As we enter an important election year, it raises questions about how much work Congress will accomplish in 2024. In particular, will Congress extend the high estate tax exemption introduced in 2017 under the Tax Cuts and Jobs Act or allow it to sunset in 2025? Considering how polarized U.S. politics have gotten, it seems likely that the issue will probably not be addressed until a new administration is in place. That means potentially a lost year of negotiations over the law and a higher likelihood that the estate tax will revert to 2017 levels. Whatever happens, it is advisable to consult with an attorney now to determine what tax and estate planning you may want to do to benefit you either way.
Overview of the 2017 Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) made a variety of changes to tax laws affecting both individuals and businesses. Some of these include:
- Individual Tax Rates: Individual income tax rates were reduced by adjusting the tax brackets. The top individual tax rate was also lowered from 39.6% to 37%.
- Standard Deduction and Personal Exemptions: The standard deduction for individuals and married couples was increased. Personal exemptions were also eliminated.
- Child Tax Credit: The credit was expanded and the amount increased.
- Mortgage Interest Deduction: The limit on deductible mortgage debt for new loans was reduced.
- Alternative Minimum Tax (AMT): The AMT exemption was increased, reducing the number of individuals subject to the AMT.
- Corporate Tax Rate: The corporate tax rate was reduced from 35% to 21%.
- Pass-Through Business Income: A deduction was provided for certain pass-through business income.
- Bonus Depreciation and Section 179 Expensing: Enhanced and expanded business deductions for capital investments were added.
- Estate Tax: The estate tax exemption was increased, reducing the number of taxable estates.
TCJA Sunset Provisions
The TCJA enacted certain provisions that had expiration dates, meaning they would expire or “sunset” at the end of 2025 unless extended by new legislation. These included changes to itemized deductions for individuals, such as those for medical expenses, charitable deductions, child tax credit, and others. If they are allowed to sunset, the deduction will either disappear or the amount decreased.
Most relevant to estate planning and gifting strategies is the potential sunset of the estate tax exemption limits and lifetime gift tax exemption. In 2024, the exemption is $13.6 million and will rise again in 2025. However, if no new legislation is passed, at the end of 2025, the estate tax exemption will reset to 2017 levels. That amount will be approximately $5.49 million per person, and thereafter, will be indexed to inflation. The lifetime gift exemption is unified with the estate tax exemption levels, so it will also reset to match the new lower amount.
Planning for the Sunset
It is unlikely that there will be action to address the provisions set to expire given it’s an election year. As a result, it is important to review your current tax situation and identify areas that may be impacted if the higher exemption expires. You may be able to reduce taxes now as well as benefit your estate with adjustments to your financial and estate planning strategies. For example, the IRS has stated that any gifts made prior to the sunset will be honored because the reduced exemption amount won’t be applied retroactively. Accordingly, now may be a good time to gift assets out of your estate if you can afford to do so and your estate is worth more than $5 million.
However, before you take any steps, or ignore the issue because you’re hoping for a reprieve, you should consult with your advisors. Your financial advisor, accountant, and attorney can help you navigate tax law changes and provide personalized tax planning tailored to your circumstances. They can also keep you abreast of legislative developments that may affect you, whether they involve the TCJA or other laws.
If you would like an assessment of your tax and estate planning, contact us for a consultation. We work with clients to develop strategies that help them protect their assets during their lifetime and preserve their estate after they pass away.