As we approach the 2024 election, both individuals and small businesses find themselves at a significant tax policy crossroads. With a new president and Congress set to take office in January 2025, and key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) scheduled to expire at the end of that year, the U.S. tax landscape is poised for substantial changes. Whether you're an individual taxpayer or a small business owner, understanding how these changes could affect your tax position is crucial for planning ahead.
What’s Happening?
The TCJA introduced sweeping reforms to the tax code when it was passed in 2017, lowering tax rates, increasing deductions, and providing new tax benefits for businesses. However, many of these provisions were set to expire in 2025, leaving taxpayers uncertain about the future. The 2024 election will play a pivotal role in determining whether these changes will be extended, modified, or allowed to expire.
Key Expiring Provisions That Could Impact You
Here’s a breakdown of the most significant TCJA provisions set to expire in 2025 and how their expiration could affect both individuals and small businesses:
1. Standard Deduction
Current Law: The TCJA nearly doubled the standard deduction, increasing it to $30,725 for married couples in 2024.
After Expiration: If the TCJA expires, the standard deduction will drop to approximately $16,525, and personal exemptions (eliminated under the TCJA) will return, adding about $5,275 per taxpayer.
2. Individual Income Tax Rates
Current Law: The TCJA lowered tax rates across the board. The top marginal rate is currently 37%.
After Expiration: If the provisions expire, tax rates will revert to their pre-2017 levels, with the top rate rising back to 39.6%.
3. State and Local Tax (SALT) Deduction
Current Law: Under the TCJA, deductions for state and local taxes are capped at $10,000.
After Expiration: If the cap is lifted, taxpayers in high-tax states would be able to deduct the full amount of state and local taxes paid, potentially lowering their federal tax liability.
4. Child Tax Credit
Current Law: The TCJA increased the child tax credit to $2,000 per child under 17.
After Expiration: This will drop back to $1,000, making the real value of the credit about 25% lower than in 2017.
5. Small Business Income Deduction (Section 199A)
Current Law: Small businesses can deduct 20% of qualified pass-through income under Section 199A.
After Expiration: If the TCJA expires, this deduction will no longer be available, significantly impacting tax liabilities for sole proprietors, partnerships, and S-corporations.
6. Alternative Minimum Tax (AMT)
Current Law: The TCJA raised the exemption amounts for the AMT, reducing the number of taxpayers who are subject to it.
After Expiration: The exemption amounts will drop, potentially subjecting more taxpayers to the AMT.
7. Estate Tax Exemption
Current Law: The TCJA doubled the estate tax exemption to approximately $28.6 million for married couples.
After Expiration: The exemption will drop to about $14.3 million, significantly impacting high-net-worth individuals.
The Role of the 2024 Election
The 2024 election will be crucial in determining whether these provisions are extended or allowed to expire. Both major candidates have outlined differing tax policy views:
Kamala Harris: Supports many of the tax proposals in President Biden's 2025 budget, including protecting individuals earning less than $400,000 from tax hikes. Her campaign also favors increasing the corporate income tax rate and capital gains taxes for high-income earners.
Donald Trump: Supports extending the TCJA provisions and has proposed lowering the corporate tax rate further for certain businesses, as well as continuing the 20% small business deduction and doubling the estate tax exemption.
The election’s outcome will dictate the future direction of tax policy, and both businesses and individuals should be prepared for a variety of possible changes.
What Should You Do Now?
As we await the outcome of the 2024 election, there are several steps you can take to prepare for potential tax changes in 2025:
1. Monitor Tax Proposals: Keep an eye on the tax proposals from both presidential candidates, as well as from congressional candidates in your state. Understanding the changes being proposed can help you make better decisions now.
2. Year-End Tax Planning: Work with one of Motta’s tax advisors to create a 2024 year-end tax planning strategy. This may involve accelerating income, deferring deductions, or taking other actions to optimize your tax position ahead of potential changes.
3. Prepare for Expiration Scenarios: Model out different tax scenarios based on the expiration of key TCJA provisions and assess how they may impact your personal or business finances.
4. Review Estate Plans: High-net-worth individuals should review their estate plans to ensure they take full advantage of the current estate tax exemptions before they potentially revert in 2026.
The Bottom Line
Every election season brings the possibility of changes to tax laws, but the 2024 election and the expiration of key TCJA provisions in 2025 could mark a significant turning point for U.S. tax policy. Whether you’re an individual taxpayer or a small business owner, understanding these changes and planning ahead with your tax advisor is crucial to minimizing your tax liability and maximizing your financial health.
Stay informed, plan strategically, and prepare for whatever tax policy shifts may lie ahead.
Need help navigating the potential tax changes ahead?
Contact Motta Financial’s team of expert tax advisors to ensure you’re prepared for whatever the 2024 election and 2025 tax changes bring.
This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. Motta Financial, which earns fees when clients select its services, is not offering impartial advice in a fiduciary capacity in providing this educational material. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.
