Although change is inevitable and uncertainty remains high, planning opportunities exist.
For many, the word “sunset” likely conjures up memories of a stunning sky in a peaceful setting. In tax parlance, a sunset refers to provisions of the tax code that are scheduled to expire at a certain date and may evoke very different emotions from investors who are trying to plan for the possibility, but no guarantee, of such an event happening.
The Tax Cuts and Jobs Act (TCJA) of 20171 ushered in major changes to the tax code, but many of its provisions were passed on a temporary basis, and absent congressional intervention, will lapse after 2025. Whether Congress will ultimately allow some, all, or none of these provisions to sunset is unknown, which can make planning in anticipation of such an event challenging. What is certain is that the 2024 election results will greatly influence the eventual outcome. Investors who proactively plan for a potential sunset will likely have more flexibility and planning optionality than those who passively take a “wait and see” approach.
Although a detailed analysis of the TCJA is beyond the scope of this article, some2 of the most important temporary TCJA changes for individual investors included the following:
Overall, the TCJA lowered taxes for many (but not all) individual investors, and a complete sunset would likely cause overall taxes to rise for many investors. However, the TCJA changes could net to either a higher or a lower overall tax bill, depending on an investor’s tax profile. For individuals whose circumstances haven’t changed much since the passage of the TCJA, in many cases, this outcome would essentially be reversed if the sunset occurs as scheduled.
Amidst so much uncertainty, planning for a potential sunset is challenging. Making drastic changes to one’s overall tax and investment strategies based solely on political predictions is risky. Focusing on planning that clients will be doing anyway in the future, but that may need to be accelerated or modified due to potential tax changes, may be more defensible.
Although there are still many unknowns, and it may be premature to consider executing certain strategies right now, in some cases it may be wise to begin discussing “what-if” scenarios with clients and obtain planning buy-in today rather than waiting until there is legislative certainty.
It may be possible to lay some of the planning groundwork today and increase optionality without “pulling the trigger.” For example, a client contemplating the sale of a business could begin business sale due diligence now but defer the final decision around timing until there is more clarity.
Investors who plan to exercise Incentive Stock Options (ISOs) in the near future may wish to consider doing so before 2026, while the TCJA changes to the AMT rules are still in effect. When exercising an ISO, the bargain element is considered income for AMT purposes but not regular income tax purposes. The percentage of individual income tax returns subject to the AMT dropped significantly after the TCJA was passed and is expected to spike in 2026 absent Congressional action.3
If the sunset were to occur as currently scheduled (a big “if”), some individuals could potentially benefit from accelerating income to 2025 (when federal income tax rates are lower) or deferring deductions to 2026 (when federal income tax rates are higher and the standard deduction is lower), although the time value of money should also be considered.
For example, some married couples filing jointly could see their federal marginal income tax rate increase from 24% in 2025 to 33% in 2026 (assuming no changes to their circumstances), underscoring the potential benefits of income tax planning in certain situations. However, future changes in marginal tax rates can vary drastically. For example, other married couples with a 35% marginal tax rate in 2025 might maintain the same 35% marginal rate in 2026, all else being equal.
Although many individuals have little control over the timing of their income, some have more flexibility than others, including certain business owners, those receiving distributions from retirement accounts or those contemplating a Roth conversion.
Due to the currently elevated standard deduction, many investors who used to itemize their deductions pre-TCJA now claim the standard deduction. In 2026, this trend would be expected to reverse, with more taxpayers itemizing their deductions due to the reduction in the standard deduction. Investors who “bunch” their deductions to increase total deductions over a multi-year period may wish to consider claiming the standard deduction in 2025 and itemizing their deductions in 2026. Charitably inclined individuals could consider making charitable grants from a donor-advised fund (DAF)4 during 2024 and 2025 and then replenishing the DAF in 2026, when the charitable deduction may be more valuable.
However, as is common with taxes, many factors and nuances must be considered when making such decisions. For example, deductions may be more valuable in 2025 for certain higher income investors who have ordinary income to offset and expect to be subject to the AMT in 2026 but not in 2025.
Investors who plan to donate cash in excess of 50% of AGI to public charities or a DAF in a single year may qualify for a larger charitable deduction if the contribution is made before a potential sunset.5 However, an investor must also consider that deductions may be worth more after a potential sunset, and there may be more tax efficient assets to donate than cash, such as highly appreciated securities held longer than a year.
Although the state and local tax (SALT) deduction would no longer be capped starting in 2026, which would favor wealthy taxpayers in high tax states the most, the additional benefits may still be limited for investors subject to the AMT.
Investors who do Roth conversions in 2025 may be able to defer the payment of state income taxes on the additional income until April 2026, potentially taking advantage of both lower income tax rates in 2025 and more favorable SALT deduction rules in 2026.6 The income taxes paid on a Roth conversion also lower the value of an investor’s gross estate, potentially also providing federal (and in some states, state) transfer tax savings for wealthy investors.
