Navigating the Tax Cuts and Jobs Act: Strategies for 2024 and Beyond

The Tax Cuts and Jobs Act (TCJA), enacted in 2017, brought sweeping changes to the U.S. tax code, affecting both individuals and businesses. As we approach the end of its provisions, set to expire in 2025, it is crucial for tax professionals to understand these changes and strategize accordingly. This blog explores the significant provisions of the TCJA, the impending expirations, and how tax professionals can guide their clients through these transitions.

The TCJA: A Brief Overview

The TCJA lowered individual income tax rates across the board, simplified many tax rules, and introduced several new deductions. For businesses, the TCJA permanently reduced the corporate tax rate from 35% to 21% and allowed for 100% bonus depreciation on certain assets. However, many of these provisions are temporary and set to expire by the end of 2025.

Key Individual Tax Provisions and Their Implications

1. Individual Income Tax Rates The TCJA reduced the tax rates for individuals, with the highest marginal rate dropping from 39.6% to 37%. However, these lower rates are scheduled to revert to pre-TCJA levels after December 31, 2025. Tax professionals should help clients plan for this potential increase by considering tax-efficient investment strategies and other income-smoothing techniques.
   
   
2. Standard Deduction and Itemized Deductions The standard deduction nearly doubled under the TCJA, which significantly reduced the number of taxpayers itemizing their deductions. This change simplified tax filing for many but also eliminated several itemized deductions, such as unreimbursed employee expenses and tax preparation fees. These provisions will expire at the end of 2025, and taxpayers may find it advantageous to itemize once again.
   
   
3. State and Local Tax (SALT) Deduction Cap The TCJA capped the SALT deduction at $10,000, impacting taxpayers in high-tax states. This cap will expire in 2025, potentially allowing for full deduction of state and local taxes once more. Advising clients to defer certain payments or plan large purchases around this change could be beneficial.

Key Business Tax Provisions and Their Implications

1. Corporate Tax Rate and Bonus Depreciation The corporate tax rate reduction to 21% is permanent, but the 100% bonus depreciation for short-lived capital investments is set to phase out by 2026. Businesses should consider accelerating investments in qualifying property to take full advantage of this deduction before it decreases.
   
   
2. Pass-Through Deduction The TCJA introduced a 20% deduction for qualified business income from pass-through entities (e.g., S corporations, partnerships). This deduction is subject to complex limitations and is set to expire after 2025. Tax professionals should evaluate whether restructuring businesses or changing compensation strategies can maximize this benefit before its expiration.
   
   
3. Net Operating Loss (NOL) Deduction Previously, NOLs could be carried back two years and forward 20 years. The TCJA limited this to 80% of taxable income and eliminated the carryback provision, though the carryforward period became indefinite. This limitation was extended through 2028 by subsequent legislation. Businesses should plan for these limitations and consider strategies such as income deferral or expense acceleration.

Strategic Planning for Expiring Provisions of the TCJA

With numerous provisions of the Tax Cuts and Jobs Act (TCJA) set to expire by the end of 2025, strategic tax planning is critical for both individuals and businesses. Here's a detailed approach to preparing for these changes:

1. Maximize Deductions and Credits Now Encourage clients to capitalize on expiring benefits while they are still available. For instance, businesses should consider making significant capital investments now to take advantage of 100% bonus depreciation, which allows for immediate expensing of certain assets. This provision phases out starting in 2023 and fully expires in 2026.
   
   
2. Reassess Business Structures The 20% pass-through deduction, which is significant for S corporations, partnerships, and sole proprietorships, is set to expire. Tax professionals should review their clients’ business structures to determine if converting to a different entity type, such as a C corporation, could provide long-term tax benefits despite the TCJA's corporate tax rate reduction being permanent. This reassessment is crucial for high-income earners and those in industries heavily reliant on this deduction.
   
   
3. Estate and Gift Tax Planning The TCJA significantly increased the estate and gift tax exemption from $5.6 million to $11.2 million, adjusted for inflation. However, this provision will revert to pre-TCJA levels in 2026. Clients with substantial estates should consider making large gifts now to take advantage of the higher exemption. Proper planning can reduce the future estate tax liability and ensure wealth transfer is maximized under the current favorable conditions.
   
   
4. Plan for Increased Individual Tax Rates Individual tax rates are scheduled to increase as the current lower rates expire. Tax professionals should advise clients on income-smoothing strategies to mitigate the impact of these rate hikes. This might include accelerating income into the lower-rate years or utilizing tax-deferred retirement accounts effectively.
   
   
5. Review Itemized Deductions The cap on state and local tax (SALT) deductions has been a significant issue for taxpayers in high-tax states. This cap is set to expire, potentially allowing for greater deductions in 2026 and beyond. Tax professionals should help clients evaluate whether itemizing deductions will be more beneficial than taking the standard deduction in future years.
   
   
6. Utilize Net Operating Loss (NOL) Carryforwards The TCJA limited NOL deductions to 80% of taxable income and eliminated carrybacks, but extended carryforwards indefinitely. This provision is critical for businesses recovering from financial losses. Strategic planning should include optimizing the timing and utilization of NOLs to minimize tax liabilities as the rules continue to evolve.

Looking Ahead: The Role of TaxPlanIQ

Navigating these complex changes requires sophisticated tools and strategies. TaxPlanIQ offers a comprehensive platform for tax planning, enabling professionals to create customized tax plans, evaluate multiple scenarios, and communicate potential savings to clients effectively. As the TCJA provisions sunset, TaxPlanIQ can help ensure that you are prepared to mitigate the impact of these changes and maximize your clients’ tax savings.

In conclusion, staying informed and proactive is essential as the TCJA’s expiration approaches. By leveraging the right strategies and tools, tax professionals can help clients navigate these changes and continue to provide high-value advisory services. For a deeper dive into how TaxPlanIQ can support your tax planning needs, sign up for a free demo today.