Robert W Morris & Company PC

As we approach the expiration of the Trump-era tax cuts, it's crucial for businesses and individuals to understand the potential impacts and prepare accordingly. At Robert W. Morris & Company, P.C., we're committed to helping our clients navigate these changes to minimize their tax liabilities and make informed financial decisions.

What Are the Trump Tax Cuts?

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, brought significant changes to the tax landscape. These changes included reduced tax rates for individuals and corporations, an increased standard deduction, and limitations on certain deductions. However, many of the provisions affecting individuals are set to expire after 2025, which means potential tax increases for some taxpayers unless Congress acts to extend them.

Key Areas Affected by the Expiration

1. Individual Income Tax Rates: The current individual tax brackets, which range from 10% to 37%, will revert to the pre-2017 rates, with a top rate of 39.6%. This change could result in higher taxes for many, particularly those in higher income brackets.

2. Standard Deduction and Personal Exemptions: The standard deduction, which nearly doubled under the TCJA, will decrease, and personal exemptions, which were eliminated, may return. This could complicate tax planning and potentially increase taxable income for many filers.

3. Child Tax Credit: The child tax credit, currently $2,000 per qualifying child, is scheduled to drop to $1,000, which could significantly impact families with children.

4. State and Local Tax (SALT) Deduction: The current $10,000 cap on SALT deductions is set to expire, but without legislative action, the full deduction could be reinstated, offering relief to those in high-tax states but complicating tax planning strategies.

5. Qualified Business Income (QBI) Deduction: The 20% deduction for pass-through entities (like S-corporations, partnerships, and sole proprietorships) is set to expire, which could result in higher effective tax rates for business owners.

6. Estate and Gift Tax Exemptions: The TCJA significantly increased the estate and gift tax exemptions, but these are set to revert to pre-2017 levels, which could have major implications for estate planning.

7. Capital Gains Taxes: Currently, long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on your income level. If the Trump tax cuts expire, these rates could increase, particularly for higher-income taxpayers, who may see the top rate rise to 23.8% when combined with the Net Investment Income Tax (NIIT). Additionally, the thresholds for each capital gains rate could revert to lower levels, meaning more taxpayers could face higher taxes on their investment gains.

How to Prepare

With the expiration of these tax cuts on the horizon, it's essential to begin planning now to mitigate potential tax increases. Here are some steps you can take:

1. Review Your Tax Situation: Evaluate your current tax situation to understand how the expiring provisions might affect you. This is particularly important for those in higher tax brackets or those who benefit from deductions that may be reduced or eliminated.

2. Consider Accelerating Income and Gains: If you're in a position to do so, consider accelerating income into the current tax years while rates are lower. This could include taking bonuses, selling appreciated assets to lock in current capital gains rates, or converting traditional IRAs to Roth IRAs.

3. Maximize Deductions and Credits: Take full advantage of deductions and credits available under the current law. This might include making charitable contributions, maximizing retirement contributions, or utilizing the QBI deduction if you're a business owner.

4. Plan for Potential Estate Tax Changes: If you're concerned about the estate tax, now may be the time to review your estate plan and consider gifting strategies or other options to reduce potential tax liabilities.

5. Reevaluate Your Investment Strategy: If capital gains tax rates are likely to increase, you may want to reconsider your investment strategy, particularly with regard to selling assets or harvesting gains. Consult with a financial advisor to determine the best approach based on your situation.

6. Stay Informed and Seek Professional Advice: Tax laws are complex and subject to change, so it's important to stay informed and seek professional advice tailored to your unique situation. At Robert W. Morris & Company, P.C., we're here to help you navigate these changes and develop a tax strategy that aligns with your financial goals.

Conclusion

The expiration of the Trump tax cuts presents both challenges and opportunities for taxpayers. By taking proactive steps now, you can position yourself to minimize the impact and make the most of the current tax environment. If you have any questions or need assistance with your tax planning, don't hesitate to contact us. We're here to help you every step of the way.