As we approach the end of 2025, a significant change looms for our financial landscape: the sunset of the 2017 Tax Reform Act, officially known as the Tax Cuts and Jobs Act (TCJA). At AAFMAA Wealth Management & Trust LLC (AWM&T), we recognize the unique financial needs of Veterans. Here’s what the sunset of this Act means for you and how you can prepare for these impending changes.
Understanding the 2017 Tax Reform Act
The Tax Cuts and Jobs Act, enacted in December 2017, was a landmark piece of legislation that brought substantial changes to the U.S. tax code. Key provisions of the TCJA included:
- Reduced Individual Income Tax Rates: The Act lowered tax rates across income brackets, resulting in increased take-home pay for many Americans.
- Increased Standard Deduction: The standard deduction nearly doubled, which simplified tax filings for many individuals by reducing the need to itemize deductions.
- Child Tax Credit Expansion: The credit was doubled from $1,000 to $2,000 per qualifying child, with a higher income threshold for eligibility.
- State and Local Tax Deduction Cap: The deduction for state and local taxes paid was capped at $10,000, which impacted taxpayers in high-tax states.
- Mortgage Interest Deduction Limitation: The cap on the mortgage interest deduction was reduced to mortgages up to $750,000.
When Will the TCJA Sunset?
The provisions of the TCJA are set to expire on December 31, 2025. This sunset means that unless new legislation is enacted, the tax rules will revert to their pre-2017 state starting January 1, 2026. This reversion includes higher tax rates, a lower standard deduction, and other pre-TCJA provisions.
What Does This Mean for Your Military Family?
The expiration of the TCJA can have several implications. Here’s what you need to consider:
- Potential Tax Increases: With the sunset of the TCJA, individual income tax rates are expected to rise. This change could lead to higher tax liabilities for many families.
- Adjustments in Deductions: The standard deduction will decrease, and itemized deductions may become more beneficial again. This shift could complicate tax filings and necessitate a more strategic approach to deductions.
- Impact on Families: The reduction in the child tax credit will reduce refunds or increase taxes owed for families with dependent children.
- Homeowners Considerations: If you have a mortgage, the changes in the mortgage interest deduction could affect your tax benefits.
How to Prepare for Tax Changes
Given the potential for increased tax burdens and changes in deductions, it's essential to begin planning now. Here are a few steps you can take:
- Review Your Tax Situation: Assess how the reversion to pre-2017 tax rules will impact your specific situation. Consider consulting with a tax professional to understand the nuances of your tax liabilities.
- Maximize Current Benefits: Take full advantage of the current TCJA provisions while you still can. This includes maximizing contributions to retirement accounts, utilizing the increased standard deduction, and capitalizing on the child tax credit.
- Plan for the Future: Develop a long-term financial plan that anticipates higher taxes and adjusts for potential changes in deductions and credits. This might involve strategies like Roth IRA conversions, adjusting your investment portfolio, or increasing contributions to tax-advantaged accounts.
AWM&T is Here to Help
Navigating the financial complexities of taxes can be daunting, especially with significant changes on the horizon. Although we are not tax professionals, AWM&T’s team provides tax-optimizing financial guidance and wealth management solutions exclusively to those who have served in the U.S. Armed Forces. To learn more about our suite of services, please contact a Relationship Manager or call 910-307-3500 today. Our team of experienced financial professionals is here to support you every step of the way.