The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the U.S. tax code, impacting individuals and businesses. As we approach the potential sunset of many provisions at the end of 2025, high net-worth families must prepare for potential shifts back to pre-TCJA rules. The TCJA lowered income tax rates, doubled the estate tax exemption, and altered various deductions and credits. The expiration of these provisions would revert to higher tax rates and a lower estate tax exemption. In light of this, these areas are worth considering:
Tax rates. First and foremost, the potential increase in individual income tax rates impacts every taxpayer. The TCJA reduced the top marginal tax rate from 39.6% to 37%. High-earning individuals may need to consider strategies such as accelerating income, utilizing Roth conversions, or harvesting capital gains at lower tax rates.
Deductions. Changes to the state and local tax (SALT) deduction and personal exemptions would also impact tax planning. The TCJA capped the SALT deduction at $10,000, significantly impacting taxpayers in high-tax states. If this cap is lifted, taxpayers in those states may benefit from increased deductions. Additionally, the return of personal exemptions, eliminated under the TCJA, could provide further tax relief.
Corporate tax rate and qualified business income. Business owners should prepare for changes in corporate tax rates and deductions. The TCJA reduced the corporate tax rate from 35% to 21%. Pass-through entities that benefited from a 20% deduction on qualified business income (QBI) may also see this deduction disappear.
Estate tax exemptions. The estate tax exemption stands at $13.61 million per individual in 2024, allowing couples to shield nearly $27.22 million from estate taxes. If the TCJA provisions expire, this exemption would drop to approximately $5 million per individual, adjusted for inflation, to roughly $7 million per person. This would result in more estates subject to the 40% federal tax. High net-worth families should consider strategies such as gifting, utilizing trusts, and other wealth transfer techniques to minimize the potential tax burden on their heirs.
The possible sunset of the TCJA presents a complex landscape for high-net-worth clients. Proactive financial planning will help navigate changes in tax laws. Contact your Crestwood Advisors team today to discuss how potential changes might affect you and to develop a plan tailored to your circumstances.
Source: Henry-Moreland, B. (2024). TCJA Sunset: Planning For Changes In Marginal Tax Rates. Nerd’s Eye View | Kitces.com. https://www.kitces.com/blog/tax-cut-and-jobs-act-tcja-sunset-marginal-tax-rates-personal-exemption-phaseout-pease-limitation-qbi-deduction/
