What you should know about the potential Tax Cuts and Jobs Act (TCJA) sunset

Key takeaways:

• The Tax Cuts and Jobs Act (TCJA) made sweeping changes to the tax landscape, but many of its provisions are set to expire at the end of 2025.
• It’s unknown if the TCJA provisions will be extended, but President Trump and Congress are largely in favor of extending its provisions and cutting taxes further
• Even though the future is uncertain, you can help your clients in advance to prepare for and mitigate the tax impact of future changes

02/27/2025 – The Tax Cuts and Jobs Act (TCJA) passed under President Trump in 2017, significantly changed the way many people filed their taxes. Reducing tax rates, increasing the standard deduction, eliminating or limiting many itemized deductions, and narrowing the application of the Alternative Minimum Tax (AMT) caused taxpayers to file differently than they had the past. In fact, according to the Tax Policy Center, in 2017, before the TCJA took effect, 31% of taxpayers itemized deductions, while only 9% itemized deductions in 2020, the 3rd year the TCJA was in effect.¹ The TCJA also dramatically changed the way people plan for income taxes, particularly considering that a majority of its provisions were set to expire at the end of 2025.

With President Trump back in office and a Congress largely in favor of continued tax cuts, it is possible many of the TCJA’s provisions will be extended. Furthermore, President Trump and members of Congress have proposed various new tax revisions. While a tax bill could pass early in the year, it’s also possible there could be last minute proposals and extensions. Since no one knows exactly what new tax law will look like, how can effective planning be done without knowing about changes for next year?

What did the TCJA change?

While the TCJA made sweeping changes to the individual, corporate, and estate tax landscape, many of those provisions are currently set to expire on December 31, 2025. Among the most substantial TCJA individual income tax provisions set to sunset are the following:

• Broader income tax brackets and lower top individual tax rate
• Increased standard deduction
• Eliminated personal exemption, miscellaneous itemized deduction and capped mortgage interest and state and local tax deduction
• Reduced number of taxpayers affected by the AMT
• Deduction for certain pass-through business owners, the qualified business interest deduction

It appears that these provisions and many others are likely to be extended, minimizing the urgency to take advantage of the current tax law this year; however, we do not know for certain if they’ll all be extended and whether they’ll be extended in their current form. It’s also up for speculation how long an extension of the TCJA will last before it expires, due to Congressional budget rules.

Potential new changes to the Tax Code

In addition to extending the TCJA provisions, several new tax breaks have been proposed on the campaign trail and in Congress. Some of these potential changes include:

• Further rate reductions to ordinary income tax and capital gain tax
• No tax on tips, overtime, and Social Security
• End cap on state and local tax deduction
• Make auto loan interest deductible

These suggestions would likely be fleshed out into more detail if they move forward. Other tax reductions could be on the table as the year progresses.

Planning for changes

With so many proposals and expiring provisions, it’s impossible to predict exactly what the tax law will be for next year and beyond. The Tax Foundation estimates that the cost of extending all the sunsetting provisions of the TCJA (including corporate and estate tax cuts) and enacting the current proposals without revenue offsets would be about $6.7 trillion from 2025 to 2034.² Since the costs must be considered, it’s possible that not all TCJA provisions are extended or new proposals enacted. It’s also likely that extensions and new tax breaks may also sunset in a few years. In light of the uncertainty, clients may be leaning heavily on their financial professional for help to navigate the murky tax landscape. They may be asking questions that cannot yet be answered, like:

• Are taxes going up or down?
• What will and won’t be taxed?
• What’s happening to deductions?
• What’s happening to the capital gains tax?
• Who will be subject to the Alternative Minimum Tax?

While they may not be able to answer these questions on their own, you can help clients plan in a rapidly changing tax environment by focusing on certainty over uncertainty. You can help them shift their focus from maximizing their tax savings in a single year to minimizing their lifetime tax burden.

Traditionally, the assumption has been that taxpayers will be in a higher income tax bracket during their working years than in retirement. However, since many clients have large balances in high performing tax deferred retirement plans and tax rates have been reduced, that’s not always the case. Financial professionals can help their clients take a holistic view of current and projected future income and deductions to help ascertain whether and how much income deferral makes sense. In some cases, actually accelerating income to a lower income tax year can reduce the overall lifetime tax bill.

Investing for tax flexibility in uncertain times

Particularly in an unpredictable environment, it’s crucial for taxpayers to understand the value of an appropriate tax attribute mix and evaluate investments that are taxed as income is earned, tax deferred, or never taxed. When there is tax diversity in the income sources, there’s greater flexibility to choose which assets to draw income from to control when the taxes will be due. While the tax nature of some income can’t be changed, doing Roth conversions or investing in other assets that produce income tax free income may be useful to reallocate tax deferred or currently taxed income to income that’ll be never be taxed. Clients who have some assets in each tax category have more flexibility to plan and choose their income sources.

As a financial professional, you’ll also want to make sure your clients are familiar with the rules on contributions to and distributions from qualified plans. Clients who’re between the ages of 60 and 63 can make a new, increased catch-up contribution to their 401(k). You can help guide them on whether making the increased contribution to their traditional 401(k) or Roth 401(k), if available, makes sense to fit into their overall tax diversification.

Distributions matter, too. While clients born after 1960 may be able to wait until they are 75 to begin taking required minimum distributions, it could make sense to start earlier and take just enough to push them to the top of a low tax bracket. Having the ability to take lower required minimum distributions in the future could reduce a taxpayer’s retirement income tax burden and decrease future Medicare premiums and tax on Social Security.

What about the Alternative Minimum Tax?

Clients who may have been subject to the AMT before the TCJA and haven’t been in the past few years may want to examine whether the AMT would apply if the old rules were revived. The TCJA increased the income level at which the allowable AMT exemption is phased out, resulting in millions of taxpayers who once paid additional tax under the AMT to no longer be subject to it. In fact, 5 million families were subject to the AMT in 2017, the year before the TCJA went into effect, compared to 200,000 in 2018, the first year of the TCJA.³ Your clients may want to collaborate with their tax advisor to evaluate whether the AMT might adversely affect them if the income threshold for the phaseout of the AMT exemption is drastically reduced next year. High income earners who may experience a substantial tax increase from the AMT’s application may want to consider accelerating tax preferences, if possible.

While no one has a crystal ball, clients can still do effective planning this year by focusing on fundamentals like tax diversification, tax timing, and their lifetime tax picture.