Tax Trends: 2025 quarterly tax roundtable

The following is a verbatim output of transcribing from a video recording. Although the information in this transcription is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or grammatical, spelling and transcription errors.

Michael Wronsky

Hello everyone. My name is Michael Wronski and I'm the Director of Baker Tilly's Washington Tax Council and the moderator of and participant in today's Tax Trends Roundtable panel discussion. Baker Tilly's Washington Tax Council team is a team of professionals dedicated to providing tax offices and clients with thought leadership on legislative, regulatory and market updates and consulting on all manners of tax technical issues.

We have a fantastic group of experienced Baker Tilley tax professionals on our group today with a variety of special, specializations including James Creech, who is a director with Baker Tilly's Tax Advisory and Controversy practice. In this role, James is responsible for advising on complex tax returns, defending taxpayers who are under IRS or state taxing authority examination, appealing agency actions, and providing litigation support of the taxpayer is suing the United States over tax positions. In addition, he is responsible for working with the IRS and various state agencies to find out what ended their delinquent returns or abatement of penalties. Next, I'm pleased to introduce Michael Lung, who is a tax Director with our Washington Tax Council practice leading the trust in a state private wealth vertical. Now he has a diverse background working with high net worth individuals spanning more than a decade and he has extensive experience with developing a state and wealth transfer plans and reviewing and drafting legal documents. Michael also has experience in representing beneficiaries in fiduciaries and trust in a state litigation. And last but not least, Andy Whitehair, one of the most recent additions to our team is a director with our Washington Tax Council practice who leads our individual private wealth vertical within our group where he focuses on complex tax matters relevant to the firm's high net wealth clientele. He specializes in a range of subject areas including but not limited to individual taxation exempt organizations charitable giving in estates, gifts and trusts, and he supports the firm's client service teams with research, consulting and thought leadership. So again, thrilled to introduce to you this wonderful team that we are going to speak with today. But without further ado, let's get into the nitty gritty, starting with an overview of the current policy landscape.

So starting off, it's important to know that we had one crisis that was averted in that the House and the Senate passed the former government funding bill, the Continuing Resolution, which funds the government through the end of its fiscal year, which ends on September 30th, 2025.

The President signed it into law on March 15th, which ultimately avoided the government shutdown. Now at first, as many of you may be aware of, passage seemed unlikely given Senate Democrats strong opposition to the lack of any guardrails around the President's and or the Department of Government efficiencies continued freezing of previously appropriated funds.

However, Senate Minority Leader Chuck Schumer reversed his initial course where he at first said that he would not bring the bill to the floor, which all but one Democratic representative in the House had voted against, but indeed ultimately brought it up for a Senate floor vote in the interest of avoiding a government shutdown, where ultimately passed 5446 after the requisite 60 votes were needed to clear a key procedural hurdle in the Senate were achieved.

So it's important to know, and I know I think James is going to talk about this a little bit when it's his turn to speak, but I will just allude to it now. But this continuing resolution that was passed includes a further freezing of $20 billion worth of IRS funding that was allocated to it via the Inflation Reduction Act, as I know many of you have heard about.

But I'll let James kick that conversation off when we get to that instance, but it's important to note that it's a big tax implication of the continuing resolution bill that was passed. So next steps that are key to keep in mind are, you know, the government has been funded through the end of its fiscal year, which was the procedural hurdle that was first on everyone's mind to clear.

But now that we have that addressed, Congress can refocus on tax reform.

And so it would initially seem that, OK, we've got plan, we've got point A address that we can focus on Point B. There's still a lot up in the air in terms of what needs to be done in order for a tax bill to come to fruition. Some of this we have covered in our tax policy pulse issues that I hope all of you have had the pleasure of reading.

But in the instance that you have not been, we're happy to get into it here, so we must principally address the matter of whether we're going to have a one bill or A2 bill track to work with here. And what I mean by that is when the House passed its budget resolution, it includes all of the residents priorities in a nutshell, including defense energy, border security and, in the matter most closely at hand, tax initiatives.

So it's that one big, beautiful bill that you all have heard so much about and that the president is very keen on getting passed.

On the flip side, the Senate's bill only includes those first 3 priorities, those being defense, energy, and border security. And it excludes tax reform wanting to address it in a separate bill with the notion that, you know, those first priorities being defense, energy, and border security are the least controversial items of the president's agenda that everyone wants to get passed, whereas tax reform is a cause for much consternation and creating many points of negotiation between Senate Republicans, House Republicans.

Fiscal Hawks, there's a lot to consider here.

As we will talk about in a moment.

There's quite a few hurdles to clear despite the fact that it's got everybody in Congress's attention to move forward. So in addition to the one or two bill track format the other item that the House and the Senate need to get on the same page with respect to is whether the TCJA provisions are going to be temporarily extended or will they be made permanent. So the Houses bill includes a $4.5 trillion instruction to the House Ways and Means Committee to increase the federal deficit over a 10 year period.

