By April Rosenberry, JD, LLM in Taxation
Director of Estate, Tax, and Financial Planning
Countdown to 2026: Key Tax Planning Moves
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, many of which are set to expire after 2025 without legislative action by Congress.
As this pivotal year approaches, understanding the implications of these expiring provisions is crucial for effective tax planning and maximizing tax savings. The estate tax exemption, which is currently more than $13 million per individual, will be reset in 2026 to $5 million per individual (adjusted for inflation), posing potential tax liabilities for high-net-worth individuals. Along with other tax changes, taxpayers must prepare for a possible increase in income tax rates and changes to deductions and credits.
| Key Provisions Expiring After 2025 |
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1. Individual Tax Rates: The TCJA lowered tax rates, with a top bracket of 37%. In 2026, these rates will revert to pre-TCJA levels, with the top rate increasing to 39.6%.
2. Standard Deduction: The TCJA nearly doubled the standard deduction, reducing taxable income. Starting in 2026, the deduction will be reduced by about half, adjusted for inflation.
3. Itemized Deductions:
- State and Local Tax (SALT):The $10,000 cap on the SALT deduction significantly impacted taxpayers in high-tax states. This cap will be lifted after 2025, allowing for a larger deduction for state and local taxes paid.
- Mortgage Interest: The TCJA restricted the home mortgage interest deduction to the first $750,000 of debt. In 2026, the mortgage interest deduction will revert to pre-TCJA levels, allowing interest on up to $1 million of mortgage debt and $100,000 of home equity loan interest to be deductible.
- Miscellaneous Deductions: The TCJA temporarily repealed most miscellaneous itemized deductions, such as unreimbursed employee expenses and investment advisory fees. These deductions will return in 2026 if they exceed 2% of the taxpayer’s adjusted gross income.
4. Child Tax Credit: The TCJA expanded the child tax credit to $2,000 per qualifying child, with higher income thresholds for eligibility. In 2026, this credit will revert to pre-TCJA levels of $1,000 per child.
5. Estate Tax Exemption: The TCJA increased the estate tax exemption, which will be reduced significantly in 2026.
| Potential Strategies to Mitigate Impact |
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1. Set Up Trusts:
- Spousal Lifetime Access Trust (SLAT): A SLAT allows one spouse to gift assets into an irrevocable trust for the other spouse’s benefit, providing access to income and principal distributions while removing the assets from the grantor spouse’s taxable estate.
- Irrevocable Life Insurance Trust (ILIT): An ILIT provides life insurance proceeds to beneficiaries outside of the insured’s estate. This trust is funded when insurance premium payments are made through the irrevocable trust and considered gifts to the beneficiaries.
- Irrevocable Trust for Children and Descendants: An irrevocable trust allows individuals to gift money outside their estate for someone else’s benefit. This trust generally cannot be modified, amended, or revoked except in specific situations with beneficiaries’ consent or a court order.
2. Review Charitable Giving Strategies:
- Charitable Remainder Trusts (CRT): This irrevocable trust provides income for the beneficiary (which may include the grantor or their heirs) for a specific period. After that, the remaining assets are distributed to charitable beneficiaries.
- Charitable Lead Trusts (CLT): Unlike a CRT, a CLT provides the income first to charitable beneficiaries for a set period before distributing the remaining assets to non-charitable beneficiaries.
- Specific Charitable Bequests: Individuals can include specific language to leave a precise amount or percentage of assets to charity at death, excluding these amounts from the taxable estate.
- Qualified Charitable Distributions (QCD): This strategy allows individuals over 70½ to give directly from an IRA to charity, up to $100,000 per year, lowering their taxable estate.
- Foundation or Donor-Advised Fund (DAF): Setting up a foundation or DAF allows ongoing charitable giving and offers potential tax benefits.
3. Maximize Annual Gifting:
- For 2024, individuals may give up to $18,000 per year to an unlimited number of recipients without tax implications. Married couples can double this amount, allowing significant asset transfers out of their taxable estate.
4. Make Direct Payments for Education and Medical Costs:
- Paying education and medical costs directly to institutions can reduce a taxable estate without affecting the annual gift exclusion. For example, a married couple could cover a grandchild’s tuition and still gift the grandchild $36,000 tax-free.
Beyond these strategies, individuals might also consider delaying deductible expenses until higher tax rates apply in 2026, recognizing more income before 2026 to benefit from lower rates, or gifting assets before 2026 to utilize higher exemption levels.
As the TCJA’s provisions sunset, proactive tax planning before 2026 is essential. Understanding these changes and implementing strategies can mitigate potential tax liabilities and maximize financial benefits.
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