The law known as the Tax Cuts and Jobs Act (“TCJA”) included some major changes to the Internal Revenue Code, but not all of them are here to stay.
A number of significant provisions are set to expire after 2025, having significant impact on law firms, their employees, and their clients. Although Congress may act to extend some or all of them, it is important to know which provisions are expiring that may affect your tax planning.
Provisions
- The TCJA lowered individual tax rates, but these rates will revert to their pre-2018 levels. This means the top rate will increase from 37% to 39.6%. Law firm partners and high-income earners should prepare for higher personal tax liabilities.
- The nearly doubled standard deduction will be reduced, which may lead more taxpayers to itemize deductions again. Additionally, the $10,000 cap on state and local tax deductions will be lifted, potentially increasing the value of itemizing for those in high-tax states.
- The 20% deduction for pass-through business income, which has been beneficial for many law firms, will no longer be available. Firms should explore other tax planning strategies to mitigate the impact of this change.
- The estate and gift tax exclusion amount will be cut roughly in half. Law firms should advise clients on estate planning strategies to take advantage of the higher exclusion before it sunsets.
- The TCJA’s provision for 100% bonus depreciation on qualified property will completely phase out. Firms planning significant capital expenditures should consider accelerating these purchases to benefit from the current rules.
- The child tax credit will decrease from $2,000 to $1,000 per qualifying child. This change may affect the personal tax planning of employees with children.
Action Steps for Law Firms
- Review and adjust tax strategies: Work with a tax advisor to review current tax strategies and adjust them in anticipation of the TCJA changes.
- Educate partners: Ensure that partners are aware of the upcoming changes and how they might be affected.
- Plan for capital expenditures: Consider the timing of major purchases to take advantage of current bonus depreciation rules.
By staying informed and proactive on the latest in federal tax reform and more, law firms can navigate the sunset of the TCJA and minimize its impact on their financial health.