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Financial Planning > Tax Planning > Tax Deductions

These Tax Cuts Are Sunsetting in 2026. Are Your Clients Ready?

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What You Need to Know

  • A number of estate and income tax provisions of the Tax Cuts and Jobs Act are set to expire after 2025.
  • The drop in the lifetime gift and estate tax deduction is very significant for higher net worth clients.
  • More clients may start itemizing deductions again as the standard deduction drops.

The sweeping tax overhaul enacted in 2017, known as the Tax Cuts and Jobs Act (TCJA), provided a number of income and estate tax reductions and changes. Many of these changes were set to expire, or sunset at, the end of 2025. It’s important that you incorporate these changes into your planning for clients who will be affected.

Here is a look at some of the tax cuts and other changes that will be sunsetting. 

Estate Taxes

Perhaps the most notable tax break that will be sunsetting after 2025 is the lifetime estate and gift tax exemption. Before 2018, the exemption was $5 million per person or $10 million for a married couple. For 2023, these limits are $12.92 and $25.84 million, respectively. For 2024, the limits will be $13.61 million and $27.22 million for a couple combined.

The annual gift tax exclusion has also risen as a result of this legislation; it is $17,000 for 2023 and will rise to $18,000 in 2024. It is not clear what the annual exclusion will be after 2025. 

As things currently stand, the estate tax exemption will revert back to pre-TCJA levels of $5 million per person after 2026. The level will be adjusted for inflation, so it is expected that it will be around $7 million per person. 

The implications of this sunset will vary among your clients. For those whose estate does not exceed the expected 2026 levels, there will be little or no impact unless their estate grows to exceed the reduced amounts over time. 

For clients whose estate currently exceeds the expected 2026 exemption levels, there are a few options to take advantage of the current higher exemption and/or to reduce the size of their estate to minimize the impact of the lower exemption rates on their heirs in the future. The best course of action for each affected client will depend on their situation. 

One option is to spend down part of their estate. Especially if the client is older, be sure to discuss the fact that it is OK to enjoy their money. Maybe this involves more travel or buying that expensive car they have always wanted. 

Making lifetime gifts allows them to watch their heirs enjoy the money they have been gifted. Whether these gifts are to children, grandchildren or others, these gifts can be rewarding both financially and otherwise for your clients. 

Giving to charity is another way to spend down their estate if appropriate for your client. Outright donations, funding a donor advised fund, or establishing a charitable trust can all be ways to accomplish their goals surrounding charitable giving and estate reduction. 

Income Tax Bracket Projections for 2026

The TCJA reduced the marginal tax brackets for most taxpayers. The top marginal rate for both single and married filers declined to 37% from 39.6% prior to 2018. Marginal rates have declined at most income levels. Here is a comparison of the seven marginal tax brackets that affect most taxpayers.

2023 Projected 2026
10% 10%
12% 15%
22% 25%
24% 28%
32% 33%
35% 35%
37% 39.6%

Roth Conversions

One option to consider before tax rates rise is a Roth IRA conversion. The Roth conversion can help with tax diversification of your client’s retirement accounts, allowing for options when withdrawing funds for retirement income planning. Additionally: 

  • Money in a Roth IRA is not subject to required minimum distributions, which will reduce taxes in retirement for your client.
  • Under Secure 2.0, inherited Roth IRAs are a tax-efficient way to leave an IRA to non-spousal beneficiaries. 

Standard Deduction

One thing to note is that the TCJA has increased the level of the standard deduction, making it harder for many taxpayers to itemize deductions. These higher standard deduction levels will revert back to roughly the pre-TCJA levels, which were $6,350 for single filers and $12,700 for those filing married and joint, both indexed for inflation.

For 2023, the standard deductions are $13,850 for single filers and $27,700 for married joint filers. For 2024, these deductions are $14,600 and $29,200. 

This major cut to the standard deduction and the repeal of the “SALT cap” on deductions for state and local taxes could mean that it will be easier for your clients to itemize deductions such as charitable contributions as well as higher levels for property taxes and state and local income taxes. Depending upon your client’s situation, this could have a major impact on their tax bills beginning in 2026.

Note that it also opens up a number of planning strategies such as bunching deductions or deductible expenses into a single year to maximize the benefits of the standard deduction. 

Mortgage Interest Deduction

Another change of note involves the ability to deduct mortgage interest. The TCJA limited the ability to deduct mortgage interest to the first $750,000 of mortgage debt on loans taken out after 2017. This limit will revert to the pre-2018 limit of $1 million.

For home equity loans, mortgage interest deductions were limited to loans used for home repairs and improvements. This limitation will be lifted after 2025, and borrowers will be allowed to deduct interest on the first $100,000 of home equity debt. 

Capital Gains, Dividends and AMT

The taxes on capital gains and qualified dividends will remain mostly unchanged after the 2025 sunset. The preferential rates on these income items didn’t change with the onset of the TCJA and won’t change after 2025. Likewise with the 3.8% net investment income tax surcharge on gains and dividends for higher income taxpayers. 

One thing that will revert back to pre-TCJA rules is the separation between long-term capital gains tax rates and the rates for qualified dividends. The TCJA combined these rates, but this will be eliminated after 2025. 

The alternative minimum tax (AMT) remained in force after the passage of the TCJA, but the thresholds increased so that fewer taxpayers were impacted by the AMT. These higher thresholds will go away after 2025 and are projected to increase the number of taxpayers impacted by the AMT. If your client is likely to be affected, it’s not too early to do some planning around this. 

The 2024 Wildcard

While there are a number of TCJA provisions that are set to expire after 2025, we have a presidential election coming up in 2024. The whole tax landscape could be affected by the outcome of this election. This includes not only which party takes the White House, but also which party assumes control of the House and the Senate. Stay tuned. 

What to do now? 

Depending upon your client’s situation, including their age, their income and the nature of their assets, you should at least broach the topic of these scheduled tax changes with them in terms of any financial planning changes that might be wise to consider. You will also want to be sure their tax professional, as well as their estate planning professional, is involved as appropriate. 


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