2025 Tax Planning

Many of you may be aware of the potential tax planning changes on the horizon coming in 2025 to estate-tax rates. Most people are unaware, however, of some of the other tax-cuts that sunset at the end of 2025 if there is no action from Congress and the President to renew them. These tax cuts are all part of the 2017 Tax Cuts and Jobs Act (TCJA).

Following are a list of tax cuts which may come to an end:

  • Individual income tax rates revert to pre-TCJA levels (putting many taxpayers in a higher marginal bracket).
  • The standard deduction will be cut roughly in half (adjusted for inflation).
  • The estate-tax exemption will also be cut roughly in half (adjusted for inflation).
  • The 20% pass-through deduction for certain types of businesses goes away.
  • The percentage of adjusted gross income allowed as a charitable gift falls from 60% to 50%.

As you know, we intend to spend a good portion of our time with you this year focused on estate planning. Thus, if the estate tax exemption sunsetting is an issue for you, we will work with you and your estate planning attorney on strategies to support you.

Impact to Estate Planning

Note that in 2017 the federal estate tax exemption was $5.49 million. The first $5.49 million that a taxpayer passed on to heirs transferred estate-tax free. After adjustment for inflation, that exemption stands at $12.92 million; for married couples, the combined exemption is $25.84 million. If the tax cut isn’t extended, it would reduce the single-taxpayer exemption down to approximately $6.5 million or about $13 million for married couples.

Impact to Overall Tax Planning

The TCJA doubled the standard deduction. The standard deductions for the 2017 tax year were $6,350 for single filers and $12,700 for those married filing jointly. Today, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. If the higher standard exemption disappears at the end of 2025, some clients will need to do more comprehensive tax planning. It is anticipated that many Americans will pay an additional 1% to 4% (though the brackets might be more favorable for some) in personal taxes under the post-sunset tax tables than at this time. For more information on tax rates – current and projected – review this piece by Putnam.

What Can I Do?

Only time will tell if the TCJA is extended or if new legislation is passed. With that said, here are some things you can do proactively so that you are prepared either way:

  • Reach out to your estate planning attorney and SWMG wealth advisor to discuss strategies and update documents, as needed. Again, this mostly impacts clients with estates in the range of $6.5M (single) and $13M (couples).
  • Increase your gifting between now and 2025. In 2024, an individual can give away up to $18,000 in cash or other assets to any person, free of gift tax and with no requirement to file a gift tax return. Likewise, the recipient pays no taxes on the gifted amount. A married couple can give away as much as $36,000 in the same way, with the same results.
  • Consider Roth conversions. If you have significant holdings in traditional vs. Roth retirement accounts, you may want to consider a Roth contribution before tax rates rise. SWMG typically reaches out proactively to discuss Roth conversions with clients where it makes sense, but if you are unsure, ask your CPA.
  • Re-evaluate business structures. For business clients organized as sole proprietorships, LLCs, partnerships, and other pass-through entities, it will be important to evaluate the effect of the loss of the 20% pass-through exemption on business income. In certain cases, it could make sense to reorganize as a C corporation, since the 21% tax rate for these businesses is unaffected by the sunsetting TCJA provisions.
  • Stay on top of the situation. No matter which way things go, we will partner with you and your other advisors to educate you on options and strategies in your best interest.

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