A View From The Bar

Our newest section features our newest team member, Wealth Advisor & Attorney, Nikhil (Nik) Agharkar.

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3 Things To Do Now In Case the TCJA Sunsets

With the recent major developments in US politics, the view from the bar is that it’s probably prudent to start preparing for the possible expiration of the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA of 2017 temporarily doubled the federal estate tax exemption, reduced individual income tax rates, and introduced a higher standard deduction, all of which are set to revert to pre-2018 levels after 2025. These changes could significantly impact estate planning and tax liabilities for high-net-worth individuals. Though the laws are not due to change until the end of 2025, as we’ve seen, anything could happen. So now is as good a time as any to roll up our sleeves and dive into some savvy prep work.

Here are three steps to make sure you’re ready for anything:

1. Review and Adjust Your Estate Plan

   Why: The TCJA increased the federal estate tax exemption to $27.22 million per married couple ($13.69 million per person), but it's set to shrink back to pre-2018 levels after 2025, which some are saying will be around $14 million per married couple ($7 million per person) accounting for inflation. That’s a huge decrease in the available exemption, particularly considering the skyrocketing values we see in housing. Translation: More estates could be on the hook for federal estate taxes.

   Action Items:

   1. Evaluate Current Estate Plans: Make sure your estate planning documents aren’t stuck in a pre-2018 time warp.

   2. Use Gifting Strategies: Think of it as early holiday shopping—make substantial gifts now before the exemption decreases.

   3. Trust Revisions: If you have a trust, it may be time for a makeover to ensure it’s optimized for tax efficiency under the new rules.

   
   

2. Maximize Use of Tax-Advantaged Accounts

   Why: Changes in the tax code can throw a wrench into your long-term growth and withdrawal strategies for retirement and investment accounts. When a cloud of uncertainty hangs over Capitol Hill, it's best to seek a safe harbor before the storm. Your retirement accounts can be a great option!

   Action Items:

   1. Contribute to Retirement Accounts: Stuff your IRAs and 401(k)s to the applicable yearly limits over the next 18 months.

   2. Roth Conversions: Consider converting traditional IRAs to Roth IRAs—pay the tax now and enjoy tax-free withdrawals later. There are even ways to set up backdoor or mega backdoor Roth conversions that could be taken advantage of now that might help with any unforeseen changes to the tax code.

   3. Health Savings Accounts (HSAs): Fully fund HSAs to take advantage of their triple tax whammy: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. But be careful with this one because you need to have a high-deductible health care plan that may not work for your family.

   
   

3. Review Capital Gains Strategies

   Why: The TCJA retained the favorable capital gains tax rates but changed the income thresholds for these rates, making them slightly more advantageous for some taxpayers. By indexing the thresholds for inflation, the TCJA allowed more individuals to benefit from the lower rates over time. This preservation and adjustment of capital gains tax brackets helped investors maintain more of their investment profits. But these laws are set to expire at the end of 2025, and depending on the way the election goes, these laws may very well turn into a pumpkin on December 31, 2025.

   Action Steps:

   1. Harvest Gains: Cash in on your capital gains while the getting’s good. And while you’re at it, see if you can’t harvest some losses to reduce the overall impact on your bottom line.

   2. Rebalance Portfolios: Tweak your portfolio to prep for potential changes in capital gains taxes—maybe sprinkle in some more tax-efficient assets.

Bonus Action Item: Consult with Financial Advisors

Before you take any action, talk to your team! Meet up with your financial advisors, tax planners, and estate attorneys to craft a game plan tailored to you. Make sure they run the numbers with your advisors to spot the best strategies under different tax scenarios. Keep an ear to the ground for legislative updates so you can tweak your plans as needed.

The sunset of the 2017 tax cuts could flip the tax script. By refreshing your financial and estate plans, maxing out tax-advantaged accounts, rethinking capital gains strategies, timing income and deductions smartly, and getting expert advice, you’ll be better equipped to handle whatever comes your way.