As the year 2025 draws near, financial advisors are gearing up for significant changes in the American tax landscape. The expiration of several key provisions embedded in the 2017 Tax Cuts and Jobs Act (TCJA) poses a substantial risk to taxpayers, especially high-net-worth individuals. The expiration of these tax breaks could lead to a dramatic shift in liabilities, making proactive tax planning an undeniable necessity. This article delves into the implications of impending tax changes and outlines strategies that advisors are recommending to their clients.
The Impending Tax Cliff: An Overview
The TCJA, championed by former President Donald Trump, introduced numerous temporary tax benefits aimed at stimulating economic growth. These included reduced federal income tax rates, an increase in the standard deduction, a larger child tax credit, a significant 20% deduction for pass-through businesses, and elevated estate and gift tax exemptions. However, most of these provisions are set to expire post-2025 unless Congress intervenes.
With uncertainty looming over the political landscape, including control of the Senate and House, it’s difficult to predict which, if any, of these provisions will be extended. Consequently, top financial planners are urging clients to adopt a forward-thinking approach to tax management.
Revisiting Estate and Gift Tax Exemptions
One of the most pressing considerations involves the current estate and gift tax exemption limits. In 2024, these exemptions stand at an impressive $13.61 million for individuals and $27.22 million for couples. However, these thresholds are not just numbers; they present an opportunity for wealth transfer that could drastically change after 2025. If Congress fails to extend these exemptions, they could revert to significantly lower levels, which could mean that large portions of wealth become subject to a 40% tax rate on amounts exceeding these thresholds.
Wealth advisors are focusing on strategies that capitalize on these current exemptions. Certified financial planner Peter Traphagen Jr. emphasizes the importance of proactive estate planning tailored to individual family circumstances. This may involve the establishment of trusts, direct gifts to heirs, or even leveraging educational savings accounts. “By moving assets out of the estate now,” he notes, “clients can minimize future taxes.”
Beyond the estate planning landscape, advisors are making preparations for potential increases in federal income tax rates. The TCJA lowered income tax brackets, but without congressional action, these will revert back to their 2017 levels, including higher rates that could significantly impact taxpayers once the new structures take effect. For instance, clients might find themselves facing a marginal tax rate of 39.6%, which they’ve been temporarily sheltered from.
Samantha Pahlow, a wealth management expert at Ferguson Wellman Capital Management, highlights the importance of shifting income into today’s lower brackets. Strategies like converting traditional individual retirement accounts into Roth IRAs or accelerating business income recognition may help taxpayers mitigate their future liabilities before the tax rate increases take effect.
Another important aspect of tax planning involves deductions. The TCJA raised the standard deduction significantly, yet projections indicate that this will be slashed in 2026. Currently set at $14,600 for single filers and $29,200 for married couples, many taxpayers have benefitted from claiming the standard deduction rather than itemizing. However, as the tax landscape shifts and the standard deduction potentially falls to its previous levels, taxpayers may find themselves in a position where itemizing deductions becomes more appealing.
Financial advisors suggest that clients take stock of their potential deductions now, considering strategies like deferring charitable contributions until after the reduction in the standard deduction. For instance, deferring your charitable donations could allow you to take advantage of itemized deductions that may increase in value relative to your taxable income in the future.
The tax ramifications of the TCJA’s pending expiration are not merely theoretical; they present a pressing concern for high-income individuals and families. Financial advisors are encouraging a proactive approach to tax planning, focusing on wealth transfer strategies, income adjustment, and deductions. By fully engaging with these strategies before the tax cliff arrives, individuals may avoid significant financial repercussions and preserve their wealth for future generations. The landscape is complex and ever-changing, but with the right guidance, navigating these waters can lead to substantial rewards.