If the Tax Cuts and Jobs Act (TCJA) expires as at the end of 2025, the average taxpayer could owe roughly $2,000 more in taxes, according to the Tax Policy Center.
This additional burden, however, would vary. There are actually wide variations on the impact on the tax bill depending on the taxpayer’s income level, residence, and other personal circumstances. For example, certain taxpayers residing in higher-taxes states could actually see a decrease in their tax bill, since the $10,000 cap on deducting state and local taxes is scheduled to expire.
In our last post, “Five observations on the expiration of the Tax Cuts and Jobs Act (TCJA)” we took a high-level view of the many considerations around key elements of the tax code: SALT deductions, standard deductions, alternative minimum tax, and estate tax exemption levels.
To get a sense of how different types of taxpayers may be impacted by the expiration of the TCJA, here are some hypothetical examples.
What is the trajectory of taxes post-TCJA?
1. Family of four living in Missouri
Here’s some background on our hypothetical family:
- Annual income is $200,000 comprised mainly from wages
- They are making contributions into their 401(k) of 6% of income annually
- They own a home valued at $500,000 with a mortgage of $400,000
- Their two children are 8 and 10 years old
Impact of TCJA expiration = tax bill increases ↑
In this scenario, the couple’s effective tax rate is increased by a little more than 1.5% leading to a tax increase of roughly $3,500.1
2. Retired couple living in Florida
- In this example, our hypothetical retirees report $175,000 in income annually, consisting of distributions from their IRAs, Social Security benefits, and dividends and capital gains from mutual funds within taxable accounts
Impact of TCJA expiration = tax bill increases ↑
The effective tax rate is increased by almost 2% in this example leading to a tax increase of roughly $3,400.2
3. High-earning single taxpayer living in New York City
- In this example, the individual has annual income of $800,000 consisting primarily of earned income from wages. Their residence is a condominium in New York City valued at $2.5 million with a mortgage of $2 million
- Making charitable contributions of $25,000 a year
Impact of TCJA expiration = tax bill decreases ↓
The effective tax rate is reduced by approximately 3% in this example leading to a tax savings of approximately $28,000.3
Planning considerations to prepare
It is important to consult with a tax professional about your individual situation. There may be strategies to consider based on your personal situation that would be used to help hedge the risk of higher taxes in the future. For example, several strategies using Roth IRAs could be options. For more details on these strategies, see our piece, “Ten Roth strategies to hedge the risk of higher taxes.”
WHAT ARE THE RISKS?
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1. Tax Foundation, Tax Calculator: How the TCJA’s expiration will affect you. As of 2024.
2. Ibid.
3. Ibid.
