New Administration, New Tax Rules: How to Prepare

With the 2024 general election results final, we now know Donald Trump will be the 47th president of the United States, with the Republican party in full control of both chambers of Congress. One priority for the new government will be tackling key provisions of the 2017 Tax Cuts and Jobs Act (TCJA)¹ expiring next year. Broadly, President-elect Trump and the Republicans have promised to extend many provisions of the TCJA. But many are left wondering whether they can count on a full TCJA extension or if they should act now in advance of future changes.

When Does the Clock Start?

The TCJA introduced sweeping changes to the federal tax system, but many of the amendments for individual taxpayers are set to expire, or “sunset,” at the end of 2025.² These provisions include lower tax rates, a higher standard deduction, an expanded child tax credit, a doubling of the federal estate and gift tax exclusion amounts and the GST tax exemption. In high-income-tax states, taxpayers are especially keen to see the $10,000 cap for state and local taxes lifted. For businesses,³ key expiring provisions include the ability to expense certain business investments and the 20% deduction for qualified business income of pass-through entities.⁴

Congress must take decisive action to extend or make these provisions permanent. Otherwise, without a TCJA extension, taxpayers may be subjected to increased federal taxes on income and wealth transfers. As the new Congress convenes in January 2025, just ahead of the inauguration, they will kick off the budget process with the President’s budget proposal. Assuming the new administration adheres to the campaign’s blueprint, President-elect Trump’s budget would make the individual income tax and estate tax cuts of the TCJA permanent,⁵ reduce the corporate income tax rate,⁶ and scrap the SALT deduction cap.⁷ To raise revenue, he has also proposed a 10%–20% tariff on all imports—and a hefty 60% tariff on imports from China.⁸

Once the President submits a budget proposal, Congress passes a concurrent budget resolution that sets total spending, revenue, and deficit targets for at least the next five years. Then, annual appropriation bills are passed to fund discretionary programs, and legislation is enacted to adjust mandatory programs and taxes. Ideally, the congressional budget process runs from early February to the end of June. However, recent years have been marked by delays at various stages, especially in passing budget resolutions and finalizing appropriation bills. After navigating the budget process, Congress can then take up a potential TCJA extension bill.

Potential Headwinds

Extending the TCJA without budgetary offsets, like tax hikes or spending cuts, would add trillions to the deficit over the next decade. Estimates from the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) peg the cost of extending the TCJA and expanded premium tax credits from the 2022 Inflation Reduction Act at $5 trillion. This figure will rise as the budget window shifts from 2025 to 2026 and policymakers weigh additional measures, such as eliminating the SALT deduction cap and income taxes on tips and overtime.

Given the price tag, a TCJA extension and additional tax cuts are likely to garner only Republican support. The main hurdle in the Senate is the filibuster, which allows any Senator to delay or block a bill.⁹ Overcoming a filibuster requires a three-fifths majority (60 votes).¹⁰ Since Republicans won’t hold a Senate supermajority in the next congress, major tax reforms will likely proceed through the budget reconciliation process, which requires only a simple majority and limits debate to 20 hours.¹¹

Enter Reconciliation

Congressional budget committees use the reconciliation process to align tax laws and mandatory spending programs with the budget resolution’s revenue and spending targets. That way, reconciliation fast-tracks revenue and spending legislation into law.

Yet in the Senate, the Byrd rule limits the content of reconciliation laws, generally disallowing items that don’t affect outlays or revenue and prohibiting initiatives that would increase the deficit beyond the budget resolution’s fiscal years. Since its first use in 1980, Congress has enacted 27 budget reconciliation bills, including the most recent Inflation Reduction Act of 2022. The TCJA was also passed through reconciliation, which is why many of the cuts are expiring at the end of 2025.

With this backdrop, we can expect TCJA provisions to be extended only temporarily, or other revenue-raising tweaks to the tax law may be added to the final bill. In other words, even with a TCJA extension, we will end up facing a similar extension scenario in the near future.

The Outlook Beyond 2030

Long-run, fiscal realities make higher taxes seem inevitable. The national debt has surged dramatically, driven by pandemic-related relief programs and rising interest costs. The federal response to COVID-19 involved approximately $5.4 trillion in tax cuts and spending increases,¹² which contrasts sharply with the Congressional Budget Office’s (CBO) initial projections.¹³

At the same time, the CBO projects that the average yield on 10-year Treasury notes will be 4.5% as we enter 2025 compared to just 2.7% back in 2018.¹⁴ As a result, net interest expense as a percent of GDP has more than doubled from 1.6% to 3.4%.¹⁵ Regardless of the near-term TCJA extension, higher wealth transfer and income taxes are likely on the horizon. The key planning question is: how much time do we have to capitalize on current favorable conditions, and what should clients do now to prepare before the end of 2024?

