Taxpayers should stay informed about potential changes and be prepared to adapt their financial planning accordingly as we approach 2025.