Certain provisions of the Tax Cuts and Jobs Act are slated to expire in about two years, but advisors say wealthy clients should start preparing for the changes now.
“I don’t believe many clients have an understanding of the sunset of the TCJA provisions," said Thomas Pontius, financial planner with Kayne Anderson Rudnick in Los Angeles. "The ones that do understand are typically the ones who have the most to lose when the laws revert.”
Even though some provisions are set to expire, it's impossible to know what the exact outcomes will be since components of the law can be extended with the approval of Congress and the president.
“Another tax bill prior to the reversion could potentially extend some provisions or eliminate others altogether. What a new tax bill will propose will be dependent on the political landscape at that time,” Pontius said.
Notwithstanding any action by Congress, the biggest potential changes that could impact wealthy clients include the following:
• The top income tax rate reverting to 39.6% from 37%.
• The end of the 20% qualified business income deduction (QBI), also known as the Sec. 199A deduction, for many owners of sole proprietorships, partnerships and S corps.
• The sunset of the increased alternative minimum tax (AMT) exemption.
• The reinstatement of the “Pease” limitation, which reduced the value of itemized deductions for taxpayers with high annual AGI.
• An approximate halving of the federal estate tax exemption, which is $12.92 million for 2023.
Individual taxpayers have the most at stake with the changes, advisors said.
“Most of the business provisions were permanent, but pretty much all provisions impacting individuals expire at the end of 2025,” said Isaac Bradley, director of financial planning at Homrich Berg in Atlanta. “There’s been so much noise and uncertainty in Congress over the past few years that most clients haven’t been focusing on the sunset but rather on what Congress might do the next year. ... Our position continues to be that these laws are set to change at the end of 2025 and we need to plan.”
“We started talking about this about a year ago for those clients it will impact most, which generally seems to be higher-net-worth clients and middle- to higher-income clients,” said Ginger R. Ewing, private wealth advisor at Ameriprise Financial in Eagan, Minn.
“Because the estate tax exemption amount will adjust for inflation since 2017 we don’t know exactly what it will be in 2026, but I think it’s going to be around $6.5 million per person, and that can have a substantial impact on many wealthy clients,” Ewing said.
Though estate tax changes have been a focus of his firm, other potentially impactful provisions haven’t received as much focus from clients, said Tim Laffey, head of tax policy and research at Rockefeller Global Family Office in Philadelphia.
Non-C-Corp business owners could also see a substantial impact to their taxes because of the expiration of the QBI deduction. “Given that the 21% C corporation tax rate won’t be expiring, businesses that aren’t currently C corporations that are taking advantage of the QBI deduction may begin to crunch some numbers to determine if converting could lower overall taxes,” Laffey said.
Other clients should focus on bunching deductions over the next three years. “Since there is a cap on SALT deductions and the standard deduction was raised, it became less valuable for many mass-affluent individuals in high-tax states who have deductions only slightly above the standard deduction amount to itemize," said Erik Preus, head of investment solutions at Envestnet PMC in Minneapolis. "One popular planning technic that emerged, particularly among investors who give significantly to charity, was to think about taxes over a two-year horizon.”
For individuals who itemize and also give to charity, it became popular to itemize deductions every other year and take the standard deduction every other year, he added, allowing a greater deduction above the standard in the years they itemize. “This also led to increased interest in donor-advised funds, where you make the donation to the DAF in the year you take the deduction but direct the donation to specific charities in subsequent years,” he said.
Planners should proceed with the view that taxes may increase in 2026, advisors said.
“If clients are in the highest tax bracket and are expected to continue in that bracket for decades to come, think about ways to shift income into 2023 to 2025,” Ewing said. “Roth IRA conversions are a good way to do that, especially while the market is down. It isn’t fun to pay taxes on larger conversions but taxes will likely be less now than in 2026.”