By Deborah Jeanne Sergeant
Unless further legislation intervenes, a few aspects of the Tax Cuts and Jobs Act (TCJA) will phase out by the end of 2025 and 2026, making tax brackets higher for most households.
According to the Tax Policy Center in Washington, D.C. the Trump-era TCJA passed in 2017 lowered taxes for an estimated 65% of households. Only 6% pay more than before.
Planning can help mitigate the effects of losing those tax cuts for both households and businesses.
Until it ends, the effects of the TCJA include 27% of the lowest income households receiving a tax break; those between $49,000 and $86,000 receiving an average tax cut of 1.4% of their after-tax income; those with incomes between $308,000 and $733,000 received a 3.4% cut; and the highest bracket of those more than $733,000 received a 2.2% break.
“Predominantly the biggest impact to low- and middle-income families will be the change to the tax brackets and the standard deduction,” said Diana Apostolova, investment consultant with Rochester Investments in Rochester. “The standard deduction will be reduced to pre-2019 tax levels adjusted for inflation. The tax brackets will be increased to their pre-2019
“When that takes place, tax filers will have to use qualified itemized deductions and hopefully reduce
their taxable income that way,” Apostolova said.
One issue is that not every 55-plus taxpayer can generate significant itemized deductions. Many have paid off their mortgages by this point and some have downsized into a smaller home and participate in the NYS Enhanced Star program.
“They don’t pay as much in real estate taxes as younger homeowners,” Apostolova explained.
She foresees that for people with large estates, the reduction in estate tax deduction will provide “the biggest shock.”
“Because tax brackets are set to increase, proactive tax planning will make profound impact on people’s unique tax situations,” she added.
She does see some advantages of not extending the TCJA.
“People will be able to deduct investment advisory fees, tax preparation fees, medical expenses, charitable contributions and alimony and childcare payments, to mention a few,” she said. “Also, taxable gains and dividends for taxpayers below the 25% tax bracket will be zero.”
Businesses will also feel the effects of losing aspects of the TCJA. John C. Saunders, owner of John C. Saunders CPA P.C in Rochester, believes that the biggest TCJA effects that will impact people will be expense deductions and depreciation, along with benefits for investing capital gains into small businesses.
“There’s a scaling back of accelerated depreciation that will be widely felt,” Saunders said. “There were some very good things that came from this Tax Cuts and Jobs Act to be stimulative to the economy.”
He views the coming repeal of these measures as particularly injurious to the business world considering the continued fallout from businesses shaken by the pandemic’s effects. Many business owners incurred significant setbacks from lost business, skyrocketing costs and rising wages.
“There’s a lot of stuff that’s getting to critical failure level, particularly as the government seeks to take more and more control over every personal and business decision,” he said.
Discussing the upcoming changes with a tax preparer or other financial professional and how these changes relate to a particular household or business can help mitigate some of the negative effects of losing aspect of the TCJA for those impacted.