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ACM Journal - Investment Management
19 Apr

Chris’s Corner: Tax Cut & Jobs Act (TCJA) – Planning for the Sunset

Tax Cut & Jobs Act (TCJA) Sunset

 

In 2017, then-President Donald Trump passed a series of changes to the tax code, the so-called Tax Cuts and Jobs Act (TCJA). Like just about everything these days, the law was controversial and complicated. One of the more “interesting” components to the law is that there is a sunset provision, meaning many of the changes will revert right back to where they were before the bill was enacted. That sunset will occur on January 1, 2026.

Congress could act to extend the law, but that of course is highly uncertain, particularly with an upcoming election. So, thinking about which rules will change and how to plan for them makes sense while there is still time. The more meaningful provisions that sunset include:

Tax Rates

The TCJA reduced marginal tax brackets to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. After the sunset, the top rate for individuals will revert back to 39.6%.

Standard Deduction

The TCJA raised the standard deduction to almost double the prior level. ($12,000 for single filers and
$24,000 for married filing jointly). This meant that relatively few taxpayers itemized deductions. The standard deduction is also indexed for inflation, and currently stands at $14,600 for single filers and $29,200 for married filing jointly). After the sunset, the standard deduction will be roughly cut in half.

Itemized Deductions

The TCJA capped the state and local tax (SALT) deduction at $10,000.Mortgage interest deductions were limited to the first $750,000 of the loan amount and home equity loan interest was generally not allowed as a deduction. Many miscellaneous deductions were eliminated, such as investment fees, legal fees, etc. All of these will revert back in 2026, allowing those of us in high property tax states to increase our itemized deductions, and likely no longer take the standard deduction.

Alternative Minimum Tax

The TCJA decreased the number of taxpayers getting hit with the alternative minimum tax (AMT) as well as the amount owed. After the sunset, the AMT exemption will revert to the surprisingly low pre-TCJA levels. That means AMT will ensnare far more taxpayers.

Estate and Gift Tax

The TCJA doubled the estate and gift tax exclusion from $5,490,000 to $11,180,000. It also indexed that amount for future annual inflation.
The 2024 exclusion is $13.61 million per person, but because of portability it comes to $27.22 million for married couples. The estate tax rate maxes out at 40%. With the coming sunset, the estate and gift tax exclusions will be roughly cut in half.

Planning Strategies

If you are in a situation where you may not currently have to worry about estate tax, but will with the sunset, there are some strategies to consider to reduce the value of your taxable estate.

Gifts

Assets can be transferred to family members or charities. If giving gifts to family members, you might consider using stocks or other assets that have the greatest growth potential. Using 529 plans is also a good way to give assets to grandchildren if you want to ensure the money is used for education. Low basis stocks and other securities can be given to charities to avoid the capital gains tax and get a charitable deduction against income. Donor advised funds can be a good option for larger charitable gifts that you may want to disburse over time. As a reminder, the 2024 annual gift tax exclusion is $18,000.

Spousal Lifetime Exemption

This involves using one spouse’s full lifetime exemption ($12.92 million) to make gifts to children or grandchildren but retaining the other spouse’s exemption. This allows for significant estate reduction today but ensures that there will be some estate tax exemption accessible later.

Trusts

There are a number of trust structures that can be set up to remove assets from your estate. However, be aware that they all involve giving up some element of control over your assets. Income may be available with some trusts, but it can be difficult to access the principal. Irrevocable trusts can also mean giving up stepped up basis upon your death, and they can be expensive and cumbersome to maintain. Nonetheless, trusts can be very effective in the right situation.

Planning for the sunset now can make sense, particularly if you are considering a trust or other strategy that will include enlisting the help of an attorney. They will likely be jammed up as the sunset approaches. While planning now is prudent, we remain cautiously optimistic that the benefits of the TCJA will be extended and made permanent next year.

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