Wealth Management Spotlight

Managing Capital Gains Distributions from Mutual Funds and ETFs

As the end of the year approaches, many investors may find themselves surprised by an unwelcome addition to their year-end taxes: year-end capital gains distributions from mutual funds and certain ETFs. 

These distributions, typically caused by fund managers selling securities within the fund throughout the calendar year, can create significant tax liabilities — even if you didn’t sell a single share of any of your investments. For investors in taxable accounts, this can feel like paying taxes on gains you didn’t directly benefit from, and can erode your net returns and decelerate your financial goals.

Understanding the impact of year-end taxes and capital gains distributions is essential for managing your tax burden and preserving as much of your portfolio’s value as possible. By being proactive and taking advantage of tax-efficient strategies, you can stay ahead of these unwanted surprises, and keep more of your hard-earned money invested for longer-term growth.

This is why a core wealth-building and wealth-protection philosophy here at Towerpoint Wealth emphasizes tax efficiency as a cornerstone of portfolio management. Tax-efficient investing isn’t just about minimizing taxes — it’s about strategically maximizing the longer-term potential of your wealth. 

In this article, we’ll explore the challenges of year-end taxes and capital gains distributions, and provide actionable strategies to help you mitigate their impact. Let’s dive into how you can turn this tax hurdle into an opportunity to boost your investment outcomes.

Key Takeaways

• Year-end capital gains distributions from mutual funds and some ETFs can create unexpected tax liabilities for investors, even if they didn’t actively sell their shares.
• These distributions are taxed as either short-term capital gains (ordinary income rates) or long-term capital gains (usually lower than ordinary income rates).
• Mutual funds are more prone to capital gain distributions than ETFs due to structural differences in how they manage redemptions and internal trading.
• To reduce the impact of these taxes, investors can:
  – Time investments carefully, avoiding purchases just before year-end distributions.
  – Prioritize tax-advantaged accounts for holding mutual funds that trade more frequently.
  – Generally, utilize ETFs in lieu of “regular” open-end mutual funds.
  – Choose tax-efficient investments.
  – Use tax-loss harvesting to offset capital gains and reduce taxable income.
• Regular portfolio reviews and proactive communication with a financial advisor can help you stay ahead of potential tax issues.

What Are Year-End Capital Gains Distributions?

Let’s start by discussing what year-end capital gains distributions are and how they affect your portfolio.

Year-end capital gains distributions are a common, but often misunderstood, part of investing in mutual funds and certain ETFs. They result from fund managers selling securities within the fund to rebalance the portfolio, manage risks, or fulfill investor redemptions. By law, the gains from these sales are passed along to shareholders as taxable distributions, even if you didn’t sell any of your shares in the fund.

For many investors, this creates a confusing and frustrating tax situation; though you may not have sold a single share, you’re still responsible for paying taxes on the fund’s realized gains. These distributions typically happen in the fourth quarter of the year, leading to an unwelcome surprise when next year’s tax season rolls around.

Mutual Funds vs. ETFs: Why Are Mutual Funds More Affected?

Mutual funds are more prone to year-end capital gains distributions than ETFs due to differences in their structure. When mutual fund investors redeem their shares, fund managers often need to sell securities within the fund to raise cash to meet the redemption. This creates taxable gains, which legally are required to be distributed proportionally to all investors in the fund.

On the other hand, ETFs use an “in-kind” redemption process that involves exchanging securities with market makers, instead of selling them directly. This process minimizes the taxable gains that are passed on to ETF shareholders, making ETFs generally more tax-efficient. 

However, it’s important to note that certain ETFs can still distribute capital gains under specific circumstances, particularly those that trade less liquid or complex securities.

Why Year-End Capital Gains Distributions Matter

Year-end distributions can have a significant impact on your financial situation, especially if you hold mutual funds in a non-retirement “taxable” account. These distributions are reported on your 1099, and are taxed as either short-term or long-term capital gains, depending on how long the fund held the securities before selling them.

For investors, this creates two main issues:

1. Unexpected Tax Bills: If you’re not anticipating a distribution, it can upend your financial plans, forcing you to pay taxes you didn’t account for.
2. Reduced Returns: Taxes on distributions eat into your investment gains, reducing your portfolio’s net overall performance.

This problem is worsened for those who invest in a mutual fund late in the year. Even if you’ve only held the fund for a few weeks, you could still be on the hook for the entire year’s distribution. That’s why understanding a fund’s distribution schedule and structure is crucial when investing.

