TCJA Sunset: Estate & Gift Tax

More individuals may be subject to estate tax if the estate tax exemption sunsets to the pre-TCJA amounts. The gift, estate, and generation-skipping tax (GST) exclusion amount (exemptions) are currently $13,990,000 per person in 2025. Absent further congressional action, this TCJA provision will sunset, and the exemptions will revert to an estimated $7 million per person, equal to the pre-TCJA exemption amount of $5,490,000 ($11,180,000 for a married couple) increased by inflation through 2026.

The maximum estate tax rate will remain at 40%. If you have an estate valued at $13,000,000 today and died this year, your estate is under the $13,990,000 exemption amount and would not be subject to estate tax. If your estate is valued at $13,000,000 and you died in 2026, after the 2017 temporary exemption expires, you would owe approximately $2.4 million in federal estate tax (based on an estimated $7,000,000 exemption amount). This tax is due nine months from the date of death. Does your estate have the liquidity needed to pay this tax? What strategies should you implement now to reduce or eliminate estate taxes?

Individuals whose estate value is close to the sunset amount should evaluate whether the potential growth of their estate in relation to the reduced exemption will expose them to unexpected estate taxes. Today, you have an opportunity to review your estate and make needed adjustments considering the possible reduction in the exemption.

What about portability?

Portability is the ability for the surviving spouse to use the deceased spouse’s unused estate and gift tax exemption after the deceased spouse’s death. If the deceased spouse died prior to December 31, 2025, and the portability election was made, the decedent’s unused exemption amount will carryover and be added to any exemption the surviving spouse may have. As a result, portability will generally allow married couples to pass a larger amount free of estate or gift tax than a single person can.

What if you use your exemption today and then die when the exemption is reduced?

There was a concern that if you fully utilized the higher exemption prior to 2026 and the exemption is lower at your death, the IRS will “clawback” those gifts and tax them as if they were made when the exemption was lower. This would produce a very unfriendly tax result. Do not worry! The IRS issued final regulations that provide the higher exemption will apply in most instances if you pass away after December 2025, when the exemption is lower.

Strategies to Consider

The strategy snapshots linked below, are in case study format, showing different approaches to hypothetical situations you may encounter. Contact your financial professional and your tax and legal advisor to review your personal situation.

TCJA Sunset: Income Tax

The TCJA also made significant changes to individual income tax provisions. One of the more noteworthy changes was lowering the individual tax rates. The expiration of the lower rates could result in increased income tax. The potential rise in income tax can adversely affect retirees who are required to take required minimum distributions (RMDs) from IRAs or other qualified plans as well as cause taxation on Social Security benefits.

Planning opportunities

Tax diversification may help reduce future income taxation. In which category do your assets fall?

• Currently taxable assets such as mutual funds, stocks, corporate bonds, and interest-bearing bank accounts, such as certificates of deposit and savings accounts.
• Tax-deferred assets such as IRAs, qualified plans, and annuities.
• Tax-free assets such as life insurance, Roth IRAs, and municipal bonds.

With income taxes subject to rise, this may be a great time to look at Roth conversions, which require payment of income taxes at today’s lower rates instead of traditional IRA distributions, which require payment of taxes at distribution at post-TCJA higher rates. Roth IRAs are never taxed again and grow tax free.

TCJA Sunset: Businesses

The TCJA also made some significant changes to corporate and pass-through entity taxation. One of the major business tax changes TCJA made was the reduction of the corporate income tax bracket from a top rate of 35% to a flat 21%. Unlike the estate and gift tax exemption and income tax rate, this change is permanent.

Additionally, the TCJA made changes in how pass-through entities are to be taxed. The new 20% section 199A qualified business income deduction allowed many pass-through entity owners to reduce their business income tax by up to 20%. This change, however, is set to expire after December 2025, resulting in all pass-through income to be taxed at the personal income tax rate of the business owner.

Additional income tax changes of note

• The standard deduction will be reduced by almost half.
• The $10,000 SALT (state and local taxes) deduction cap will be removed.
• The mortgage interest deduction will increase to $1 million and will also include up to $100,000 in home equity debt.
• The alternative minimum tax (AMT) exemption and phase-outs will revert to pre-TCJA levels and apply to more taxpayers.
• The deduction limit for cash contributions to charities will return to 50% of adjusted gross income (AGI).