At Oldfather Financial Services, we understand that many of our clients who are nearing retirement or are already enjoying their retirement years may not be fully aware of the significant tax changes on the horizon. In just a few short years, the tax landscape could shift dramatically, potentially impacting your estate planning and income tax strategies. The 2017 Tax Cuts and Jobs Act (TCJA), which brought about numerous tax benefits, is set to expire at the end of 2025. This "sunset" could lead to a larger estate tax liability and higher income taxes for many Americans, especially those with significant assets.
The Looming Estate and Gift Tax Changes
One of the most pressing concerns for retirees and those close to retirement is the impending change to the estate and gift tax exemptions. Under the TCJA, the estate and gift tax exemption was significantly increased, providing substantial relief for high-net-worth individuals. As of 2024, the exemption is $13.61 million per individual and $27.22 million per couple. However, when the TCJA sunsets in 2026, this exemption will revert to pre-2017 levels, estimated to be around $6.8 million for individuals and $14 million for couples.
For those with estates exceeding these thresholds, this reduction in the exemption could result in a substantial tax burden. It’s crucial to review your estate plan NOW and consider strategies that could help mitigate the impact of these changes. For instance, making significant gifts before the exemption decreases could allow you to transfer more wealth to your heirs without incurring additional taxes.
Impact on Income Taxes
The expiration of the TCJA will also affect income taxes, which could directly impact your retirement income. When the TCJA sunsets, tax brackets will revert to their pre-2017 levels. This means that many retirees could see their tax rates increase. The top individual, estate, and trust income tax bracket, for example, is expected to rise from 37% back to 39.6%.
For retirees, this potential increase in tax rates may warrant a review of your income strategies. One option to consider is accelerating income before 2026. This might involve converting Traditional IRAs to Roth IRAs, thereby locking in the current lower tax rates on the conversion. Roth IRAs grow tax-free, and qualified withdrawals are also tax-free, providing a valuable hedge against future tax increases.
Changes to Deductions
The TCJA brought about significant changes to deductions, which will also be affected by the sunset. Currently, the standard deduction is quite generous—$29,200 for couples filing jointly and $14,600 for single filers in 2024. However, when the TCJA expires, these amounts are likely to decrease.
Additionally, the TCJA capped the state and local tax (SALT) deduction at $10,000 per year, a limit that will remain in place until the sunset. The mortgage interest deduction was also reduced under the TCJA, with the deduction for new mortgages limited to interest on the first $750,000 of home mortgage debt. Both of these provisions will revert to their pre-2017 levels in 2026.
If you itemize your deductions, it’s important to understand how these changes might affect your tax situation. For retirees, the impact of these changes could be significant, especially if you have substantial property taxes or mortgage interest. If you want more information about standard or itemized deduction, wait until next week’s Taxtember article.
Charitable Giving Considerations
Charitable giving is another area that will be impacted by the sunset of the TCJA. Currently, the annual deduction limit for cash contributions to public charities is 60% of your adjusted gross income (AGI). This limit will drop back to 50% in 2026. If you’re considering making significant charitable contributions, you may want to do so before the sunset to maximize your tax benefits.
For retirees who are charitably inclined, making contributions now could reduce your taxable income more effectively than waiting until after the sunset. This is particularly true if your income is likely to decrease in retirement, as the AGI limit becomes more restrictive.
Taking Action Now
While there is always the possibility that new tax legislation could be introduced before 2026, waiting for policy changes could be risky. The window to take advantage of the current favorable tax environment is closing, and it’s essential to act now.
We strongly recommend that you start planning for these changes as soon as possible. Working with a team of advisors, including a financial advisor, estate attorney, and tax advisor, can help you create a comprehensive plan that considers both the current tax provisions and the changes expected in 2026. By preparing early, you can minimize the impact of the sunset and ensure that your financial future remains secure.