Year-end capital gains distributions are more than just a tax nuisance — they can erode your portfolio’s overall efficiency over time. However, by knowing how they work and why they happen, you can take steps toward mitigating their impact and aligning your investments with your long-term financial goals.

How Capital Gains Distributions Impact Investors

Year-end capital gains distributions may seem like a routine part of investing, but they can have significant implications for both your portfolio’s performance and your year-end taxes and tax bill. For many investors, the effects of these distributions can feel out of their control, which is why understanding the potential impact is crucial for making informed decisions about how and where you invest.

The Tax Consequences of Capital Gains Distributions

As mentioned, when mutual funds or ETFs distribute capital gains, they are taxed as either short-term capital gains, which are taxed at your ordinary income rate, or long-term capital gains, which are taxed at lower rates depending on your income level.

Regardless of the type, these taxes can quickly add up and reduce the overall value of your investments. For example, if a mutual fund distributes $10,000 in capital gains and you’re in a 20% long-term capital gains tax bracket, you owe $2,000 in taxes, even if you didn’t sell any shares.

This tax liability is particularly burdensome for investors who hold mutual funds in taxable accounts. While tax-advantaged accounts like IRAs or 401(k)s shield you from immediate taxes, distributions in taxable accounts directly impact your finances today.

Erosion of Returns Over Time

Year-end capital gains distributions don’t just result in a one-time tax hit — they can have a lasting effect on your portfolio’s growth. Taxes paid on distributions reduce the amount of money you have available to reinvest, which limits the power of compounding over time.

Let’s consider two investors: one who consistently reinvests distributions without tax implications (in a tax-advantaged account) and another who pays taxes on distributions in a taxable account. Over decades, the investor in the tax-advantaged account will likely see significantly higher growth because their funds remain fully invested.

Unexpected Timing and Financial Strain

One of the most frustrating aspects of year-end capital gains distributions is their timing. Investors who buy into a mutual fund late in the year may still be responsible for the entire year’s gains. This means you could owe taxes on profits realized by the fund before you even invested.

If you purchase shares in a mutual fund on December 1, and the fund makes a large distribution on December 15. Even though you’ve held the fund for less than a month, you’ll owe taxes on your portion of the distribution, which could significantly impact your expected returns.

Why It Matters

The financial and emotional toll of capital gains distributions can be substantial. Unexpected tax bills and reduced returns can affect your overall financial plans, forcing you to adjust your budget or sell assets to cover the tax burden — and creating a significant amount of stress in the meantime. This is why proactive planning and strategic portfolio management are critical for minimizing these impacts.

Strategies to Manage and Prevent Capital Gains Tax Complications

While year-end capital gains distributions can create unexpected tax liabilities, there are strategies you can implement to mitigate or even prevent their impact. By taking a proactive approach to your investments, you can minimize taxes and keep more of your money working toward your financial goals.

Time Your Investments Carefully

One of the simplest ways to avoid unexpected capital gains taxes is to be mindful of when you invest in mutual funds. Before purchasing shares, especially late in the year, check the fund’s distribution schedule. Buying into a mutual fund just before it makes a distribution could result in an immediate tax bill on gains you didn’t benefit from.

To avoid this, you can review the fund’s website or contact the fund company to find out when distributions are expected. You can then delay your purchase until after the distribution if you’re investing in a taxable account. This strategy ensures you’re not inadvertently inheriting an unexpected tax liability when making new investments.

Make the Most of Tax-Advantaged Accounts

Placing mutual funds in tax-advantaged accounts like IRAs, 401(k)s, or Health Savings Accounts (HSAs) can help shield you from immediate taxes on capital gains distributions. Because these accounts defer or eliminate taxes on growth, they are an excellent choice for holding investments that are prone to taxable events.

For example, a Traditional IRA allows you to defer taxes on distributions until you withdraw the funds in retirement. A Roth IRA, on the other hand, allows your investments to grow tax-free, meaning you won’t owe taxes on distributions or withdrawals (as long as certain conditions are met). 

By prioritizing tax-advantaged accounts for funds that frequently distribute capital gains, you can reduce your overall tax liability and maximize your portfolio’s growth potential.

Choose Tax-Efficient Investments

Not all funds are created equal when it comes to tax efficiency. Certain types of funds, like index funds and some ETFs, tend to generate fewer taxable events than actively managed mutual funds.

