TCJA’s potential sunset: What it means for tax planning

The flip of the calendar brings a fresh set of tax rules and financial planning opportunities. When the Tax Cuts and Jobs Act (TCJA) of 2017 was implemented, many people enjoyed tax breaks. Now, several TCJA provisions are slated to sunset at the end of the year if Congress doesn’t act. Read on for an overview of important changes and what to expect from President Trump’s tax agenda.

Key takeaways:

• Federal income tax rates remain unchanged this year with the top tax bracket at 37% for those earning over $751,600 (married filing jointly). 
• If the TCJA expires, individual filers will see a rise in income tax rates and a lower standard deduction.
• Several provisions of the SECURE Act 2.0 took effect in January 2025. Employees aged 60–63 can now contribute an extra $11,250 to their 401(k) on top of the standard $23,500 limit.

Federal income tax rates aren’t changing

In 2025, federal income tax rates remain unchanged with the top tax bracket at 37% for those earning over $751,600 (married filing jointly). Slight adjustments to the tax brackets mean an individual could earn a bit more in 2025 without seeing an increase in their marginal tax rate. This will be the last year under the current tax regime, as the TCJA is set to sunset on December 31.

If the tax regime reverts to the pre-2017 structure, those earning between $200,100 and $304,950 will face the most significant impact – a 4% tax increase, with the rate rising from 24% to 28%.

Sunset of the Tax Cuts and Jobs Act of 2017

The standard deduction for joint filers is currently $30,000 but will drop to $16,700 if the TCJA expires. It’s estimated that only 10% of taxpayers are itemizing deductions today, so a reduction of the standard deduction will result in more filers having to itemize – complicating the filing process that was streamlined in 2017.

Taxpayers who are charitably inclined and plan to take the standard deduction in 2025 may consider deferring charitable contributions (both cash and appreciated stocks) until 2026, when these deductions may become more beneficial if TCJA isn’t extended.

The top marginal tax rate is scheduled to increase to 39.6% from the current 37%, and the top bracket will start at $615,100, down from $771,550. If you expect tax rates to rise in 2026 and are concerned about higher future rates, it may make sense to accelerate the realization of certain capital gains.

For those who are recently retired but not yet drawing from Social Security, there might be an opportunity to fill up lower tax brackets by realizing capital gains in 2025. For married filing jointly without any other income, the long-term capital gains rate is 0% up to $96,700. With the standard deduction of $30,000, that means $126,700 in long-term gains can be realized without any federal income tax due.

Retirement planning opportunities

In 2025, 401(k) contributions can total up to $70,000. While many are familiar with the $23,500 contribution limit, the IRS also allows for an additional $46,500 through employer contributions (such as a company match) and employee after-tax contributions.

“Super savers” can take advantage of after-tax contributions to their 401(k) plan if their plan allows. Although these contributions aren’t deductible, they can be shielded from future taxes. After being deposited into the 401(k), the funds are immediately moved to the Roth 401(k) through an “in-plan Roth conversion,” allowing high earners and aggressive savers to bypass the $150,000 income limit and $7,000 annual contribution cap for traditional Roth IRAs. This strategy, known as the “mega backdoor Roth,” remains a loophole that Congress has yet to close.

Of note, Roth 401(k) withdrawals are tax-free only if the participant has reached the age of 59½ and the account is at least five years old. Otherwise, the withdrawal will be subject to income taxes and a 10% IRS penalty on the portion of the withdrawal attributable to earnings.

Enhanced contributions under the SECURE Act 2.0

Several provisions of the SECURE Act 2.0 (passed in 2022) took effect on January 1, 2025. Notably, employees between the ages of 60 and 63 can supercharge their 401(k) catch-up contributions. In addition to the standard $23,500 limit, they can contribute an extra $11,250 to their 401(k).

Source: IRS, Natixis
 

As a reminder, the required minimum distribution age for a traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan account is now 73 years old.

Beware of mutual fund capital gains

Last year the S&P 500^® gained more than 23% after surging 24% in 2023. Back-to-back gains of 20%+ were last seen in 1997–1998. This means that many US Large Cap mutual funds are sitting on significant unrealized gains.

Each year, mutual funds must distribute their net realized gains to investors after accounting for any realized losses. According to Morningstar data, 93% of actively managed US Large Blend mutual funds have potential capital gains exposure.

That means if the fund were to liquidate, taxable investors would owe capital gains, regardless if their shares had appreciated. Moreover, two-thirds of funds have unrealized capital gains exceeding 25% of the portfolio’s net asset value.

Source: Morningstar Direct; Natixis. Data as of 11/30/2024.

So, what’s the problem? The issue arises in years when the fund is down because they still must pay out net capital gains. In down years, investors often sell shares, forcing the portfolio manager to sell stocks to raise cash. This can turn unrealized gains into realized gains that will be passed through to the mutual fund shareholder at year end in the form of a taxable distribution. After a couple of strong years, a market pullback could produce this unfortunate scenario.

Before investing in a mutual fund in a taxable account, check its prospectus to understand the potential capital gains exposure. As an alternative, consider a tax-efficient direct indexing account, where tax loss harvesting in volatile markets can be used to reduce the investor’s tax bill.

Leveraging tax loss harvesting

Direct indexing that incorporates systematic tax loss harvesting can produce better after-tax returns than traditional index-based mutual funds and exchange-traded funds.

A portfolio can harvest its losses for tax purposes by selling investments when their current value is less than the price originally paid for the security. These losses can be used to offset other capital gains on an investor’s tax return.  If there are excess losses, they can be used to offset up to $3,000 in ordinary income – or be banked for use in future years.

These strategies work well in taxable accounts, especially when initiated early in the calendar year, as they can create more opportunities to convert investment losses into tax write-offs.

Tax outlook 2025

Trump’s tax policy agenda is in flux, but the main goal is to extend the TCJA before the December 31 sunset date.

If TCJA expires, rates will increase 1%–4% for all brackets except the 10% and 35% brackets. The income threshold will drop by over $100,000 for the fifth and seventh brackets, while the sixth bracket will benefit from $30,150 of additional income before being taxed at 35%.

The State and Local Tax (SALT) deduction, currently capped at $10,000, is also up for negotiation. If the TCJA sunsets, taxpayers could potentially deduct the full amount they pay in state and local taxes, which would benefit those in high-tax states. Some proposals suggest increasing this deduction to $20,000–$30,000 instead, but this remains a key negotiation point.

Additionally, President Trump has proposed eliminating taxes on Social Security benefits, tipped wages, and overtime wages, as well as lowering the corporate tax rate from 21% to 20% for all companies and to 15% for companies that manufacture products in the US.