As we approach the potential sunset of the Tax Cuts and Jobs Act (TCJA) in 2025, taxpayers face a shifting landscape that may upend traditional tax planning strategies. Typically, conventional tax advice encourages accelerating deductions and deferring income to minimize current-year taxable income. However, absent an extension of the TCJA, taxpayers may benefit from reversing this approach: accelerating income into 2025 and deferring deductions into 2026. Here’s a closer look at why this shift in strategy might make sense and how you can prepare.

Understanding the TCJA Sunset: What’s at Stake?

The TCJA, enacted in late 2017, brought substantial changes to individual and corporate tax structures, including:

• Lowering the individual income tax rates across most brackets
• Doubling the standard deduction
• Capping state and local tax (SALT) deductions at $10,000
• Increasing the child tax credit
• Limiting the Alternative Minimum Tax (AMT)

These provisions are set to expire after 2025 unless Congress acts to extend them. Without an extension, taxpayers could see a return to pre-TCJA tax rates, higher deductions on Schedule A, and possible changes in tax credits and exclusions. As a result, for some, it might be advantageous to lock in income under the currently lower rates in 2025 and defer expenses to maximize deductions when rates are likely to increase in 2026.

The Case for Accelerating Income into 2025

Potential for Higher Tax Rates Post-2025

If the TCJA sunsets, tax brackets and rates will revert to their pre-2018 levels. By accelerating income into 2025, you may be able to lock in lower tax rates that might no longer be available in 2026. This strategy could be particularly beneficial for high earners who expect their income to be subject to significantly higher rates after 2025.

Avoiding a Steeper Tax Bill on Deferred Income

Postponing income until 2026 could expose it to higher tax rates, resulting in a larger tax liability. Accelerating income, such as capital gains, bonuses, or retirement plan distributions (if strategically sound), in 2025 could help you take advantage of current rates, especially if Congress allows the TCJA to lapse.

Consideration of Capital Gains and Qualified Dividends

The current favorable rates for long-term capital gains and qualified dividends could also be impacted if the TCJA sunsets. By recognizing gains in 2025, you might reduce exposure to any potential rate hikes in 2026. Taxpayers with substantial gains in investment portfolios may want to consider realizing those gains in the earlier, lower-taxed years.

The Case for Deferring Deductions into 2026

Higher Future Rates Amplify the Value of Deductions

Deductions are more valuable when tax rates are higher, as each dollar of deduction reduces more of your tax liability. By deferring deductions into 2026, you maximize their impact if rates return to pre-TCJA levels. This approach could apply to:

• Charitable contributions
• Mortgage interest payments
• Certain business expenses
• Property tax payments beyond the SALT limit

Maximizing Deductions with the Return of the Pease Limitation

The Pease limitation, which restricts itemized deductions for high earners, was suspended under the TCJA but could be reinstated after 2025. If it returns, careful planning is necessary to ensure that deferred deductions are still advantageous. Despite this limitation, deferring some deductions may still provide greater tax savings in a higher-rate environment.

Strategic Use of the Standard Deduction and Itemized Deductions

Doubling the standard deduction under the TCJA significantly impacted the value of itemized deductions. If the standard deduction reverts to its previous, lower levels in 2026, more taxpayers may find it beneficial to itemize. By deferring deductions to 2026, you could potentially benefit from itemizing deductions, increasing your overall tax benefit if the standard deduction becomes less favorable.

Specific Strategies for Implementation

Prepay or Delay Business and Personal Expenses

Business owners may consider adjusting the timing of certain expenses to shift the associated deductions. For example, prepaying expenses (like rent or supplies) to defer deductions, or even planning capital expenditures around the year-end, can align your strategy with anticipated tax changes.

Evaluate Roth IRA Conversions and Distributions

For taxpayers holding traditional IRAs, converting a portion of these accounts to Roth IRAs in 2025 might be beneficial. The conversion will trigger taxable income, but doing so at the potentially lower 2025 rates can yield long-term savings. Similarly, consider taking distributions (if eligible) from retirement accounts in 2025 rather than deferring to later years, especially if you’re near required minimum distribution (RMD) age.

Capital Gains Harvesting

Realizing gains from investments held for more than a year could also align with this income acceleration strategy. If capital gains rates are likely to rise, taking profits before 2026 can lock in lower tax liability on those earnings.

Review Charitable Giving Plans

Charitable contributions might be timed to achieve the highest tax benefit. You could “bunch” donations to defer until 2026 if you expect the standard deduction to drop and itemization to become more valuable.

Final Thoughts: Planning Proactively

Tax planning in light of the TCJA’s potential expiration requires a proactive approach. Working with a tax advisor to analyze your specific financial situation and adapt your income and deduction timing can help you optimize tax outcomes across 2025 and 2026. With the landscape potentially changing, reviewing your plans annually and adjusting strategies as needed will be key to maximizing tax savings and financial security.

Stay informed, anticipate potential rate changes, and consider these unconventional strategies to take advantage of today’s lower tax environment—while preparing for what may come in 2026 and beyond.