We can always be certain of one thing regarding taxes: changes will happen. This is so even though stability of the tax rules would likely be one of the most significant factors in fostering a robust economic environment. Tax legislation is a patchwork quilt reflecting the government’s often conflicting needs to raise revenue, promote fairness, enforce compliance by reluctant or evasive taxpayers, enable voluntary compliance by the willing taxpayers, stimulate favorable behavior, promote political ideology and implement public policy. The political climate is ever-changing, and with it, tax laws evolve and change.
With the dawn of 2024, we are inching closer to December 31, 2025, at which time most of the provisions of the 2017 Tax Cuts and Jobs Act will sunset. Of course, Congress could act in the meantime, but absent any specific relief, many tax rules will revert to their 2017 versions. Of particular note are the following:
(1) Estate and Gift Tax Exclusion. The lifetime exclusion for gift and estate tax will revert from its current level ($13.61 million per person in 2024) to $5 million, adjusted for inflation and expected to be about $7 million. Currently, with the high exclusion amount, the number of estate tax returns filed each year is very small. Interestingly, the IRS has reported that in 2021, 3.4 million Americans died. Only 0.18% of them (6,158) filed an estate tax return, and only 2,584 paid any tax. The total estate tax was $18.4 billion, an average of $7.1 million per estate.1 When the exclusion drops in 2026 to about $7 million per person and $14 million for a married couple, more estate tax returns will be required and more tax will be paid. However, with proper planning, the estate tax can be minimized or avoided altogether. There is still time for those whose estates could now be subject to tax due to the lower exclusion amount.
(2) SALT (State And Local Taxes) Deduction Limits. Since the TCJA, for individual taxpayers, a $10,000 limit has been in place on the itemized deduction for combined state and local taxes, which includes income, property and sales taxes. (Property and sales taxes remain fully deductible in business activity.) Before the TCJA, this deduction was basically unlimited. It has primarily affected taxpayers in states imposing high income taxes. Ending this limitation before 2025 has been proposed by legislators from both sides of the aisle but not enacted. The Biden Administration’s Build Back Better proposed legislation, which was not ultimately passed, would have raised the limit to $80,000. Other proposals for limits of $20,000, $60,000 and unlimited have stalled. We can expect this to be a continuing “hot” political issue in 2024 and into 2025.
(3) Child Tax Credit. The issues of amount, permanency, refundability and entitlement parameters continue to be subjects of discussion. Democrats are pushing this as a top tax issue.
(4) Restoration of business-related tax breaks. Republicans are advocating for the end to provisions in the 2017 law that limited current deductions for research and development costs, full cost of new and used business assets and interest.
(5) Other itemized deductions which were paused in 2018 are scheduled to return in 2026, including tax preparation fees, investment expenses, IRA custodial fees, moving expenses and casualty/theft losses. Personal and dependent exemptions will return. Tax rates are scheduled to increase for individuals, back to 2017 rates and brackets. The lower 21% corporate tax rate was designated as “permanent” and is not scheduled to be automatically increased, but the 20% QBI deduction for self-employed taxpayers and those with flow-through business income is on the list of those deductions scheduled to end.
Just based on it being an election year, 2024 promises to be an interesting one. Within the broad array of issues on the table, tax changes are going to be important. Under the temporary fix it approved in November, Congress must resolve the deferred budget impasse by Jan. 19, in part, and by February 2, for the remainder. At the time of this writing it appears an agreement may be near. But, in addition to the short-term spending agreement, Congress is tasked with addressing the longer term plan for the generation of revenue sufficient to fund the approved spending, currently and going forward. The particulars of tax rates, deductions and credits, and their relation to various aspects of public policy `will be at the center of the discussion. Change is going to come!
Darren Larsen
Los Angeles Chapter
Law Office of Darren M. Larsen
Originally posted on WIFS website January 9, 2024
