Introduction to the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (“TCJA”) that was passed and signed into law in December 2017, made significant changes across multiple areas of the tax code. Since the TCJA was passed via the budget reconciliation process, sunset provisions had to be built in for some of the major components. Unless legislative action is taken, many key provisions of the TCJA are expected to sunset (or expire) on December 31, 2025.
Sunset of Key Individual Tax Provisions
The TCJA overhauled many areas of the individual tax code, including lowering individual tax rates, widening tax brackets, and altering personal deductions and exemptions, which are set to expire at the end of 2025.
When the TCJA went into effect on January 1, 2018, it maintained the seven-bracket individual tax rate structure, but reduced both the income thresholds and most individual income tax rates. For example, the pre-TCJA top individual tax bracket was 39.6% for single taxpayers with incomes greater than $418,401 and for married taxpayers with incomes greater than $470,701. The TCJA reduced the top individual tax rate to 37% for single taxpayers with incomes greater than $500,000 and for married taxpayers with incomes greater than $600,000. The income thresholds for each bracket are adjusted for inflation each year.
Below is a comparison of how marginal tax rates could differ upon expiration of the TCJA:
The TCJA also increased the standard deduction to $12,400 for single taxpayers and $24,800 for married taxpayers (tax year 2020), compared with $6,500 (single) and $9,550 (married) under prior law. The bill eliminated the personal exemption and a variety of other miscellaneous deductions. It also limiting certain itemized deductions, such as those for state and local tax (SALT), mortgage interest, and charitable contributions (see Summary of Key Expiring or Changing Income Tax Provisions Under the TCJA table for a detailed summary).
Sunset of Key Business Tax Provisions
The TCJA also made significant changes to many areas of the business tax code, including reducing the corporate tax rate and altering or eliminating certain business deductions.
The TCJA lowered the corporate income tax (CIT) rate from 35% to 21% starting in 2018 – note that this reduced CIT rate was made permanent by the TCJA. The TCJA also allows full and immediate expensing of short-lived capital investments for five years and increases the section 179 expensing cap from $500,000 to $1 million. The bill also eliminated or curtailed a variety of business taxes and expenditures, including the deductibility of net interest, net operating loss carrybacks and carryforwards, the corporate alternative minimum tax, and tax treatment of like-kind exchanges.
Planning Opportunities
There are many significant opportunities available for individuals and families who may be impacted by the pending sunset of certain TCJA tax provisions. While the sunset is not scheduled to happen until December 31, 2025, below are some considerations when reviewing your current financial plan with your advisor to determine if additional action steps are appropriate:
- Timing of certain income and deductions.
- Reviewing your current portfolio holdings with your portfolio manager.
- Congress may act to extend some or all TCJA modifications/provisions.
- Possible further increase of certain tax rates for wealthy individuals.
- The potential for future legislation to:
a. Increase tax rates on capital gains.
b. Limit or eliminate certain strategies that are currently permitted.
In conjunction with your legal, tax, and financial advisors, City National Rochdale’s Private Wealth Solution team specializes in educating clients and assisting them in making these important financial decisions. Our Comprehensive Wealth Assessment will focus on identifying gaps and solutions and empower you to make informed decisions that optimize your financial well-being. Reach out to your financial advisor if you are interested in learning more about how City National Rochdale can help.
IMPORTANT INFORMATION
This document is for general information and education only. It is not meant to provide specific tax guidance. The information in this document was compiled by the staff of City National Rochdale (CNR) from data and sources believed to be reliable, but CNR makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimates or projections given, constitute the judgment of the author as of the date of the presentation. CNR has no obligation to update, modify, or amend this document or otherwise notify you in the event any information stated, opinion expressed, matter discussed, estimate, or projection changes or is determined to be inaccurate.
City National Bank, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances.
This presentation (or any portion thereof) may not be reproduced, distributed, or further published by any person without the written consent of CNR.
City National Rochdale, LLC, is a SEC-registered investment adviser and wholly owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank and City National Rochdale are subsidiaries of Royal Bank of Canada.
City National Rochdale, LLC Non-deposit investment Products are: • not FDIC insured • not Bank guaranteed • may lose value |
© 2024 City National Rochdale. All rights reserved.