Index funds, for example, track a market index and require less trading, which results in fewer realized capital gains. Exchange-traded funds (ETFs), on the other hand, are designed with a unique structure that minimizes taxable events, making them an ideal choice for taxable accounts.

Another option to consider is tax-managed funds. These funds are specifically designed to minimize taxable distributions by implementing strategies like loss harvesting and low-turnover trading.

Take Advantage of Tax-Loss Harvesting

Tax-loss harvesting can be an effective strategy for reducing taxable gains by using losses from underperforming investments to offset them. This works by selling investments that have declined in value to combat the capital gains from distributions or other profitable sales. 

For example, if a mutual fund distributes $5,000 in capital gains, you could sell a stock or another investment with a $5,000 loss to eliminate the taxable income. If your losses exceed your gains, you can offset up to $3,000 of ordinary income annually, with any additional losses carried forward to future tax years. 

By proactively managing your portfolio throughout the year, tax-loss harvesting can help you minimize your tax burden and support your overall financial plan.

Work With a Financial Advisor

Navigating the complexities of capital gains distributions and tax-efficient investing can be overwhelming, especially as year-end deadlines approach. A financial advisor can help by providing personalized guidance tailored to your unique financial situation, goals, and preferences.

Advisors can help you identify funds that are prone to distributions and recommend alternatives. They can also help you optimize your portfolio by placing the right assets in the right accounts and using tax-loss harvesting strategies to minimize your tax liability.

At Towerpoint Wealth, we make decisions with the understanding that minimizing taxes is a crucial part of helping our clients achieve their long-term financial goals, which is why tax efficiency is a focus for all of our investment strategies. 

By working with a financial advisor to optimize your investments for tax considerations, you can work to get the most out of your assets and preserve your nest egg for long-term growth.

Proactive Communication and Planning

Our last, but critical strategy for managing capital gains tax complications is proactive communication and planning. By regularly reviewing your portfolio and staying informed about upcoming distributions, you can make more strategic decisions about your investments and avoid costly surprises.

Closely monitoring the funds in your portfolio can help you to stay aware of your upcoming tax liabilities. Many mutual funds and ETFs provide distribution estimates in the fourth quarter, which can give you a clear picture of potential tax liabilities. 

Reviewing these estimates with your financial advisor or on your own can help you determine how they might impact your overall tax situation and act accordingly. If a fund is planning a significant distribution, you may want to take action, such as selling your shares before the distribution in a taxable account, to avoid inheriting a tax liability.

It’s also important to think ahead about your overall financial goals. Do you need liquidity in the near future? Are you planning to rebalance your portfolio or make new investments before the end of the year? By aligning these objectives with your tax strategy, you can make more efficient decisions that support your broader financial plan. Keeping open communication with your advisor and planning your objectives beforehand is key in mitigating unnecessary tax complications.

Final Thoughts

As we have discussed, year-end capital gains distributions can pose a significant challenge for investors, creating unexpected tax liabilities and reducing the portfolio’s overall returns. However, with the right strategies — such as careful timing, using tax-advantaged accounts, opting for tax-efficient investments, and implementing strategies like tax-loss harvesting — you can take control of your tax situation and minimize the impact of these distributions.

Proactive planning and regular portfolio reviews are essential to ensuring your investments remain aligned with your financial goals. At Towerpoint Wealth, we focus on tax efficiency as a cornerstone of our investment approach, helping our clients maximize their wealth and keep more of their returns working toward their future. 

If you want to learn how we can help you build a tax-efficient portfolio that supports your long-term goals, we welcome speaking with you.

By staying informed and working with experienced professionals, you can turn the stress of year-end capital gains distributions into an opportunity to strengthen your financial plan and feel confident in your future. 

Joseph Eschleman, CIMA®
President

Jonathan W. LaTurner
Partner, Wealth Advisor

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

Isabelle Orozco
Office Coordinator

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What It Means for Investors and the Future of the Dow Jones Industrial Average Index

The Dow Jones Industrial Average (DJIA), or “The Dow,” is a popular and widely-followed stock market index, a core benchmark of investor sentiment and economic health. Understanding this 30-stock index is not static, each Dow Jones update reflects shifts in the U.S. economy, as well as the overall market and investment landscape. 

Recently, the Dow has taken a step forward to add an innovative and fast-growing company, attempting to be a more accurate gauge of current market and economic trends. 

