The Tax Cuts and Jobs Act of 2017 lowered taxes for millions of Americans, but the legislation is due to expire at the end of 2025, which means that if Congress doesn’t act, taxes will rise for many Americans.
Massive overhaul
At the most basic level, the Tax Cuts and Jobs Act of 2017 was a massive overhaul of the federal tax code that took effect in 2018. In fact, it was the largest piece of tax reform in three decades.
It created a 21% flat corporate tax rate, which was permanent. However, numerous tax cuts for individuals were temporary, thus the need to keep an eye on how Congress chooses to handle the legislation’s potential expiration at the end of next year.
The legislation was certainly very thorough. First, it changed numerous tax rates. The top tax rate dropped from 39.6% to 37%. The 33% tax bracket went to 32% and the 28% bracket was reduced to 24%.
Meanwhile, the 25% tax bracket dropped to 22% and the 15% bracket was slashed to 12%. The 10% tax bracket, the lowest, was unchanged. The 35% bracket was also left untouched.
The standard deduction
The legislation also increased the standard deduction. This year, the standard deduction is $14,600 for individuals and $29,200 for married couples. The Tax Cuts and Jobs Act of 2017 also got rid of the personal exemption through 2025.
The personal exemption was $4,150 and was available to every taxpayer. While the legislation ended this particular deduction, it made up for it by modestly increasing the standard deduction.
The Affordable Care Act
When the Affordable Care Act was signed into law, it included tax penalties for people who neglected to buy health insurance. But the Tax Cuts and Jobs Act of 2017 eliminated that requirement.
The legislation also increased the child tax credit to $2,000 and created a $500 credit for non-child dependents.
Both changes will vanish if the legislation is allowed to expire at the end of next year.
The estate tax
The estate tax is also an issue here. The legislation increased the estate tax exemption tax and this year it’s a maximum of $13.61 million. Like every other part of the Tax Cuts and Jobs Act of 2017, it will expire at the conclusion of 2025.
This is maximum amount of an estate that you can transfer to a beneficiary before the estate tax is triggered. That means if you have an estate worth $14 million, your beneficiary would only be required to pay taxes on $390,000.
What happens next?
Let’s imagine a hypothetical situation where the Tax Cuts and Jobs Act of 2017 is allowed to expire, untouched.
Rates would return to what they were before the legislation was signed into law, which was $5.49 million, or $6.98 million when adjusted for inflation.
Using that same $14 million estate as an example, you’d pay taxes on a little more than half of it.
If you have a significant estate, you should closely monitor how Congress handles the legislation in the months before its possible expiration. And once Congress has made its final decision — whatever it may be — you should review your entire financial strategy with your financial services professional.
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