How to Prepare for a TCJA Sunset in 2025

In December 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. The Act lowered the income tax rates for most income levels. The Act is scheduled to sunset or expire at the end of 2025. If no new legislation is passed in the meantime, the current tax brackets will be replaced with the higher tax brackets that were in place prior to TCJA in 2017.

While there is still time for new tax legislation to be passed before the TCJA expires, there is no guarantee that will happen. In order to be proactive, there are some strategies that can be used in case of an increase in taxes.

Potential Changes or Revisions if TJCA Ends on December 31, 2025

Estate and Gift Taxes

For 2023, individuals can transfer up to $12.92 million; for married couples, it’s up to $25.84 million either during their lifetime or as part of their estate without triggering federal gift taxes or estate taxes.

If there is no new legislation, these exemption amounts will be reduced by half for the 2026 tax year. If your taxable estate exceeds the existing exemption amount, there are some strategies you can explore:

• Annual Cash Gifts: You can gift up to $17,000 a year or $34,000 for married couples who file jointly to as many people as you choose. These annual gifts aren’t taxed and won’t count against your lifetime exemption.
• 529 Plan Accelerated Gifts: Currently, you can accelerate five years of gifts to 529 accounts for anyone; they don’t have to be a child, grandchild, or even related to you. This means you could gift up to $85,000 a year, or $170,000 for married couples, to each person.
• Dynasty Trusts: If you haven’t used much of your lifetime gift and estate tax exemption yet, you may want to consider creating a dynasty trust as long as it’s legal under local state laws. Any future trust asset income and appreciation can be transferred to younger generations without incurring estate or gift taxes.
• Irrevocable Life Insurance Trusts (ILIT): Buying a survivorship policy owned through an ILIT is a common way of transferring wealth outside of a taxable estate. And the death benefit paid to beneficiaries is considered tax-free income.

Income and Capital Gains

If nothing changes, tax brackets will go back to what they were prior to TCJA, and many wealthy taxpayers will since a noticeable increase in their effective tax rate. There are some options to accelerate income to take advantage of the current, lower tax brackets:

• Tax Diversification: Tax diversification means diversifying wealth by the tax status of assets during retirment. Holding assets in accounts that are taxed differently can provide flexibility when managing tax bills. Tax diversification can include converting a traditional IRA to a Roth IRA. By making this conversion before 2026, you can pay the income tax liability upfront when the tax rate may be lower rather than waiting until the time of the distribution when the liability may be higher. Or using municipal bonds to generate tax-free income.
• Harvest Capital Gains: In anticipation of potentially higher capital gains tax rates in the future, you may want to consider selling some securities that have high appreciation before TCJA ends. Yes, the sale will create a taxable gain, but it may be less than in the future. Because wash sale rules apply to harvesting losses and not gains, you could then purchase the same securities at a stepped-up cost basis to help reduce future recognized gains while still owning the investment.

There is Still Time

We often say no one can predict the future when it comes to investing and that’s doubly true of tax legislation. Washington can seem to creep along on all manner of issues, including taxes, and then suddenly, there are big changes announced.

Whatever happens or doesn’t happen with TCJA, it’s wise to know your options.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. If you have any questions about retirement planning or any other aspect of financial planning, reach out. We’re here to help you Life the Life You Love.