As we approach 2025, significant changes to the U.S. tax code loom on the horizon. The Tax Cuts and Jobs Act of 2017 introduced several temporary provisions that are set to expire or revert to pre-2018 levels. This blog post will outline the key changes and provide actionable steps to help you prepare for the evolving tax landscape.
Key Expiring Provisions:
1. Individual Tax Rates: Current lower rates across all brackets will revert to pre-2018 levels.
2. Standard Deduction: The nearly doubled standard deduction amounts will decrease.
3. Personal Exemptions: These will remain eliminated.
4. State and Local Tax (SALT) Deduction Cap: The $10,000 cap may expire, potentially allowing higher deductions.
5. Child Tax Credit: The enhanced credit of $2,000 per qualifying child will revert to $1,000.
6. Qualified Business Income Deduction: The 20% deduction for pass-through entities will expire.
Actionable Steps to Take Now:
1. Understand Your Future Tax Bracket
Be proactive in assessing how your individual tax bracket may change post-2025. If you expect to be in a higher bracket, consider accelerating income into the current lower-rate years. This might involve converting traditional IRAs to Roth IRAs or realizing capital gains. Conversely, if you anticipate being in a lower bracket, deferring income and accelerating deductions could be beneficial.
2. Maximize the Increased Standard Deduction
While the higher standard deduction is still available, take full advantage of it. For many taxpayers, this means simplifying tax filing by not itemizing deductions. However, be strategic – if your itemized deductions are close to the standard deduction amount, consider bundling charitable contributions or medical expenses into a single year to exceed the threshold and itemize.
3. Plan for Future Itemized Deductions
As the standard deduction is set to decrease after 2025, start planning now for potential itemized deductions. This might involve:
– Timing major medical procedures or expenses
– Strategizing charitable giving
– Considering the potential lift of the SALT deduction cap
Keep thorough records of potentially deductible expenses, even if you’re not currently itemizing. This information will be valuable for future tax planning.
4. Business Owners: Leverage the QBI Deduction
If you’re a business owner benefiting from the Qualified Business Income (QBI) deduction, now is the time to maximize its value. Consider:
– Increasing your qualified business income where possible
– Reviewing and optimizing your business structure
– Exploring strategies to remain under the income thresholds for full QBI deduction eligibility
Additionally, start planning for how your business tax strategy might need to evolve post-2025 when this deduction expires.
5. Reevaluate Your Long-term Financial Plan
These impending tax changes should prompt a comprehensive review of your long-term financial strategy. Consider how changes in tax rates, deductions, and credits might affect your retirement savings, investment decisions, and overall financial goals.
While it’s possible that Congress may act to extend some or all of these provisions, it’s prudent to plan based on current law. By taking proactive steps now, you can position yourself to navigate the changing tax landscape effectively. Remember, tax planning is complex and highly individual – consulting with a qualified tax professional can help you develop a personalized strategy that aligns with your unique financial situation and goals.
Stay informed, plan ahead, and be ready to adapt as we approach these significant tax code changes in 2025.