Perspective :

What advisors need to know about the Tax Cuts & Jobs Act (TCJA) expiry

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We are one year out from the next presidential and congressional elections, and the volume is starting to increase about the scheduled expiration of the 2017 Tax Cuts and Jobs Act (TCJA) after 2025. For financial advisors, the increased rhetoric on the campaign trail may translate into worried clients with questions about what it means for them and what they should be doing.

The short version: The sky is not falling, and beyond keeping an ear to the ground, I believe there isn’t any material action to take immediately. It’s just too early to know what will happen (if anything), plus investors have more than 24 months until any potential change goes into effect.

Still, it’s good for advisors to be able to respond about how changes to the law could affect clients so they can separate fact from fiction.

Looking back: About the TCJA

The Tax Cuts and Jobs Act was passed under budget reconciliation rules in December 2017 when Republicans controlled the White House, Senate and House. Because of the arcane rules with this type of passage, many tax cuts included in the law could not be made permanent for revenue reasons (i.e., a lack thereof), leading many parts of the TCJA to expire after December 31, 2025.

This is not the first time we have had temporary tax laws expire, and past experiences provide some clues about what could happen.

In a very similar situation, on January 1, 2013, tax changes passed by Republicans back in 2003 during the George W. Bush presidency (and extended for two years in 2010 as part of a budget deal) expired. Barack Obama was reelected president in 2012, and the Democratic party controlled the Senate. Republicans still held the House, so neither party could get all they wanted. When it came time to address the expiring tax laws, the result was a compromise in which some tax laws were extended two years with the top tax rate increasing back to 39.6% from 35%, some were revised, and others were allowed to expire.

As we head into 2025, it’s hard to tell how the leadership of the different branches will fall out, but we do know that absent government action, most of the individual components of the TCJA will expire.

Major individual tax items that will change without government action

  1. Reduction of the estate tax threshold by half.
    • The passage of TCJA effectively doubled the threshold for inherited assets that can pass tax-free, going from $5,490,000 to $11,180,000. Today, thanks to the impacts of inflation, that number has grown to $13,610,000 per person. Given the ages of so many baby boomers and the amounts involved, this potential change could impact many.
  1. A change in the income threshold and phaseouts for the Alternative Minimum Tax (AMT).
    • Anyone who has paid the AMT knows it is neither Alternative nor a Minimum. The TCJA materially reduced the number of taxpayers impacted by the AMT.
  1. Increase in tax rates for taxable income by 2 to 4% and a change in taxable thresholds
    • The top marginal tax rate would return to 39.6% from 37%. Note that in 2024, taxpayers with married filing joint filing status do not cross into the top tax rate until taxable income reaches $732,200.
  1. Reduction of the standard deduction by almost half.
    • The TCJA effectively doubled the amount of the standard deduction. This is the amount that taxpayers can deduct from the adjusted gross income (AGI). The increase led to many more taxpayers not claiming certain deductions (home interest expense, state and local taxes, medical expenses, etc.), which are reported on Schedule A. Reducing this by half will cause many more taxpayers to track and claim these expenses.
  1. No change: the TCJA did NOT change or reduce the tax rates for long-term capital gains and qualified dividends.
    • These rates (which financial advisors can influence for their clients) were not lowered. These rates will not change in 2026.

Economic and political issues affecting TCJA conversations today

Besides the makeup of the branches of government, other factors will shape the discussion on the TCJA:

  • High interest rates: If the current conventional wisdom holds that interest rates will remain higher for longer, this will lead to even more interest expense for the U.S. government as it services the national debt. This increased expense crowds out other spending initiatives. As a result, higher interest rates may make some lawmakers reluctant to pass on an opportunity to increase tax revenues by rolling back (or allowing to expire) some parts of the TCJA as they try to balance the budget.
  • Potential for gridlock: Recent political developments show that even with a majority, a party may be unable to pass certain laws. This could add another element of uncertainty to the fate of TCJA, depending on the outcome of the 2024 election.

What to tell your clients

Although the rhetorical volume about the expiration of TCJA is growing, the actual effect will depend on your client’s wealth and situation and what laws actually change – if any. The soonest we can expect any real inkling of how things will go is after election day 2024, and even then, it will take months to hammer out the details, which won’t go into effect until 2026.

How to talk to your clients:

  • It’s likely too soon to make any changes to your investments or financial position.
  • Take note of what the parties say they will do but remember that not all will come true. We’ve seen that it is much easier to campaign on proposals than to actually pass the law.
  • If the past is a guide, this likely will not be a black-and-white, all-or-nothing decision.
  • The more impactful topics to follow are the possible changes to the estate tax, the standard deduction, and top tax rates.
  • If new laws are proposed in 2025, clients may want to adjust estate plans (if they have wealth at a level that would be affected) or accelerate some income into 2025 (if possible) to avoid that income being taxed at a possibly higher rate in 2026.

But those are decisions that you have time to make as things become clearer. Reassure clients that you are on top of developments, remind them to take any promises/predictions with a grain of salt, and encourage them not to get swept up in the hype of possible TCJA expiration in an election year.

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