Preparing for Upcoming Tax Law Changes

The Tax Cuts and Jobs Act (TCJA), enacted for the 2018 tax year, included many provisions that are set to expire December 31, 2025. If these provisions expire, Tax Foundation estimates taxes will increase for 62% of Americans in 2026.

While tax legislation will be a major discussion point in 2025, the probability of these provisions being extended is unclear, so it is important to begin preparing now.

Our Wilkins Miller team recently released a short video discussing these upcoming changes. Please see below for some additional detail on these provisions and how they may impact you.

Qualified Business Income Deduction

For many owners of partnerships and S corporations, the qualified business income deduction has allowed for a 20% deduction on their income since 2018. With the loss of this deduction, some businesses may want to consider converting from a passthrough entity to a C corporation, but this complex issue would take detailed analysis.

Bonus Depreciation

Bonus depreciation allows businesses to write off a percentage of the cost of certain assets in the year they are placed in service. For 2018-2022, taxpayers could deduct 100% of the cost of the eligible asset. In 2023, it was reduced to 80% and it will continue to be reduced by 20% every year until complete phase-out in 2027.

Taxpayers may want to consider electing Section 179 on eligible assets in order to take the 100% first year expense, but there are many other limitations that need to be considered.

Individual Tax Rates

Tax rates will increase to pre-TCJA levels, with the highest amount increasing to 39.6%. Overall, tax rates will increase by around 3% for each tax bracket. Also, the range of income in each bracket is smaller, so taxpayers will most likely reach higher tax brackets faster. As we approach the end of 2025, taxpayers may want to consider accelerating income into 2025 to take advantage of the lower rates.

Standard and Itemized Deductions

Since TCJA increased the standard deduction, more taxpayers have been taking it rather than itemizing deductions. The standard deduction is set to be roughly cut in half for 2026, so it may become more advantageous for taxpayers to begin itemizing their deductions of state and local taxes, mortgage or investment interest, and charitable contributions. As we approach the end of 2025, taxpayers may want to consider deferring some of these personal deductions into 2026 in order to see more of a benefit.

For taxpayers who itemize their deductions, the state and local state tax cap of $10,000 is also set to expire, which may allow for more deductions. Passthrough entity owners who have made the PTE election may want to revisit whether this strategy is still beneficial.

Estate and Gift Tax Exclusion

The estate and gift tax exclusion will be roughly cut in half on January 1, 2026. For 2025, individuals can transfer around $14 million ($28 million for married couples) without triggering the federal estate or gift tax. For 2026, those numbers will drop to approximately $7 million for individuals and $14 million for married couples. This reduction of the exclusion will result in more taxable gifts and estates.

Affected individuals should begin estate planning now including strategic gifting, utilizing trusts, and potential business valuations for business owners.

How we can help

The November 2024 elections will have a major impact on how these expiring provisions may play out. It is important to stay informed and updated about the potential changes.

We will be monitoring the status and releasing more information as it is available because we want to ensure that you have the tools and knowledge to navigate the changes smoothly.

Please contact your Wilkins Miller advisor if you have any questions on how these changes may impact you.