By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies
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As we wrap up our Financial To-Dos for 2024, hopefully you’re recovering from the holiday bustle and are prepared for a new year! As our last financial to-do, you need to prepare for estate tax laws changing in the new year. For 2025, the annual gift exclusion is rising again, moving from $18,000 to $19,000 per person, per year ($38,000 for a married couple). This is the fourth increase in a row, extending the record set last year with a three-year consecutive increase.
Also moving up are the transfer tax numbers (lifetime gifting/estate tax exclusion), indexing up from $13.61 to $13.99 million (or $27.98 million for a married couple with proper planning). Again, this is a record high exclusion.
While these indexed changes have become familiar, 2025 will also have a very unique change in the law. Recall that as the law is written today, the transfer tax exclusion is to sunset to 2017 values on December 31, 2025, meaning the current exclusion will be cut in about half. Best guess is if the sunset occurs, the exclusion will be around $7 million (note that the annual gift exclusion will not be affected by the sunset). Since the election in November, many articles have been published claiming that the sunset will not occur because of the “Red Wave” in Congress and the White House. However, given the fact that Congress must affirmatively act to change the law, there is still a question as to whether the law will change. Congress often struggles to proactively address such issues, and many times only address tax issues at the last minute.
Another factor affecting any change in the law is that the rules traditionally require 60 affirmative votes in the Senate, which seems unlikely. What is more likely is that Congress will use the “reconciliation” rules to pass any new tax laws, which is what was used to pass the 2017 Tax Cuts and Jobs Act (TCJA) that created the higher thresholds we have today. The reconciliation process only requires a majority of the Senate to pass new law, but the bill must either pay for itself or must lapse within 10 years (which is what is forcing the changes in 2026). Calculating these numbers can be very confusing, but many agree that if you include the income tax changes from the 2017 TCJA, it will take a huge reduction in spending (probably north of $4 trillion) to use reconciliation again.
All of that said, the income tax laws are also scheduled to sunset at the end of 2025, which would lead to a reduction of the standard deduction, an increase in tax rates, a compression of tax brackets, but also a return of many itemized deductions. In short, the sunset will lead to an increase in income taxes for nearly every taxpayer. This is more likely to motivate Congress than the estate tax rules, but since 2001, the estate tax rules have been piggybacking on income tax changes, so if a change is to come, it’s likely to affect all of these tax rules.
It is best to keep your eyes on these developments and keep yourself informed, and you can look to future blogs and reports from us as the situation unfolds. In the near term, however, the best planning may be to plan for what the current law states, but consider flexibility as best as you can should a change occur. This will involve working with your tax and legal advisor, along with your financial advisor acting as a team to meet your legacy goals. As always, there’s no guarantees in life but change, and change is on the horizon in the tax world one way or the other.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.