Navigating the Changing Tax Landscape

In the financial world, few topics are as relevant or as immediately impactful as tax laws. The Tax Cuts and Jobs Act of 2017 (TCJA), enacted in December 2017, marked a significant shift in tax policy, bringing about lower income tax rates, increased federal estate, gift, and generation-skipping transfer tax exemptions, among other benefits. However, like all good things, these benefits are set to end, or "sunset," on January 1, 2026. As we approach this critical date, it's vital to understand the implications and adjust our financial planning strategies accordingly.

Portability and the Implications of the Sunset

Portability refers to the transferability of the unused exemption of the first spouse to pass away to the surviving spouse. What this means is that if a spouse passes away before the sunset in 2026, the unused exemption amount that transfers to the surviving spouse won't decrease due to the sunset.

Under the TCJA, the estate, gift and generation-skipping transfer tax basic exclusion amounts have doubled to $10 million per person (indexed for inflation) or $20 million per married couple. As of 2023, these amounts are equivalent to $12.92 million and $25.84 million, respectively.

However, post-sunset, on January 1, 2026, these exemption amounts will revert to $5 million per person and $10 million per couple, both adjusted for inflation. This projected decrease has raised concerns about potential tax implications for large gifts made between 2018 and 2025.

It’s important to seize the opportunity today and make the most of the existing higher exemption amounts before the sunset.

Life Insurance: A Key Planning Opportunity

One powerful tool often overlooked in comprehensive estate planning is life insurance. Life insurance can provide the liquidity your estate needs to optimize the wealth transferred to your loved ones. If you already have an estate plan in place, it's worth revisiting to ensure that you've not missed any opportunities.

The Importance of Tax-Diversified Strategies

As we inch closer to 2026, it's crucial to consider tax-diversified strategies to help minimize your future tax burden. Life insurance that builds cash value can be an effective instrument to reduce overall exposure to taxes, complementing a diversified tax strategy as part of your portfolio.

Also, keep in mind that federal income tax rates will rise when the TCJA ends. For instance, the top income bracket will see a tax rate increase from 37% to 39.6%. The changes are similar across other income brackets, which further underscores the need for tax-efficient planning.

More Sunsetting Provisions

Beyond the alterations to estate, gift and generation-skipping transfer taxes, several other significant provisions will sunset in 2026. The standard deduction will nearly halve, the $10,000 limit on state and local taxes (SALT) deduction will be removed, and the mortgage interest deduction will revert to pre-TCJA levels, among other changes.

For businesses and business owners, the sunset of the 20% tax deduction on business income for pass-through entities (Section 199A) will be a critical change. The increase in alternative minimum tax (AMT) exemptions and income exemption phase-out limits will revert to pre-TCJA levels, increasing the number of AMT taxpayers.

 

What Should You Do Now?

As we navigate the changing tax landscape, it's important to ensure your financial strategy can handle the transition. Here's a simple checklist to help you get started:

• Explore tax reduction strategies like gifting, trust planning and charitable planning.
• Determine the future of your estate. Do you wish to leave it to your heirs, a charity, or risk it falling into the wrong hands without a proper strategy?
• Discuss estate planning and tax planning strategies with us today.

The key is to understand these changes, anticipate their impact, and plan accordingly. By doing so, we can maximize your financial opportunities today and ensure a secure financial future.

Connect with an Advisor