With Harris Victory In Sight, Tax Breaks In Jeopardy

Charles Paikert

20 August 2024

If Kamala Harris wins the US presidential election, “it’s a near certainty that the Tax Cuts and Jobs Act will be allowed to expire,” according to Mark Weiskind, partner and senior wealth manager at Fairway Wealth Management in Independence, Ohio.

Although Harris didn’t specifically address tax policy in her economic policy address last week, there’s little doubt that the Democratic candidate is not going to extend Republican Donald Trump’s signature 2017 legislation that gave substantial tax breaks to corporations and wealthy taxpayers; it is due to expire at the end of 2025.

As the odds of a Harris victory grow, what are wealth managers and tax experts advising their UHNW and high net worth clients to do now?

“Don’t panic,” said Jessica Perna, private tax partner for Ernst & Young. “If the bulk of a client’s income comes from long-term capital gains, it’s likely nothing will really change.”

PKF O’Connor Davies has been taking a “wait and see approach” when it comes to income tax advice, said partner Chris Migliaccio. “So much depends on the outcome of the election that there aren’t any prudent immediate moves for clients to make.”

Clock ticking on bonuses, Roths and gifts
If the TCJA Act does expire, the top individual ordinary income tax rate will increase from 37 per cent to 39.6 per cent. Clients in that top bracket should consider asking employers to accelerate payment of their annual bonus to make sure it’s received before December 1, 2025, Perna said.

Wealthy clients should also consider doing Roth IRA conversions now, according to experts.

“If you convert your traditional IRA to a Roth IRA while the tax rates are lower, you can avoid higher taxes down the line,” said Joseph Zappia, principal and co-chief investment officer for LVW Advisors in Rochester, New York. An optimal time to make such a conversion would be when there’s a dip in the market, and valuations on securities assets are lower, according to Perna.

When it comes to estate and gift planning, “the big push is to make sure UHNW clients take advantage of the current $13.6 million estate exemption while they still can, and before it’s set to fall to approximately $7 million in 2026,” Weiskind said.

“At a 40 per cent gift/estate tax rate, the potential missed opportunity by not utilizing the higher exemption is over $2.5 million in eventual additional tax liabilities,” he explained. “So with clients with large enough estates, we are advising they make major gifts between now and the end of 2025 to utilize the higher exemption.”

Zappia agreed: “The message is clear: don’t wait around. With the lifetime exemption possibly dropping from around $13 million to $7 million, it’s crucial for UHNW clients to act now. Waiting for changes in the law could mean missing out on some big opportunities. Plus, there’s always the chance that any new laws could be retroactive.”

Deductions and trusts
Clients are also being encouraged to take advantage of the annual gift exemption.

“If you have kids or grandkids in college, paying tuition directly to their schools is another smart way to help without triggering gift taxes,” Zappia said. “These strategies can help reduce taxable estates and make sure clients are supporting their loved ones.”

Since the TCJA allowed higher standard deductions, many taxpayers haven’t been itemizing deductions.

If the law expires, the standard deduction will be reduced, Weiskind said, “so state, local and property tax payments, charitable gifts, and mortgage interest may become deductible again for certain taxpayers. We will be advising those taxpayers to try to defer some of those items when possible until 2026, when they may potentially be deductible on their tax returns.”

Grantor Retained Annuity Trusts, or GRATs, which are currently tax advantageous, may be revised if Democrats win control of the House and Senate, Perna warned. She’s advising clients to take advantage of the trusts now, as is Zappia.

“Creating grantor trusts is a great way for clients to remove assets from their taxable estate while still benefiting their family,” he said. “These trusts can provide income to spouses or kids, giving clients some control over their assets.”

A Spousal Lifetime Access Trust, or SLAT, is another trust that maximizes a client’s ability to gift under existing law, according to PKF O’Connor Davies partner Joseph Parmegiani. This irrevocable trust enables one spouse to gift to a trust that can benefit the other spouse even while the spouse who made the gift is still alive.

“The key advantage of a SLAT, in addition to reducing an estate’s assets, is that it allows the non-donor spouse to request distributions of income or principal to maintain the couple’s normal standard of living,” said Parmegiani. “Usually, while the donor spouse is living, he or she is responsible for any tax on the income the trust earns which allows the assets inside the trust to grow without being reduced by income taxes.”

Finally, a Harris win is likely to trigger an overwhelming need for the services of estate tax attorneys to draft new documents, Perna cautioned. If work needs to be done, “make sure you give yourself enough time,” she said. "Don’t wait until the end of 2025.”