Prudent Wealth Transfer Planning Strategies

Taxpayers should start weighing their options now rather than waiting, as many strategies offer more than just a temporary tax reprieve. For instance, with certain techniques, the future growth of assets may also be shielded from various forms of taxation.

Know Your Numbers

Before starting any wealth transfer or income tax planning strategy, taxpayers should first assess their overall financial plan. What are their primary wealth priorities? How much is needed to sustain their lifestyle? How do they envision their legacy between family, loved ones, and philanthropy? The answers to these questions drive toward the next step in the planning conversation: core and surplus capital (Display).

Bernstein defines core capital as the amount of money a taxpayer needs to retain to endow their lifestyle spending needs, grown with inflation, for the rest of their life. We use Bernstein’s proprietary Wealth Forecasting System to calculate a core capital number that is highly likely to withstand elevated inflation, challenging market conditions, and a longer-than-average life expectancy. The required amount of core capital varies by asset allocation. For instance, a more conservatively allocated investor will require more core capital than a moderate or growth-oriented allocation at the same spending level.

Once taxpayers have secured their core capital, they can begin to plan how to direct their other assets—which we call surplus capital—toward other goals such as enhanced lifestyle spending, new ventures, transfers to loved ones, or philanthropy.

Wealth Transfer Planning

Transfers to loved ones, either during life or at death, face transfer taxes—gift, estate, and GST. Today, the enhanced basic exclusion and GST exemption stands at $13.61 million and is scheduled to rise to $13.99 million as of January 1, 2025. Under current law, the enhanced exclusion is worth just over $2.7 million in estate tax savings. The drawback, of course, is you must irrevocably transfer $13.61 million of your wealth to your beneficiaries or a trust for their benefit.

But the savings from today’s enhanced exclusion is often not the only benefit to consider. By transferring assets now, a taxpayer can ensure that the future growth of those assets occurs outside of their estate. The display below compares the growth of a $13.99 million gift, invested in a moderate-risk portfolio, over 10 years to the inflation adjustment that the taxpayer would receive on their expanded exclusion over the next 10 years, assuming that this provision in the TCJA is extended (Display).

But what about taxpayers who have some surplus capital, but not enough to fully use the basic exclusion during life? The benefits of transferring wealth now still apply, but there are other, more scalable ways to pursue those transfers. The most basic method is the annual exclusion gift, which allows a taxpayer to give up to $18,000 to as many individuals as they want. This amount will rise to $19,000 in 2025, and spouses can combine gifts to transfer twice the amount.

Another compelling strategy for transferring future asset growth is through Grantor Retained Annuity Trusts (GRATs). Setting up a GRAT involves transferring assets to a grantor trust and receiving a fixed stream of payments over a specified period. The payments can be structured such that the present value of the annuity payments, discounted by an IRS-determined interest rate,¹⁶ equal the value of the assets transferred to the trust, effectively resulting in no gift for gift tax purposes. GRATs succeed by transferring appreciation of the contributed assets above the IRS-determined rate to the trust’s beneficiaries. Our research shows that GRATs can be a very powerful and flexible strategy for transferring assets over time. But time is a crucial factor for success with GRATs. So, it doesn’t pay to sleep on this wealth transfer opportunity while waiting for Congress to act on tax laws.

Don’t Forget Income Taxes

While a TCJA extension may postpone potential income tax hikes, there are strategies you can consider now to mitigate future tax exposure. One effective approach is converting traditional IRAs to Roth IRAs, which can help manage and potentially reduce your tax burden down the line.

Shifting from passively managed index funds to active, tax-loss-harvesting strategies that track similar indices may also prove worthwhile. On an after-tax basis, active loss-harvesting strategies may outperform passively managed exchange-traded funds tracking the same index.

Finally, consider using nonqualified private placement variable annuities (PPVA) or private placement life insurance (PPLI) policies to enhance the after-tax returns of any tax-inefficient investments in your portfolio. Both PPVA contracts and PPLI policies offer tax-deferred wealth accumulation, while properly structured PPLI policies provide an opportunity for tax-efficient access to this accumulated wealth during the insured’s life along with a tax-free death benefit.¹⁷

Navigating the Debate

The results of the 2024 general election mean that many of today’s exclusions and rates may be extended, but uncertainty still looms. Your Bernstein Advisor will keep you up-to-date as the debate unfolds. In the meantime, there is no time like the present to revisit your financial plan, level-set on your core capital, and define your long-term wealth and legacy priorities.