Big tax changes aren't expected in the short term given the Republican-controlled House and a Democratic Senate and White House. But what tax measures, if any, have a chance—and how should wealthy clients plan for them?

“With the recent passage of the budget bill, there’s little likelihood of any significant tax legislation being proposed until September,” said Andy Bass, chief wealth officer at Telemus in Southfield, Mich. “Between a divided Congress and the lack of a tax increase appetite, there’s low likelihood that there will be a significant tax reform bill in 2023.”

“We expect to see gridlock between the GOP and Dems as well as within the parties themselves, as evidenced by [House Speaker Kevin] McCarthy’s confirmation process,” said Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York.

Yet “tax planning becomes somewhat more straightforward in a political environment like this,” said Erik Preus, head of Investment Solutions at Envestnet PMC in Minneapolis. “Investors can plan with relative certainty that they know what the tax landscape will be for this tax year and next.”

Planning today revolves around the 2026 sunset provisions of the Tax Cuts and Jobs Act that will increase ordinary rates to what they were in 2017 and halve the estate tax exemption. “This will come about unless Congress delays or modifies its implementation—the other side of the divided Congress, as nothing may be done,” Bass said. “Some are preparing but holding off implementation until after the 2024 election. The economy will also play a role. If we’re in a recession, there will be a limited appetite for major tax increases.”

TCJA provisions that could revert to their pre-TCJA amounts in 2026 include individual marginal tax brackets, the standard deduction, the state and local tax deduction and the lifetime exclusion. The SECURE Act 2.0 and the proposed regulations on inherited IRAs, however, could impact the tax situation sooner, said Thomas Pontius, financial planner with Kayne Anderson Rudnick in Los Angeles.

The wealthiest clients should consider using their lifetime exclusion ($12.92 million this year) before the 2026 sunset, potentially back to the pre-TCJA $5 million (adjusted for inflation). “At the very least, they should understand that some vehicles they can use allow them to make gifts intended for specific purposes other than just outright gifts to beneficiaries,” Pontius said.

Clients with consistent ordinary income should understand if accelerating income now will have any benefit before the marginal tax brackets change back to their pre-TCJA levels, he said. “Roth conversions are a terrific way to accelerate taxable income and fill up all the lower brackets in anticipation of marginal tax bracket changes or increased ordinary income in future years,” he said.

“We should be using the next two years to do proactive planning knowing there will likely be major changes beginning in 2026,” Pontius said.

Measures that both parties might agree on, FitzPatrick said, include repealing the state and local tax deduction (SALT) cap, regulating cryptocurrency and allowing banks to accept cannabis business money in states where cannabis has been legalized. Others that could pass include expanding the Earned Income Tax Credit, increasing the child tax credit and creating a new tax credit for businesses.

“Clients can plan their taxes in the face of this uncertainty by proactively keeping track of their income and expenses, taking advantage of any tax credits they may qualify for and consulting with a qualified accountant or financial advisor,” said Chris McMahon, CEO of Aquinas Wealth Advisors in Pittsburgh.

“Republicans will likely attempt to enshrine certain measures such as lower income tax rates into permanent law, but we can’t rely on this,” FitzPatrick said. “We also expect Republicans to make a strong effort to salvage the 20% pass through deduction from businesses to non-corporate taxpayers, another provision of the TCJA set to expire in 2025.” The GOP has also expressed interest in boosting large businesses through deductions for R&D expenses, interest expenses and bonus depreciation, he said.

“If the U.S. economy slumps further, we could envision a Republican House suggesting a recession income tax cut,” FitzPatrick said. “Don’t worry about the circus in D.C. and focus on your long-term objectives and what’s controllable.”