How the expiring TCJA may impact taxes in the future

How the expiring TCJA may impact taxes in the future

Tax rates could rise in a couple of years unless Congress acts.

The current tax code has been in place since the Tax Cuts and Jobs Act (TCJA) was signed into law in late 2017. Most provisions, including personal income tax rates and brackets, expire at the end of 2025 unless Congress acts. The 21% corporate tax rate and long-term capital gains tax rates do not expire.

Here is a comparison of how taxes would differ upon expiration of the TCJA.

Current tax rates and projections upon sunset of TCJA

Married couples filing a joint return:

tax comparison married filing jointly

*Sources: Internal Revenue Service and Putnam Research. Projected tax rates are estimated and based on analysis of 2017 tax rates prior to passage of the TCJA, with tax bracket figures adjusted to account for annual inflation adjustments through 2023. Figures in red indicate an increase in tax rate upon TCJA expiration. Figures in green indicate where tax rates at certain income levels would decrease upon expiration of the TCJA.

Planning considerations

Under the current law, these tax brackets would expire at the end of 2025 and be replaced with the tax brackets that were in place prior to the TCJA. Still, Congress could act before 2025 and extend the current tax structure or make other changes. However, given rising budget deficits and insolvency issues facing major programs like Social Security and Medicare, it’s reasonable to believe that taxes will be higher in the future.

Here are some planning considerations for potential rising tax rates:

  • Consider partial Roth conversions over time to increase tax diversification of retirement savings. Taxpayers with a mix of pretax and Roth retirement savings may be able to better control their tax bill in retirement. For example, taxpayers could draw from pretax sources when they are in lower tax brackets and draw from Roth sources when in higher tax brackets
  • Look for other alternatives for funding Roth accounts such as “backdoor” Roth IRA contributions or making contributions into a designated Roth account within an employer retirement plan
  • Donate IRA assets to a qualified charity if over age 70½ to draw down pre-tax retirement savings tax-free and potentially reduce the amount of future required distributions
  • Consider accelerating income before the tax rates expire at the end of 2025 such as exercising stock options, avoiding deferred compensation, or electing out of installment sales
  • Gift income-producing property to family members who may be in lower tax brackets
  • Defer losses or deductions to the time when tax rates increase
  • Consider taking larger RMDs than required to “fill up” favorable tax brackets
  • For those subject to the 10-year rule on inherited IRAs, consider taking larger distributions before the TCJA expires, if concerned about higher tax rates later in the 10-year window required to fully distribute the account

Given the uncertainty around future tax policy and rates, it is critical to work with a qualified tax professional on timing of income, deduction, or losses since each taxpayer’s situation may be unique.

For more detail on tax rate changes and other updates, see “Looking ahead to the expiration of the TCJA.”


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