By Sarah Ruef-Lindquist, JD, CTFA
For Pen Bay Pilot’s Wave magazine, fall 2024
Before you know it, we’ll be celebrating the new year and we will be a quarter of the way through the 21st century with the arrival of 2025.
And just as swiftly, we will approach the end of 2025 and the sunsetting of Tax Cuts and Jobs Act (TCJA) on December 31, 2025 with provisions that will impact many individuals and families.
Here are some of the provisions that impact most taxpayers:
Standard deduction: Because the standard deduction was doubled ($12,000 for single filers and $24,000 for married filing jointly), many taxpayers haven’t itemized deductions under TCJA. In 2026, the standard deduction will be about half of what it is currently, adjusted for inflation, likely steering taxpayers back to itemizing deductions.
And speaking of itemized deductions, those who did continue to itemize had to navigate changes that will sunset.
- The state and local tax (SALT) deduction was capped at $10,000, most significant for taxpayers states with higher taxes. In 2026, this limitation will expire, allowing greater benefit from deducting taxes including real estate taxes, state or local income taxes and personal property taxes.
- The TCJA ended the home equity loan interest deduction and limited the home mortgage interest deduction to the first $750,000 of debt (if married filing jointly) for loans that originated on or after Dec. 16, 2017. The mortgage interest deduction will revert to interest deductible on the first $1 million in home mortgage debt and $100,000 for a home equity loan.
- The TCJA temporarily eliminated most miscellaneous itemized deductions, such as investment/advisory fees, legal fees and unreimbursed employee expenses. These deductions will once again be allowed in 2026, to the extent they exceed 2% of the taxpayer’s adjusted gross income.
Income tax rates: TCJA lowered tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 37%. These tax rates are set to sunset Dec. 31, 2025. The top tax rate beginning Jan. 1, 2026, will revert to 39.6%.
Given that rates could revert back to pre-TCJA rates and that itemized deductions may regain their usefulness, some taxpayers may wish to time certain expenses for deductions available against income under higher tax rates.
And then there’s estate and gift taxes. These are taxes on amounts given as gifts or passing from a decedent. The TCJA effectively doubled the estate and gift tax basic exclusion. The basic exclusion applies to assets in estates and takes into account significant lifetime gifting activity. The 2024 exclusion amount is $13.61 million per person ($27.22 million for married couples) and the amount for 2025 will be adjusted for inflation.
Taxpayers who die through 2025 with a taxable estate greater than the exclusion amount can be subject to a federal tax rate of up to 40%. Some states also impose an estate tax, so estate assets passing to heirs can be significantly reduced.
At the end of 2025, this tax provision will sunset, cutting the exclusion roughly in half. Individual taxpayers with significant estates that are above the lower 2026 exclusion amount should consult with their tax advisers and estate attorneys as soon as possible to take advantage of the expiring TCJA exclusion by using planning strategies and considering gifts before the end of 2025. There’s only a year left to shelter significant asset transfers with these historically generous exemptions.
Enjoy the holidays and time with family and friends and as you settle into 2025, consider how the sunsetting provision of TCJA may impact your financial situation and estate planning. Seek the advice of qualified legal and tax professionals to determine the best course of action for your particular situation.
