We are just over one week removed from Election Day and while final vote totals of the 2024 election are still being tabulated, unlike in 2020, the final results have been determined. President Trump will be returning to the White House in January and is bringing a Republican Senate and House with him. Now that the campaign promise season is over, it is time to govern and pass legislation within the House and Senate rules.
During the campaign, President Trump espoused several tax positions but mostly focused on the extension of the Tax Cut and Jobs Act (TCJA) passed in 2017 during his first term. Extension of the TJCA is necessary to prevent the expiration of a number of individual tax provisions that, when passed in 2017, could not be extended beyond December 31, 2025 due to Senate budgetary rules requiring use of budget reconciliation (more on that later.) A reminder of the impact beginning in 2026 of a few of these expiring positions:
- Individual income tax rates increase
- Standard Deductions would decrease and Personal Exemptions would return
- Estate, Gift and GST Exemptions would be roughly cut in half
- The Section 199A Qualified Business Income deduction for pass-through income of 20% would no longer exist
In addition to the extension of the TCJA, some new tax positions include:
- Exempting tip income
- Exempting overtime income
- Exempting Social Security benefits from income
- Restoring the state and local tax (SALT) deduction
- Making interest on auto loans deductible
- Imposition of tariffs with differing rates
Because of this impending reduction of the Estate, Gift and GST exemptions, most estate planners were prepared for a very busy 2025. While a Republican sweep may have reduced the urgency, we suggest continuing to be diligent in utilizing these increased exemptions sooner rather than later. The benefits of doing so include certainty regarding estate planning and the removal of further appreciation from your estate.
Since 2000, there has been almost a continual lack of certainty regarding the estate exemption. The passage of the anti-clawback regulations by the Internal Revenue Service was helpful in removing uncertainty in the event the exemptions were reduced. One uncertainty that remains, even with a Republican sweep, is will a majority of Republicans hold firm and pass an extension of the TCJA prior to its expiration at the end of 2025.
The concern for some will largely revolve around the cost of doing so. The Committee for a Responsible Federal Budget has estimated the cost to extend the TCJA at roughly $4 trillion dollars over ten years. To remove the deduction limitation for state and local taxes is estimated to cost an additional $1.25 trillion dollars over ten years. The new provisions regarding exempting tips, overtime and social security income are estimated at an additional $3.6 trillion.
As mentioned earlier, due to the Senate filibuster rules requiring a vote of 60 Senators to cut off discussion, Budget Reconciliation would be required to pass any tax bill. Budget Reconciliation would allow the passage of a tax bill via a simple majority. However, it also requires that the budgetary cost of cuts be neutrally offset by revenue increase over a ten-year period. This is why, in 2017, the TCJA individual provisions could only be in effect through December 31, 2025. The major revenue raiser discussed has been the imposition of tariffs. In his first term, President Trump imposed tariffs using his executive power. Unfortunately, Congress would have to legislatively pass tariffs to have the revenue count under budget reconciliation and offset the costs of extending tax cuts.
This is why the razor-thin majorities in the House and Senate matter. The majority in the House is expected to be four and in the Senate three. One House member that was re-elected has already resigned. Several House and Senate members will likely become a part of the Trump Administration. While the vacancies are in place, the margins for passage get tighter. Legislatively imposing tariffs that may impact businesses in a House member’s district could be less than ideal for that member’s re-election prospects in the future. In addition, many members of Congress on both sides of the aisle are worried about increasing levels of government debt. So, when will the passage of any extension of the TCJA and the additional tax provisions mentioned during the campaign actually occur? It remains uncertain.
How does this impact an individual hoping to utilize the increased exemptions? The increased exemptions are certain to remain through 2025 and may possibly be extended. Therefore, for most affluent families, the answer is staying the course and complete the planning. Utilizing the increased exemptions by executing the necessary documents, completing the gifting and funding where necessary, with a December 31, 2025 completion target, should remain the focus.
For those clients that are unsure about making gifts or that have timing issues related to asset selection or titling, there may be a slight opportunity to pause in order to consider and/or implement in a more strategic and thoughtful manner. Continue to discuss exemption planning matters with counsel. The slight pause may allow for proper titling among spouses, where necessary in 2025, followed by the spouse’s gift to a Spousal Lifetime Access Trust (SLAT) possibly occurring early in 2026, if the exemptions are extended.
Your Oxford team is positioned to ensure that our affluent family clients continue to develop well-thought-out wealth enhancement strategies and implement them timely and efficiently. Consultation with your Oxford team and an analysis of the possible impact of any tax policy will allow your full team of advisors to identify the optimal solutions for your family.
The opinions expressed are those of Oxford Financial Group, Ltd. The opinions are as of date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Tax and legal counsel should be engaged before taking any action. OFG-2411-19
