What’s Changing in Tax Laws That You Need to Know About Now

There are opportunities and challenges for tax planning on the horizon, as many provisions in the 2017 Tax Cuts and Jobs Act (TCJA) expire at the end of 2025, and future tax law will likely be impacted by the upcoming Presidential election.

While there is much debate and differing perspectives on tax policy, taxes are an important investment in the country and play a vital role in helping the less fortunate. To see where your tax dollars go, click here. Our goal is to make you aware of potential changes, share questions clients are asking, and provide planning ideas.

What Happens in 2026?

Former President Trump has proposed making the TCJA permanent, while President Biden has proposed increasing taxes on wealthier taxpayers. Each candidate would likely need to have their party control the House and the Senate in order to achieve their plans. If the election results in a divided government, the parties will need to come to agreement, or accept the expiration of many TCJA provisions.

If the TCJA expires, income tax rates would increase throughout the tax brackets. The top rate would bump to 39.6%, and the Alternative Minimum Tax (AMT) would impact more taxpayers. State and local tax deductions would no longer be limited, miscellaneous itemized deductions would return, and the standard deduction would decline. The qualified business income deduction will also expire. With regard to estate taxes, the exemption would be cut in half (from $13.61M today per person to $6.8 M per person, inflation adjusted), and the estate tax rate would increase from 40% to 45%.

What is the Current Administration Proposing?

President Biden has proposed higher taxes for wealthier taxpayers to help reduce the deficit, pay for new social programs, and strengthen Social Security and Medicare. Some of the proposed changes include:

• Increase the top individual tax rate to 39.6% and the corporate rate to 28%.
• Tax qualified dividends and long-term capital gains for those earning more than $1M at the top income tax rate. Increase the NIIT tax to 5% for those earning more than $400,000.
• Tax unrealized gains if gifted or bequeathed at death (there would be a capital gain exemption for the first $5M of unrealized gains, or $10M if a couple).
• Other notable estate planning changes include limiting the ability to apply valuation discounts, tightening rules around grantor trusts and GRATs, restricting GST duration, and placing limits on the annual exclusion amount.
• A minimum income tax of 25% would be instituted for those with over $100 million in net worth.

Biden has vowed to not raise taxes on those earning under $400,000 and has proposed some tax reductions for families with children and for first-time homebuyers.

What is Former President Trump Proposing?

Trump has proposed making the TCJA permanent, eliminating taxes on workers’ tips and potentially lowering the corporate tax rate, while increasing tariffs to help pay for these tax cuts.

What Tax Planning Moves Should I Consider?

Key planning moves would include realizing income before there is a change and potentially postponing deductions, as they may be more valuable if tax rates are higher. Those with incomes over $1M may want to consider realizing capital gains this year (or even before the election) if it makes sense for non-tax reasons as well. Due to tax complexity and AMT, your CPA would need to run the numbers and consider various scenarios.

Should I Make a Large Gift Before Exemption Declines?

If you expect to have an estate well over $6.8M ($13.6M for a couple), it could make sense to use the “bonus” exemption (top half of exemption) before it potentially expires. When making a gift, the bottom half of your exemption is used first so it takes a very large gift to be able to use the portion that is expiring if you haven’t used the bottom half already. Even if you can’t utilize the top half of the exemption, gifting can make sense as it removes future appreciation from your estate and it may be that the exemption could be lowered more than anticipated. Before gifting, you’ll want to understand your gift capacity, consider the emotional and developmental impacts to the beneficiary, and how it might impact your other goals, such as philanthropy.

What Estate Planning Moves Should I Consider?

With the possibility of lower exemptions and tighter estate planning laws, there are various strategies to consider. Some of these include maximizing annual exclusion giving, gifting illiquid assets, and utilizing features of grantor trusts that may go away. If you are giving an appreciated asset, ask your advisors how proposed changes could impact you. It may also make sense to consider life insurance to help pay estate taxes, especially for business owners who have significant illiquid assets. Due to the complexity of estate laws, it’s best to share your goals with your estate attorney, wealth advisor, and CPA to see what applies in your situation.

When Would the New Tax Rules Take Effect?

The effective date of new legislation would likely be some time in 2025 but it could be any time after the election. If Congress doesn’t act, most of the tax provisions of the TCJA will expire at the end of 2025. Making a gift to a new trust or gifting an illiquid asset can take a significant amount of time to implement, so it’s important to get started sooner rather than later if you decide to make changes.

Tax-motivated moves in anticipation of potential changes are naturally fraught with uncertainty. Likewise, if you wait for clarity, you may miss an opportunity. The only certainty is that tax laws will continually change over time. If a particular action makes sense for non-tax reasons as well, it may be worthwhile to implement soon. Talk to your tax professional to learn more.

For more information about the Presidential candidates’ proposed tax policies, visit Tracking the 2024 Presidential Tax Plans taxfoundation.org