As the calendar inches toward 2025, the financial landscape is becoming increasingly complex for high-net-worth individuals and their advisors. This period is marked by uncertainty surrounding the Tax Cuts and Jobs Act of 2017 (TCJA). Initially heralded as a breakthrough, the TCJA introduced significant temporary tax changes that are set to expire at the end of 2025 unless Congress intervenes. The implications of these impending changes are substantial, prompting advisors to formulate strategic tax plans for their clients now, rather than waiting for potentially unfavorable conditions to arise.
The expiration of TCJA provisions raises questions about the future of individual tax rates, standard deductions, and various credits. The legislation introduced lower federal income tax brackets, enhanced standard deductions, and a more favorable child tax credit, among other benefits. However, these advantages are fleeting. As they approach sunset, their possible expiration creates a significant tax cliff—an abrupt change that could dramatically increase the tax burden for many. Given the current political climate, no one can predict which provisions might receive an extension, leading to anxiety among taxpayers and financial planners alike.
Financial advisors are taking immediate steps to prepare their clients for this uncertainty. By anticipating which tax advantages could dissipate, they aim to influence their clients’ financial strategies before those changes occur. Some advisors, like Peter Traphagen Jr. from Traphagen Financial Group, are particularly focused on estate and gift taxes, which are poised to lose their generous exemptions post-2025.
This is a pivotal moment for wealthy individuals contemplating estate transfers. Under TCJA, the lifetime estate and gift exemption stands at a staggering $13.61 million for individuals and $27.22 million for couples, a figure that is set to halve if no action is taken. This means that individuals planning to pass on wealth need to take action sooner rather than later to capitalize on these higher exemptions. Various strategies, such as funding education savings plans, establishing trusts, or making direct payments to medical providers, can help mitigate the impact of these looming changes.
Investment advisors, such as Shea Abernethy, emphasize the importance of proactive measures to transfer wealth while still maximizing the potential for estate growth. Their strategies encourage individuals to remove assets from their estates to protect gains from future taxation. This includes a thorough assessment of one’s wealth, personal goals, and family dynamics, tailoring each approach to individual circumstances.
Beyond estate considerations, shifts in future tax brackets are necessitating a reconsideration of income strategies. Financial professionals like Samantha Pahlow are advising clients to consider tax-efficient ways to manage their income now, as many anticipate that federal income tax rates will revert to pre-TCJA levels. By accelerating income into lower tax brackets and taking advantage of deductions while they last, clients can better shield themselves from the impending tax increase.
For instance, the strategic conversion of traditional retirement accounts to Roth IRAs not only reduces taxable income but also positions clients to avoid higher tax brackets in the future. Pass-through entities will also feel the impact of the possible sunsetting of the 20% Qualified Business Income deduction, inspiring business owners to reevaluate their income recognition practices.
In addition to planning for changes to tax brackets, advisors highlight the potential reduction in the standard deduction post-2025. Currently, the standard deduction for individual taxpayers is $14,600 and $29,200 for married couples filing jointly. With the potential to be cut in half, many taxpayers may find themselves itemizing deductions such as charitable contributions, medical expenses, and state and local taxes again.
Given this forecast, advisors recommend strategies such as deferring deductions to earlier periods to maximize the benefits available under the current law. This proactive approach is vital in crafting comprehensive tax strategies in light of potential changes.
As 2025 draws closer, the urgency for clients to adapt their financial strategies is palpable. With the TCJA’s far-reaching implications on both estate and personal tax planning, it’s imperative for financial advisors to equip their clients with actionable strategies to navigate these turbulent waters. By acting decisively, both clients and their advisors can mitigate the impact of this anticipated tax cliff and safeguard their financial future.