Here Comes the Sun(set)…. It Feels Like Years Since We’ve Been Here.

A Look Ahead at the Planning Implications of a Sunsetting 2017 Tax Act

As most know by now, on January 1st, 2026, approximately 20 months from this writing, the extensive changes enacted by the “Trump tax law reforms” (TCJA) of 2017 will have expired. This sunset is now squarely on the forward planning radar screen, with a myriad of tax provisions that will revert to their former 2016 selves. This article takes a curated approach focusing on those that will most impact the high-income/high-net-worth taxpayer and the planning opportunities (or imperatives) the changes will create. And, of course, with the dynamic caveat that the following is based on Congress not taking action to extend/modify some or all of them prior to that date.

Estate & Gift Tax

The estate, gift & generation-skipping tax (GST) exemptions have been at historical highs, now almost $14 million in 2024. They would drop to about 50% of that level. If you agree that, to a significant degree, the estate tax is a “voluntary” tax and that you can pay it or plan around it, now is the time to explore your options. And it is important to realize, there is a timeline on many of the available strategies. The race will go to the swift.

The key concept is to gift assets, especially those with appreciation potential, out of your estate while the exemption levels are still high. Usually this means to your children or trusts for their benefit. One interesting technique to accomplish this is the Spousal Lifetime Access Trust, or SLAT. This strategy entails one, or both, spouses transferring assets to an irrevocable trust for their respective spouse and children’s benefit. The benefiting spouse can be the trustee of that trust, with access to both income and principal during life and at their death the trust can continue for the couple’s children’s benefit. This is a great way to have your cake and eat it too.

Income Tax

The list here is long. The following is a selection of the most important changes to be aware of:

• • Individual tax rates will increase and the brackets to which they will apply will change. For example, the top rate will go from 37% back up to 39.6%. And, as importantly, the bracket to which that higher rate will apply will begin at $480,051 versus the current $693,751 for the 37% rate.
    
    Planning Opportunity: While accelerating income before rates go up is an obvious tactic, a more impactful version of that is the Roth Conversion. This is the strategy of converting a traditional IRA into a Roth IRA. (In a Roth IRA, while the contributions are not deductible, commensurate growth within it and future distributions are not taxable.) The cost of doing this is ordinary income in the amount of the conversion, in the year of conversion. If it makes sense to pursue a conversion (which is a separate analysis) pre-2026 would be the time to do it.

• • SALT deduction limitation. State and local tax (and this includes real estate tax) deductions have been capped at $10,000. For those living in states with high income and property taxes this has been a real problem, costing many taxpayers tens of thousands of dollars in additional taxes paid. It will expire after 2025. Pro Tip: Ultimately, many feel it will remain capped, but at a higher level, or limitations will be phased in based on income levels.

• • Miscellaneous itemized deductions, like investment advisory fees, legal fees, etc. will again be allowed subject to the 2% of AGI hurdle.

• • The Pease Limitation will be reinstated. Before it was repealed in 2017, it reduced the amount of many allowable itemized deductions by 3% of AGI over a threshold, — $313,800 for married filing jointly, when last in effect. It will return, indexed for inflation, so still at a relatively high level.

• • The alternative minimum tax exemption and phase out. Have we so soon forgotten this nemesis, the original “Millionaire’s Tax,” which has a habit of creeping to engulf more and more earners over time? Recall the alt min, which is essentially a flat tax with a broader base of taxable income and lower marginal tax rates, is calculated separately from the regular tax and if higher is the tax paid. There is an initial exemption amount, which in 2024 (for married filing jointly) was $133,300; that exemption begins to phase out at $1,218,700. These levels will revert to pre-TCJA levels of $84,500 and $160,900 (indexed for inflation). Importantly, some deductions available under the regular tax are not available in the reverted alt min computation. They include both of the above items, the SALT & miscellaneous itemized deductions. Has this chimera been reawakened?
    
    Planning Point (It Gets Complicated!) It is important to be aware that the prospective reinstitution of the SALT and miscellaneous itemized deductions on one hand, would appear to be a cause for celebration. On the other hand, neither will be available in the reverted alt min computation, which will result in higher tax levels under its regime. Combine that with the reinstated Pease Limitation, which affects the regular tax computation, and you will see higher levels of taxation there as well. One thing is clear, as the accountants say, “You are going to have to run the numbers!”

• • The Qualified business income (QBI) 20% deduction (Sec 199A) is due to expire beginning in 2026. Again, this argues for accelerating any qualified available pass-through deductions prior to that date.

• • Bonus depreciation. The TCJA allowed 100% depreciation of qualified business property with a phase-out beginning in 2023. It is currently at 60%. This is a tax attribute used in a number of tax-sheltered investments e.g. leveraged equipment leasing. It is unclear if this will be allowed to expire, or possibly be reinstated at 100% prior to 2026.

• • Qualified Opportunity Zone (OZ) Investments. Investing funds derived from the sale of an asset in OZ Funds allowed for deferral of capital gain on that sale until 12/31/26. More importantly, there is permanent elimination of all capital gain on the investments in the fund if held for a minimum of 10 years. The OZ provisions themselves are scheduled to expire at year-end 2025, although the permanent elimination of capital gains in funds already in existence would continue until 12/31/2047.
    
    Planning Opportunity: There is still time to invest in these funds. The worst case is an investor would not be able to defer the gain on sale of assets to be used for the investment, but would still enjoy the much more economically attractive elimination of all gain on the fund’s investments. There is also a good chance these provisions will be extended, if in no other way, as a stand-alone.

Conclusion

It is still far from clear, particularly with a General Election coming this November, what if anything Congress will do about these sunset provisions. What is clear is that is the game is afoot, and all thoughtful taxpayers should be aware of what changes are in play and what their impact could be in their particular situation. Execution will take time; now is your opportunity to look ahead and connect up with your tax advisor. It is also important to realize there is a timeline on many of the available strategies. The race will go to the swift.