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Regardless of whether either presidential candidate’s campaign tax proposals become reality—and history shows that possibility to be iffy—there is one tax issue that the next president and our new Congress must tackle: the expiration at the end of next year of the Tax Cuts and Jobs Act of 2017.
Because the law was passed through reconciliation, it has a sunset provision, which means that unless new legislation is signed, after the end of 2025 key provisions of our federal individual income tax code will revert to what was in place earlier. The top marginal tax rate, for example, could rise from the current 37% to the former 39.6%, and begin at a lower income level. The alternative minimum tax likely would apply to more taxpayers. The standard deduction would decrease, but the limitations on deductions for state and local income and property taxes would go away as would limitations on deductions for mortgage interest. A concern for many high-net-worth clients would be a halving of the estate tax exemption, which started at $10 million for the 2018 tax year and now stands at $13.61 million for individuals having been adjusted for inflation over the years. The exemption would automatically reset to $5 million, or approximately $7 million when adjusted for inflation.
Advisors and their clients clearly have been aware that major tax legislation would be necessary in 2025 and have been carefully reading the political tea leaves in recent years to assess who would likely control Capitol Hill and the White House when it came time to create the nation’s next tax regime or leave the current one in place. This year’s race is so close that making confident predictions about outcomes seems unwise. Instead, since whatever legislation is passed in 2025 won’t take effect until the 2026 tax year, it is probably best to await the final election results before taking significant steps to reposition client portfolios. Here are some suggestions in the meantime:
- Consider a proactive stance now and in 2025. Even if the current tax law is extended or tax cuts are enacted, it makes sense to review clients’ financial and tax plans before year-end 2024 to prepare for possibly higher taxes. For some clients, it may be possible to bring income forward into this year. That would be a kind of storm preparation move if doing so makes sense in the context of a client’s total financial plan because pulling income forward would enable clients to benefit from current tax rates and allow for similar moves in 2025. Next year, it also may make sense to take some capital gains if the political environment in 2025 indicates an increase in the capital gains tax rate is likely.
- Be prepared for lots of talk and brinksmanship. Unless one party makes a clean sweep of both houses of Congress and the White House, any clear action on taxes will probably take time to unfold. Until then, there will be a lot of noise and name-calling coming from both sides of the aisle. However, if we do see a closely divided government after the election, it is important to be clear-eyed on the likely outcome from that from an income tax standpoint. And that is that several, if not most, of the provisions of 2017 will expire and many investors will see their taxes go up. Since Democrats opposed virtually all of the provisions of the 2017 tax law, if they hold just one branch of government, they will be in a strong negotiating position to let sunset take place and revert to the 2017 tax code.
- Tap outside resources. Taking tax implications into consideration in complex portfolios can be daunting. Doing that in an environment of policy uncertainty is even more fraught. Many advisors have found that Envestnet’s tax overlay service for managed accounts can be a very useful tool in helping them better manage the tax-related aspects of client portfolios. By enabling investors to set specific capital gains budgets through a patented risk-optimization engine, the service brings clarity and peace of mind to end investors. It also underscores their advisor’s value by demonstrating real dollar savings through active tax management.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Intended for investment professionals only. Past performance is not indicative of future results.
Neither Envestnet nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
Envestnet is not a law firm and as such, does not provide legal or regulatory advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel as applicable.
