Will they or won’t they? That’s the question on everyone’s mind: will Congress renew the expiring provisions from the Tax Cuts and Jobs Act (TCJA), or will they allow some or all of them to sunset in favor of other priorities? These upcoming legal decisions will impact not just business owners but all taxpayers. Instead of letting the uncertainty spiral into anxiety, take a beat and weigh your options. For one, you don’t have to go on this tax planning journey alone. Our network of Certified Tax Planners would be more than happy to help take on the load and guide you through the best practices for creating a 2025 tax plan.
In our last blog, we provided an overview of the tax laws and tariffs that could impact your plans this year. Today, we’ll discuss best practices for creating a flexible tax plan, including the importance of scenario modeling.
Why Scenario Modeling Matters
How can you create an actionable tax plan when so many tax laws are up for renewal, revision, or removal this year? To recap, some of the key tax laws to keep an eye on include:
• Personal income tax rates and brackets
• Standard deduction
• State and local tax (SALT) deductions
• Estate tax exemption
• Expanded child tax credit
• Alternative minimum tax
• 20% deduction from qualified business income (199A)
When you work with a Certified Tax Planner, the first thing they will typically do is look at your current financial situation and the tax laws currently in place and create a model. This is what your tax plan should look like if no new laws are passed this year. Isn’t that unlikely to happen, you may ask? When it comes to scenario modeling, the wisest place to start is with what is true right now. From there, your tax planner will make tweaks based on alternative scenarios, taking one possibility at a time. For instance, what if the 199A deduction is renewed? What if the marginal tax rates are revised instead of reverting to pre-TCJA rates? What if the estate tax is eliminated (per a proposal from the Trump administration)? What if the standard deduction is not increased but itemized deductions become more beneficial? Looking at each scenario will help you to weigh the pros and cons of different tax strategies and figure out if there are any that will benefit you even if Congress decides on certain proposals on the table now.
Dealing with Deductions
As you begin the scenario modeling process, a major question will be how to deal with deductions. Mainly this comes down to whether to accelerate deductions so you can reduce your tax liability this year or defer them to another year when the impact would be greater. This can become a fairly complex question (another reason why working with a professional is key) but just being aware that you have this option can make a huge difference.
To take an example, let’s pretend that you and your spouse earn $250,000 a year in pass-through income. Under the current law, you would likely qualify for that 199A deduction, allowing you to deduct 20% of your qualified business income. What if 199A is not extended beyond this year? Keep in mind that the TCJA provisions do not expire until the end of 2025, so if Congress simply allows them to sunset (versus introducing a new version of 199A, for instance), then you can still enjoy this benefit for the entire 2025 tax year. This would be your starting point in the scenario modeling process—what if nothing changes?
Similarly, you’ll be looking at the possibility of maximizing the current personal income tax rates. If you run a pass-through business, all of your income is taxed as individual income. If you have a lower tax rate now than you would if the TCJA provisions expire this year, your first scenario could involve accelerating income to make use of that low tax rate. For instance, you might do a Roth IRA conversion where your retirement income is taxed upfront but is tax-free when you withdraw it. You might also consider stock trades that would bring in more income now, since you might have to pay more taxes on the same trade next year.
Fortunately, these are all strategies you could make toward the end of the year once we know much more about the tax landscape for 2025. Remember this is just Scenario A: the status quo. Once we’ve analyzed what tax strategies we would use if no new laws were approved, we can start making adjustments based on tax proposals that are drawing close to the finish line.
The cap for state and local tax (SALT) deductions is a great example of this. Currently, the cap is set at $10,000, so we would start our plan as if that cap were in place for the rest of 2025 but then disappears starting in 2026. Once that model is set up, we begin to tweak it based on current tax proposals. Right now, lawmakers are suggesting a wide range of options from raising the SALT cap to introducing an income limit. Of course, the outcome matters the most to taxpayers living in high-tax states.
However, the SALT cap itself is not the only factor to consider. For instance, if the $10,000 SALT cap stays in place but the other TCJA provisions expire, the standard deduction will be cut in half. This would mean you might consider itemized deductions instead of claiming the standard deduction. Even with the SALT cap, you might see a bigger tax benefit. You can see where going through the scenario modeling process step-by-step with a professional can make a major difference!
What About Tariffs?
Tariffs have a more indirect impact on our tax plan, since they mainly shift profitability for businesses and cost of living for consumers. Again, we have to start out by planning based on what we know to be true today. So if your business relies on imports from China, start with your estimated revenue based on the existing tariffs and go from there.
Just as we mentioned above, a key move will be to determine if you are looking to accelerate or defer tax deductions this year. If it would be more advantageous to accelerate deductions, you can look into the inventory methods that offer bigger deductions. On the other hand, if taxes go up this year and you want to defer deductions, you can look at expense-shifting strategies, such as cost segregation or different accounting methods. Your tax planner can help you figure out the timing for when these deductions should kick in to make the maximum impact on your bill.
Lastly, keep in mind that tariffs affect the cost of capital goods and therefore can impact cash flow for your business. By looking at the timing of equipment purchases or expanding the business, you can ensure that related deductions are available in the year that benefits you most.
A Few Final Best Practices
The main takeaway to remember here is to be proactive not reactive. This means waiting for actual legislative texts to be finalized, not relying on headlines and press releases. The news can be very helpful in keeping you alert to possible changes, but we should not treat them as definitive until Congress and the President have put their approval stamp on it. This means avoiding any big moves that are not reversible. For instance, you might be tempted to change your business entity type based on possible tax changes, but you can only do so every five years. Instead of reactively making a decision, talk through this option with your tax planner to weigh the pros and cons of acting now versus down the road.
Finally, remember to rely the most heavily on tools and tax strategies that are available now. Not every tax law is under the microscope at the moment. Strategies like timing deductions and deferring or accelerating expenses are likely to be available no matter the tax year we’re in. The same might be true for certain deductions that are not currently under scrutiny by the government. Look at these options first before factoring in other tax laws that are more likely to shift this year.
Summary
Regardless of the outcome of the Congressional debates about tax policy, there will inevitably be ways to reduce taxes by staying informed on the current laws. While the current state of uncertainty may make you uncomfortable, don’t let it make you reactive. Rely on the level-headed guidance of a tax professional to ensure you’ve weighed the pros and cons of any potential tax strategy and formed a flexible tax plan that is ready for any future scenarios.
To begin the process of creating that flexible tax plan, contact a Certified Tax Planner today.
