By Boyce F. Lowery, CLU®, ChFC®
A lot of people have been enjoying the lower tax rates and higher exemptions brought about by the Tax Cuts & Jobs Act (“TCJA”) that was effective January 1, 2018. For qualifying business owners of a pass-through business, they are now realizing the benefits of the 20% deduction of Qualified Business Income that is scheduled to be in place through December 31, 2025. Businesses structured as a C Corporation are now paying taxes at rates that are up to 40% less than the rates they paid prior to TCJA. Individual taxpayers are reaping the benefits of higher personal exemptions and somewhat lower tax rates as well.
Yes, there were some negative changes to the new tax law, like limiting the deduction for state and local taxes to just $10,000. But all in all, most people have benefited from the TCJA, either directly, indirectly, or both. However, please be aware that the higher personal exemptions, the 20% deduction of Qualified Business Income for qualifying pass-through businesses, and the lower tax rates on Schedule 1040 are scheduled to expire on December 31, 2025. Other detrimental changes are scheduled as well, such as eliminating the much higher estate tax exemption amounts and the lifetime gift exemption amounts. Both the estate tax exemption amount and the lifetime gift exemption amount are scheduled to be reduced back to 2017 levels as of December 31, 2025.
The year 2025 seems like a long way away, so people have been procrastinating in taking advantage of the opportunities presented by the TCJA. They may be doing so at their own peril. There likely will never be a better time than now to get one’s estate planning in order. There is also a window of time for other planning that can take advantage of the lower income tax rate environment.
The 2020 Elections
The political environment today is in a state of upheaval that leaves one to wonder “What’s next?” The fact is that no one knows what the future holds. We can only make decisions with the facts we have at present. Those facts, from a planning perspective, have probably never been better if you’ve had financial success in life. The opportunity in front of us today will not continue and may not even last until 2025, as is currently codified. Our next election will have profound implications from many perspectives. Financially speaking, opportunities available today could quickly evaporate for those who have procrastinated.
Regardless of which way the election goes, facts are facts. Our country’s leaders have done a very poor job through the years in managing our finances. Spending is completely out of control, with waste and fraud being rampant, and tax collections are poorly managed in many respects.
Our National Financial Crisis
Let’s take a look at where we are right now as a country:
- National debt: $22.3 trillion ($182,000 per taxpayer)
- Annual budget deficits: $1 trillion +
- Annual interest on national debt: $400 billion
- Medicare system: severely underfunded
- Social Security system: severely underfunded, though not as badly as Medicare
Clearly, we have a problem. We don’t have the funds to fulfill our promises to aging American workers. Our country is swimming in debt and it’s only getting deeper and deeper. Politicians, who are in charge of our spending, have a lot of grand, expensive plans in store, like an infrastructure deal that would cost an additional $2 trillion and things like the Green New Deal and Medicare for All.
Proposed Solutions to the Crisis
It isn’t hard to imagine that change will have to occur for us to keep our head above water as a country. With the 2020 election right around the corner, we are getting a glimpse of what that change may entail. A lot of the Democratic candidates are proposing very aggressive tactics, most of which would require huge tax increases.
For example, Bernie Sanders is advocating for a reduction in the estate and gift tax exemptions and detrimental changes to trusts that are commonly used for estate and wealth transfer planning. He has introduced legislation that would make the following changes:
- Reduces the estate & generation skipping tax exemption https://www.investopedia.com/articles/tax/09/generation-skipping-transfer-tax-gst.asp amount down to $3,500,000 from $11,400,000
- Reduces the gift tax exemption amount down to $1,000,000 from $11,400,000
- Increases the estate tax rate from 40% to 45% for estates under $10,000,000
- Increases the estate tax rate from 40% to 50% for estates over $10,000,000 and under $50,000,000
- Increases the estate tax rate from 40% to 55% for estates over $50,000,000 and under $1,000,000,000
- Increases the estate tax rate from 40% to 77% for estates over $1,000,000,000
- “Kills” GRATs https://www.investopedia.com/terms/g/grat.asp by limiting the term and requiring a minimum remainder
- “Kills” IDGTs https://definitions.uslegal.com/i/intentionally-defective-grantor-trust-idgt/ by forcing estate inclusion of grantor trusts
- “Kills” the dynasty trust https://www.investopedia.com/terms/d/dynasty-trust.asp by requiring the trust to terminate within 50-years
- Eliminates most valuation discounts
Most of the other Democratic presidential hopefuls, as well as Democratic Party leaders, are also touting significant income tax increases, especially for those who make $250,000 or more in annual income. While proposals like the ones being promoted rarely become law, it is important to take notice of the overall trend and national sentiment. Not long ago, everyone was excited about tax cuts, and now huge tax increases are being called for in unison by many.
What it Means for You
In our opinion, our current tax rates are probably as low as they will ever go in our lifetime. After all, many of the tax cuts from the TCJA are scheduled to expire after December 31, 2025. While a future Congress could extend them, popular sentiment seems to point in the opposite direction. In addition to low tax rates, if Democrats have their way in the 2020 presidential election, we may see the elimination of a variety of other financial planning techniques.
Because of this, there are tremendous opportunities for planning right now that should not be ignored. This is a time when procrastination could prove very costly. Don’t be fooled into thinking that things will always be the way they are now. Depending on the election results, 2021 and beyond could be a totally different federal tax landscape. Now is the time to act to secure your personal future and your legacy for future generations.
If you want to take advantage of our current short window of federal tax relief to secure your family’s future, give us a call at 888-827-0146. Now is the time to make your move, don’t wait until it’s too late!
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.