Countdown to 2026: Key Tax Changes You Need to Know

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, many of which are set to expire after 2025 unless extended by Congress. As this pivotal year approaches, understanding the implications of these expiring provisions is crucial for effective tax planning and maximizing tax savings. The estate tax exemption, which is currently more than $13 million per individual, will be reset in 2026 to $5 million per individual (adjusted for inflation), posing potential tax liabilities for high-net-worth individuals. Along with other tax changes, taxpayers must prepare for a possible increase in income tax rates and changes to deductions and credits.

Potential Strategies to Mitigate Impact:

1. Set Up Trusts:

• Spousal Lifetime Access Trust (SLAT): Allows one spouse to gift assets into an irrevocable trust for the other spouse’s benefit, providing access to income and principal distributions while removing assets from the grantor spouse’s taxable estate.
• Irrevocable Life Insurance Trust (ILIT): Provides life insurance proceeds to beneficiaries outside of the insured’s estate, funded when premium payments are made through the irrevocable trust and considered gifts to the beneficiaries.
• Irrevocable Trust for Children and Descendants: Allows individuals to gift money outside their estate for someone else’s benefit. This trust generally cannot be modified, amended, or revoked except in specific situations with beneficiaries’ consent or a court order.

2. Review Charitable Giving Strategies:

• Charitable Remainder Trust (CRT): This irrevocable trust provides income for the beneficiary (which may include the grantor or their heirs) for a specific period before assets are distributed to charitable beneficiaries.
• Charitable Lead Trust (CLT): Unlike a CRT, a CLT provides income to charitable beneficiaries first for a set period then the remaining assets to non-charitable beneficiaries.
• Specific Charitable Bequests: Leaves a precise amount or percentage of assets to charity at death, excluding it from the taxable estate.
• Qualified Charitable Distributions (QCD): Allows individuals over 70½ to give up to $100,000/year directly from an IRA to charity, lowering their taxable estate.
• Foundation or Donor-Advised Fund (DAF): Allows ongoing charitable giving with potential tax benefits.

3. Maximize Annual Gifting:

• For 2024, individuals may give up to $18,000 per year to an unlimited number of recipients without tax implications. Married couples can double this amount, allowing significant asset transfers out of their taxable estate.

4. Make Direct Payments for Education and Medical Costs:

• Paying education and medical costs directly to institutions can reduce a taxable estate without affecting the annual gift exclusion. For example, a married couple could cover a grandchild’s tuition and still gift the grandchild $36,000 tax-free.

Beyond these strategies, individuals might also consider delaying deductible expenses until higher tax rates apply in 2026, recognizing more income before 2026 to benefit from lower rates, or gifting assets before 2026 to utilize higher exemption levels.

As the TCJA’s provisions sunset, proactive tax planning before 2026 is essential. Understanding these changes and implementing strategies can mitigate potential tax liabilities and maximize financial benefits.

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