The DJIA has long acted as a barometer for market sentiment, reflecting the confidence, concerns, and trends driving investor decisions and the overall U.S. economic outlook. Recently, it was announced that Nvidia, a powerhouse in the A.I. and technology industry, will replace Intel in this index. This recent Dow Jones update marks a major shift in the Dow, reflecting the growing influence of AI and semiconductor technologies.

As Nvidia steps into and Intel steps out of the Dow, many investors are left wondering how this change will affect their portfolios. In this article, we are going to analyze The Dow and its historical role in the stock market, and the effect that Nvidia’s inclusion may have on the index.

Key Takeaways

• Nvidia has replaced Intel in the Dow Jones Industrial Average, reflecting the rising influence of AI and semiconductors. 
• The Dow regularly updates its lineup to mirror market and economic shifts, helping it stay relevant as a benchmark index.
• Nvidia’s inclusion may drive new interest and demand in the stock, possibly impacting its stock value.
• Nvidia’s presence may enhance the Dow’s performance, especially given tech and AI’s growing role in the economy.
• This Dow Jones update highlights the importance of emerging tech sectors, potentially attracting new investors.

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, first introduced in 1896 by Charles Dow, is one of the oldest and most influential stock market indices. It was created to offer a snapshot of the industrial sector’s health by tracking a group of prominent U.S. companies. 

Over time, however, the index has evolved, representing a broader host of industries to better reflect the diverse U.S. economy. Today, the Dow consists of 30 leading companies across sectors such as technology, healthcare, finance, and consumer goods.

Unlike other indices that are market capitalization-weighted, the Dow is price-weighted. This means that companies with higher stock prices influence the index more than those with lower prices. For example, a large movement in the price of a high-priced stock, like UnitedHealth or Goldman Sachs, will have a more significant effect on the DJIA than a comparable move in a lower-priced stock.

The index is maintained by S&P Dow Jones Indices, and its components are selected by a committee. Companies are included based on their economic significance, stability, and representation of critical U.S. economic sectors. Importantly, the index is not static; it is periodically reviewed to ensure it accurately reflects shifts in the economy. Companies may be added or removed based on their performance, relevance, and role in the market. This adaptability is essential for maintaining the Dow’s position as an accurate measure of U.S. economic health.

Recent Changes in the Dow

Before Nvidia’s addition to the Dow, the most recent rearrangement took place in February, when Amazon replaced Walgreens (WBA). Walgreens had been struggling for some time, and its underperformance led the Dow to seek more exposure to the consumer retail sector. 

Prior to that, the Dow made significant changes, removing ExxonMobil, Pfizer, and Raytheon Technologies (formerly Raytheon) in favor of Salesforce, Amgen, and Honeywell in 2020. These new additions have generally outperformed the broader market, with the notable exception of Exxon, whose stock struggled due to the pandemic’s impact on oil prices. 

These shifts in the DJIA index underscore the Dow’s role in adapting to changing industries and economic forces. Companies are regularly removed when they no longer are deemed a “good” representation of the current market landscape, with many of them seeing initial declines in their stock prices after being ousted. 

Nvidia Joins the Dow

The decision to add Nvidia, a leader in graphics processing units (GPUs), artificial intelligence, and data processing, reflects the tech sector’s rapid evolution and the shift towards AI-driven industries. 

Nvidia has been instrumental in powering industries from gaming to machine learning, and its advanced chips are the foundation of AI innovation. The company’s relevance to the modern economy — and the tech sector’s future — made it an ideal addition to the Dow.

Notably, this switch is more symbolic than material, as the Dow is just one index that is used to measure the health and success of the market. As Nvidia joins the Dow Jones Index’s current lineup, its presence signals the stock market’s commitment to AI, automation, and digital innovation, influencing both Nvidia stock forecasts and investor interest in the tech sector. Investors are likely to view this change as a signal that these areas continue to be central to U.S. economic growth, and that the companies behind them may be among the strongest players in the market. 

As Nvidia enters the DJIA index, investors might want to watch Nvidia’s stock forecast closely, assessing its growth potential in AI-driven sectors.

Nvidia’s Background and Historical Stock Performance

Founded in 1993, Nvidia (NVDA) started as a gaming chip manufacturer but quickly evolved into a leader in high-performance computing. Its GPUs became essential to gaming, but Nvidia soon saw the potential for its technology to drive other innovative industries, including data centers, AI, and autonomous vehicles. 

