Planning Ahead for the Sunset of the TCJA

How time flies. It seems like just yesterday that we were writing about the newly-enacted Tax Cuts and Jobs Act (TCJA), and the tax and estate planning opportunities for individual taxpayers. At the time, we cautioned that many provisions of the TCJA that applied to individuals would “sunset” after December 31, 2025, which seemed far off. As of this writing, that date is barely eighteen months away—which means that if you want to make the most of the benefits offered by the TCJA, it’s time to take action.

While it’s possible that lawmakers could move to extend some or all of these provisions, that hasn’t happened yet, and there’s no guarantee that it will. Here are some things to think about sooner, rather than later.

The Estate and Gift Tax Lifetime Exemption is Going Back Down

In 2017, when the TCJA was passed, the lifetime gift and estate tax exemption was $5.49 million dollars per individual. In 2018, when the law took effect, the exemption jumped to $11.18 million, meaning that an individual could gift during life, or transfer at death, assets up to that amount without incurring gift or estate tax. (Gifts that are not in excess of the annual exclusion amount do not reduce the available amount of the lifetime exemption.) The exemption amount is doubled for a married couple, and when one spouse dies, the unused amount of their exemption is “portable” to the surviving spouse. 

The lifetime exemption, also known as the unified exemption, is indexed annually for inflation and is now worth $13.61 per person. However, after the TCJA sunsets on December 31, 2025, the exemption will return to 2017 levels (indexed for inflation): about $7 million dollars per person.

The great majority of estates in the United States will not be subject to estate tax, even after the exemption amount decreases. However, the decreased exemptions means that some estates that would not be subject to taxation today will be as of January 1, 2026. If yours is one of them, you should act now to reduce the size of your taxable estate.

Depending on your circumstances, there are many mechanisms for doing so. There are multiple types of irrevocable trusts, such as dynasty trusts, spousal lifetime access trusts (SLATs), and irrevocable life insurance trusts (ILITs) which can remove assets from your taxable estate, keeping it below the threshold of the exemption amount. 

These trusts are complex, and should be drafted and implemented by an experienced estate and tax-planning attorney to ensure that they comply with applicable law and are effective for your purposes.

Making outright gifts is another way to reduce the size of your taxable estate, especially if you combine gifts with your spouse. In 2024, each of you can gift up to $18,000 (or $36,000 combined) to an unlimited number of people without having to file a gift tax return or reducing the available amount of your lifetime exemption. However, making such gifts can have unintended consequences, such as affecting your eligibility for Medicaid, so be sure to consult with your estate planning attorney before taking action.

Federal Income Tax Rates and Brackets are Reverting to Previous Levels

The TCJA revised federal income tax rates and changed tax brackets, but those changes will also revert to their 2017 numbers as of January 1, 2026. The top tax bracket will once again return to 39.6%; it is currently 37%. The income threshold at which the top bracket is reached will also be lower.

Taxpayers with higher incomes could face greater income tax liability as a result of these changes. There are some strategies you can pursue now if you are concerned that your income tax liability will increase after the sunset of the TCJA. 

If you have the option of accelerating ordinary income forward to 2024 or 2025, you may be able to take advantage of the more advantageous income tax rates while they are still around. However, you might want to balance this strategy against the value of being to itemize tax deductions, which will become more desirable when the TCJA sunsets.

The Standard Deduction Returns to Its 2017 Level

The TCJA didn’t take away the ability to itemize deductions on income tax, but it reduced the incentive to do so. The law doubled the amount of the standard deduction, and limited the amount of certain  deductions that were commonly used by taxpayers who itemize. The net effect was that for many people, it became easier, and more sensible, to simply claim the standard deduction.

After the sunset of the TCJA, you may want to reconsider that strategy if you previously adopted it. Not only will the standard deduction revert to its 2017 level adjusted for inflation, but some previously-limited deductions will increase, including:

• SALT (State and Local Tax deduction): will no longer be subject to  $10,000 cap
• Mortgage interest deduction: Interest on the first $1,000,000 of mortgage debt can be deducted, up from interest on the first $750,000 under the TCJA. Post TCJA sunset, homeowners can also deduct  interest on up to $100,000 of home equity loan debt.
• Casualty losses: Under the TCJA, only casualty losses incurred in a federally-declared disaster area could be deducted. After December 31, 2025, taxpayers can deduct these losses whether or not they occurred in a federally-declared disaster area.
• Moving expenses: After the TCJA sunsets, reimbursed moving expenses will no longer be considered taxable income, and qualifying unreimbursed moving expenses will be tax-deductible.

As always with tax planning, a broad perspective is required; there are a lot of moving parts. A strategy that seems favorable at first glance could have unintended consequences that make it unwise after further consideration.

To learn more about what to expect after the sunset of the TCJA, or to take advantage of its provisions while there is still time, contact Estate Planning & Elder Law Services to schedule a consultation.