As the end of 2025 is rapidly approaching, it’s crucial to keep an eye on tax laws that are set to change or expire. Tax policy is in constant flux, and often, these changes can have a significant impact on your financial situation. For individuals and businesses alike, understanding these alterations is vital for tax planning and ensuring that you maximize your savings and deductions. In this blog post, we will explore the tax provisions that are slated to expire by the end of the year and discuss how you can take advantage of them before they are gone.
Understanding the Current Tax Landscape
Tax laws are often designed to encourage certain behaviors and stimulate economic activity. Over the past several years, the U.S. government has implemented temporary measures in response to economic downturns, the COVID-19 pandemic, and other factors. Some of these measures were set to be temporary, with expiration dates built into the legislation.
However, many of these provisions have been extended or renewed in the past, and it’s still possible that some will be extended again. Yet, as of now, the following changes are expected to expire by the end of the year, and it’s important to take note of how they might affect your finances.
Key Tax Provisions Expiring by the End of 2025
- Enhanced Child Tax Credit
The enhanced Child Tax Credit (CTC), which was part of the American Rescue Plan in 2021, significantly increased the credit for families with children. For tax years 2021 and 2022, the CTC was raised to $3,600 per child under the age of 6 and $3,000 for children aged 6 to 17. In addition, the credit was made fully refundable, meaning that families could receive the credit even if they had no taxable income.
However, this provision is set to expire at the end of 2022. If Congress does not extend or make permanent the enhanced CTC, families will see a reduction in the amount of credit they can claim. The credit will return to its pre-2021 levels, which means $2,000 per child under the age of 17, and it will no longer be fully refundable.
How to Take Advantage:
- If you are eligible, it’s important to ensure that you have received your full enhanced Child Tax Credit payments for the year.
- If you haven’t already, consider taking advantage of any remaining credits by filing early and ensuring your eligibility is fully accounted for.
- Families with children may also want to adjust their withholding or make estimated tax payments to compensate for the reduction in credit in the coming year.
- Temporary Increase in Standard Deduction for Charitable Donations
In response to the pandemic, Congress temporarily allowed taxpayers to deduct up to $300 ($600 for married couples filing jointly) in cash donations to charitable organizations even if they did not itemize deductions. This provision was included in the CARES Act and has been extended for several years. However, this benefit is scheduled to expire by the end of 2025.
How to Take Advantage:
- If you plan to make charitable contributions, consider doing so before the end of the year to take full advantage of this benefit, especially if you typically take the standard deduction rather than itemizing.
- Keep track of all charitable contributions, no matter how small. Even if you don’t itemize, you can still claim this deduction, which can reduce your taxable income.
- Temporary Changes to the Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a valuable benefit for low- to moderate-income workers. The American Rescue Plan temporarily expanded the EITC for 2021 and 2022, particularly for workers without children and for taxpayers in higher income brackets. However, these temporary expansions are set to expire at the end of 2022, meaning the EITC will revert to its pre-2021 levels.
How to Take Advantage:
- If you are eligible for the EITC, ensure that you take full advantage of the enhanced credit before it expires.
- Keep detailed records of your earned income, especially if you work in a gig economy or have variable income sources, to ensure you qualify for the maximum EITC.
- Filing early can ensure that you don’t miss out on the higher benefits if you qualify.
- Temporary Expansion of Child and Dependent Care Credit
The Child and Dependent Care Credit was expanded in 2021 under the American Rescue Plan. The maximum credit was increased to $4,000 for one qualifying dependent (up from $3,000) and $8,000 for two or more qualifying dependents (up from $6,000). This credit was also made fully refundable for the first time. However, these expanded benefits are set to expire by the end of 2022, and the credit will revert to pre-2021 levels.
How to Take Advantage:
- If you have incurred expenses for child or dependent care during the year, be sure to claim the maximum possible amount before the credit decreases.
- Filing your tax return as soon as possible can help you receive the full, expanded credit.
- Keep documentation of all care expenses, including receipts and any forms from daycare providers, to ensure you claim the credit correctly.
- Capital Gains Tax Treatment for Investment Income
For higher-income individuals, the temporary lower capital gains tax rates that were introduced under the Tax Cuts and Jobs Act (TCJA) in 2017 are scheduled to expire in 2025. The current tax rates on long-term capital gains for most individuals are 0%, 15%, or 20%, depending on income. After 2025, it is expected that these rates will rise for higher earners.
How to Take Advantage:
- Consider selling investments that have appreciated in value before the expiration of these lower tax rates. By doing so, you may be able to lock in lower capital gains taxes.
- If you are planning to sell real estate or other significant assets, it may be beneficial to accelerate the sale into this year to take advantage of the current tax treatment.
- You may also want to consider tax-loss harvesting (selling losing investments to offset gains), as it could be beneficial to offset future higher tax rates on capital gains.
General Tax Tips for Year-End Planning
Beyond these specific provisions, there are general strategies that can help you optimize your tax situation as we near the end of the year:
- Maximize Retirement Contributions: If you’re not already maxing out contributions to your 401(k), IRA, or other retirement accounts, consider doing so before the end of the year. Contributions to traditional retirement accounts can lower your taxable income, and many employers offer matching contributions to 401(k) plans.
- Defer Income: If you are self-employed or have significant income from freelance or contract work, you may want to defer income into the next year if possible. This can help you avoid being pushed into a higher tax bracket for the current year.
- Accelerate Deductions: Consider accelerating deductible expenses into the current year. This could include making mortgage payments, paying property taxes, or prepaying business expenses if you’re self-employed.
- Consult with a Tax Professional: Tax laws can be complex, and they are constantly changing. A tax professional can help you navigate these changes and ensure that you are maximizing your tax savings.
Conclusion
Tax laws and provisions are constantly evolving, and many of the temporary measures introduced in recent years are set to expire at the end of the year. By staying informed and taking advantage of these expiring benefits, you can minimize your tax liability and potentially save a significant amount of money. Whether it’s the enhanced Child Tax Credit, the expanded Child and Dependent Care Credit, or the favorable treatment of capital gains, it’s crucial to act before these provisions disappear.
If you’re unsure about how to navigate these changes or how to optimize your tax planning, don’t hesitate to consult with a financial advisor or tax professional. Taking action now can make a big difference when it comes time to file your taxes next year.
By making smart decisions and utilizing the tools available to you, you can maximize your tax savings and enter the new year with a more secure financial outlook.