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The Potential Impact of Expiring Tax Cuts: Should You Consider Paying Taxes Now or Later?

The Potential Impact of Expiring Tax Cuts: Should You Consider Paying Taxes Now or Later?

May 03, 2024

Potential Expiring Tax Changes from the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 ushered in significant changes to the U.S. tax code, affecting individuals, businesses, and the economy. One key aspect of the TCJA was that many of its provisions are set to expire at the end of 2025, leading to potential tax law changes if these provisions are not extended. As we look ahead to the possible impact of allowing the TCJA tax cuts to expire, reverting to pre-2018 tax laws, it is important to examine whether it may be in your best interest to pay taxes on retirement funds now rather than paying taxes later.

Expiration Dates for Certain Tax Provisions in the TCJA of 2017

Individual Income Tax Rates

One of the most noticeable changes brought about by the TCJA was the adjustment of individual income tax rates. The Act lowered the tax rates for most taxpayers. For example, the top tax rate decreased from 39.6% to 37%, benefiting high-income earners.

If the TCJA provisions expire, individual income tax rates would revert to pre-2018 levels. This would mean an increase in tax rates across the board, with the top rate returning to 39.6%. Taxpayers in all income brackets would see their tax bills rise, potentially impacting their spending power and financial planning strategies.

 Income Tax Brackets Before and After 2025 Sunset Provision

Source: https://creativeplanning.com/insights/taxes/preparing-for-the-2025-tax-sunset/, 04/02/2024

Standard Deduction and Personal Exemptions

The TCJA nearly doubled the standard deduction, making it more attractive for taxpayers to take the standard deduction instead of itemizing. It also suspended personal exemptions, which were a fixed deduction based on the number of dependents claimed.

If the TCJA provisions expire, the standard deduction would revert to its pre-2018 amount, and personal exemptions would be reinstated. This could result in a higher taxable income for many taxpayers, particularly those with small families who lost the personal exemptions, but benefited from the higher standard deduction.

State and Local Tax (SALT) Deduction

Another significant change brought about by the TCJA was the limitation on the deduction for state and local taxes (SALT). The Act capped the SALT deduction at $10,000, which primarily impacted taxpayers in high-tax states.

If the TCJA provisions expire, the SALT deduction limitation would be lifted, allowing taxpayers to deduct the full amount of their state and local taxes again. This would benefit residents of high-tax states, who would see a reduction in their federal tax bills.

Child Tax Credit

The TCJA expanded the Child Tax Credit (CTC) and made it available to more taxpayers. The Act doubled the credit from $1,000 to $2,000 per qualifying child and increased the income thresholds, allowing more taxpayers to qualify for the credit.

If the TCJA provisions expire, the CTC would revert to its pre-2018 amount, reducing the credit to $1,000 per qualifying child and tightening the income thresholds. This would result in higher taxes for families with children, potentially impacting their financial stability.

Should You Consider Paying Taxes Now or Later?

The expiration of the tax cuts enacted with the 2017 Tax Cuts and Jobs Act would lead to significant changes in the tax landscape for individuals and businesses. Tax rates would increase, deductions and credits would revert to previous levels, and the overall impact on the economy could be substantial.

As the 2025 deadline approaches, policymakers will face decisions about the future of these tax provisions and their implications for taxpayers and the economy. The debate is likely to be contentious, with differing views on the best path forward for the U.S. tax code.

With potential tax increases in the future, it could be prudent to consider recognizing and paying income or capital gain taxes now rather than in the uncertain future. Some steps to recognize taxable income or capital gains include Roth IRA conversions, selling appreciated stock or investments, and taking distributions from tax-deferred accounts or investments. Recognizing the taxes now and repositioning funds into tax advantaged accounts may save additional taxes on future growth in addition to the potentially higher tax rates applicable to the principle in the future.

2024 Tax Strategies: Tax Law Changes and Tools that Can Help Manage Your Tax Liability

Managing your taxes efficiently requires a clear understanding of the tax saving opportunities available to you. Watch our Financial Power Hour video, 2024 Tax Strategies: Tax Law Changes and Tools that Can Help Manage Your Tax Liability, to gain a better understanding of how you can plan for the upcoming year to potentially help save money on your taxes. You can watch the class on our YouTube Channel at 2024 Tax Strategies. The class includes tax planning strategies that can help save income taxes, avoid capital gain taxes, and pass on more wealth to the people and causes you care about.

Please contact our office at 860-258-2600, 800-416-1655 or hello@hiwealth.com if you have any questions or would like to schedule a conversation with a Financial Coach at Hammond Iles to discuss your personal situation.


Hammond Iles Wealth Advisors is a Registered Investment Adviser. Hammond Iles Wealth Advisors does not provide tax or legal advice. This presentation is for informational purposes only and is not a replacement for real-life advice, so make sure you consult your tax, legal, and accounting professionals before modifying your overall tax strategy.