As we move towards the pivotal year of 2025, financial advisors are preparing for a significant shift in the taxation landscape that could affect millions of Americans. The anticipated expiration of notable provisions from the Tax Cuts and Jobs Act of 2017 (TCJA), implemented during Donald Trump’s presidency, has created immediate concern among top-ranked financial professionals. With trillions of dollars in tax breaks set to vanish unless Congress intervenes, advisors are actively formulating strategies to guide their clients through this upcoming tax cliff.
The TCJA introduced several temporary tax adjustments aimed at buoying the economy, primarily through individual tax relief. Noteworthy among these changes are the reduction of federal income tax rates, introduction of larger standard deductions, enhancements to the child tax credit, a 20% deduction for pass-through corporations, as well as an increase in the estate and gift tax exemption. The expiration timeline set for these provisions raises critical questions about which, if any, might see an extension from Congress, especially with the political landscape remaining uncertain.
In light of these looming changes, advisors are not waiting for legislative action. Some have begun proactive tax planning to identify potential impacts on clients’ financial situations. This preparation becomes especially pertinent for high-net-worth clients affected by estate and gift taxes. In 2024, for example, the exemption for estate and gift taxes stands at an impressive $13.61 million for individuals and $27.22 million for couples. However, should these exemptions expire as scheduled post-2025, they would be significantly halved, potentially leading to higher tax liabilities for many.
In anticipation of the impending tax changes, estate planning has taken center stage for many financial advisors. The strategies employed can vary enormously depending on the wealth of the families involved and their unique goals. Certified financial planner Peter Traphagen Jr. notes the importance of using the current exemptions strategically. Wealthy individuals looking to minimize their taxable estate are implementing methods such as creating trusts, gifting to beneficiaries, or making direct payments for educational and medical expenses.
Investment advisor Shea Abernethy highlights that a crucial component of effective estate planning is the notion that assets transferred out of one’s estate are no longer subject to estate tax or future appreciation, preserving wealth for the next generation. Techniques such as 529 college savings plans or similar vehicles can also play a significant role in asset management, enabling families to leverage tax-exempt growth.
Anticipating Higher Income Tax Rates
Another aspect of tax planning involves the expected increase in federal income tax brackets, which could revert to pre-TCJA levels after 2025, raising rates across the board. Samantha Pahlow, wealth management chair at Ferguson Wellman Capital Management, is strategizing to accelerate income recognition in lower tax brackets while they still exist, a move that could significantly impact her clients’ financial situations.
Immediate actions may include converting funds into Roth IRAs or hastening recognition of business income to capitalize on the current advantageous tax structure. For pass-through entities, the opportunity to utilize the 20% qualified business income deduction provides another strategy to optimize tax rates before possible changes.
Finally, advisors are preparing for possible changes to standard and itemized deductions after 2025. The TCJA increased the standard deduction significantly, with figures for 2024 set at $14,600 for individuals and $29,200 for married couples. However, the anticipated reduction in the standard deduction could result in many taxpayers transitioning back to itemizing their deductions, which would affect various tax breaks such as charitable giving, medical expenses, and local taxes.
In this transitional phase, deferring deductions could emerge as a valuable strategy. For example, postponing charitable donations to 2026, when itemization may be more beneficial, could maximize the tax advantage. By planning strategically around these tax implications, financial advisors are equipping their clients to navigate the complexities of the forthcoming tax landscape.
As the clock ticks down to 2025, financial advisors are stepping up to address the uncertainties posed by the expiration of crucial tax benefits. Through thoughtful estate planning, income acceleration strategies, and adaptive deduction approaches, they aim to empower their clients to mitigate potential tax burdens effectively. The evolving financial ecosystem underscores the importance of proactive planning in securing long-term financial health.