With the sunsetting of provisions in the 2017 Tax Cuts and Jobs Act coming soon, it’s necessary to take the time now to determine how this might affect your taxes and make plans accordingly.
Instead of the great tax sunset looming, Americans should learn the implications of the expiring tax cuts and think more urgently about their estate and income tax planning. Without planning, the 2026 tax year could be a shock to many U.S. taxpayers. High-net- worth individuals may be surprised by a larger estate tax liability — as well as other significant tax changes — when the favorable provisions enacted by the 2017 Tax Cuts and Jobs Act (TCJA) expire, or “sunset,” at the end of 2025.
Primarily related to individual income and estate taxes, items expected to be affected by TCJA changes include:
- Estate tax and gift tax exemptions
- Income tax brackets
- Standard deductions and personal exemptions
- SALT deduction limitations
- Mortgage interest deductions
- Pease limitations
- Qualified business income deductions
- Alternative minimum tax
- Some specific examples follow:
- Estate and gift tax
The sunsetting of the current estate and gift tax provisions may provide the greatest gloom—reverting to pre-TCJA levels. For example, the TCJA provided 10 years of estate and gift tax relief through an elevated exemption that is currently over $13 million per individual. It will reset to an estimated $6 million in 2026. This poses a significant impact on individuals who own larger estates, including numerous baby boomers.
Income tax
Tax brackets will revert to pre-TCJA levels as well, resulting in many Americans seeing their tax rate increase. For example, the top individual, estate and trust income tax bracket is expected to return to 39.6% from the current rate of 37%.
Deductions
Change is ahead for multiple tax deductions, including standard deductions, personal exemptions, state and local tax (SALT) deduction limitations and mortgage interest deductions.
Charitable giving
The tax deduction for charitable donations is also sunsetting back to 50% of adjusted gross income (AGI) in 2026, from the recent levels of 60% AGI for cash contributions to public charities.
Because tax laws are complex, and seemingly ever-changing, it’s prudent to not only plan ahead but also thoughtfully engage with your team of advisors. To be prepared rather than surprised by the sunsetting of the 2017 TCJA, meet with your financial advisor, attorney and tax advisor to put together a plan.
Discuss your options and opportunities with your financial advisor, accountant and attorney before the TCJA changes occur. Together they can help with personalized strategies to fit your unique situations.