A tax sunset refers to a situation in which provisions of the tax code are set to expire at a set future date. More specifically, the tax provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to expire at the end of 2025. This means that some notable features of individual and estate tax planning that people have become accustomed to are en route to expiration. The impending sunset has left many taxpayers wondering, “How do I prepare for this?”
Estate and Gift Tax
For individuals with high net worth and larger estates, the sunset of the estate and gift tax provisions will evoke the most concern. Currently, the federal estate and gift tax exemption threshold is $12.92 million per individual and $25.84 million per married couple. Starting in 2026 (assuming there is no change in legislation), estate and gift tax exemptions are estimated to be reduced to $6.8 million per individual and $14 million per married couple. This reduction in the exemption leaves many individuals with potential estate tax problems.
What to Consider
- Review your estate plan with your attorney to determine what planning opportunities may be available.
- Individuals with taxable estates approaching, or above $12.92 million ($25.84 million for couples) should consider taking advantage of the current, higher limits.
- Explore estate planning strategies such as annual gifting, 529 plan accelerated gifts, dynasty trusts, charitable strategies, or life insurance trusts.
Unlike the potential estate and gift tax changes, the expiration of the income tax provisions would directly impact most taxpayers around the country. At the end of 2025, income tax brackets are set to revert back to pre-TCJA levels which would leave many taxpayers with a higher effective tax rate. For example, the top tax bracket will increase from its current rate of 37% to 39.6%. This will also affect taxpayers in lower brackets as the 12% tax bracket will increase to a 15% rate. Below are the changes that would occur within individual income tax brackets, assuming the TCJA of 2017 expires.
What to Consider
- Converting traditional IRA assets to a Roth IRA prior to 2026 to lock in current rates.
- Diversifying assets by tax status to provide more flexibility in managing your tax bill.
- Utilizing gifting and other strategies to reduce your taxable income.
The future is unknown, but it is important to have a flexible plan in place that allows you to adapt to different potential outcomes. Due to the complexity of the impending tax sunset, we recommend you remain in communication with your accountant and/or attorney for guidance as things progress. If you have any additional questions, our team of professionals here at Voisard Asset Management Group would be happy to assist.