Here Comes the Sun

Here Comes the Sun: Daylight Savings Time for the TCJA Understanding the 2025 Tax Laws and Its Individual Impact

With key provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 set to expire or “sunset,” a new legislative package, widely referred to as the "One Big Beautiful Bill" (OBBB), was signed into law on July 4. This comprehensive bill introduces significant changes to the tax landscape, aiming to make “permanent” (at least until the next election cycle) many of the TCJA's individual tax breaks while also adding new deductions and shifting funding priorities. For individuals, talking with your advisors is key to understanding the impact of these changes and the implementation of sound financial and estate planning strategies while minimizing tax liabilities.

The Landscape Before the TCJA's Sunset

Before delving into the specifics of the OBBB, it's essential to recall the backdrop against which it emerged. The TCJA, enacted in late 2017, dramatically reshaped the tax code for individuals and corporate entities. Its most notable provisions included lower individual income tax rates, an increased standard deduction, the elimination of personal exemptions, effectively doubled the amount of lifetime federal gift and estate tax exemption, a cap on the State and Local Tax (SALT) deduction, and introduction of deductions for qualified business income. These changes were, by design, temporary and scheduled to sunset at the end of 2025. Without new legislation, many taxpayers would have faced a return to pre-TCJA tax rates and a smaller standard deduction, potentially leading to a substantial tax increase for millions. This looming expiration created an urgent need for Congress to act, setting the stage for the OBBB. The new law, while extending many of the TCJA's individual benefits, also introduces its own distinct features and realigns spending priorities.

Core Pillars of the 2025 Tax Law: What's New and What's Permanent

The 2025 tax law represents a significant legislative undertaking, with implications spanning various facets of individual taxation. Here's a breakdown of its key provisions and their projected impact:

1. Estate and Gift Tax Exclusion: The OBBB enacts a permanent increase in the federal estate and gift tax lifetime exclusion amount. The basic exclusion amount is slightly increased to a maximum of $15 million per person for individuals dying or gifts made in 2026 and later years, with future inflation adjustments based on 2025 as the new base year. This significantly higher exclusion means that fewer estates will be subject to federal estate taxes, providing substantial relief for wealthy families. The annual federal gift tax exclusion remains at $19,000 per recipient in 2025.
2. Permanent Income Tax Rates and Brackets: One of the most impactful changes under the OBBB is the permanent extension of the individual income tax rates and brackets established by the TCJA. This means that the lower tax rates seen in recent years will continue beyond 2025, providing certainty for taxpayers and preventing a substantial "tax hike" that would have occurred if the TCJA provisions had simply expired. While the specific rates and brackets are subject to annual inflation adjustments, the underlying structure of the TCJA rates is now solidified.
3. Increased Standard Deduction: The OBBB also makes permanent the increased standard deduction amounts, adjusted for inflation. For 2025, the standard deduction has been increased to $15,000 for single filers, $30,000 for married couples filing jointly, and $22,500 for heads of household. This continues to simplify tax filing for many Americans, as a larger standard deduction reduces the need to itemize deductions, especially for those with moderate itemized expenses.
4. Modified State and Local Tax (SALT) Deduction Cap: A highly contentious issue, the SALT deduction cap, which limited the deduction of state and local taxes to $10,000 under the TCJA, sees a significant change, at least for a few years. The 2025 bill temporarily quadruples this cap to $40,000 for a period of five years. This provision is particularly beneficial for residents of high-tax states, who have been disproportionately affected by the previous cap. While far short of a full repeal of the limitation, this increased cap offers substantial relief to many individuals with significant property taxes and state income taxes.
5. Senior Deduction and Social Security: The bill includes a new temporary deduction for older adults, providing a $6,000 deduction for most seniors earning less than $75,000 a year (or $150,000 for married couples filing jointly). While President Trump had campaigned on eliminating taxes on Social Security benefits entirely, this deduction is a more modest, temporary measure that applies to all income, not just Social Security. It is projected to benefit millions of seniors by increasing their after-tax income. However, it's crucial to note that it does not eliminate the taxability of Social Security benefits, a point that has led to some confusion.
6. Capital Gains Tax Rates: While the overall framework of capital gains taxation remains largely consistent, the income thresholds for the 0%, 15%, and 20% long-term capital gains tax rates have been adjusted for inflation for 2025. Short-term capital gains continue to be taxed at ordinary income tax rates. For individuals, understanding these thresholds is critical when planning the sale of investments or other appreciated assets.
7. Retirement Savings Changes: The bill includes several inflation-related adjustments to retirement plan contribution limits. The employee contribution limit for 401(k) and 403(b) plans increases to $23,500 for those under 50. Catch-up contributions for those 50 and older remain at $7,500, but a higher catch-up limit of $11,250 applies for individuals aged 60-63, as introduced by the SECURE 2.0 Act. Traditional and Roth IRA contribution limits remain at $7,000. These adjustments aim to encourage and support retirement savings for individuals across various income levels.
8. Alternative Minimum Tax (AMT) Outlook: The TCJA significantly narrowed the reach of the Alternative Minimum Tax (AMT) by increasing exemptions and phase-out thresholds. The OBBB largely continues this approach, making it less likely for most individuals to be subject to the AMT. For 2025, the AMT exemption is $88,100 for individuals and $137,000 for married couples filing jointly, with phase-out beginning at higher income levels. However, if the TCJA provisions had fully sunset, the number of taxpayers impacted by the AMT would have expanded significantly, making the extension of these AMT adjustments a crucial aspect of the new bill.

