Sunsetting of the Tax Cuts and Jobs Act (TCJA): How to Prepare

By: Michael Blahusch CFP® | ChFC® | CRPC® | MBA

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about sweeping changes to the U.S. tax code, aimed at simplifying taxation and stimulating economic growth. While many Americans benefited from lower tax rates, these provisions were not meant to last forever. Key components of the TCJA are set to expire at the end of 2025, an event often referred to as the "sunsetting" of the TCJA. For those planning retirement, understanding the implications of these changes is crucial for maintaining financial wellness. Here’s what you need to know and how to prepare.

A Quick Overview of the TCJA

The TCJA was signed into law by former President Donald Trump in December 2017, marking the most significant overhaul of the U.S. tax code since the 1980s. Its main goals were to reduce individual and corporate tax rates, simplify tax filing, and encourage domestic business investment.

Some of the key provisions of the TCJA included:

• Lowering individual tax rates: The law reduced tax brackets for most individuals, resulting in lower taxes for many Americans.
• Doubling the standard deduction: The standard deduction was nearly doubled, reducing the number of people who itemize their deductions.
• Eliminating personal exemptions: The law removed personal exemptions while increasing the Child Tax Credit and dependent credits.
• Capping state and local tax (SALT) deductions: SALT deductions were limited to $10,000, which particularly impacted residents of high-tax states.
• Business tax changes: Corporate tax rates were slashed from 35% to 21%, and provisions were added to encourage companies to invest in the U.S.

However, many of the benefits to individuals are set to expire by the end of 2025, unless Congress acts to extend them. For retirees, the changes could have a substantial impact on income, investments, and overall financial planning.

How the TCJA Sunsetting Will Affect Your Taxes

If the TCJA is allowed to expire without any legislative action, several significant changes will occur in the 2026 tax year. Here’s a breakdown of the most important changes and how they may affect you as you near or enter retirement.

1. Return to Higher Tax Brackets: 

One of the most immediate impacts will be the return to pre-2017 tax brackets. While the TCJA reduced tax rates for all income groups, those rates will revert to higher levels. For example, the 12% bracket will increase to 15%, and the top marginal rate of 37% will rise to 39.6%.
What this means for you: Higher tax rates could mean less take-home pay or more taxes on your retirement income, whether it's from Social Security, pensions, or withdrawals from retirement accounts like 401(k)s or IRAs. If you’re planning to rely heavily on these sources, you may want to adjust your retirement budget to account for these increased tax liabilities.

2. Standard Deduction Shrinks Under the TCJA: 

The standard deduction was significantly increased to $12,550 for individuals and $25,100 for married couples filing jointly (2021 numbers). Once the law sunsets, the standard deduction will shrink back to its previous levels, which were nearly half the current amounts.
What this means for you: A smaller standard deduction will likely result in higher taxable income, especially for retirees who no longer itemize their deductions. This could increase your overall tax bill during retirement unless you have significant deductible expenses such as mortgage interest or charitable contributions.

3. Reinstatement of Personal Exemptions: 

The TCJA eliminated personal exemptions, which allowed taxpayers to deduct a set amount from their taxable income for each person in the household. When the law sunsets, personal exemptions will return.
What this means for you: For retirees living alone, the reintroduction of personal exemptions could help offset some of the financial burden from other changes, particularly for those with dependents. If you're part of a multigenerational household, this may provide some tax relief.

4. Child Tax Credit Decreases: 

The TCJA increased the Child Tax Credit to $2,000 per child and made more of it refundable. It also added a $500 credit for non-child dependents, which was especially useful for retirees supporting adult children or elderly parents.
What this means for you: If you're still providing financial support to dependents, such as grandchildren or adult children with special needs, the expiration of these credits could significantly reduce your tax refund or increase your tax bill.

Planning for 2026 and Beyond

With the TCJA sunsetting, now is the time to reassess your financial strategy and make necessary adjustments. Here are some actionable steps to consider:

• Review your retirement plan: Consider how higher tax rates and a lower standard deduction will impact your retirement income. You may want to accelerate withdrawals or diversify your income streams to minimize your tax burden.

• Maximize tax-efficient savings vehicles: Contribute to tax-advantaged accounts like Roth IRAs, which provide tax-free withdrawals in retirement, or Health Savings Accounts (HSAs), which offer tax-free withdrawals for qualified medical expenses.

• Consider a Roth conversion: If you're in a lower tax bracket now, converting a portion of your traditional IRA or 401(k) to a Roth IRA before 2026 could help you lock in the current lower rates.

• Consult a financial planner: Given the complexity of the tax changes, seeking professional advice is critical. A RetireUS CERTIFIED FINANCIAL PLANNER™ can help you navigate these shifts and ensure you're on track to meet your retirement goals. Click here to learn more! 
   

Conclusion

The sunsetting of the TCJA presents both challenges and opportunities for retirees. Understanding the upcoming changes is essential for maintaining financial stability. By proactively planning for these tax adjustments, you can protect your retirement savings and continue working toward financial freedom. If you’re unsure about how these changes might affect you, reach out to RetireUS for a personalized financial wellness check. Our platform is designed to help pre-retirees like you navigate the complexities of retirement planning.

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 Any references made regarding the taxable nature of your investments should not be construed as tax advice. RetireUS dba McAdam LLC is not a tax advisory firm; therefore, any tax decisions or assumptions should be made/verified with your tax professional.