Sunsets are great on the water or golf course; in tax law, sunsets have a different meaning. In the context of tax law, a sunset is an expiration date. The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to U.S. tax law which are set to expire or sunset after the 2025 tax year.
This type of finite tax change results in a political solution to what is an economic problem. By using a sunset provision, the projected reduction in tax revenues is only modeled by the Congressional Budget Office (CBO) until the sunset date. The CBO projects the 2024 Federal deficit to be about $2 trillion or 7% of gross domestic product (GDP). It is much easier to borrow than to repay.
These temporary tax law changes make proactive planning rewarding for individuals, families, and businesses. The TJCA reduced taxes and expanded estate and gift tax exclusions. It also established the qualified business income (QBI) deduction and expanded bonus depreciation. On the flip side, it eliminated the state and local taxes (SALT) deduction (ouch in NJ and NY.)
Shapiro CPAs specialize in closely held and family businesses which are organized as a pass-thru entity for income taxes. This includes S-elected corporations, limited liability corporations, and partnerships. These entities incur one level of taxation at the shareholder/partner level. The QBI deduction was enacted to bring the owners of pass-through entities into closer parity with reduced corporate tax rates. This permits up to a 20% deduction of QBI subject to limitations. Extension of this deduction, which can be sizeable for shareholders, is advisable to permit smaller businesses to compete. Pass-thru businesses may also take advantage of NJ and NY workaround provisions to permit the deduction of state income taxes. The sunset of reduced tax rates and the QBI deduction may lead to increased levels of small business sales.
The 2024 estate and gift tax exemption of $13.61M per person provides relief and opportunity to many. This window, however, may close at the end of next year and the exemption may revert to prior levels of $5M indexed for inflation.
If you wish to provide a greater legacy for your family or have philanthropic motivations, the $18,000 annual gift tax exclusion and the gift of appreciated securities to charity have made this easier to implement. Parents and grandparents may find accelerated 529 gifts appealing, utilizing the 5-year election allowing up to $90,000 in 2024.
One potential strategy for larger estates is a spousal lifetime access trust (SLAT). Using a SLAT, married couples can harness the benefits of the current gift tax exclusion while also receiving income distributions.
Navigating the tax laws and creating a strategy to benefit from a wide range of potential tax environments takes considerable time, coordination, and decision-making. We help clients design and implement sophisticated financial plans with goals to maximize and retain wealth while minimizing taxes.
It is not possible to project which tax laws will sunset, be extended, or modified. However, we stand ready to help our clients whatever the future will hold. Shapiro CPAs have provided proactive individualized tax management along with timely and accurate preparation for over 75 years. We are experienced and equipped to manage the complex needs of successful individuals and closely held businesses. I would welcome the opportunity to help your family and business grow and prosper.
You should discuss any tax or legal matter with your tax or legal advisor.
Shapiro CPAs does not provide legal services.
This article is not to be construed as written advice under IRS circular 230.