One word expected to be heard throughout 2025 is change, and with change comes opportunity. Tompkins can help you navigate and plan for the potential tax changes expected this year. In 2017, the Tax Cuts and Jobs Act (TCJA) significantly changed the tax code, reducing taxes for individuals and businesses. Without legislative action, many of these provisions are set to expire, or “sunset”, at the end of this year. For various reasons, extensions are uncertain and most likely will not occur until September, at the earliest. Considering the significant potential changes in the tax law, it is essential you start planning now.
How will this affect you and what should you be doing to prepare for these changes? The next few paragraphs will outline some of the key changes and planning techniques to consider.
Income Tax Rates
The TCJA lowered the marginal rates for most individual brackets. Without legislative action, these rates will revert back to pre-TCJA levels as shown in the graph below:
Things to Consider
- Roth conversion. If you expect to be in a higher marginal tax rate after the TCJA sunsets, it might make sense to pay taxes on the IRA distribution this year, while TCJA rates remain in effect, rather than after rates revert to pre-TCJA levels.
- Utilize capital gains tax rates to your advantage. Long-term capital gains tax rates are typically lower than ordinary income tax rates. If you have investments with significant gains, consider strategically realizing those gains before the overall individual tax rates increase.
- Use Tax-loss harvesting as a strategy to offset capital gains with capital losses and reduce overall tax liability.
Deductions and Tax Credits
The TCJA eliminated the personal exemption and 2% miscellaneous itemized deductions but nearly doubled the standard deduction. It also limited state and local tax (SALT) deductions to $10,000 and tightened limits on mortgage and home equity interest deductions. These will revert back to pre-TCJA Levels if the sunset takes place.
Things to Consider
- Review the timing of your deductions. If you anticipate your tax rate will be higher in future years after the expiration of the TCJA provisions, you may want to consider deferring a deductible expenditure until the higher rates come into play, because these deductions would be more valuable against higher income tax rates.
Charitable Planning
The TCJA raised the ceiling for charitable contribution deductions from 50% to 60% of adjusted gross income (AGI). The charitable contribution is scheduled to fall back to 50% on January 1, 2026 if the sunset takes place.
Things to Consider
- Donate appreciated assets to charity in 2025 to avoid capital gains taxes and receive a tax deduction. Also, consider other charitable giving strategies such as donor-advised funds, charitable gift annuities, charitable remainder trusts, or private foundations.
- Utilize a Qualified Charitable Distribution (QCD) as a charitable giving strategy. A QCD allows individuals age 70 ½ or older to make a tax-free donation from their IRA directly to a qualified charity of up to $108,000 during this year. The annual amount permitted is indexed for inflation. The QCD allows you to avoid taxes on taxable distributions from your IRA and may be counted towards satisfying all or a part of your RMD. A deduction is not required, but the amount is excluded from your taxable income. Note: You will want to check with the charity to confirm that they are eligible to receive the QCDs. Some charities such as donor advised funds and private foundations do not qualify for QCD treatment.
Estate and Gift Tax
TCJA doubled the federal lifetime estate and gift tax exemption in 2017. As a result, fewer estate tax returns were required to be filed and less estate tax was paid. The 2025 federal estate and gift tax exemption is $13,990,000. With proper planning, a married couple may be able to shield up to $27,980,000 this year from estate or gift taxes. If the act sunsets, the exemption may return to pre-TCJA levels, which will be significantly less, potentially as low as half, the current levels. As a result, more individuals and estates will owe estate tax.
Things to Consider
- Review your estate planning documents and consider gifting. With the lifetime federal exemption slated to drop, an opportunity exists to take advantage of the higher exemption before it sunsets. For example, Jane Smith expects to transfer $12,000,000 to a family member upon her death. If that occurs in 2026, roughly $7,000,000 would be exempt from federal estate taxes, but the remaining $5,000,000 would be subject to estate tax. However, if Jane Smith gifted $10,000,000 before the end of 2025, then the $10,000,000 (plus the remaining $2,000,000 transferred through her estate after TCJA provisions expire) may be exempt from gift and estate taxes.
- Consider State gift and estate tax implications. New York, Pennsylvania and Florida do not have a gift tax. However, New York has an estate tax exemption of $7,160,000 this year, in addition to the federal estate tax described above, and Pennsylvania has an inheritance tax. Florida does not have an estate or inheritance tax.
- Utilize the annual exclusion. The annual exclusion amount in 2025 is $19,000. An individual taxpayer is allowed to gift $19,000 per person in 2025 without any gift tax consequences and without having to report the gift to the IRS. A married couple may gift $38,000 per person in 2025 without triggering any gift tax consequences. The married couple will, however, need to report the gift to the IRS. This type of gifting can reduce the size of your estate and reduce tax burdens for your beneficiaries.
- Superfund 529 plans by using your annual gift exclusion. Education costs are rising. Many individuals would like to help their children or grandchildren with their education goals. A 529 plan allows an individual to not only contribute up to the maximum annual gift exclusion, but you are able to superfund or front load 5 years of annual contributions in a single year. When setting up a 529 plan, this means that a single donor in 2025 can give up to $95,000. For married couples, they may each contribute up to $95,000 this year for a total of $190,000 without incurring gift taxes.
- Consider using trusts.
- Credit Shelter Trust (CST). A CST is an irrevocable trust created at death and used by married couples to shelter part of their assets from estate tax, allowing wealth to pass to their beneficiaries more effectively.
- Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust created during life that allows one spouse to gift assets to a trust for the benefit of the other spouse.
- Irrevocable Trusts. There are a variety of irrevocable trusts that can be used, during life or at death, to reduce the value of your taxable estate and ultimately allow you to pass more wealth on to your beneficiaries.
If you have any questions about your business and planning for the future, reach out to one of our Wealth Advisors today! https://www.tompkinsfinancialadvisors.com/about-us/contact-us
Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific tax or legal advice or recommendations for any individual.