A potentially more time sensitive consideration is the scheduled reduction of the federal lifetime exemption, which presents taxpayers with a “use it or lose it” opportunity. Under current law, the enhanced gift and estate tax exemption ($13.61 million in 2024) will be cut in half after 2025.7 Wealthy individuals with the means to fully use up the currently elevated exemption may wish to consider doing so now if they already intend to make large gifts in the near future.8
Wealth transfer planning takes time and should not be rushed. Clients should be thoughtful about how to give, how much to gift, and the most appropriate assets to transfer.9 Additionally, strategies may take time to fully implement10 or require appraisals or the creation of trusts. Estate planning attorneys, CPAs and valuation professionals may be swamped and not have the bandwidth to help anyone that chooses to delay planning.
Given that the exemption would be reduced from the top but is used up from the bottom as gifts are made, married couples who are unable to fully use up the exemptions of both spouses may benefit from exhausting one spouse’s exemption rather than using equal amounts of both exemptions.
Treasury regulations confirm that individuals who take advantage of the increased lifetime exclusion amount will not be adversely impacted after 2025 when the exemption amount is scheduled to decrease.11
Some of the potential sunset changes could have an impact on risk adjusted, after-tax asset allocation decisions as well as optimal asset location strategies. For example, if the sunset occurs as currently scheduled, REIT dividends may no longer qualify for the 20% Qualified Business Income Deduction, increasing the overall tax drag of REITs.
Increases in marginal tax rates could impact decisions about whether to invest in taxable vs tax-exempt bonds. A lapse of the favorable AMT changes could also impact the potential benefits of investing in Private Activity Bonds12 for certain investors.
What will ultimately happen with the expiring TCJA tax provisions will be influenced heavily by the outcome of the election, and which party, if any, has political control. While the current Congress has begun to consider TCJA expiration, Congressional activity on this issue will likely pick up in earnest in the Fall of 2025 and could potentially even extend into 2026, with changes applied retroactively to the beginning of 2026.
Donald Trump has voiced support for extending the sweeping TCJA tax cuts if elected,13 while Vice President Harris has not yet fully outlined her economic agenda and views on tax policy. Both parties may wish to avoid tax increases on the middle class. However, fiscal concerns about the rising federal deficit, the substantial costs to extend the TCJA tax cuts, and hot button issues like the SALT deduction cap will certainly be part of the discussion.
Planning in anticipation of a potential TCJA sunset remains challenging and fluid, and future tax reform will likely extend beyond the expiring TCJA provisions. Although change is inevitable and uncertainty remains high, planning opportunities exist. Advisors can help clients feel greater peace of mind and increase their odds of successfully maximizing after-tax wealth by helping them to take steps now to prepare for a potential sunset while maintaining flexibility and a long-term perspective. Even for situations where there are no clear steps that can be taken now, clients will appreciate that at least their tax planning choices have been thoughtfully considered and analyzed in a time of uncertainty about the future.
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1 https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.pdf
2 Other important changes for individual taxpayers included the repeal of personal exemptions, the suspension of the Pease limitation, and expansion of the Child Tax Credit.
3 Source: IRS 2017 and 2018 tax individual income tax return data; https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-amt-0
4 A donor advised fund is a charitable giving account managed and administered by a charitable sponsoring organization. Such accounts allow donors to make a charitable contribution, potentially receive an immediate income tax deduction and then recommend grants from the fund over time.
5 Disallowed charitable deductions may carry forward up to 5 years. See IRC Sec 170.
6 Deferring the payment of state income taxes until 2026 based on safe harbor rules may not be an option in all states (such as in California), and the benefits of the SALT deduction may be limited for those subject to AMT or those who don’t itemize their deductions. When doing Roth conversions, many other important factors should also be carefully considered.
7 Applicable state income and transfer tax rules are beyond the scope of this article but should also be carefully considered. The Generation Skipping Transfer (GST) Tax exemption is also scheduled to be reduced. Taxpayers could consider making an affirmative allocation of all remaining GST exemption to existing non-exempt trusts and to trusts with a mixed inclusion ratio.
8 In 2012, the exemption was $5.12 million and was scheduled to decrease to $1 million on 1/1/2013. The scheduled change did not occur. Some wealthy taxpayers who engaged in planning to use up the exemption ahead of the scheduled decrease later felt “donor’s remorse.” Similarly, many wealthy taxpayers engaged in planning following the 2020 election in anticipation of major tax reform changes that never materialized. Donative intent and planning flexibility may help to prevent such donor’s remorse if the exemption does not decrease in 2026 as currently scheduled.
9 Assets transferred during life will generally result in the recipient having a carryover basis, while assets inherited at death will typically receive a basis step-up. Consequently, it may be advantageous to gift assets with a high cost basis relative to value and retain assets with a low cost basis. Assets transferred to a grantor trust may potentially be swapped out at a later date for assets of equivalent value.
10 For example, if both spouses wish to create Spousal Lifetime Access Trusts, or SLATs, advisors may recommend creating them in different tax years to reduce the risk of the IRS treating them as reciprocal trusts.
11 https://www.irs.gov/newsroom/final-regulations-confirm-making-large-gifts-now-wont-harm-estates-after-2025
12 Interest earned on Private Activity Bonds may be taxable for AMT purposes but not taxable for regular tax purposes.
13 https://www.cnn.com/2024/06/13/politics/tax-cuts-expiring-trump-biden/index.html
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