Not All Sunsets Are Beautiful
Good to Know
Income taxes and transfer taxes will rise—in some cases painfully—after December 31, 2025. Transfer taxes include gift, estate, and generation-skipping taxes. Income tax rates will increase and transfer taxes may rise as taxpayer friendly provisions of the Tax Cuts and Jobs Act (TCJA) expire (sunset) for years beginning on or after January 1, 2026. We’ll look at a select few of the expiring provisions in this article, beginning with income tax.
Expiring Income Tax Provisions
The sunset of TCJA could cost your clients enough in additional federal income taxes to pay for a family of four to vacation on a Caribbean Island for a week.
For example, income tax rates will increase by as much as 4% for taxpayers with taxable income of $100,000 to $182,100 in 2026.
Across all of the rate brackets the income tax rate will increase by an average of about 3% but your clients in the taxable income bracket just referenced could lose as much as a luxury vacation would cost for the entire family.
Income tax rates are just one of the benefits of TCJA that will expire, including the loss of:
- One-half of the standard deduction,
- One-half of the child tax credit,
- Reduction in the charitable contribution deduction, and
- 100% of the qualified business income deduction for self-employed taxpayers.
Potential offsets to these losses could include the renewal of the personal exemption deduction, increase in the state and local tax deduction, and broader deductibility of interest paid on second mortgages.
Regrettably, increased income tax is not the only threat looming on the tax horizon.
Expiring Gift, Estate, and Generation Skipping Transfer (GST) Taxes
Your clients can shelter1 up to $14,610,000 from estate and gift taxes in 2024. That same amount is available to shelter2 the GST tax as well. These shelters will be slashed by about 50% for years beginning on or after January 1, 2026, under the TCJA’s sunset provisions. What does that mean to your clients? Clients with net worth over an inflation-adjusted net worth of $5,000,000 could pay gift, estate, or GST taxes at a 40% rate.
Savvy Financial Advisors have a pro-active opportunity to reach out to their clients and help them plan to minimize the financial impact of this unwelcome “sunset.”
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1 The Basic Exclusion Amount ($13,610,000 in 2024) can be used to shelter cumulative lifetime taxable gifts or taxable transfers at death.
2 This GST Exemption Amount can be used to shelter taxable gifts or taxable transfers at death from the GST tax.
