Pre-election Tax Talk: Stay Ahead of the Curve

The 2024 general election is just around the corner, bringing the potential for major tax policy changes. And with key provisions of the 2017 Tax Cuts and Jobs Act (TCJA)¹ expiring next year, the stakes are high for taxpayers, business owners, and investors. Whether you’re concerned about income tax rates, wealth transfer taxes, or estate planning strategies, it pays to stay ahead of the curve and start strategizing with your advisor now.

The Wheels Are in Motion

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, and 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

Should Congress fail to extend or make these provisions permanent, taxpayers may be subjected to increased federal taxes on income and wealth transfers. The outcome of the November election will be pivotal, setting the stage for next year’s tax policy debate. Depending on which party (if either) takes control, many TCJA provisions may either expire, be extended, or be reversed.

Key Policy Proposals

When it comes to tax policy changes, former President Donald Trump and Vice President Kamala Harris have markedly different approaches. Trump has proposed material tax cuts for individuals and corporations, while Harris favors raising taxes on the wealthiest Americans and largest corporations.

Trump’s plan aims to 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 proposes a 10%–20% tariff on all imports—and a hefty 60% tariff on imports from China.⁸ In contrast, Harris proposes hiking the tax rate on long-term capital gains to 28% for those earning $1 million or more annually.⁹ She also wants to increase the net investment income tax from 3.8% to 5%, shifting the top capital gain tax rate to 33%.¹⁰ Harris supports taxing unrealized capital gains for taxpayers with net worths of $100 million or more and reducing the estate and gift tax exclusion to $3.5 million from its current $13.61 million, increasing to $13.99 million in 2025, while raising the estate tax rate up to 65% on a graduated basis.¹¹ However, she has indicated that her plan won’t increase taxes on anyone earning less than $400,000 a year.¹²

Below is a summary of each candidate’s key tax proposals:

The Outlook for Tax Policy Changes

Regardless of the election outcome, higher taxes seem inevitable due to current fiscal realities. 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,¹⁶ pushing the federal debt from 79% of GDP in 2019 to 97% in 2023.¹⁷ This contrasts sharply with the Congressional Budget Office’s (CBO) initial projections, which anticipated the debt would not exceed 88% of GDP by the end of 2023.¹⁸

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 2018.¹⁹ As a result, nominal net interest expense has more than tripled from their initial forecast of $307 billion to over a trillion dollars in 2025, according to their most recent analysis.²⁰ Put another way, net interest expense as a percent of GDP has more than doubled from 1.6% to 3.4%.²¹ Regardless of the political landscape after the 2024 general election, higher wealth transfer and income taxes are likely on the horizon. The relevant planning question is: how much time do we have to take advantage of today’s favorable backdrop before tax policy changes take effect?

A Legislative Blueprint

Since Vice President Harris’s tax proposals would reduce the deficit, much of her tax agenda could be enacted with a simple majority vote provided the Democrats achieve unified control of the House, Senate, and Oval Office. The primary obstacle to passing partisan legislation in the Senate is the filibuster, which allows any Senator to delay or block a bill.²² Overcoming a filibuster requires a three-fifths majority (60 votes).²³ Given the long odds of either party achieving such a supermajority, major tax policy changes are likely to proceed through the budget reconciliation process, which requires only a simple majority and limits debate to 20 hours.²⁴ This process was used to pass both the Inflation Reduction Act²⁵ and the Tax Cuts and Jobs Act of 2017.

Prudent Planning Strategies

With tax hikes potentially looming on the horizon, taxpayers would be wise to start weighing their options now. The likelier such increases become, the faster the schedules of attorneys, appraisers, trust companies, and other relevant planning professionals will fill up. Before the ink dries on any legislation, here are some proactive steps and strategies to consider:

Wealth Transfer Tax Planning

Explore locking in the enhanced basic exclusion and GST exemption by making a gift of $13.61 million this year, along with any inflation adjustment that’s provided next year. 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.

Keep in mind, in order to secure any enhanced benefit from the gift, you must give more than half the exclusion, or $6.8 million, today, plus any inflation adjustment through 2026.²⁶ For example, based on an inflation rate of 2.8%, a taxpayer would need to transfer more than $7.2 million to benefit from the enhanced exclusion. In other words, the enhanced exclusion doesn’t come into play until you first use all of the exclusion that would remain post-sunset. If the Democrats succeed in reducing the basic exclusion to $3.5 million, as proposed, making a $7.2 million gift before the change could result in $1.5 million in estate tax savings assuming a 2.8% inflation adjustment through 2025.

The enhanced exclusion allows married couples to gift up to $27.22 million combined in 2024 (increasing to $27.98 million in 2025). However, if they intend to give less, it may be more advantageous not to split the gifts. Instead, they should use one spouse’s entire exclusion and GST exemption before tapping into the other spouse’s exclusion. For example, consider a married couple that only wants to gift $13.61 million. Instead of each spouse gifting $6.8 million (half of each spouse’s exclusion), they should make the entire gift from one spouse. That way, when one spouse gifts $6.8 million, the other spouse would still retain the same exclusion amount after the sunset. If the couple had split the gift, neither spouse would have any exclusion left (other than inflation adjustments) after the sunset.

 

Before completing a gift, taxpayers should review any outstanding loans and prior gifts to ensure they haven’t already used their exclusion inadvertently. Finally, review existing trusts for general powers of appointment. Since the American Taxpayer Relief Act of 2012,²⁷ creating estate inclusion for low-basis assets held in trusts—in order to capture a step-up in cost basis at the power holder’s death—has been a major focus of estate planning. Reversing some of that planning may now become necessary.

Income Tax Planning

To get ahead of potential income tax hikes, taxpayers may consider accelerating income. For instance, spreading income between two tax years may help capture additional tax savings. This strategy allows taxpayers who are not already subject to top marginal tax rates to capture an additional tax bracket run. Options for accelerating income include:

• converting traditional IRAs to Roth IRAs;
• selling appreciated assets;
• realizing gains in irrevocable grantor trusts;
• not deferring income in deferred compensation plans;
• making 83(b) elections on restricted stock grants;
• distributing low basis employer stock from retirement plans if the net unrealized appreciation (NUA) is eligible for capital gains treatment; and
• completing business sale transactions before the end of 2025.

Investment Planning

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 non-qualified 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.²⁸

Navigating Potential Tax Policy Changes in 2024

The 2024 general election carries meaningful implications for US tax policy, potentially impacting taxpayers, business owners, and investors. The contrasting tax proposals from Vice President Kamala Harris and former President Donald Trump underscore diverging approaches to individual income tax rates, estate tax, corporate taxes, and tariffs. In the face of possible tax hikes, proactive wealth transfer tax planning, income tax planning, and investment planning can help taxpayers navigate the evolving tax landscape. It’s crucial for taxpayers to consider these strategies and take proactive steps to navigate potential policy tax changes while optimizing their financial positions. With careful planning and consideration of the candidates’ tax proposals, individuals and businesses can position themselves to adapt to potential changes and make informed decisions to protect their financial interests.