NVDA’s growth has been fueled by its focus on research and development (R&D), and the development of powerful, versatile chips. Nvidia’s stock performance also reflects this growth. Over the past decade, Nvidia’s shares have risen dramatically, driven by strong revenue and earnings growth, driven by increasing demand for its technology. Nvidia’s stock grew by 239% in 2023 alone!

Nvidia is also part of the “Magnificent 7” group of stocks, a group of tech giants driving much of the S&P 500’s gains in recent years. Its inclusion with these Magnificent 7 stocks showcases Nvidia’s standing among the elite companies shaping the future of technology.

Intel’s Role in the Dow

Intel (INTC), a pioneering force in computer processors, was added to the Dow in 1999, during a time when personal computing was rapidly expanding. 

Intel played a central role in the growth of personal computing and the Internet, and its processors became recognized for high-quality computing power. However, in recent years, Intel has struggled with competition and shifting demands. While it remains a leader in the semiconductor industry, Intel has faced pressure from companies like AMD and Nvidia, especially in high-performance computing and AI applications.

The decision to remove Intel from the Dow is largely due to its recent struggles to keep up with industry changes. Although Intel still has a significant market share, its slower adoption of new technologies and recent challenges have diminished its appeal, compared to Nvidia, whose growth trajectory and market leadership align it better with the Dow’s representation of industry leaders.

Implications for the Dow and Investors

Thinking about investing in Nvidia? Here’s what you should know.

Nvidia’s addition to the Dow is a strong statement about the prominence of AI and data processing in the modern economy. Nvidia brings a fresh, high-growth tech component to the Dow that Intel, despite its achievements, could no longer offer. This shift also highlights the broader trend of high-tech, AI-driven industries becoming more integral to the U.S. economy. 

As the Dow’s current lineup becomes increasingly tech-centric, Nvidia’s stock forecast will be of interest to investors looking for AI-driven growth.

For Nvidia investors, this Dow Jones update serves as an endorsement of the company’s AI-driven growth potential, with many closely watching Nvidia stock forecasts to forecast future performance. Nvidia’s stock could see increased demand due to the index’s broader market exposure, potentially driving up its price further as institutional investors who track the Dow may begin to allocate more capital to Nvidia.

For new investors, Nvidia’s inclusion could signal a strategic opportunity. As a tech leader and a key player in the future of AI, the stock offers long-term growth potential. However, it’s essential to keep in mind that Nvidia’s price may already reflect much of this growth, meaning any short-term gains could be tempered by market fluctuations. 

Before allocating investments in response to this event, investors should consider whether Nvidia fits within their long-term portfolio goals, especially since tech stocks are often more volatile than those in other sectors.

The Dow itself stands to benefit from Nvidia’s inclusion. As a leader in the semiconductor industry and a key player in the AI sector, Nvidia represents the growing influence of technology on the broader economy. The inclusion of such a forward-looking company emphasizes the Dow’s adaptability and commitment to staying relevant in the face of rapidly changing market and economic trends. This shift may also attract more interest from investors focused on technology and innovation, potentially increasing the overall performance of the index over time.

Ultimately, as with any major market change, it’s important for you, as an investor, to consult with your financial advisor before making any decisions about adjusting your portfolio. While Nvidia’s inclusion in the Dow is an exciting development for tech and AI enthusiasts, every investment decision should align with your longer-term financial goals, risk tolerance, and investment strategy. 

Working with an advisor can provide valuable insights into how such changes may impact your portfolio and help you navigate market trends effectively.

Final Thoughts

As Nvidia replaced Intel in the index, the growing importance of sectors like AI and semiconductors is becoming much more apparent to investors. 

This shift in the Dow Jones index’s current lineup highlights the Dow’s adaptability to economic trends and could shape future Nvidia stock forecasts, reinforcing the index’s role as a vital measure of market sentiment and the U.S. economy. For Nvidia investors, this inclusion could increase stock demand, while new investors may see it as a long-term growth opportunity.

If you’re considering making significant changes to your portfolio following this news, we recommend that you meet and consult with a trusted financial advisor. Each decision that you make should be in line with your preferences, goals, and time horizon — NOT as a knee-jerk reaction to recent trends in the market.

At Towerpoint Wealth, a Sacramento Investment Advisor Firm, we work intimately with our clients to create a disciplined plan and strategy that aligns with their shorter and longer-term personal and economic goals. If you want to talk with an experienced advisor to decide if you should adjust your investment strategy, we welcome speaking with you.

