Now that we’re post-Labor Day (hope you enjoyed the long weekend with your Colorado Springs family or friends), it’s time to start looking at what’s coming. From now until December…
- For you North Colorado Springs side hustlers – the September 15 estimated tax payment deadline
- For you late filers – the tax extension deadline on October 15
- To reduce 2024 taxes – year-end tax moves
- TCJA sunset in 2025 (and what you should do now to prepare — more on that in today’s note)
This is another time of year when these regular communications I send out become critical for you. Because the IRS, thanks to the Inflation Reduction Act funds, is more beefed up and more intent on collecting. And when elections happen, we’re all holding our breath wondering what could change with the new administration’s tax initiatives.
I assure you, I will be keeping a close eye on things, though not much will happen before year-end simply because the outcome of November 5 has yet to be seen.
But whatever happens, I’ll make sure you stay informed. I’ll also make sure you get regular actionable insights on meeting Uncle Sam’s tax requirements while also not paying more than you legally have to.
That’s one big reason for today’s writing. The provisions from the Tax Cuts and Jobs Act are expiring at the end of next year. Could those provisions be extended? Maybe, but also, maybe not.
So, let’s examine what you should do assuming they do expire. Because there are things you can do this year to start preparing for that.
TCJA Sunset Informed Tax Moves for Colorado Springs Taxpayers
“Hope is a good breakfast but a bad supper.” – Francis Bacon
The TCJA sunset is nearing, and thanks to this being an election year, there’s a lot of uncertainty about whether or not its provisions for individual taxpayers will be extended past 2025. Because Congress isn’t prone to compromise, plan for the worst and be surprised if the best happens.
Translation: Plan for taxes to go up in 2026.
Especially considering that the rates will not only increase, but the tax brackets will compress back to 2017 standards, pushing some into higher tax brackets (which means more taxes to pay).
For example: If you’re a couple with a combined income of 300k, your rate will go up from 24 percent to 33 percent! That’s a considerable increase in taxes.
Strategize about a better tax positioning right now. We know that some of the provisions from the Tax Cuts and Jobs Act will expire and tax rates will go up, especially in some key areas.
So here are some moves you can make for next year to ensure you don’t end up with a larger tax bill in 2026.
Review your withholdings and estimated taxes
Take a look at your latest W-2 and compare it to last year’s. If you suspect you haven’t withheld enough, it’s a good idea to talk to your HR department about adjusting your withholdings.
This will be especially important as tax brackets are scheduled to revert back to 2017 standards, which means you might end up in a higher tax bracket.
And if you’ve got a side hustle, make sure you’ve paid enough in estimated taxes. If you’re falling short this year, there’s still time to make payments before the year ends to avoid penalties.
Accelerating and delaying financial moves
Given that tax rates are likely to increase in 2026, you might want to consider accelerating income into 2024 or 2025, while rates are still lower. This could involve taking distributions from your IRA, realizing capital gains, or even taking bonuses or other income earlier than usual.
Conversely, you might want to delay depreciation on your properties or assets, delay paying for expenses for Schedule C and rental properties, or delay taking deductible expenses.
Prepare for a reduced CTC
The Child Tax Credit (CTC) is set to revert to its pre-TCJA levels in 2026. This means a decrease from the current maximum credit of 2k per qualifying child to 1k, as well as a reduction in the phaseout threshold from 75k to 50k for unmarried filers and from 110k to 90k for married filers.
Additionally, the refundable portion of the credit may be reduced. This will have a big impact on low-to-moderate-income families because they may end up getting less refunded than they’ve counted on until now. So, it may be time to consider other tax benefits you can take advantage of to make up the difference.
Timing your charitable contributions
Examine AGI (adjusted gross income) limits and time your donations accordingly. Consider delaying your charitable contributions until 2026, when higher rates could make those deductions more valuable.
For example, if you plan to make significant charitable donations, consider bunching contributions. Or you could make use of a Donor Advised Fund, which allows you to make a large contribution now, get the tax deduction in the current year, but spread out the actual donations to charities over five years.
Capital gains and losses
With the sunset of the TCJA approaching, it’s important to consider how capital gains and losses could affect your tax strategy. If you expect your tax rate to increase after 2025, you might consider harvesting gains in 2024 and 2025, selling assets that have appreciated in value to take advantage of potentially lower rates now.
Conversely, deferring capital losses until after 2025 could help you offset gains that may be taxed at higher rates, reducing your overall tax liability. Just be mindful of the wash sale rules, which can limit the tax benefits of selling an asset at a loss if you repurchase it within 30 days.
Roth IRA conversions
If you’ve been thinking about converting a traditional IRA to a Roth IRA, the next two years might be the perfect time while tax brackets are lower. This strategy transfers pre-tax or nondeductible IRA money to a Roth IRA. The trade-off is an upfront tax bill on the converted balance.
With tax rates still relatively low in 2024 and 2025, converting now could save you money in the long run. For example, a married couple with a taxable income of 94.3k is at the top of the 12 percent bracket. If they were to complete a Roth conversion of 289.598k to max out the 24 percent bracket, they’d save nearly 16k in federal taxes by doing the conversion before the tax rates potentially increase in 2026. This strategy not only saves on taxes but also allows the converted amount to grow tax-free in the Roth IRA.
Standard deduction decreasing to 17 percent
The TCJA nearly doubled the standard deduction, benefiting 85-90 percent of taxpayers who generally didn’t have enough deductions to justify itemizing.
If the standard deduction drops back to its pre-TCJA levels (17 percent), this change may mean you’ll need to start itemizing again or end up accepting a much smaller standard deduction (and therefore less off your overall tax bill). To prepare, consider bunching your deductions—such as medical expenses—into one year to maximize their impact.
Estate planning moves will be critical
We’re currently witnessing what’s known as the Great Wealth Transfer, as the baby boomer generation, which holds an estimated $68 trillion in various assets, begins passing down their wealth. Thanks to the TCJA, the current estate tax exemption is at an all-time high—13.6 million per individual—but it’s set to drop by nearly half in 2026.
If you have significant wealth to transfer, now is the time to act before the TCJA sunset. Start thinking about making gifts to your heirs or setting up trusts before the exemption decreases, to minimize your estate tax liability and maximize the wealth passed on to your beneficiaries..
Given Congress’s track record of last-minute decisions, it’s wise to plan for the worst and be pleasantly surprised if things work out better than expected TCJA sunset. The decisions you make in 2024 and 2025 could significantly impact your tax situation in 2026 and beyond, so now is the time to start planning.
To ensure you’re making the best tax moves, schedule an appointment today so we can discuss what’s happening in your life (especially if there are changes) and develop a strategy tailored to your needs:
Being tax smart this year and next,
Susan Wilklow