What’s an Uncertain Client to Do?

What’s an Uncertain Client to Do?

Now that the election is over, the 2024 year-end tax planning season is upon us. While the 2024 tax rules are set, a looming tax fight over the expiring provisions of the Tax Cuts and Jobs Act could reshape the tax landscape for 2026 and beyond.

Uncertainty about the future can play a role in your clients’ 2024 tax planning as well as their planning for future years. The Republican Party, which will hold the White House, the Senate and likely the House, seems poised to renew the tax changes President-elect Donald Trump championed in his first term and enacted in 2017. But it’s far from certain that all provisions will remain intact.

2024 Tax Planning Issues

Your client’s basic year-end tax planning issues for 2024 will not change due to the results of the election. As we approach year-end, you will want to review your client’s likely tax situation with them.

Review these items with your client, as you would in any other year:

  • Income
  • Deductions  
  • Retirement plan contributions
  • Business profit/loss (if self-employed)
  • Taxes paid
  • Any year-end bonus or stock compensation due

The Election and the Unknown

The election of Donald Trump to a second term has created some planning uncertainty for many taxpayers. Will the sunsetting of certain provisions of the 2017 tax overhaul still proceed as planned in the original legislation? The president-elect has indicated that he will try to extend some or all of his signature tax law.

Here are how several key provisions could affect your clients:

  • The lifetime gift and estate tax exemption could return to 2017 levels, adjusted for inflation. The exemption is $13.61 million per person in 2024, rising to $13.99 million in 2025. The expiration of the tax overhaul would bring the 2026 exemption to approximately $7 million. This can be a major issue for high-net-worth clients. 
  • Individual income tax brackets are scheduled to increase at the end of 2025 to 2017 levels, adjusted for inflation. This will result in higher federal taxes for most of your clients, all else being equal. 
  • Standard deductions are scheduled to return to inflation-adjusted 2017 levels at the end of 2025. The 2025 standard deduction of $15,000, or $30,000 for a married couple filing jointly, would drop to approximately $6,350 or $12,700 for 2026.
  • The “SALT cap”  that limits the state and local tax deduction on federal tax returns to $10,000 is also scheduled to sunset. The combination of the repeal of this provision and the lowering of the standard deduction would mean that more of your clients may choose to itemize deductions in the future. 

How should clients view this in terms of moves they might have made in anticipation of the sunsetting of TCJA provisions?

Accelerating Income Into 2024 and 2025

Some of your clients might be planning to accelerate income into 2024 and 2025 in order to take advantage of the currently lower tax brackets. This could be anything from doing a Roth conversion to taking traditional retirement account distributions in that “gap” period between retirement and claiming Social Security. This might also include accelerating compensation into 2024 or 2025, including exercising stock options.

While it may look like the lower personal income tax brackets may stick around past 2025, we don’t know this for sure. Moreover, if accelerating income into 2024 or 2025 made sense before the election, it probably still does. A driver in this decision should be your client’s projected income and their likely tax situation based on the overall tax picture this year and next.

If it makes sense to accelerate income into this year on its own merits, then what happens in the future as far as tax rule changes probably doesn’t matter. For example, if doing a Roth conversion made sense prior to the election, it is probably still a good idea for your client to do. Likewise with taking retirement income from a traditional retirement account this year or exercising equity compensation from their employer this year versus in the future.

If your clients’ income is potentially a bit lower than in other years, accelerating income into 2024 can make sense for their tax and financial planning situation.

Bunching Deductions

With the larger standard deduction and the SALT cap, many taxpayers have been bunching deductions into a single year in order to be able to itemize for that year. Again, if this made sense for 2024 and/or 2025 prior to the election based on your client’s situation, then it probably still does. Much will depend on your client’s income levels for 2024 and 2025.

With the performance of the stock market in 2024, your client may have appreciated shares that they want to donate either directly to a charity or to a donor-advised fund. This strategy can also be incorporated into rebalancing before year-end.

Donations of appreciated stock offer the opportunity for itemized deductions as well as the ability to not pay capital gains. If this is a good option for your client this year as part of a strategy to bunch deductions, it probably makes sense to proceed regardless of what might happen with the current tax rules in the future.

Estate Tax Planning  

One of the most publicized provisions that is set to sunset after 2025 is the expanded lifetime gift and estate tax exemption. For 2024, the exemption is $13.61 million and $27.22 million for a couple. For 2025, these limits increase to $13.99 million and $27.98 million, respectively.

The 2026 levels are expected to be around $7 million and $14 million if the expansion expires. However, many Washington observers say it is highly likely the expansion will be renewed.

For clients with a net worth over the projected 2026 levels, much has been written about gifting assets, establishing appropriate trusts and other estate planning ideas. These strategies to reduce their taxable estate can make sense for 2024 and 2025 regardless of what happens with the estate tax exemption in the future. Staying focused on your client’s objectives in terms of leaving the appropriate assets to the appropriate beneficiaries is far more important than predicting future estate tax rules.

Conclusion

An election, especially one that precedes a major tax fight, can add a cloud of uncertainty to tax and related planning. Certainly you will want to keep your eyes on developments in the tax rules that could affect your clients.

However, you cannot let the potential for change paralyze your tax and financial planning work with clients. If there are moves that make sense under the current rules based on your client’s situation for 2024 and 2025, it probably makes sense to move forward.

This isn’t to say that you should discount potential changes under the new Congress and administration. There may be situations where it pays to wait and see. This is where your clients need your expertise and sound judgment on their behalf.

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