Investing in individual stocks involves significant risks that investors should carefully consider. These risks include, but are not limited to: Market Volatility: The value of individual stocks can fluctuate widely due to market conditions, economic events, geopolitical developments, or company-specific news. Business-Specific Risk: Individual companies face unique risks such as declining revenues, management changes, operational challenges, or financial instability. Poor performance or bankruptcy of a company could result in a total loss of your investment. Concentration Risk: Investing in a single stock or a small number of stocks increases exposure to the risks of those particular companies, reducing diversification benefits and potentially amplifying losses. Lack of Liquidity: Some stocks, especially smaller-cap or less-traded ones, may have low liquidity, making it difficult to buy or sell shares at a desired price. Time Commitment: Properly researching and monitoring individual stocks requires time, effort, and expertise to stay informed about the company’s performance, industry trends, and market conditions. Unpredictable Events:
Natural disasters, regulatory changes, litigation, or unforeseen crises can adversely affect individual stocks, regardless of their previous performance. Emotional Decision-Making: Investors may react emotionally to short-term market fluctuations, leading to poor decisions such as panic-selling or overbuying.

Important Reminder: Past performance of a stock is not indicative of future results. Investing in individual stocks carries no guarantees, and investors should be prepared for the possibility of losing some or all of their principal investment.

Recommendation: Diversification and consultation with a qualified financial advisor can help mitigate these risks. Ensure any investment decisions align with your financial goals, risk tolerance, and time horizon.

This newsletter is for informational purposes only and should not be construed as personalized investment advice.

Joseph Eschleman, CIMA®
President

Jonathan W. LaTurner
Partner, Wealth Advisor

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

Isabelle Orozco
Office Coordinator

 Connect with Towerpoint Wealth, your Sacramento Financial Advisor, on any of these platforms, and send us a message to share your preferred charity.

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Preparing for the Tax Cuts and Jobs Act (TCJA) Expiration at the end of 2025 and Its Impact on Taxes

The clock is ticking on one of the most significant tax overhauls in recent history. As the sun is “set to set” on the Tax Cuts and Jobs Act (TCJA) at the end of 2025, millions of Americans are now wondering, “What might my 2026 tax bill look like?”

The TCJA of 2017 brought sweeping changes to the U.S. tax code, impacting everything from individual income tax rates and the standard deduction, to estate tax exemptions, mortgage interest, and charitable donation deductions. 

For many Americans, these changes have meant lower taxes and simplified filing processes, but these benefits were not written nor legally allowed to last forever. Many of the key provisions that were introduced under the TCJA are set to expire, or “sunset” at the end of 2025, creating a significant possible shift in the tax landscape that could affect millions of taxpayers if the legislation is not extended.

The TCJA expiration could mean a higher tax bill for you, fewer deductions, and a possible shift in how you plan for your financial future. Whether you’re concerned about your income tax rate, the standard deduction, or tax credits that benefit your family, it’s crucial to understand how these changes could impact your bottom line and what steps you can take to prepare.

In this article, we’ll explore what you can expect ahead of a possible TCJA expiration, and considerations on how you can proactively adjust your financial strategy to stay ahead of these potential tax changes.

Key Takeaways

• Many Tax Cuts and Jobs Act (TCJA) provisions are set to expire, or “sunset,” at the end of 2025, potentially leading to higher tax bills and fewer deductions for many taxpayers.
• Key provisions at risk of expiration include the increased standard deduction, lower income tax rates, the Child Tax Credit, state and local tax (SALT) deductions and more.
• If the TCJA expires, the standard deduction will decrease significantly, making itemized deductions more relevant again, impacting how taxpayers calculate their taxable income.
• The 20% deduction for qualified business income will no longer be available for small business owners, increasing their tax liability.
• It is uncertain if Congress will extend the expiring tax provisions.
• Consulting with a financial advisor can help you develop strategies to mitigate these potential tax impacts, and optimize your financial planning ahead of the potential changes.

What is the Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) of 2017 was a landmark reform of the U.S. tax code, bringing about significant changes for both individuals and businesses. Passed by Congress and signed into law by President Donald Trump, the act aimed to stimulate economic growth by reducing taxes for individuals and businesses. 

Thanks to the TCJA, many individuals enjoyed lower tax rates, a bigger standard deduction, and improved tax credits — like the Child Tax Credit — that put more money back in their pockets. On the corporate side, it significantly reduced the corporate tax rate, from 35% to 21%, and introduced incentives for businesses to invest in the U.S.

