The word sunset has such pleasant connotations, since everyone loves a good sunset. When this word is applied to the expiration of the Tax Cuts & and Jobs Act of 2017, it might be an attempt to disguise the impending darkness that comes with the expiration of the personal tax cuts of 2017 at the end of next year, 2025. However, with the potential return of higher tax rates comes some planning opportunities that can be explored now, a good fifteen months before we arrive in 2026.
As Forbes Magazine points out, “many provisions are set to expire (or sunset) at the end of 2025” and “the most striking anticipated increase (9%) would hit taxpayers in the middle brackets.” Not only do rates increase but the tax brackets shift to include more income in higher brackets. Partially mitigating these rate increases is the fact that itemizing deductions will be back. The state and local tax limitation of $10,000 will be gone and some restrictions on mortgage interest deductibility will be modified. Tax prep charges and investment fees will again be deductible, and 20% of all taxpayers who stopped itemizing deductions after 2017 may again start saving receipts.
In addition, the marriage penalty will be back, and the unified credit, which affects exemption from Federal estate tax, will be halved. As RBC Wealth Management points out “with a potentially higher tax environment on the horizon, it could be wise to explore ways to take advantage of current lower brackets”. For example, consider accelerating income over which you have some control, or converting some of your IRA to a Roth IRA, paying tax now so you won’t have to at all later. Alternatively, deferring deductions into 2026 and beyond might be prudent. As an example, if you are considering a charitable trust, waiting until 2026 makes good sense. Or bunching deductions in later years for maximum deductibility at higher rates could be explored.
The 2017 Act made corporate tax rate reduction permanent, but the personal cuts were temporary to reduce the overall expense of the Tax Act. Now these tax rate increases are on the horizon and it’s not at all pretty like a sunset. “Congress can still act to change the laws in advance, but there’s little expectation that will occur,” according to a Forbes magazine article. We invite you to talk to our Baldwin tax professionals to evaluate your alternatives in advance of these likely changes.
Sources:
https://www.forbes.com/sites/kristinmckenna/2024/06/25/major-tax-changes-are-coming-in-2026-are-you-ready/
Major tax changes are coming in 2016. Are you ready? By Kristin McKenna Forbes Magazine
https://www.taxpolicycenter.org/briefing-book/key-elements-us-tax-system
Tax Policy Center, Urban Institute and Brookings Institution, Briefing Book, “Key Elements of the U.S. Tax System” 2018
https://www.rbcwealthmanagement.com/en-us/insights/preparing-for-the-great-sunset-what-you-need-to-know-if-tax-code-provisions-expire
RBC Wealth Mmgt, Angie O’Leary, Bill Ringham “The great tax sunset is coming. Are you prepared?”
https://www.pnc.com/insights/wealth-management/markets-economy/2026-tax-law-changes-prepare-for-TCJA-provisions-to-sunset.html#:~:text=The%20TCJA%20set%20the%20personal,amounts%20allowed%20by%20the%20TCJA.
“2026 Tax Law Changes: Prepare for TCJA Provisions to Sunset” PNC Bank 2/5/24
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Richard K. May
Managing Director (RKM), Business Development
Richard founded his financial advisory firm in 1980, which was one of the early fee-only advisors in the industry. He received his B.A. from Princeton University and his M.B.A. from the University of Michigan.
In 2007, Richard founded the West Chester LLC, a private equity company that promoted and funded business start-ups and public projects in the Borough of West Chester. In 2011, he co-founded the Uptown! Entertainment Alliance and the Uptown! Bravo Theatre, LLC. Together they purchased and rehabilitated the National Guard Armory, and then opened the Uptown! Knauer Performing Arts Center in 2016. Richard also serves on the board of Chester County OIC and is currently working on starting a live performance venue in Kennett Square, PA for 2025.