These Tax Cuts Are Sunsetting in 2026. Are Your Clients Ready?
What You Need to Know
A number of estate and income tax provisions of the Tax Cuts and Jobs Act are set to expire after 2025.
The drop in the lifetime gift and estate tax deduction is very significant for higher net worth clients.
More clients may start itemizing deductions again as the standard deduction drops.
The sweeping tax overhaul enacted in 2017, known as the Tax Cuts and Jobs Act (TCJA), provided a number of income and estate tax reductions and changes. Many of these changes were set to expire, or sunset at, the end of 2025. It’s important that you incorporate these changes into your planning for clients who will be affected.
Here is a look at some of the tax cuts and other changes that will be sunsetting.
Estate Taxes
Perhaps the most notable tax break that will be sunsetting after 2025 is the lifetime estate and gift tax exemption. Before 2018, the exemption was $5 million per person or $10 million for a married couple. For 2023, these limits are $12.92 and $25.84 million, respectively. For 2024, the limits will be $13.61 million and $27.22 million for a couple combined.
The annual gift tax exclusion has also risen as a result of this legislation; it is $17,000 for 2023 and will rise to $18,000 in 2024. It is not clear what the annual exclusion will be after 2025.
As things currently stand, the estate tax exemption will revert back to pre-TCJA levels of $5 million per person after 2026. The level will be adjusted for inflation, so it is expected that it will be around $7 million per person.
The implications of this sunset will vary among your clients. For those whose estate does not exceed the expected 2026 levels, there will be little or no impact unless their estate grows to exceed the reduced amounts over time.
For clients whose estate currently exceeds the expected 2026 exemption levels, there are a few options to take advantage of the current higher exemption and/or to reduce the size of their estate to minimize the impact of the lower exemption rates on their heirs in the future. The best course of action for each affected client will depend on their situation.
One option is to spend down part of their estate. Especially if the client is older, be sure to discuss the fact that it is OK to enjoy their money. Maybe this involves more travel or buying that expensive car they have always wanted.
Making lifetime gifts allows them to watch their heirs enjoy the money they have been gifted. Whether these gifts are to children, grandchildren or others, these gifts can be rewarding both financially and otherwise for your clients.
Giving to charity is another way to spend down their estate if appropriate for your client. Outright donations, funding a donor advised fund, or establishing a charitable trust can all be ways to accomplish their goals surrounding charitable giving and estate reduction.
Income Tax Bracket Projections for 2026
The TCJA reduced the marginal tax brackets for most taxpayers. The top marginal rate for both single and married filers declined to 37% from 39.6% prior to 2018. Marginal rates have declined at most income levels. Here is a comparison of the seven marginal tax brackets that affect most taxpayers.
2023
Projected 2026
10%
10%
12%
15%
22%
25%
24%
28%
32%
33%
35%
35%
37%
39.6%
Roth Conversions
One option to consider before tax rates rise is a Roth IRA conversion. The Roth conversion can help with tax diversification of your client’s retirement accounts, allowing for options when withdrawing funds for retirement income planning. Additionally:
Money in a Roth IRA is not subject to required minimum distributions, which will reduce taxes in retirement for your client.
Under Secure 2.0, inherited Roth IRAs are a tax-efficient way to leave an IRA to non-spousal beneficiaries.
Standard Deduction
One thing to note is that the TCJA has increased the level of the standard deduction, making it harder for many taxpayers to itemize deductions. These higher standard deduction levels will revert back to roughly the pre-TCJA levels, which were $6,350 for single filers and $12,700 for those filing married and joint, both indexed for inflation.
