Image Source: Unsplash
 

Officially it’s called the Tax Cuts and Jobs Act (TCJA). More commonly it’s known as the Trump tax cuts. No matter what you call it, the provisions of the Act created in 2017 are set to expire on December 31, 2025.

The TCJA made massive changes for businesses and individuals.

• A tax cut on corporate profits
• A restructuring of tax brackets that lowered individual tax rates
• Almost doubling the standard deduction
• Changed income thresholds for capital gains taxes
• Doubled the lifetime gift and estate tax exemption from $5.5 million to $11.2 million.

It’s always possible Congress may do something to extend the tax cuts. If not, all these non-permanent changes will revert to pre-TCJA levels on January 1, 2026. Here are some things to consider before the TCJA window closes.
 

Estate and gift tax considerations

In 2023, individuals can transfer up to $12.92 million, and a married couple can transfer up to $25.84 million (either during their life or as part of their estate) without triggering federal gift taxes or estate taxes. If no legislative action is taken, the amount will be cut in half when TCJA sunsets. If your taxable estate exceeds the current exemption amount, some estate planning strategies that may prove beneficial include:
 

Annual cash gifts

In 2023, the gifting limit is $17,000 a year for individuals and $34,000 for married couples filing jointly. You can give that amount to as many people as you want. The annual gifts aren’t subject to taxes and don’t count against your lifetime exemption. If you have a large extended family, this is an easy way to transfer considerable wealth to the next generation.
 

529 plan accelerated gifts

Current tax law allows you to give five years of gifts to 529 educational accounts in a single year. That means individuals can gift up to $85,000 in a single year ($17,000 x 5) or $170,000 for a married couple, to each child, grandchild, etc. Once the money is in the 529 account, the money grows tax-free, and then can be withdrawn tax-free for qualified education expenses AND it reduces your taxable estate.
 

Dynasty trusts

If you haven’t yet used a major chunk of your lifetime gift and estate tax exemption, you may want to consider establishing a dynasty trust. It provides for multiple future generations for as long as state law permits the trust to exist. Any future trust asset income and appreciation can then be transferred between subsequent generations without estate or gift taxes. And by funding the trust with a life insurance policy, you can further increase the trust’s value.
 

Irrevocable life insurance trusts (ILITs)

A survivorship policy owned by an ILIT is one of the most common ways to transfer wealth outside of your taxable estate. The death benefit paid to your beneficiaries is considered tax-free.
 

Income and capital gains tax considerations

When the Trump tax cuts expire, income tax brackets will revert to pre-TCJA levels. For example, the current top tax bracket of 37% will increase to 39.6%. With that in mind, you may want to look for opportunities to accelerate income over the next couple of years to take advantage of the current lower brackets.
 

Convert a traditional IRA to a Roth IRA

Required Minimum Distributions from traditional IRAs begin at age 72. They’re taxed as ordinary income and if you take money out before you’re 59 ½, you’ll pay a 10% penalty on top of the taxes.

Roth IRAs have no RMDs, and all future growth and distributions are tax-free once you reach age 59 ½ and have had the Roth for at least five years. By converting your traditional IRA to a Roth before 2026, you pay the income tax liability upfront (potentially at a lower tax rate) rather than at the time of distribution.
 

Tax Loss Harvesting

If you think there will be higher capital gains rates in the future, consider selling some of your highly appreciated securities before TCJA expires. Even though selling those securities will produce a taxable gain, the taxes may be less now than after TCJA goes away. And according to the tax loss Wash Sale Rule you can buy back the same investment after 30 days, deduct the loss and have a stepped-up cost basis. Any unused capital losses can be carried forward to be used in future years.
 

Legislation

The TCJA Permanency Act (H.R. 976) was introduced in the U.S. House of Representatives in February 2023. It would make permanent the provisions of the Tax Cuts and Jobs Act of 2017 avoiding the 2025 expiration. If not passed by Congress, 23 provisions of TCJA will expire.

More By This Author: