Tax legislation is often written and enacted to sunset on a date certain…”kicking the can” of tax policy down the road for future legislators and administrations to wrestle over…and leaving some uncertainty for the purpose of planning for taxpayers.
The Tax Cuts and Jobs Act (TCJA) of 2017 is no exception. Significant changes could be on the way then or even beforehand – if Congress acts before the sunset date of 12/31/2025.
For many, the most significant parts of the TCJA were the changes in tax brackets and rates, increase in the standard deduction, and changing the threshold for capital gains taxes to benefit high-income taxpayers. Also significant for the wealthy was the doubling of the lifetime exclusion amount for gifts and the estate tax exemption (both went from over $5 million to over $11 million). This allows the wealthier among us to give away or own at death twice as much as previously possible without transfer taxes due.
It is possible that when the TCJA provisions expire, the tax provisions will revert back to where they were before TCJA…so what might one consider doing before those provisions expire or other changes take effect?
With income taxes potentially increasing across the board, accelerating income if possible into a year while the TCJA rates apply may be advisable. This could pertain to payments due from others under installment sales contracts or other types of arrangements, like rents or royalties.
It also can mean taking advantage of potentially favorable-by-comparison capital gains treatment with a current low 15% rate applying to those with taxable income between $44,625 per year ($89,250 for married filing jointly) and $492,300 ($553,850 for married filing jointly) and no capital gains for those earning below those lower threshold amount. Many experts believe these rates will increase, and their applicability reach more taxpayers at lower income levels. Considering harvesting capital gains sooner, rather than later, could mean lower capital gains taxes than waiting.
Making gifts without having to report them for gift tax purposes and minimizing exposure to estate tax can be accomplished. The current annual gift exclusion is $17,000 for individuals and $34,000 for married couples for gifts per done. In other words, a taxpayer or a couple can make gifts in those amounts to one or more individuals. If a married couple makes 4 annual exclusion gifts – one to each of their 4 children – they can reduce their estate by $134,000 each year.
There are other possible strategies to address the potential increase in income, gift and estate taxes and in all cases one should consult with their own financial, tax and legal advisors before taking any action. But the time to consider this is now, before any changes take effect.