As the calendar inches toward 2026, financial advisors are increasingly alert to the impending tax cliff brought about by the expiration of the Tax Cuts and Jobs Act (TCJA) of 2017. Originally implemented to stimulate economic growth through temporary tax reductions, many of the reforms introduced—including lower income tax brackets, expanded standard deductions, and increased exemptions for gifts and estate taxes—are set to vanish if Congress does not act. This potential shift could have profound implications for individuals, families, and businesses alike, and advisors are proactively adjusting their strategies to help clients mitigate the repercussions of the upcoming changes.
The TCJA was a sweeping reform that fundamentally altered the tax landscape, providing benefits that range from enhanced standard deductions to significant deductions for pass-through businesses. However, as we approach the deadline for these provisions, uncertainty looms over which, if any, will be extended by Congress—especially amid fluctuating political dynamics. As of now, the fate of these tax breaks relies on the shifting control of the Senate, House, and the White House. During this period of ambiguity, advisors are taking proactive measures to prepare their clients for potential impacts.
Strategies for Benefiting from Higher Exemptions
One of the most pressing concerns is the imminent change in estate and gift tax exemptions, which currently stand at impressive levels—$13.61 million for individuals and $27.22 million for married couples. These exemptions allow high-net-worth individuals to transfer wealth to successors tax-free, but the potential reduction of these figures post-2025 poses a significant risk. Should Congress choose to let these provisions expire, the exemption could be halved, and any amounts over the new threshold could incur a hefty 40% tax.
In light of this situation, advisors are exploring various estate planning techniques to help clients take advantage of the current exemptions. These methods can include irrevocable trusts, direct gifts to heirs while still alive, and funding educational accounts, among others. As estate planner Shea Abernethy aptly notes, removing assets from an estate can be crucial, as once they are gifted, they stop compounding and accruing income that would otherwise be taxable.
Another significant aspect to consider is the planned reversion of federal income tax brackets to their pre-TCJA levels, which could occur in 2026. If Congress allows these brackets to reset, it will mean increased tax rates for many taxpayers. For instance, the top bracket could shift back to 39.6%, which has prompted financial planners to develop strategies centered on accelerating income recognition.
Wealth management experts, like Samantha Pahlow, advocate for facilitating Roth IRA conversions or front-loading business income to capitalize on the currently lower tax rates. Such moves would prepare clients to anchor themselves in the existing lower bracket, offering them a tactical advantage ahead of the anticipated tax hike should the tax code revert.
As the standard deduction is a key element of tax filings, clients must also reevaluate their charitable giving and potential itemized deductions in the year leading up to 2026. For instance, the standard exemption offered for 2024 is set at $14,600 for individuals and $29,200 for couples, meaning many taxpayers will likely not be itemizing deductions. After 2025, however, these figures will likely be cut in half, giving rise to a scenario where most beneficiaries will need to itemize, depending on their individual financial situations.
Advisors are now encouraging clients to consider delaying deductions, such as charitable contributions, to maximize their potential benefits in the years following the tax cliff. This multifaceted approach seeks to not only navigate the complexities of upcoming tax changes but also to position clients advantageously in their financial planning.
With trillions of dollars in tax breaks potentially on the chopping block, it is imperative for both advisors and their clients to strategize proactively. Whether focusing on seizing current estate and gift exemptions, accelerating income to optimize tax brackets, or rethinking deductions, the landscape is changing rapidly. As we head towards 2025, informed and strategic planning will be essential to navigate the challenges posed by the looming tax cliff effectively. This focus on preemptive measures will enable individuals and families to safeguard their financial health amidst legislative uncertainty, ensuring they are as prepared as possible for whatever tax implications lie ahead.