Financial experts advise pre-planning to avoid sticker shock
Financial experts advise pre-planning to avoid sticker shock
Excluding any action from Congress, the Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025. With it will come significant changes for businesses and individuals as the tax code’s non-permanent changes, like personal income tax rates and brackets, revert to pre-TCJA levels.
“The tax environment is going to change significantly when 2026 starts,” said Jesse Cramer, associate relationship manager at Rochester-based Cobblestone Capital Advisors, LLC. “What does that mean? One of the things most applicable to everyday people, including business owners, is that income tax rates are going to shift up.”
When considering these changes, Cramer says it’s vital to differentiate between marginal tax rates – e.g., the highest rate you pay, which applies to the last dollars you earn – and effective tax rates, which is the average rate across your total tax bill.
“Both marginal and effective tax rates are going up. Certain income ranges might be in a loophole where their marginal tax rate actually decreases, but they shouldn’t celebrate too much. They’ll still pay more income tax on all their earlier dollars, in the lower ranges. Even those people are certain to see their effective tax rate – their total tax bill – increase.”
For example, married couples currently earning $22,000 to $364,000 — who fall in the 12%, 22%, or 24% marginal tax brackets — will see a projected marginal tax increase to 15%, 25%, and 28% respectively. That income range covers a vast majority of workers.
“Tax rates have always gone down,” said Craig Gingerich, a CFP and vice president, financial advisor at Sage Rutty & Company, a Rochester-based financial services firm, who calls the approaching sunsetting, unprecedented. “This is the first time they’ve gone up.”
Other changes with the greatest impact will be the child tax credit decreasing for most American families when it reverts to its pre-TCJA form and standard deductions being cut roughly in half.
“Itemized deductions and standard deductions are going to revert to the prior rules,” Cramer said. “And that means that itemized deductions are going to become much more attractive.”
If you’re considering making a significant charitable contribution in 2023, 2024 or 2025, you may want to consult with your accountant, financial planner, or charitable officer first. Waiting until 2026 when you can deduct a larger amount from your taxable income might be the right move, Cramer said.
For those with considerable wealth, “The largest impact is going to be on the estate side of things,” said Kristopher Hacker, CFA, senior vice president, equity strategist at Community Bank, which has 26 branch locations and one commercial lending location in the Rochester and Finger Lakes region.
With the sunsetting, the federal lifetime gift and estate exclusion will be reduced by half when it reverts to pre-TCJA levels.
The upcoming sunsetting has created “an enormous planning opportunity” for high-net-worth individuals to transfer wealth now, according to Myles B. Fischer, a partner and member of the Wills, Trusts and Estates Group at the law firm Harris Beach. “We’re trying to utilize as much of the increased exclusion as possible before it goes away.”
To take advantage of the current federal lifetime gift and estate tax exclusion before it sunsets, popular tools and vehicles Fischer uses with applicable clients include selective gifting and leveraged gifts to trusts, like Spousal Lifetime Access Trusts (SLATs).
A SLAT is an irrevocable trust created by one spouse for the primary benefit of the other spouse and, if desired, their descendants. It removes assets from married couples’ combined estates and utilizes available exclusions.
“SLATs are a way to use the basic exclusion amount now without the donor-spouse relinquishing indirect access to the assets contributed to the SLAT,” Fischer wrote in a recent blog post for the firm. “Uniquely, a SLAT provides continued access to the transferred assets to the donor’s spouse such that assets remain within the reach of the marital unit and can be accessed if needed in the future.”
Among the other advantages of a SLAT, Fischer notes, are the ability for the donor to dictate the terms governing the transferred assets and the ability to make the SLAT a dynasty-type trust to benefit grandchildren and future generations if desired without exposing the assets to estate tax, by allocating available Generation-Skipping Tax (GST) Exemption.
Another planning consideration to keep in mind with the proposed sunsetting is where you will keep your retirement funds. “With lower income taxes right now, Roth contributions make more sense for more people. “You would rather pay the income tax now,” Cramer said. “Whereas come 2026 that calculus is going to shift, and more money should be put towards Traditional contributions.”
There is a possibility Congress could extend the current tax structure or make other changes based on factors like a recession or political posturing, however, the professionals featured in this piece encourage readers to plan for the sunsetting to happen.
“Keep in mind that the situation is fluid and there is so much that can change,” Hacker said. “Be educated, keep having conversations to stay on top of developments and make sure your portfolios are properly risk prepared.”
They also all recommend talking to your trusted team of advisors now if you have not done so yet. Depending on your financial situation, this team can include an accountant, financial advisor or planner, attorney, banker, and trust administrator.
“Having a plan makes sense,” Gingerich said. “You should have a lifetime plan for tax strategy. If you are looking year by year you are winning half the time, but not the game.”
Gingerich notes that 2026 is quickly coming down the pike and the sunsetting TCJA is among the top three conversations he has been having with clients for whom it will have a meaningful impact.
The sunsetting is also on the radars of many of Cramer’s clients and for those where it is not, he is starting the conversation now. “Bring this [the sunsetting] up with your professionals during your annual or quarterly meeting,” Cramer said. “There’s no substitute for the time that we currently have.”
Caurie Putnam is a Rochester-area freelance writer.n