While many of the TCJA’s changes were permanent, several key provisions for individuals, like lower tax brackets and the higher standard deduction, were temporary and are set to expire at the end of 2025. 

Key Expiring Tax Provisions in 2025

As the TCJA nears its expiration date at the end of next year, several major provisions are set to sunset, significantly impacting individual taxpayers. Understanding these key changes can help you anticipate how your tax situation may shift and what adjustments may be necessary for your financial planning.

Standard Deduction and Personal Exemption

One of the most widely felt changes under the TCJA was the near doubling of the standard deduction, which simplified tax filing and created significant tax savings for millions of Americans. For 2026, the standard deduction for married couples filing jointly would be roughly $30,600 without a TCJA expiration, while single filers would enjoy a deduction of $15,350. 

However, if the TCJA expires as scheduled, the standard deduction will drop dramatically. Come 2026, married couples filing jointly could see it shrink to around $16,600, while single filers might only get about $8,300.

Additionally, the TCJA eliminated personal exemptions, which used to provide tax relief for dependents. When the act expires, personal exemptions will return, with each exemption set to be around $5,275. While the return of personal exemptions might offset the lower standard deduction for some families, the overall impact could be a much more complex tax filing process and higher taxable income for others.

Individual Income Tax Rates

Another major change under the TCJA was the reduction of marginal income tax rates across the board. For example, the top marginal tax rate fell from 39.6% to 37%, while the rates for lower tax brackets also saw impactful reductions. If the TCJA expiration happens, these rates are expected to revert to their pre-2017 levels, meaning higher income tax rates for virtually all taxpayers.

Here’s a brief look at how some of the tax brackets will change for single filers if the TCJA expires:

• The 12% bracket will revert to 15%.
• The 22% bracket will revert to 25%.
• The 24% bracket will revert to 28%.
• The 32% bracket will revert to 33%.
• The 37% bracket will revert to 39.6%.

This hike in tax rates could mean heavier tax bills for many, and may require adjustments to tax-saving strategies like retirement contributions or charitable giving.

State and Local Tax (SALT) Deduction

The TCJA placed a $10,000 cap on the state and local tax (SALT) deduction, which primarily affected high-income earners in states with high property and/or income taxes. If the Act expires, the SALT deduction cap will be removed, allowing taxpayers to deduct the full amount of their state and local taxes. This change will disproportionately benefit taxpayers in high-tax states — such as California, New York, and New Jersey.

For individuals in these states, the restoration of the full SALT deduction could result in significant tax savings. However, it’s important to note that while this may benefit some taxpayers, the loss of other TCJA provisions could offset these savings.

Child Tax Credit

The TCJA increased the Child Tax Credit (CTC) from $1,000 to $2,000 per child under age 17, creating a substantial tax benefit for families. It also raised the income thresholds at which the credit phases out, allowing more middle and upper-income families to also take advantage of the credit. For 2024, the refundable portion of the credit is set at $1,700.

Should the TCJA expire, families could see the Child Tax Credit drop back to just $1,000 per child, which, when adjusted for inflation, would be about 25% less than its 2017 value. This reduction would place a heavier tax burden on families, particularly those with multiple children, and could necessitate adjustments in budgeting or saving for future expenses.

20% Deduction for Qualified Business Income (Section 199A)

Small business owners and individuals with pass-through income — such as sole proprietors, partners, and S-corporation owners — benefited from the TCJA’s 20% deduction for qualified business income (QBI). This deduction allowed eligible taxpayers to reduce their taxable income by up to 20%, resulting in substantial tax savings for many small business owners.

If the TCJA expires, this deduction will no longer be available, meaning that small business owners could face higher tax bills. This change may prompt business owners to explore other tax-saving strategies or restructure their operations to minimize the impact.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was designed to ensure that high-income taxpayers pay a minimum amount of tax, regardless of how many deductions or credits they claim. The TCJA raised both the exemption amounts and the income thresholds at which the AMT applies, reducing the number of taxpayers subject to the AMT.

In the event of the Tax Cuts and Jobs Act Expiration, the AMT exemption will drop significantly — from approximately $140,300 for married couples filing jointly in 2024 to around $110,075 in 2026. This could mean that more taxpayers, particularly high earners, may find themselves subject to the AMT again, potentially resulting in higher tax liabilities.

