As taxpayers scramble to complete their 2022 returns ahead of Tuesday’s filing deadline, many are also thinking about ways to reduce future tax bills. If you’re among them, here’s an important piece of advice: Remember that the federal tax code is headed for major changes in just a few years.
The Tax Cuts and Jobs Act, signed into law Dec. 22, 2017, and colloquially known as the Trump tax cuts, contained a host of changes to individual tax rates that are set to expire after 2025. At that point, absent congressional action, tax rates for 2026 will revert to the rates payers were subjected to before the change.
It might seem like a long way off, but the kind of financial planning that has a big impact on tax bills often has to be done years ahead. To start preparing, here’s a list of what changed with the 2017 law and what will change if the temporary provisions expire as planned:
The top rate will rise. The Trump tax cuts generally brought down individual rates, but on a temporary basis. Without congressional renewal, the top marginal income-tax rate, which applies to income above $693,750 and higher for married couples or $578,125 for singles, will return to 39.6% from the current top rate of 37%.
So will several other brackets. Most other tax brackets saw rate decreases as well, although the second-highest bracket held steady at 35%, and the bracket for the lowest earners was left at 10%. The 33% bracket was cut slightly to 32%, and the other brackets saw three- to four-point reductions: the 28% bracket was cut to 24%; the 25% bracket dropped to 22%; and the 15% bracket was lowered to 12%.
Standard deductions will drop. The tax package also made temporary adjustments to the standard deduction for individual filers, nearly doubling the deduction for married couples filing jointly from $13,000 to $24,000, according to the Tax Policy Center’s analysis. Congress enacted similar increases to standard deductions for single filers and payers filing as head of households. Like the bracket increases, the adjustments to the standard deductions are set to expire after 2025.
Estate taxes will leap higher. The tax overhaul contained important provisions for wealthy families planning their legacy. Most notably, while the bill kept the top estate tax rate at 40%, it doubled the exemption for single filers from $5.6 million to $11.2 million, and for married couples filing jointly from $11.2 million to $22.4 million. Those provisions are also due to expire after 2025. That means many more families (basically those that expect to have estates larger than $11 million), should be doing some serious estate planning.
Mortgage interest deductions will improve. The bill went the other way with mortgage interest, lowering the cap on deductible interest for a first and second home to $750,000 in principal value, down from $1 million, with the change set to expire after 2025.
The ACA penalty will remain kaput. The tax overhaul permanently eliminated the penalty individuals paid for not having a qualified health insurance plan under the Affordable Care Act.
Corporate tax rates will stay low. Most of the provisions for individual taxpayers are temporary, but the package created a single corporate tax rate of 21%, and made that change permanent, meaning that the rate will hold unless Congress acts. The bill also permanently eliminated the corporate alternative minimum tax.
The ultimate fate of the Trump tax cuts is anyone’s guess at this point. For its part, the Biden administration has signaled support for extending most of the individual cuts as a starting point in the debt-ceiling debate.
Soon, it may be hard to think about anything but the expiration of these provisions: Debates over tax policy could be a major factor both in the imminent showdown over the federal debt ceiling and in the 2024 presidential election. Any potential progressive candidate to Biden’s left would certainly take aim at a tax overhaul bill so universally panned by Democrats at the time that the narrow GOP majority had to use the parliamentary tactic of reconciliation to pass the measure with a simple majority.
Next time around, proponents of a more progressive tax system could have an inherent advantage given the very Washington way the original tax cuts were structured. With an attached sunset date—2026—no action will mean a reversion to the prior set of rates. That could mean that any potential GOP president, Trump or otherwise, would end up fighting for Congress to enact legislation extending the cuts, or some version of them.
This article was originally published in Barron’s on April 13, 2023, and was written by Kenneth Corbin.
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