Taxes will figure big in 2024, a major election year – and the year before the potential sunset of some provisions of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. What can wealthy clients look for?
Recently the Biden administration released its “Green Book” of FY24 revenue proposals. “Absent some grand bargain associated with the raising of the debt ceiling, the Republican-controlled House will likely prevent most if not all of President Biden’s Green Book initiatives in the near term,” said Gerald B. Goldberg, CEO and co-founder of GYL Financial Synergies in West Hartford, Conn. “Many of these would have had the net effect of raising additional tax revenue mostly from higher income individuals.”
“Democrats have proposed increasing tax rates on wealthy individuals,” said Rochelle Hodes, principal in the Washington National Tax Office of the accounting firm Crowe in Washington, D.C. “Republicans have proposed making permanent the tax changes in TCJA, including those that affect individuals, while tweaking some provisions.
“The debate between the party candidates will be whose plan most appropriately allocates the tax burden between wealthy individuals and lower- and middle-income individuals,” she added.
Biden has said he’d allow TCJA tax cut provisions to expire and has proposed additional tax increases, said Erik Preus, head of investment solutions at Envestnet PMC in Minneapolis: a wealth tax for households with a net worth of at least $100 million; raising the capital gains tax to 39.6% for incomes greater than $1 million; raising the net investment income tax from 3.8% to 5%; and raising the corporate tax to 28%.
“We’ll continue to see the debate over an increase in income taxes on ordinary income, dividends and interest and capital gains taxes. There will also be a focus on some of the more popular estate planning reduction strategies,” said Jim Bertles, principal and managing director at AlTi.
“While it’s unlikely for either candidate to get all proposals through Congress and passed into law, it’s also likely that the expirations of the TCJA tax provisions won’t be the only adjustments high-net-worth clients will have to prepare for,” said Preus.
The question facing advisors and clients remains not whether, but how to adjust to the tax-law uncertainty?
“Generally, those clients who are concerned about potential changes in tax law and the effects of the sunset provisions expiring have already taken action,” Bertles said. “Some individuals are less concerned about the tax implications and normally don’t tend to review their strategies until we get closer to an election year.”
A Republican sweep would likely result in preservation of the current tax rate structure,” said Marc Gerson, chair of the tax practice group at Miller & Chevalier, Washington D.C. “Divided government would provide the least certainty,” he added, “but keep in mind that without any action, the 2017 individual and estate tax structures will expire.”
One of the biggest potentiial impacts could be on high-net-worth estates. This year under the TCJA, the federal gift and estate unified tax exemption is $12.92 million per person. On Jan. 1, 2026, the exemption could revert to the pre-TCJA exemption of around half that or less.
“By far the biggest recommendation is do estate planning now,” said Sarah Allen-Anthony, managing partner of the global private client services group at Crowe in South Bend, Ind. “Waiting to see who wins and whether the exemption is raised, lowered or the estate tax is repealed is not advisable.
“It’s also a good time to re-visit current estate planning strategies due to increasing interest rates,” Allen-Anthony said.
A spousal lifetime access trust (SLAT) can be an effective tool in navigating the sunset of TJCA, Goldberg said. Other tools include charitable remainder trusts, grantor trusts and gift planning.
“Individuals may wish to consider partial Roth conversions, accelerate income and realize capital gains while it’s advantageous to do so,” Goldberg said. “After the standard deduction peaks in 2025 and is reduced by half in 2026, itemizing will become much more appealing for many. Think about bunching charitable contributions or other deductions.”
“Some tax proposals have a higher chance of passing than others” Bertles said.