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Now is an opportune time to discuss the potential impact of the election on tax reform, as well as changes that could result from the sunset of much of the Tax Cuts and Jobs Act of 2017 (TCJA) in 2025. Help clients identify how they can capitalize on current opportunities and prepare for the possibility of tax law changes. Let's recap a few of the possible outcomes:
A Harris-Walz administration
Assuming the Kamala Harris ticket continues to back the tax reform proposals laid out by the Biden administration, many of the provisions of the TCJA would continue for taxpayers earning less than $400,000. Taxpayers earning more could be subject to the following changes:
- Increase the net investment income tax and Medicare tax to 5% percent on income above $400,000.
- Increase the top individual income tax rate to 39.6% on income above $400,000 for single filers and $450,000 for joint filers.
The Biden proposal also includes potential changes to long-term capital gains and qualified dividends taxation for taxable income above $1 million and a tax on unrealized capital gains at death for certain wealthier individuals.
A Trump-Vance administration
The Donald Trump proposal would enact a universal baseline tariff on all U.S. imports. It would also tax large private university endowments, while making the individual and estate tax cuts of the TCJA permanent and lower the corporate income tax rate from 21% to 20% percent.
The TCJA changed many deductions and exemptions such as:
- Personal exemptions were eliminated and the standard deduction was increased.
- The alternative minimum tax (AMT) exemption was increased.
- Certain itemized deductions, such as the state and local property tax deduction (SALT) and the mortgage interest deduction were dramatically reduced.
- Other deductions, like financial advisory fees and tax preparation (for non-self-employed individuals) were eliminated.
- The deductibility of some charitable contributions was increased for those who itemize.
The following changes would revert to pre-TCJA levels in 2026 without congressional intervention:
- Income tax: Tax brackets would revert to pre-TCJA levels and rates will increase for many taxpayers. The impact will extend beyond ultra-high net worth (UHNW) clients as rate increases start as low as the 12% bracket, which is scheduled to return to 15%. This could lead clients to accelerate income into 2024 and 2025 to lock in the lower rates.
- Alternative minimum tax (AMT): The increased AMT exemption may have had a positive impact on clients. These clients should talk to their accountants about the possible benefits of accelerating income in 2024 and 2025 while the larger AMT exemption likely remains.
- Itemized deductions: The limitations on certain itemized deductions may have had a negative impact on clients. Clients who live in states with high real estate prices and high tax rates may have been particularly impacted by these limitations. Such clients will likely benefit if these provisions revert to the old law.
- Estate and gift tax: The sunset of the current estate and gift tax provisions are a major concern for ultra-high-net-worth clients since the TCJA doubled the prior estate and gift tax exemption. For 2024, the federal estate and gift tax exemption is $13.61 million per individual and $27.22 million for married couples. Unless the next Congress acts to change the current law, the estate and gift tax basic exclusion will revert to pre-TCJA levels in 2026, to approximately $7 million per induvial or $14 million for a married couple. Clients who have a federally taxable estate should consider implementing a gifting program that takes advantage of the current exemption.
Bottom line: Help your clients avoid any post-election surprises by discussing potential changes and identifying opportunities to capitalize on the current TCJA provisions.
"Help clients identify how they can capitalize on current opportunities and prepare for the possibility of tax law changes."
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