You don’t have to have a large estate to see a significant impact on your taxes once provisions in the 2017 Tax Cuts and Jobs Act sunset (if Congress doesn’t act).
Originally published on Kiplinger.com January 03, 2024
Much will be written about the coming sunset of the 2017 Tax Cuts and Jobs Act (TCJA), mostly in relation to the diminishment of the lifetime generation-skipping, estate and gift tax exemptions. But this potential outcome may have little relevance to you if your net estate is less than the $7 million post-TCJA exemption (or $14 million for a married couple). But you should be concerned in regard to several other more relevant sunsetting provisions.
Since the deadline for passing an extension to the TCJA is Dec. 31, 2025, if you are alarmed by the following information, you may want to contact your representatives in Congress to stress the importance of a bipartisan agreement. The need to address this issue will be mostly missed by the media until it is too late. The foreseeable news cycles are cluttered with campaign-related smoke and mirrors, accusations, threats and litigation that serve to further alienate members of Congress from one another at a time when cooperation is essential to remedy the coming calamity.
Here is a list of the changes the sunset will cause and some guidance regarding how you may want Congress to address them so that you benefit both directly and indirectly (not necessarily by extending the TCJA in its entirety).
The income tax tables
The TCJA reduced the income tax rates and adjusted the income tax brackets in a way that, with no other provisions considered, worked to reduce income taxes for most taxpayers. If allowed to return to the pre-TCJA brackets, taxes will go up significantly (about 11% to 15% for couples earning $40,000 to $500,000, about 8% to 10% for couples earning over $1 million and just under 7% for couples earning over $10 million a year). However, those comparisons fail to consider the income tax credits and deductions that will return if the TCJA sunsets without any amendments.
You may be concerned that an extension of the TCJA will cause long-term revenue losses undercutting productivity and add directly to the national debt. To offset the lost revenue from a continuation of the TCJA personal income tax rates, consider these solutions: First, allow the income tax brackets under the TCJA to expire only for income over $490,000. Second, raise the corporate tax rate back to the pre-TCJA rate of 35%. This strategy would encourage spending by the overwhelming majority of taxpayers who are unable to save anyway and raise their standard of living while only mildly reducing the added wealth to net savers and investors.
The standard deduction, the personal and dependent exemptions and the child tax credit
The TCJA all but eliminated the need to itemize deductions for many taxpayers because the standard deduction for couples was raised from $13,000 to $24,000 (now $27,700 for 2023). But the personal and dependent exemptions ($4,150 per person in 2017) were eliminated. Should the TCJA completely sunset, with inflation indexing, in 2026, the adjusted standard deduction for couples will be $15,000, the reinstated personal and dependent exemption will be as much as $4,790 per person, and the child tax credit will decrease from $2,000 to just $1,000 per child again.
However, non-itemizing couples earning under $110,000 with two eligible children are better off under the TCJA. Their available deductions did fall from $29,600 before the TCJA to $24,000 after it went into effect, but their income tax liability, due in part to the reduced tax rates and the doubling of the child tax credit, actually decreased from $9,960 to just $7,880.
Likewise for a couple who both work full time for $15 an hour and have two children. They have a household income of just $62,000 a year. Under the TCJA, they will pay no federal income tax and receive $330 in child tax credit. After the TCJA sunsets, mostly due to the reduced child tax credit, they will pay about $1,076 in federal income tax. Larger families will again likely pay no federal income tax. Extending the child tax credit at the current $2,000 per eligible child under age 18 offers additional protection to keep these families from falling into poverty.
Itemizing after TCJA sunsets
For the itemizers with state and local taxes, mortgages and real and personal property taxes, the sunset will remove the $10,000 cap on these deductions. Taxpayers will also be able to deduct unreimbursed employee expenses and losses from personal casualty and theft. But all these deductions will once again phase out for higher-income earners (over $320,000). The sunset will also affect charitable giving, but only for wealthy donors. The annual limit on deducting charitable cash gifts will fall from 60% of adjusted gross income back to just 50%, with any unused charitable deduction allowed to carry over up to five more tax years. A return to these tax provisions will further spur economic growth if offset by higher personal income tax rates for high earners and corporations.
It is difficult to determine what is best for the majority of U.S. households. The U.S. Census Bureau estimates the median household has 2.6 occupants living in a home they own with household income of about $69,000. But 11.5% of households earn less than the poverty level (about $30,000 for a family of four, which equates to $14.42 an hour). My recommendations basically continue the parts of the TCJA that benefit these struggling working households not just because they deserve a better standard of living, but also because these tax policies, coupled with a progressive economic policy agenda, have been proven to spur productivity and investment (See the 2021 American Progress Report, with end notes, for details.)
Timothy Barrett is a Senior Vice President and Trust Counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, past Officer of the Metro Louisville Estate Planning Council and the Estate Planning Council of Southern Indiana, Member of the Louisville, Kentucky, and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Committee.