The Impending Tax Sunset

In Part 1 of this series, we reviewed the key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and examined their potential impact on American families if these provisions expire or "sunset" at the end of 2025. Whether Congress decides to extend some or all these provisions or allows them to sunset as scheduled, understanding the possible scenarios and preparing accordingly is essential.

Scenario 1: Provisions Expire as Scheduled

If the provisions of the TCJA are allowed to sunset at the end of 2025, here’s what you can expect:

1. Estate and Gift Tax: The exemption amount will drop significantly to approximately $6.8 million per individual and around $14 million for couples. This reduction could expose more of your estate to federal estate taxes, requiring immediate action to optimize your estate planning.¹

2. Increased Income Tax Rates: Marginal tax rates will return to pre-TCJA levels, with the highest bracket rising to 39.6%. High-income earners will need to consider strategies to mitigate the impact of higher taxes, such as accelerating income into the current lower-tax years.¹

3. Reduced Child Tax Credit: The child tax credit will decrease from $2,000 to $1,000 per child, affecting families with multiple dependents.¹

4. Reduced Standard Deduction and Restored Itemized Deductions: The standard deduction will decrease, potentially leading to higher taxable incomes. The limitations on SALT and mortgage interest deductions will revert, which could significantly impact Californians who rely on these deductions due to the state's high cost of living.

Scenario 2: Extension or Modification of Provisions

There is always the possibility that Congress may choose to extend some or all the favorable TCJA provisions or introduce new legislation to modify the tax code. In this scenario:

1. Continued High Exemptions: If the estate and gift tax exemptions remain elevated, families will have more opportunities to plan and transfer wealth tax-efficiently. However, continued vigilance is required as political climates and policies can change.

2. Stable Income Tax Rates: If current rates are extended, maintaining proactive tax planning strategies like Roth IRA conversions and income smoothing can continue to benefit high-net-worth individuals.

Strategic Steps to Consider

Regardless of which scenario unfolds, here are some strategic steps you can take:

1. Review and Update Your Estate Plan: Work closely with your estate planning professionals to review your estate plan. Consider utilizing gifting strategies to take advantage of the current high exemptions before they potentially decrease.

2. Accelerate Income: Evaluate whether it makes sense to accelerate income into the current lower-tax years. This can include actions like taking bonuses early or converting traditional IRAs to Roth IRAs.

3. Charitable Giving: The TCJA increased the deduction limit for cash contributions to public charities to 60% of AGI, but this will revert to 50% in 2026[^1]. Consider making significant charitable donations now to maximize your deductions.

4. Stay Informed and Flexible: Tax laws are subject to change, so staying informed and maintaining flexibility in your planning is crucial. Regular check-ins with your financial advisor and tax professional can help you stay ahead of any legislative changes.

The impending sunset of the TCJA provisions presents both challenges and opportunities for families. By understanding the potential impacts and proactively working with a network of professionals, you can navigate these changes effectively and safeguard your financial future.

For more detailed information and personalized advice, feel free to reach out to Carmel Capital Partners. Stay proactive, stay informed, and ensure your estate and tax plans are robust enough to withstand these looming changes.

¹ IRS.gov, 2024.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Carmel Capital Partners, an SEC Registered Investment Advisor.