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Get Clients Ready for 2026 Tax Hikes Now

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In the extensive experience of James Bergeron, an attorney and advisor education specialist at Nuveen, the key to effective tax planning is to think ahead.

The end of 2023 is a particularly important moment to look ahead, Bergeron argues, as a number of major tax cuts affecting a wide swath of Americans are set to expire in 2026. He made this case during a recent webinar hosted by Nuveen, titled “Taxes: The calm before the storm?”

The main “storm” in reference is the sunsetting of key provisions of 2017’s Tax Cuts and Jobs Act (TCJA), a signature piece of legislation passed by the Republican-controlled Congress during the early presidency of Donald Trump. Among a sweep of other changes, the law greatly increased the lifetime estate tax exemption for individuals and couples.

However, the expanded estate tax exemption provision, which pushed the lifetime exemption for a married couple to more than $26 million, is set to expire at the end of 2025. At that time, the limit will be cut essentially in half, barring what many see as unlikely congressional action in the interim.

According to Bergeron, this is a major tax planning consideration for advisors and their clients to grapple with in the next two years, but it’s just one of several big-ticket tax considerations on the table now. The pressure is on for financial planners, he says, but so is the opportunity to deliver significant value in this area.

Beyond Estate Taxes

As Bergeron emphasized, various TCJA provisions are on track to expire at the end of 2025 — not just the historically generous estate tax exemption.

Also included in the expiring provisions are those that lowered individual income tax rates and those that expanded some tax brackets, Bergeron warned. So are key policies that increased the alternative minimum tax (AMT) exemption and certain exemption phase-out levels.

Other important provisions that are set to expire are the near-doubling of the standard deduction and the significant boost to the transfer tax exemption amount.

As a result of these changes, Bergeron said, tax liabilities for the vast majority of American taxpayers will likely rise as of Jan. 1, 2026. This fact, in turn, could have a significant impact on the established tax-mitigation strategies advisors and their clients have put in place since 2017.

Debt Ceiling Worries

As Bergeron pointed out, 2023 brought a two-year suspension of the debt ceiling, which caps the total amount of money the government is allowed to borrow. As such, legislators have until Jan. 1, 2025, to decide whether (and by how much) to raise the limit on federal borrowing.

“As that deadline approaches and the two main political parties look to negotiate a solution to the growing debt, we will likely hear calls for cuts in spending as well as for increases in revenues — i.e. taxes,” Bergeron pointed out.

While it is not really possible to know today where tax rates could move in the future, Bergeron said there is a general consensus that rates are relatively low from a historical perspective.

When one factors in considerations about the future funding needs of programs like Social Security and Medicare, there is even more reason to think that rates are likelier to be higher than lower in the mid- to long-term future.

The specific potential impact of higher rates will vary by client, Bergeron said, but it makes sense to consider whether there are strategies that can be implemented today while rates are, historically speaking, low.

2024 Election Impact

In addition to the presidential race, all 435 seats in the House of Representatives, along with 34 of the 100 seats in the Senate, will be on the ballot in November 2024, Bergeron pointed out.

He warned that the outcomes of these elections will affect tax priorities and policies for 2025 and beyond — the totality of which is difficult to predict.

For example, Bergeron explained, although the Biden administration has already proposed an increase in capital gains tax rates, the future makeup of the House and Senate will determine whether there is enough support to enact such a change.

In addition, he warned, further changes to estate tax levels and/or exemptions may be on the table.

Tax Planning Actions to Consider

As Bergeron emphasized, there is clearly significant uncertainty about the future, but advisors and clients still have the opportunity to take advantage of two year-end planning seasons of “relative stability” in tax rates and rules.

The best approach is to take full advantage of what is known now, Bergeron said, while also accounting for what might change. This can and should be an ongoing part of client discussions and planning sessions over the coming two years, Bergeron said, but there are also some firm-level actions advisors can take to better position themselves and their clients for success.

For example, an advisor could consider segmenting their book of business and sorting out lists of clients according to a few key parameters, such as levels of ordinary income, anticipated estate and trust income, and interest in philanthropic gifting.

Advisors may want to specifically consider the needs of clients who are expecting significant unrealized capital gains or losses, clients anticipating a change in state domicile, and clients expecting a change in marital or job status.

Another key, Bergeron said, is to make a plan to reach out to both clients and prospects to offer insight and guidance that is relevant to their circumstances as policies change. Offering visibility into the future is particularly beneficial, for example by helping clients estimate their anticipated adjusted gross income and tax liabilities for the next few years.

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