Now that seems like a lot of money, because it is. But it's very important to note that a $4.5 trillion increase would be insufficient to extend the TCJA provisions for 10 years, let alone include some of the president's other priorities that he has made quite a point of emphasis on during his campaign trail and even thereafter since he's been elected into office. We're going to get into that in a minute here, but just bookmark that as a point of negotiation and critical

item to reconcile. So while that $4.5 trillion figure is a lot of money, it would not extend the TCJA for 10 years, but rather more like an 8 or 9 year extension. So it indeed would be a temporary rather than permanent measure.

Now the Houses bill also includes a $1.5 trillion instruction to mandatorily save in spending, and the bulk of that instruction is supposed to come from the Energy and Commerce Committee, which quite notably covers Medicaid, and they need to account for $880 billion of those $1.5 trillion in savings.

So while that resolution that the House passed does not specifically name Medicaid, it is still created consternation among the party as making cuts to Medicaid would be politically a very contentious move. Some senators are very opposed to it. And though it again, it doesn't specifically name Medicaid to achieve those $880 billion of savings without touching Medicaid would prove very difficult. And again to my previous point, there have been prominent Republican senators, specifically Missouri's Josh Hawley comes to mind, who have said they will not vote for such cuts given their impact to his constituents in Missouri.

Now further complicating matters, and that's probably going to be a theme that you're hearing quite a bit here, the savings instructions include an unconventional measure whereby the extent that actual spending cuts exceed 2 trillion, the excess will be added to the four and a half trillion dollar spending allowance that's allowed into the Ways and Means Committee.

So in other words, if they come up with 2 1/2 trillion dollars worth of savings. That $4.5 trillion spending instruction would be increased to 5 trillion. And so that is certainly going to create some motivation to find savings to enact the party's priorities.

But to the extent that the overall cuts fall short of $2 trillion in savings, that would be subtracted from the $4.5 trillion figure. So let's say, for example, you know, instead of saving 2 trillion, they save 1.5. That $4.5 trillion figure would drop to four. So there's a lot to consider here, a lot of moving parts, a lot of priorities to juggle.

So while the path and the ball seemed to be moving forward. There's a lot left to contend with in terms of competing priorities and appeasement that needs to be made. So further complicating issues are the fact that the Senate and the president are adamant that the TCJA provisions be made permanent, which, as I just went over, would not be allowed for under the House's budget blueprint.

And so the only way that they can practically make an extension of the TCJA permanent would be to use the highly unconventional current policy baseline. And what that means is that the current policy baseline presumes that expiring provisions such as the TCJA will be extended in accordance with current policy. Meaning policy is that these rate cuts, these taxpayer friendly provisions are ingrained in current policy and therefore

continue and in turn therefore have no associated costs in terms of how any bill would be scored so significantly what this no cost measure circumference are the rules governing reconciliation that prohibit increasing the federal deficit either by more than the amount allowed in the budget instructions or beyond the budget window. So again, the only way you're going to get permanent cuts in play is if you can do so with a no cost score that's going to circumvent that budget window and reconcile the instruction figure. So a couple things to keep in mind here. It's questionable whether the Senate parliamentarian, who is a nonpartisan figure, that is kind of the Senate scorekeeper in terms of making sure that budget reconciliation instructions and budget reconciliation legislation

passes muster whether they will approve of such a measure and we just learned that it's anticipated that the Senate parliamentarian rule on this issue in just a matter of days according to various reports. So I think we should find out more from this standpoint in the coming days here because it's really going to have a profound impact on how they decide in the GOP they can move forward and whether a permanent extension of the TCJA is possible.

But it's also important to note that even if the Senate parliamentarian approves of this measure, it's questionable whether the GOP deficit Hawks will approve it, and we already know of a few senators on record who will not.

Moving forward, and again yet just to illustrate how far apart the two sides are, those being the deficit Hawks and the more moderate Republicans, is the ultimate bill whether it should include an increase to the federal borrowing limit the House's budget resolution currently calls for an increase to the budget.

I'm sorry, the debt limit of $4 trillion, and why that's relevant is the United States hit the ceiling for the amount that it's authorized by law to borrow at the beginning of this current calendar year. Meaning since then, Treasury has been resorting to so-called extraordinary measures to continue paying the government's bills without needing to borrow additional funds.

Now, it's estimated that the X date which some of you may have heard of, which is the date on which these extraordinary measures will have been exhausted.

That date will come upon us sometime this summer or early fall, meaning that unless the statutory debt ceiling is increased by then, the federal government will no longer be able to make payments on its current debt, which would have untold catastrophic economic consequences. A discussion about that is beyond the scope of this webinar, but be assured that as some of you may recall from a decade or so ago, if the government comes close to defaulting on its debt, the markets will for sure react in a very, very adverse way. Our credit rating could be downgraded. Again, we're getting beyond the scope of this webinar, but just to underscore the importance of getting this debt ceiling matter resolved

I do want to give some color there so for what it's worth, the president just recently advocated for any tax bill to increase the debt limit as in line with the House's current bill or I'm sorry, current reconciliation instructions to be clear, which would allow the country to borrow more money to meet its obligations. So if everybody comes into alignment on the Republican Party and say that our tax needs to address the debt limit that's only going to increase the time sensitivity around passing it to avoid the US defaulting on its debt, which again would have catastrophic consequences.