Estate Tax Exemption

For individuals concerned about estate planning, the TCJA also doubled the estate tax exemption, providing significant tax relief for wealthy families. Under the TCJA estate tax exemption, this exemption would be $28.6 million for married couples in 2026, meaning only estates valued above this amount are subject to the federal estate tax.

However, if the TCJA expires, the estate tax exemption will fall to approximately $14.3 million for married couples. This reduction could expose more estates to federal estate taxes, and may require estate planning strategies, such as gifting or the creation of trusts, to minimize the tax burden on heirs.

Will the TCJA be Extended?

As we approach 2025, many individuals and businesses are left wondering: will the Tax Cuts and Jobs Act (TCJA) be extended? 

The reality is that the future of these provisions remains uncertain. While some political leaders advocate for extending favorable tax measures, including lower tax rates and increased deductions, there is no definitive answer yet.

As part of his campaign for the 2024 Presidential Election, former President Donald Trump has expressed a desire to extend all expiring provisions, signaling support for maintaining the benefits that many taxpayers have enjoyed since the TCJA was enacted.  

Vice President Kamala Harris, on the other hand, has indicated that any discussions around tax increases should avoid impacting those earning less than $400,000, suggesting that certain provisions may be preserved for middle-income earners.

Ultimately, the decision lies in the hands of Congress and our new President, and their actions leading up to the expiration deadline will be crucial. Given the uncertain political landscape and the varying opinions on taxation, it’s conceivable that lawmakers might step in to extend at least some of these temporary provisions. 

However, until a resolution is reached, there is still uncertainty as to what may happen next. It’s wise for individuals and businesses alike to remain vigilant and consult their financial advisors to navigate the evolving tax landscape effectively.

How Can I Prepare for These Expirations?

With the potential expiration of key provisions of the Tax Cuts and Jobs Act (TCJA) looming, individuals and businesses should take proactive steps to assess how these changes could affect their finances. Financial advisors can be key partners in helping you navigate this transition and minimize any negative impacts on your income and overall financial situation.

For individuals, your advisor can review your income, deductions, and credits to understand how expiring provisions like the lower tax rates, increased standard deduction, and enhanced child tax credit will affect your tax liability. They can also recommend tax-efficient strategies — such as accelerating income or charitable giving before any potential tax changes take effect — or maximizing retirement contributions to reduce taxable income.

Businesses, on the other hand, can benefit from working closely with their financial advisor to review the potential loss of the 20% deduction for qualified business income and other favorable provisions for pass-through entities. 

Advisors can also help business owners reassess their corporate structure, and determine whether it makes sense to make changes ahead of the tax shift, ensuring that you’re well-positioned to handle a potentially higher tax environment.

Ultimately, planning ahead with your financial advisor can help you avoid surprises in the next two years,and create strategies that better protect your financial future if the TCJA provisions do expire.

Final Thoughts

As the expiration of the Tax Cuts and Jobs Act (TCJA) approaches at the end of 2025, individuals and businesses need to stay informed about the potential changes to key tax provisions. 

A significant reduction in the standard deduction, a return to higher individual income tax rates, and the elimination of the 20% deduction for qualified business income could all impact financial situations substantially. The reinstatement of personal exemptions and the removal of the SALT deduction cap may also alter how taxes are calculated, especially for those in high-tax states.

Given the uncertainty surrounding whether Congress will extend these expiring tax provisions in 2025, it’s imperative that you consult with your financial advisor to proactively assess your tax strategy. They can help you navigate these changes, optimize your financial planning, and prepare for possible shifts in tax liability. 

At Towerpoint Wealth, we know that staying ahead of the curve now can ensure you’re better positioned to handle the implications of the TCJA’s expiration, allowing you to make informed decisions that support your financial goals. If you’re worried about how expiring provisions of the TCJA could affect your tax bill, we invite you to schedule an initial 20-minute “Ask Anything” discovery call with us to see how our wealth advisors can help you navigate your financial planning.

Want to learn more about proposed tax policies ahead of the 2024 election? Check it out here!

Joseph Eschleman
Certified Investment Management Analyst, CIMA^®

Jonathan W. LaTurner
Wealth Advisor

Steve Pitchford
CPA, Certified Financial Planner^®

Lori A. Heppner
Director of Operations

Nathan P. Billigmeier
Director of Research and Analytics

Michelle Venezia
Client Service Specialist

Luis Barrera
Marketing Specialist

 Megan M. Miller, EA
Associate Wealth Advisor

Isabella Orozco,
Office Coordinator

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