Stay the Course or Buckle Up? Planning for the 2025 Sunset Post Election

by Maria Tipton, J.D.

With the election in the history books and Republicans leading the charge, uncertainty remains regarding potential tax reform. The unknown that looms largest (and darkest) over wealth advisors is what fate will the Tax Cuts and Jobs Act of 2017 (TCJA) face?

Under the TCJA, an individual may transfer up to $13.99 million ($27.98 million for married couples) either during life or at death, without incurring any federal gift or estate tax. If you pass away with assets in excess of your allotted lifetime exemption, that amount is subject to a 40% federal estate tax. However, the allotted lifetime federal gift and estate tax exemptions are scheduled to dramatically decrease after December 31, 2025. Unless the tax legislation under the TJCA is made permanent or some other legislative action taken, the lifetime exemption amount will “sunset” back to pre-2017 figures, effective on January 1, 2026. Adjusting for inflation, the “sunset” exemption limit for individuals is estimated to be approximately $7 million per individual and $14 million for married couples. Keep in mind that avoiding the “sunset” requires Congress to affirmatively act to either make the TJCA permanent or put another solution in place. Effectively, Congress can raise taxes by doing nothing.

While the Republican sweep has led many advisors and clients to believe that the current exemption levels will be made permanent, the details of any tax legislation and the legislative appetite to act remain uncertain. The approach from our wealth advisors, however, remains unchanged by the election results. While the mantra of “use it or lose it” may have been quieted by the election results, clients who can afford to take advantage of the historically high gift tax exemption levels now should do so to mitigate as much estate tax exposure as reasonably possible. Clients who can afford to gift part or all of their high exemption should prioritize planning now as tax reform details may not crystalize until the fourth quarter of 2025, giving affected clients very little time to devise and execute a comprehensive plan.

While the impact that the TCJA has on the federal estate tax exemption often garners top billing during discussion, the impact on income tax rates should not be overlooked. When the TCJA expires at the end of 2025, marginal tax rates for individuals will revert to pre-TCJA levels, including a return to the 39.6% maximum rate from 37%. Additionally, the standard deduction for both single and joint filers are expected to revert to pre-TCJA figures adjusted for inflation. Currently, the 2025 standard deduction for joint filers is $29,200. If the TCJA sunsets, joint filers can expect a standard deduction of approximately $16,600 in 2026. On a positive note, for itemizers, the SALT cap of $10,000 expires with the TCJA sunset. It is equally as important to start strategizing with your wealth advisors to plan for a sunset of the TCJA’s income tax component. Strategies such as Roth conversions, taking larger distributions from an inherited IRA accounts in certain years and potentially accelerating the realization of capital gains may all be impacted by a reversion to pre-TCJA income tax rules.

Our wealth advisors will be working with our clients over the next several months to determine which planning strategies could and should be implemented to not only reduce estate and income tax, but to also achieve client goals and secure their legacy. There is still time to prioritize planning if you have not already done so. Starting now, or staying the course if you are already underway, will ensure that your plan is one that has been thoughtfully crafted and carried out. The countdown clock is ticking and the time to plan is now. 

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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