In his classic song, ‘On the Road Again,’ Willie Nelson sings about how he “can’t wait to get on the road again” to go places he’s never been and see things he may never see again. As we approach the November 2024 presidential election, we once again find ourselves on a familiar road: the road to tax reform.
This road began back in 2017 when former President Trump enacted what is known as the Tax Cuts and Jobs Act (TCJA), some of the provisions of which are set to expire on December 31, 2025. This expiration, or “sunset” as it is commonly known, would coincide with the first year of the next presidential administration and congressional session, so the upcoming 2024 election is likely to shape the future of the TCJA and any coinciding tax reform.
While there have been numerous proposals by party leaders on both sides on various tax topics, this article focuses on what we believe are the top five areas for high-net-worth individuals that may be impacted by the upcoming election and ensuing tax reform discussions.
What’s at stake
The TCJA doubled the gift and estate tax exemption when enacted, and it currently sits at $13.61 million per person or $27.22 million for a married couple in 2024. If the TCJA sunsets without further legislative action, the exemption amount will be reduced by approximately half.
What's at stake
The TCJA reduced ordinary income tax rates for individuals at the highest tax bracket, and effectively raised the income threshold at which the highest capital gains tax rate applies. The Democrats and Republicans have vastly different proposals for tax rates.
What's at stake
The TCJA modified certain provisions of the Tax Code which permit individual taxpayers to take certain deductions, including doubling the “standard deduction” (for taxpayers that do not itemize deductions), capping state and local tax deductions, capping deductible interest on mortgages, and eliminating the deduction for interest paid on home equity loans. If the TCJA sunsets, the standard deduction will be cut in half and other modifications to deduction rules will change.
What’s at stake
The TCJA introduced a new deduction for pass-through business entities which is equal to 20% of “qualified business income,” known as the section 199A deduction. If the TCJA sunsets, the 199A deduction will expire and pass-through business income will generally be taxed according to ordinary individual income tax rates without a deduction for qualified business income.
What’s at stake
As part of the Inflation Reduction Act, the IRS received significant additional funding. With one of the largest increases in the IRS’ budget in many years, the IRS has laid out its plan to put the additional funds to work, including increasing audit rates among wealthy individual taxpayers by more than 50%. The IRS has added additional workforce committed to enforcement and administration of tax laws (including issuance of guidance and interpretation of the tax laws).
Although we have been down this road before, many uncertainties lie ahead. Not just who will win the presidency and control Congress in the upcoming election, but how the composition of the government, whether Democratic, Republican, or divided, will influence negotiations around budgets, spending, deficits, and by extension, tax reform. Given that and the potential for tax law changes in the coming years, whether due to the expiration of the TCJA or other legislation proposed by either party, the time to plan and to act is sooner rather than later.
As Willie Nelson sings, these are places and things we may not see again, so best not to delay in getting on the road again.
Please see important disclosures at the end of the article.
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Source for tax data: www.irs.gov, 2023 – 2024.
This material is provided for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Note that tax, estate planning, investing, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful.
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