Donald Trump's victory in the U.S. presidential election, combined with the Republican Party's forthcoming control of the U.S. Senate and potentially the House of Representatives, makes it likely that key parts of the 2017 tax overhaul will be extended before the bill sunsets at the end of 2025.
This includes the historically high estate tax exemption, the higher standard deduction, the lower income tax brackets and the restructured alternative minimum tax framework that has resulted in fewer Americans facing AMT payments on tax day.
That was the perspective shared early Wednesday in an interview with Ben Henry-Moreland, a senior financial planning "nerd" with Kitces.com. Henry-Moreland noted that the dust hasn't settled on the election, with control of the House being an important factor in the tax policy discussion, but his gut tells him that Republicans are poised for a clean sweep in Washington.
"I would say that, at this point on Wednesday morning, we are probably looking at a Republican trifecta in the White House and in both chambers of Congress," Henry-Moreland said. "As such, our base case is now to assume that the Tax Cuts and Jobs Act law will be extended."
There is even the possibility that Republicans could seize on this moment to repeal the estate tax entirely — as was proposed in the original version of the 2017 tax overhaul.
"That's now a real possibility, but I should offer a caveat by saying that the estate tax exemption has already been raised high enough so that it only applies to relatively few families — only to the wealthiest Americans," Henry-Moreland explained. "So, it might not be a priority compared with other potential policy changes."
Another important factor, he said, is that Trump has voiced a number of big plans with respect to mass deportations and other policy efforts that would cost the federal government a lot of money.
"So that fact makes me less confident that they would be able to outright eliminate the income tax and replace the revenue with tariffs, as Trump has floated on several occasions," Henry-Moreland observed. "It might be more possible to restructure the income tax so it doesn't apply to tips, overtime or Social Security, as he has said he wants to do."
The tax policy landscape always comes with uncertainty, but financial planners are probably safe in assuming that the estate tax rules aren't going to change dramatically at the end of 2025.
State Taxes and Other Considerations
Henry-Moreland said it is likely that many financial planners and clients who have been feeling pressured to consider making major estate planning decisions ahead of the TCJA sunset are now going to be hitting the brakes. But that doesn't mean it is appropriate for all clients to change their plans for late 2024 and 2025.
"It's worth remembering that a number of states have their own estate and inheritance taxes to consider," Henry-Moreland explained. "Most states have a lower exemption than the federal one. So, trust planning activity that is about getting money out of the estate to avoid different states' estate taxes is likely to continue."
While the estate tax exemption is likely to be a hot talking point in the months ahead, it is less significant than other tax policies, given that only several thousand of the wealthiest families find themselves subject to estate taxes in any given year.
"I think we're also likely to see some debate about the state and local tax deduction cap issue and the alternative minimum tax policies," Henry-Moreland suggested.
