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Writer's pictureRealFacts Reports

Tax Cut Expirations And Tax Bracket Adjustments

IRS Building

2025 tax policies are on the forefront of many people’s minds as we head into this presidential election, especially because several parts of 2017’s Tax Cuts and Jobs Act (TCJA) will be expiring at the end of 2025. The following parts will expire on December 31st, 2025:

 

-      Lower individual income tax rates

-      The almost doubled TCJA standard deduction

-      No Tax Exemptions

-      Higher child-tax credit

 

If these do not receive congressional extension, they will expire at the end of 2025. If not extended, the absence of these parts of the TCJA will increase individual income taxes, reduce the standard tax deduction amount, potentially bring back tax exemptions, and decrease the child-tax credit. This is weighing on a lot of people’s minds as we move closer to the upcoming election, whichever administration that wins in November will be in office when these tax cuts expire. Former President Trump has been clear that he wants to extend the tax cuts and other aspects of the TCJA, this makes sense as he implemented the TCJA legislature when he was in office. Vice President Harris has said that she only wants to extend the tax cuts for households that make less than $400,000 a year. If the tax cuts expire without extension, the top marginal tax rate in the U.S. would be at 39.6%. We don’t currently know which provisions of the TCJA have a good chance of being extended by Congress or not, especially because we still don’t know which party/administration will have control of the House, Senate, and Oval Office.

 

Financial advisors are currently implementing a few different tax strategies to help their clients navigate the uncertainties of the current tax situation. To start, estate planning is at the forefront of planner’s minds. The TCJA allows large exemptions for estate gifts, allowing cheaper or even free transfers of wealth between generations. Kate Dore of CNBC wrote, “In 2024, the lifetime estate and gift tax exemption is $13.61 million for individuals or $27.22 million for married couples. Next year, that limit will adjust for inflation before dropping by roughly one-half after 2025 if Congress does not extend the provision. Transfers above those thresholds could be subject to a maximum tax rate of 40%.” Planners are also attempting to “accelerate income” before tax increases to take advantage of lower brackets.

 

Every fall, the IRS announces tax bracket adjustments for the coming year. The IRS adjusts tax brackets on an annual basis to account for inflation, making sure that the tax brackets are indicative of purchasing power, not just based on dollar amount. The goal is to protect taxpayers from “bracket creep”. Describing this effect,  Alex Durante of the Tax Foundation wrote, “Bracket creep occurs when inflation, rather than real increases in income, pushes people into higher income tax brackets or reduces the value they receive from credits and deductions,"

 

2025’s tax announcements arrived this week as the Internal Revenue service announced their tax bracket adjustments for 2025. This year, the brackets will move higher at a slower pace than they have in previous years because inflation is at a much lower percentage than it was during the pandemic era. The adjustment for 2025 brackets came in at about 2.8%, down significantly from the 7% adjustment in 2023, and the 5.4% in 2024.

 

Tax Bracket

 

Joe Light of Barron’s wrote, “The top marginal rate of 37% will now apply to single filers who make more than $626,350 a year and to married couples making more than $751,600. The lowest rate of 10% applies to single filers making $11,925 or less and joint filers making $23,850 or less. The IRS also adjusted upward the amount taxpayers can make without having to pay capital-gains taxes. For 2025, single filers can enjoy a 0% rate if they make up to $48,350 or up to $96,700 if married, filing jointly. The standard deduction was also raised slightly to $15,000 for individuals and to $30,000 for those married, filing jointly. Some tax provisions, such as the $10,000 deduction limit for state and local income taxes (SALT), don’t adjust for inflation.”

 

As Joe mentioned right at the end, there are certain tax provisions that do not get annually adjusted for inflation. These include:

 

-      The cap for State and Local Income Taxes (SALT) will remain at $10,000

-      The $2,000 Child Tax Credit

-      The Lifetime Learning Credit

 

Although these don’t get adjusted annually, both SALT and the Child Tax Credit benefit from TCJA, meaning they will decrease to pre-2017 levels if not extended by congress.

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