Major Tax Tips for 2024 Heading into 2025
As we progress through 2024, there are significant tax law changes on the horizon that could dramatically impact your financial situation in 2025 and beyond. The Tax Cuts and Jobs Act (TCJA) of 2017 made sweeping changes to the tax code, but many of the provisions impacting individuals were temporary and are scheduled to sunset after 2025. With 2024 being an election year, there is added uncertainty around whether these individual tax provisions will ultimately be extended by Congress.
As your trusted financial planner, I’m closely monitoring these developments to ensure you are prepared and can take advantage of tax planning opportunities before they potentially expire at the end of 2025. Here are the major items on my radar as we head into 2025.
Individual Income Tax Rates Reverting to Pre-2018 Levels
Perhaps the most impactful change on the horizon is the reversion of individual income tax rates and brackets back to their pre-TCJA levels starting in 2026. Under current law, the rates in effect since 2018 will sunset after 2025, resulting in higher tax rates across most income levels.
For example, the current 22% marginal rate will increase to 25%, the 24% rate will rise to 28%, the 32% bracket goes to 33%, and the top 37% rate will revert back to the pre-TCJA highest rate of 39.6%. The income thresholds for each bracket will also change, with the highest rate kicking in at lower levels of income compared to today.
This dynamic creates a tremendous opportunity for tax planning in 2024 and 2025 while rates remain lower. If you expect your income to be lower in these pre-sunset years compared to future years after retirement or other changes, you should strongly consider strategies to accelerate income into 2024/2025 at today’s lower rates.
One powerful strategy is to do Roth IRA conversions, which allows you to pay tax on your traditional IRA money now, with the benefit of future tax-free withdrawals from the Roth money. With rates set to increase in 2026, doing Roth conversions at today’s lower rates could potentially save you thousands, if not tens of thousands, in taxes over your lifetime.
Let’s look at an example. A married couple with $500,000 of taxable income in 2024 would be in the 35% federal marginal tax bracket. If they did a $100,000 Roth conversion in 2024, they would pay $35,000 of federal income tax on that conversion based on today’s rates.
However, if they waited until 2026 to do that same $100,000 Roth conversion after rates increased, they would be in the 39.6% bracket and owe $39,600 of federal tax—$4,600 more just for doing the same conversion a couple of years later! This simple Roth conversion illustrates how taking advantage of today’s lower rates through proactive planning can lead to significant tax savings over time.
Maximizing the Temporarily Higher Estate Tax Exemption Amount
Another major planning opportunity expiring after 2025 is the increased estate and gift tax exemption amount. Under the TCJA, the exemption amount temporarily increased to $11.7 million per individual for 2023, which is $23.4 million for a married couple. This high exemption level allows very wealthy individuals to transfer significant assets out of their estates free of the 40% estate tax.
However, after 2025 the exemption amount is scheduled to revert to around $7 million per individual when adjusted for inflation. This would be a nearly 50% reduction from today’s elevated exemption, resulting in substantially more estates becoming subject to the 40% estate tax rate.
Fortunately, the IRS has provided special anti-clawback rules that allow you to lock in the higher exemption amount for gifts made during this window before the exemption is cut in half. So if you have a large enough estate over $7 million, making gifts up to the full increased exemption amount of $12+ million before 2026 can be a tremendous wealth transfer and estate tax savings opportunity for your heirs.
Other Notable Tax Law Changes Coming in 2026
Beyond the individual rate increases and estate exemption reduction, there are several other significant tax provisions expiring after 2025:
Standard Deduction Decreases Significantly
The increased standard deduction of $12,950 for single filers and $25,900 for married filers in 2023 will decrease dramatically after 2025. This will likely cause more taxpayers to claim itemized deductions instead.
SALT Deduction Cap Removed: The $10,000 cap on the state and local tax (SALT) deduction that has been in place since 2018 will be removed after 2025. This will provide substantial benefits to taxpayers in high-income tax states who can deduct their full SALT payments.
Certain Itemized Deductions Reinstated
Miscellaneous itemized deductions such as unreimbursed employee expenses and tax preparation fees will be allowed again when the TCJA provisions expire. The overall limitation on itemized deductions for higher incomes (Pease limitation) will also return in 2026.
Child Tax Credits Less Generous: The temporarily increased child tax credit of $2,000 per child under 17 will revert to $1,000 after 2025. The income phase-out levels will also decrease, making the credit unavailable to as many taxpayers.
Pass-Through Business Income Deduction Expires
The popular Section 199A 20% deduction for qualified business income from pass-through entities like S-corporations and partnerships will no longer be available starting in 2026. There are many other smaller changes coming as well, such as the alternative minimum tax exemption decreasing and the reinstatement of personal exemptions that were repealed under TCJA.
What You Should Be Doing Now
With all these scheduled tax increases looming after 2025, I cannot stress enough the importance of reviewing your financial situation to identify any planning opportunities we should take advantage of over the next two years. This is especially crucial if you expect to have higher income levels in retirement or otherwise down the road.
Some specific planning actions I recommend exploring include:
- Roth IRA conversions to pay tax on your retirement money at lower rates before 2026
- Exercising incentive stock options before rates increase
- For business owners, looking at accelerating income into 2024/2025 when possible
- Making large taxable gifts to transfer wealth while the high exemption is in place
- Reviewing your tax withholding and quarterly estimates to account for any income shifting
- Evaluating whether Roth contributions or deductible IRA contributions are more beneficial in light of future rate increases
With some advanced planning, we can mitigate the negative impacts of the coming tax increases and take advantage of the tax savings opportunities available under current law before they potentially expire. Let’s make sure we optimize your over the next two years!
Important Disclosure: All Content is information of a general nature and does not address the circumstances of any particular individual or entity. This Content is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice as a specific recommendation or specific endorsement by Columbus Street. The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. Columbus Street accepts no responsibility for loss arising from the use of the information contained herein. In exchange for using this Content, you agree not to hold Columbus Street liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you. You alone assume the sole responsibility of evaluating the merits and risks associated with using any information or other Content provided by Columbus Street before making any decisions based on such information or other Content. You should consult with your tax advisor and financial professional before making any determination as to the appropriateness of any planning strategy indicated herein.