The Tax Cut and Jobs Act (TCJA) of 2017 was a sweeping tax reform that affected the majority of Americans. The TCJA is set to expire at the end of 2025. While parts of the act could be extended, it’s likely changes will be made regardless of the country’s political environment. Should we revert to the 2017 tax code, here are three strategies to consider:

Make Roth Conversions prior to 2026

The majority of income tax brackets were reduced in 2018, and will return to 2017 levels if the TCJA sunsets. 

10%

10%

12%

15%

22%

25%

24%

28%

32%

33%

35%

35%

37%

39.6%

Since Roth conversions are taxed at ordinary income rates, converting before 2026 would save most investors money. Furthermore, if an investor was approaching the age of required minimum distributions (RMDs), and additional income from those RMDs would push them into a higher tax bracket, a more aggressive Roth conversion strategy might help in 2024 and 2025.

Bunching Charitable Contributions

When the TCJA went into effect, higher standard deductions, and limits on the state and local tax (SALT) deduction led to fewer taxpayers itemizing their returns. In 2017 26.4% of taxpayers itemized, compared to just 10.9% in 2018. (Source: Gale ET AL. 2018. “Effects of the Tax Cut and Jobs Act: A Preliminary Analysis.”) With a return to the pre-TCJA tax code, more taxpayers will find filing an itemizing advantageous. 

Scenario 1: You’re currently taking the standard deduction, but might not in 2026

If you need additional deductions to make filing an itemized return worthwhile, a bunching strategy for charitable contributions might help. Bunching is where an investor will contribute several years of charitable donations into a donor-advised fund (DAF). A DAF is an irrevocable trust that allows an investor to write off charitable contributions for the tax year they are put into the account. However, the contributions do not need to be distributed in the same tax year. They can be invested and appreciated until they are distributed to a qualified charitable organization. Furthermore, DAFs can accept stock donations. So, if you have a large unrealized gain, contributing it to a DAF would be more advantageous than selling it and contributing the proceeds. For instance, let’s consider the following scenario:

Let’s assume that the limit on the percent of deductible charitable contributions relative to adjusted gross income will not be reached. (This was also increased from 50% to 60% under the TCJA, however, some exceptions limit some contributions to 30% or even just 20% of AGI)

Suppose you have a stock portfolio that’s worth $100,000, with a cost basis of $50,000. If a sale is subject to long-term capital gains, the profit of $50,000 would be taxed. Let’s say the 15% LTGC tax is applied as well as the 3.8% net investment income tax. 

Your tax liability would be $9,400, but you could write it off by donating $90,600 to a charitable organization. 

However, if you contributed the $100,000 of appreciated stock to a DAF, you would avoid the $9,400 tax burden, and write off an additional $10,400.

Scenario 2: You’re currently itemizing your returns

If you’re currently itemizing your returns, bunching charitable contributions before 2026 could be a good strategy since the charitable contribution limit will be reduced from 60% of AGI to 50%. This could also help offset a higher tax liability created by more aggressive Roth conversions in 2024 and 2025.

Exercise Incentive Stock Options

Incentive stock options (ISO’s) are granted by companies to compensate key employees. ISO’s have a complex tax burden associated with them. Namely, should an employee strike an ISO below the stock's current fair market value (FMV), the spread between the exercise price and the FMV is subject to the Alternative Minimum Tax (AMT) if the shares are held at the end of the calendar year. This creates a situation that disproportionately affects private companies where the employee creates a tax burden from the exercise of their ISO’s and they cannot readily offset that burden since there is no public market to sell the underlying stock.

Under the TCJA, the exemption for AMT, the higher 28% AMT tax bracket, and the phase-out threshold were all increased. Having these limits reduced would significantly impact those looking to exercise ISO’s. 

Other activities that generate AMT include private activity bonds (PAB’s) such as industrial revenue bonds, intangible drilling costs, and depletion allowances. To that regard, it might be worth considering the effect your PAB’s and limited partnerships have on AMT, and evaluating whether or not reducing your position in them prior to 2026 could help.