How to Prepare for Potential 2025 Tax Changes
The old saying goes that nothing in life is certain except death and taxes. However, with potential tax law changes looming in 2025, even taxes may feel uncertain. Taxpayers may want to prepare in advance for adjustments that could impact their financial strategy.
At the center of these potential changes is the scheduled expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) of 2017. These provisions include the 37% top marginal tax rate, expanded capital gains brackets, increased standard deductions, and limits on state and local tax (SALT) deductions. Additionally, the current estate tax exemption—set at $13.99 million for individuals and $27.98 million for couples in 2025—will revert to pre-2017 levels, adjusted for inflation, unless Congress extends these provisions.
While there is support for extending many of these tax cuts, the country’s rising budget deficit—potentially increasing by $4.6 trillion over the next decade if the TCJA is extended—could complicate negotiations. Some policymakers have also proposed additional tax breaks, such as eliminating taxes on Social Security benefits, tips, and overtime pay, which could further impact government revenue.
What Happens Next?
Despite a Republican-controlled Congress, passing any tax extensions or new cuts aren’t expected to happen overnight. Lawmakers must work within budget reconciliation rules, which impose restrictions on deficit increases beyond a 10-year window unless offset by other spending reductions.
Some tax professionals predict that Congress may not finalize tax changes until late 2025, as other legislative priorities—such as government funding, the debt ceiling, and possibly immigration reform—could take precedence.
How Should You Plan?
While tax policies could shift, major changes aren’t expected to take effect until 2026 at the earliest. For now, the best strategy might be to keep planning under current tax laws. Stay flexible for any changes that may come. Here are six tax-planning strategies that can help reduce your taxable income, according to Fidelity:
1. Consider Timing Your Income and Expenses
If tax rates increase, it may be beneficial to accelerate income into 2025 while rates remain lower and potentially delay deductible expenses to 2026 when deductions could be more valuable.
● Self-employed individuals or business owners may benefit from booking revenue sooner and deferring expenses.
● Major purchases—such as business equipment—could be postponed to potentially offset higher future tax rates.
For traditional W-2 employees, income timing may be less flexible, but bonus negotiations or stock option exercises might be areas to consider.
2. Maximize Deductions If You Itemize
Under the TCJA, the standard deduction is set at $15,000 for individuals and $30,000 for married couples filing jointly in 2025. If your eligible deductions exceed these thresholds, itemizing could lower your taxable income.
Key deduction categories include:
● Medical expenses (above 7.5% of adjusted gross income)
● Mortgage interest (deductible on loans up to $750,000)
● State and local taxes (SALT) (currently capped at $10,000)
● Charitable contributions
● Casualty and theft losses (in federally declared disaster areas)
3. Watch for Possible SALT Deduction Changes
The TCJA imposed a $10,000 cap on SALT deductions, which has impacted homeowners in high-tax states. Some lawmakers have discussed raising or removing this cap in future tax negotiations, so it may be helpful to stay updated on any developments.
4. Take Advantage of Tax Credits
Unlike deductions, tax credits provide a dollar-for-dollar reduction in taxes owed. If you qualify, it may be beneficial to consider leveraging:
● Education credits, such as the American Opportunity Tax Credit (up to $2,500 per student) and the Lifetime Learning Credit (up to $2,000 for tuition and educational expenses).
● The Child Tax Credit, which provides up to $2,000 per child under 17, is subject to income limits.
5. Evaluate Roth Conversions
If tax rates are expected to rise, converting traditional retirement funds to a Roth IRA could be a smart move.
● You’ll pay taxes on the converted amount now, but future qualified withdrawals will be tax-free.
● Roth IRAs also aren’t subject to required minimum distributions (RMDs), potentially lowering taxable income in retirement.
This strategy may be particularly beneficial for those currently in a lower tax bracket or for individuals who anticipate higher income in the future
6. Plan for Estate and Gift Taxes
If no action is taken, the federal estate tax exemption could drop to about half the current amount after 2025, potentially exposing more estates to taxation.
● To potentially reduce taxable estate value, consider gifting up to $19,000 per recipient in 2025.
● Irrevocable trusts may help preserve wealth while utilizing today’s higher exemption limits.
For more complex estate planning needs, working with a financial advisor or attorney before tax laws change can help ensure the best outcome.
The Bottom Line
Given possible changes in tax laws, planning ahead is worth considering. While these tax changes aren’t expected to take effect until 2026, proactive strategies can help minimize uncertainty.
Working with a financial advisor and a tax professional can give you personalized help. This ensures your tax plan can change as needed, no matter what happens in the future.
Sources:
https://www.fidelity.com/learning-center/personal-finance/tax-changes-2025
Disclosure:
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