Navigating the Changes: Individual Impact and Planning Considerations

The individual impact of the OBBB will vary significantly based on income level, family structure, and geographic location.

• High-Income Earners: Generally, high-income earners are expected to see the largest dollar-amount tax cuts, primarily due to the permanent lower income tax rates, the increased estate tax exclusion, and the more generous SALT deduction cap.
• Middle-Income Families: Middle-income families are also poised to benefit from the extended lower tax rates and the increased standard deduction. The enhanced Child Tax Credit will provide additional relief for those with qualifying children.
• Homeowners in High-Tax States: The quadrupling of the SALT deduction cap to $40,000, while temporary, will be a welcome change for homeowners in states with high property and income taxes, potentially leading to significant tax savings.
• Investors: The continued preferential treatment of long-term capital gains remains largely intact, which will benefit investors. However, strategic tax planning around asset sales will remain important.
• Retirement Savers: The increased contribution limits for various retirement accounts offer greater opportunities for individuals to save for their future on a tax-advantaged basis.

Planning for 2025 and Beyond:

Given the sweeping changes, individuals should take proactive steps to understand their specific tax situation. This includes:

• Reviewing Salary Withholdings: With permanent tax rate changes, individuals may need to adjust their withholding and assess its effect on their new tax liability, avoiding underpayment or overpayment.
• Consulting with Tax and Financial Professionals: For complex financial situations or significant income changes, seeking advice from qualified financial and tax advisors is highly recommended. They can provide personalized guidance on how the OBBB impacts your specific circumstances and help you optimize your financial and tax planning.
• Evaluating Deductions and Credits: Understand how the increased standard deduction, qualified business deduction, and modified SALT cap, affect your eligibility and potential tax savings.
• Retirement Planning: Maximize contributions to retirement accounts, taking advantage of the increased limits to boost long-term savings.
• Capital Gains Management: If you anticipate selling appreciated assets, understand the 2025 capital gains thresholds to strategize timing and potential tax implications.
• Staying Informed: Tax laws can evolve, so staying abreast of future legislative discussions and IRS guidance is crucial for ongoing financial well-being.

Conclusion

The OBBB represents a significant recalibration of U.S. tax policy, solidifying many of the individual tax cuts from the TCJA while introducing new, targeted deductions and realigning federal spending. As the new law takes effect, talking with your Stock Yards Bank advisors to obtain a thorough understanding of the OBBB’s provisions and proactive financial planning will be essential for individuals to navigate the evolving tax landscape and optimize your financial outcomes. Contact your advisor directly or by calling (502) 625-1005.

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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