Will the Sun Never Set on the TCJA?

As we said in a Tax Alert earlier this year, “It is still far from clear, particularly with a general election coming this November, what if anything Congress might do about these sunset provisions.” Well, that general election is now in the rearview mirror. The Republican Party came away with a trifecta, winning not only the Presidency, but majorities in both Houses of Congress. So, with the Trump Tax Cuts and Jobs Act (TCJA) of 2017 scheduled to sunset at the end of next year, what to think now?

The first question, obviously, is will the expiration actually occur? While by no means a consensus opinion, I think the smart money is on the sunset being extended for a number of years. (There are Congressional budgetary reasons for extending rather than making the 2017 changes permanent.) That being the case what to do from here?

Estate & Gift Tax

• • The estate, gift & generation-skipping tax (GST) exemptions were scheduled to return to 2016 levels indexed for inflation. That would have been an approximately 50% reduction from the current level, now at almost $14 million. Mindful of that, the conventional wisdom has been to consider gifting assets, especially those with appreciation potential, out of your estate, while the exemptions are still high. There are various techniques for doing this, but they usually consist of gifts to children, or trusts for their benefit.

So, should taxpayers continue to explore this strategy? We think the answer is yes. If it made sense to do so in the first place, then it still does, even without the threat of drastically reduced exemption levels. And the good news is that there should not be such a fraught dash to the estate planning attorney’s doorstep!

Income Tax

• • With an extension of TCJA, individual tax rates would not increase. This takes the pressure off making any big moves, e.g. converting a Roth IRA to a conventional IRA. Of course, this does not mean that there still aren’t good long-term income tax avoidance strategies, just not urgent short-term ones.

• • The SALT deduction limitation, capping state and local taxes, including real estate taxes, at $10,000 would stay. It was previously uncapped. Having said that, there is a movement afoot to uncap it as a separate measure. Afterall this would be a tax reduction. Whether it would be fully uncapped, or the current limit increased is TBD. The latter is the most likely outcome. For personal income tax planning the timing of any change here is worth keeping an eye on.

• • The alternative minimum tax (alt min) was somewhat defanged by the TCJA. (When’s the last time you thought about it?) Notwithstanding, if it stays that way and the SALT limitations are loosened, it could be problematic. This is because SALT deductions reduce ordinary income tax, but not the alt min tax². As such, this could result in the alt min being higher than the regular income tax, and therefore a payable tax. While there is very little one can do about this, it is nonetheless important to know, and underscores the need to “run the numbers” when doing personal tax planning.

• • There, of course, is more. If we are right, the Qualified Business Income (QBI) 20% deduction pass through, Bonus Depreciation, Qualified Opportunity Zone (OZ) investments, etc. will continue and now need not be rushed into.

So, it looks like we are out of panic mode in terms of tax planning for individuals. This is especially true in the case of “exemption loss fear” estate planning. Yet, the Trump administration has still not begun…. things could change…..stay tuned!

 

1. Here Comes the Sun(set)…It Feels Like Years Since We’ve Been Here, May 2024.

2. Further complicate this with the awareness that the Pease limitation on allowable itemized deductions would stay repealed (reduces taxable income) as well as the deductibility of miscellaneous itemized deductions (increases taxable income).