The Impending Tax Cliff: What You Need to Know

The Tax Cuts and Jobs Act of 2017, which lowered income taxes for most Americans, is set to expire in 2025 unless Congress takes action. The looming battle over these tax breaks adds further complications to the federal budget deficit. As we approach this crucial deadline, it is essential to understand the implications of these expiring provisions and how they could impact individual taxpayers.

Individual Tax Rates and Brackets

One of the most significant tax cuts set to expire is the reduction in federal income tax rates and wider brackets introduced by the TCJA. Without updates from Congress, tax rates will revert to their pre-2018 levels, affecting taxpayers across all income levels. Higher earners have been taking advantage of lower tax rates by strategically managing their income before the deadline.

The TCJA nearly doubled the standard deduction, making it more favorable for taxpayers to opt for this deduction rather than itemizing their expenses. However, if the standard deduction reverts to 2017 levels after 2025, more filers may consider itemizing deductions to reduce their taxable income. The $10,000 cap on state and local tax deductions has been a contentious issue for lawmakers in high-tax states and is also set to expire.

The TCJA increased the child tax credit and widened eligibility criteria, providing significant benefits to families with children. However, without further legislative action, these enhancements will revert to their 2017 levels. House lawmakers have proposed extending these enhancements, but the outcome remains uncertain in the Senate.

Gift and Estate Tax Exemptions

Ultra-wealthy Americans have benefited from higher gift and estate tax exemptions, allowing them to transfer assets tax-free to the next generation. These exemptions are set to decrease significantly in 2026 unless new laws are passed. The impending change has prompted some wealthy individuals to make lifetime gifts to minimize estate taxes.

As we approach the 2025 deadline for the expiration of the TCJA tax breaks, taxpayers must stay informed about the potential changes that could affect their finances. The political landscape will play a crucial role in the fate of these tax provisions, making it essential for individuals to plan accordingly. Whether Congress decides to extend these tax breaks or let them sunset, being prepared for various scenarios is key to navigating the complexities of the upcoming tax cliff.