The “Tax Cuts and Jobs Act” was passed by Congress and signed by former President Donald Trump in December 2017.
The tax law changes went into effect in January 2018. Most of the changes are scheduled to “sunset” on Dec. 31, 2025, and revert to the prior tax rules from 2017.
When originally passed, eight years seemed far away. However, it is now slightly over three years away. I recommend you plan proactively for the changes, or at least consider how they may affect your finances, your taxes, and your family.
We cannot predict the future, or what changes Congress will pass between now and the end of 2025. Congress is currently very partisan, and the mood in Washington, D.C., seems almost toxic. Congress may or may not pass new tax laws before Dec. 31, 2025. This article summarizes what will occur if Congress does not pass new tax laws, and the sunset provisions are triggered.
Keep in mind that the national debt in the U.S. is over $30 trillion, so my guess is that tax rates will go up. Most everyone agrees that taxes for the very wealthy should increase, but Congress has not been effective in passing these laws.
What tax laws will be sunsetting?
Tax Brackets: Previously the top personal income tax bracket was 39.6%. The TCJA lowered this rate to 37%; the 28% bracket became 24%, the 25% bracket became 22%, and the 15% bracket became 12%. Virtually all taxpayers appreciated the lower tax brackets and have been paying lower taxes since 2018.
The tax brackets will revert to the previous 2017 levels if the sunsetting occurs on Dec. 31, 2025.
The higher tax brackets will result in higher income taxes for taxpayers, but there may be additional ramifications for retirees. Their RMDs (required minimum distributions withdrawn annually from traditional IRAs, 401(k)s, and 403(b)s after age 72, previously 70.5) may be taxed at a higher rate, and their Social Security benefits may also be taxed at a higher rate. In addition, they may have to pay higher monthly surcharges, called IRMAA (Income Related Monthly Adjustment Amounts), for Medicare Parts B and D premiums.
Standard Deduction: The TCJA nearly doubled the standard deduction for taxpayers, while also eliminating many personal deductions. The standard deduction for single filers increased from $6,350 in 2017 to $12,000 in 2018. For “married filing jointly” filers it rose from $12,700 to $24,000. The standard deduction increases each year with inflation, and in 2022, it is $12,950 for singles and $25,900 for married filers. The standard deduction is scheduled to sunset on Dec. 31, 2025, reverting back to the lower amounts.
State and Local Tax Deductions (commonly called SALT): The TCJA capped SALT deductions at $10,000 for married couples filing jointly. Previously there was no cap. This has affected many taxpayers across the U.S., but primarily those from states with high taxes, such as New York, New Jersey and California.
This tax change is not expected to sunset, although the tax authorities in some states have been seeking to raise the cap to more than $10,000.
Estate Tax Deduction: The lifetime estate tax deduction increased from $5.49 million per person in 2017 to $11.18 million in 2018. The annual limit increases with inflation, and it is $12.06 million in 2022.
If Congress does not pass changes, the estate tax exemption is expected to decline on Jan. 1, 2026, possibly to $6.2 million.
Lower Corporate Tax Rate: The corporate tax rate dropped from 35% in 2017 to 21% in 2018 due to the TCJA. Congress recently passed a bill that set a minimum corporate tax rate of 15%, but corporations will likely find loopholes.
What can you do?
You may choose to take a “wait and see” approach. However, my recommendation is to contemplate the impact higher taxes may have on you and your family. You may want to consider converting a traditional IRA — or a traditional 401(k) or 403(b) — to a Roth IRA. If you believe tax rates will increase in 2026, you have a window of opportunity in 2022 through 2025 for Roth conversions. Keep in mind you can convert any amount any year, but you must pay income taxes on that amount in the tax year of the conversion.
Many financial advisors are recommending Roth conversions in 2022 because investment accounts have decreased in value this year. The key is to identify years when your income (and your taxes) may be lower. Or, you may decide on a Roth conversion because you believe paying taxes at today’s rates will be lower than future tax rates.
Recognize that a traditional IRA that contains $500,000 is actually worth less because of the taxes that will be due. If you estimate you are in a 22% federal tax bracket and a 4% state tax bracket (or will be during retirement), your $500,000 traditional IRA is only worth $370,000 ($500,000 less 26% taxes). With traditional IRAs, it is not a matter of if you will pay taxes, but when. You must pay income taxes on all withdrawals, and if you leave a traditional IRA to a child or grandchild, they will pay taxes.
Of course, the downside of converting to a Roth IRA is that you must pay taxes on the amount you convert in the year you convert. With a Roth conversion, you are paying taxes sooner rather than later. The Roth IRA is then tax-free going forward, including the future growth.
There are many variables to consider when deciding whether to convert to a Roth IRA. As with many financial issues, the devil is in the details, but those details are important. My next article will focus on the many variables you should consider. That will leave you ample time to do a Roth conversion before December 31, 2022, if you wish.
Donna Skeels Cygan, CFP, MBA, is the author of “The Joy of Financial Security.” She was a fee-only financial planner in Albuquerque for more than 20 years before retiring in 2021. She welcomes emails from readers at firstname.lastname@example.org.