Approximately two years from now, absent congressional action, the individual tax environment will change significantly. After 2025, individual tax provisions enacted under the Tax Cuts and Jobs Act (TCJA) automatically expire. Key items include the top tax rate for individual taxpayers reverting to 39.6% (applying at approximately $553,600), ending the 20% §199A qualified business income deduction, removing the $10,000 cap on the state and local tax deduction and reinstating the personal and dependent exemption deductions, plus the income phase-outs. The standard deduction will be cut almost in half and the child tax credit will be reduced. Additionally, the alternative minimum tax (AMT) exemptions and phase-outs will revert to pre-TCJA levels. Coupled with the SALT cap removal, this will likely place more taxpayers into AMT beginning in 2026.
Not only are many TCJA provisions set to expire, but many amounts used regularly from the Internal Revenue Code are tied to the chained Consumer Price Index. This means tax brackets and thresholds change during periods of inflation. Furthermore, these inflation adjustments impact the section 199A qualified business income deduction, excess business loss threshold, and the Social Security wage base, among others. Generally, the IRS releases final adjustments during the fall. However, given the continuing price volatility, it is possible that final adjustment information will be released later than normal.
The charts below summarize key rates for 2023, plus projected 2024 and estimated amounts for post-2025.
|Tax item||2023||Projected 2024||Post 2025 estimates|
|Married filing joint – top bracket||37% for taxable income over $693,750||37% for taxable income over $731,200||39.6% for taxable income over $553,600 (adjusted for inflation)|
|Single – top bracket||37% for taxable income over $578,125||37% for taxable income over $609,350||39.6% for taxable income over $492,000 (adjusted for inflation)|
|Capital gains – married filing joint||15% rate with net capital gain between $89,250-$553,850; 20% over $553,850||15% rate with net capital gain between $94,050-$583,750; 20% over $583,750||15% rate for taxpayers in 25-35% brackets; 20% rate for those above 35% bracket.|
|Capital gains – single||15% rate with net capital gain between $44,625-$492,300; 20% over $492,300||15% rate with net capital gain between $47,025-$518,900; 20% over $518,900||15% rate for taxpayers in 25-35% brackets; 20% rate for those above 35% bracket.|
|Standard deduction – married filing joint||$27,700||$29,200||Pre-TCJA amount was $12,700|
|Standard deduction – single||$13,850||$14,600||Pre-TCJA amount was $6,350|
|Alternative minimum tax exemption||$81,300(S)/$126,500(MFJ)||$85,700(S)/$133,300 (MFJ)|
|§199A qualified business income deduction income limitation – married filing joint||$364,200||$383,850||Not applicable – provision expires|
|§199A qualified business income deduction income limitation – single||$182,100||$191,900||Not applicable – provision expires|
|Excess business loss disallowance threshold – married filing joint||$578,000||$610,000||TBD, provision expires after 2028|
|Excess business loss disallowance threshold – single||$289,000||$305,000||TBD, provision expires after 2028|
|Social Security wage base||$160,200||$168,600||$174,900 (2025)/$181,200 (2026)|
Remember, the thresholds for the net investment income tax (3.8% tax) and additional Medicare tax (0.9% tax) are not tied to inflation and remain at $250,000 for married filing joint taxpayers, $125,000 for married filing separate taxpayers and $200,000 for other taxpayers.
|Tax item||2023||Projected 2024|
|Gross receipts threshold||$29,000,000||$30,000,000|
|§179 expensing limit||$2,890,000||$3,050,000|
The gross receipts threshold is used to help determine eligibility for a number of exceptions to different rules and limitations, including computing the business interest limitation under §163(j), use of the cash method of accounting in computing taxable income, ability to determine taxable income for long-term contracts under the percentage-of-completion method and having to capitalize certain direct and indirect costs into inventory.
|Tax item||2023||Projected 2024||Post 2025 estimates|
|Unified estate and gift tax exclusion||$12,920,000||$13,610,000||$6.5 million|
|Generation skipping tax exemption||$12,920,000||$13,610,000||$6.5 million|
|Gift tax annual exclusion||$17,000||$18,000||$14,000 (pre-TCJA)|
Similar to the individual tax threshold sunsets from TCJA, the estate and gift tax exclusion limitations will also revert back to pre-2018 levels after 2025. Again, without any future legislation, the estate and gift tax exclusion is projected to drop back to $5 million and indexed for inflation (currently estimated to be approximately $6.5 million) for 2026.
With continued economic uncertainty, climbing national debt and the upcoming presidential and congressional elections, it is unclear whether any of the TCJA provisions will be extended or modified. Traditional tax planning strategies, such as accelerating income into years with lower tax rates or deferring deductions into years with higher tax rates, are normally common approaches. Executing Roth IRA conversions, exercising stock options, electing out of installment sales, or evading deferred compensation agreements are all popular tactics. However, with looming tax increases on the horizon (given the expiration of the lowered TCJA individual tax rates, among other provisions), accelerating income or deferring deductions should be carefully reviewed and analyzed for each taxpayer, certainly over the next few years.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.