So while TCJA extensions or being made permanent are, you know, clearly the highlight of our discussion here, there are other priorities that complicate these tax negotiations. And some of these priorities are those that President Trump has been campaigning on before he was elected and has doubled down on since his election.

Among those include ending the carried interest break, meaning that there would be no long term capital gains treatment for a carried interest.

Senator Thune has just recently echoed calls to repeal the estate tax putting a corporate salt cap in place many of you are aware of individual taxpayers limitations on their ability to deduct state local income property taxes paid. There have been talks about putting a similar cap on corporate taxpayers to want to achieve parity between the two taxpaying types and to raise revenue for some of these you know, taxpayer favorable breaks that are being discussed again, and I know many of you have heard about this, but the president had campaigned on exempting tips, Social Security and overtime pay from income tax, which will be very difficult to achieve in terms of whether or not that will meet the reconciliation requirements which prohibit any bill from impacting Social Security. In addition to which it seems as though from, you know, taking a 10,000 foot view from above, it would seem like a very difficult, procedurally anyway, provision to enact. But we will let the very clever folks in Capitol Hill and in Treasury figure that out for us.

Some of you may have heard about the breaks being ended for sports franchises. It's not entirely clear what the president means by that, but we assume within the tax community that means ending amortization.

But again remains to be seen and another priority which would again be made difficult by the fact that, you know, we're talking about quite a few revenue reduction provisions. One more would be a reduced corporate rate for domestic manufacturers. Soi t's not as simple as just extending the TCJA or making it permanent again, the president and members of Congress have tacked on to advocate for additional provisions that would have quite a few and quite substantial dollar figures attached to them, making them all the more difficult to enact.

So with that said, everybody's concerned from here is, is timing. So the Senate just determined that, I'm sorry, the Senate just returned to session on Monday. So they had been on recess. Now they are back. And I think that the key point to point out is that timing of any tax reform bill is critically dependent on whether a one or two bill track is pursued.

And the reason being is if everybody can agree on one big, beautiful bill, you know, the latest reports are that the chambers want to agree to a budget resolution by the Easter holiday and accomplishing this by leaving the bulk of these areas that I've just gone over that are points of contention between the chambers unresolved.

Now what that would mean is that the House and the Senate would adopt separate budget resolutions that defer to the others committees regarding how much money they would be instructed to spend or save. So that said, in theory they could punt, as they seem keen to do, but that does not ultimately keep the piper from being paid because these unresolved differences will ultimately need to be addressed. So, you know, House Speaker Johnson and Ways and Means Chairman Jason Smith, they want a single bell bill on the president's desk by Memorial Day, given all of these issues that remain unsolved, that is extremely ambitious timeline and further if you know a debt ceiling increase is attached to that one big beautiful bill. It only makes it more critical that it gets passed soon as possible to avoid the US defaulting on its debt.

On the other hand, if the Senate prevails an A2 bill track is pursued. Budget rules would prohibit tax reform from passing until the next government fiscal year, which begins on October 1st, 2025. There's only one budget reconciliation bill that addresses spending revenue, and the federal debt limit can be passed each fiscal year. And the first legislation encompassing defense, energy, and border security would include spending permission, so they would only have that one if they choose the two bill track this fiscal year.

So with that all said, another area that I know is top of everyone's mind is tariffs. And when I say most recently, I mean yesterday and there are many more details to come here, but the President yesterday announced proposed 25% tariffs on all imported automobiles and automobile parts. And again, that means all imported automobiles and imported automobile parts. So while this landscape is very difficult to navigate right now between what tariffs are enacted, what tariffs the president has announced, but in turn walked back. Where we currently stand is that there are inactive tariffs as follows.

One, we have a 25% tariff on goods from Mexico and Canada that are not compliant with the US Mexico, Canada agreement.

We have a 20% blanket tariff on goods imported from China, a 10% tariff on energy from Canada not compliant with the US Mexico, Canada agreement, a 10% tariff on fertilizer potassium from Canada, and lastly, a global 25% tariff on imported steel and aluminum. So as you can imagine, as you've heard in the news this creates a very, very volatile, fluid economic situation that have the markets quite upset. I think from our perspective, one thing we want to make sure that you are all aware of being tax advisors, you should be aware that tariffs may impact your computation of costs required to be capitalized inventory under Internal Revenue Code section 263 cap A and speak to your tax advisors about any such implications to your tax situation.

And I think it's also important to note that this market volatility that the tariffs have created are giving Congress an incentive to try to mitigate these effects by enacting corresponding tax cuts. So while there's that motivation there, and all this is to say that there's pressure on Congress to navigate these differences and come up with a reconciliation bill and resulting tax passage that can pass with their slim majorities. We have a long way to go, and you can be sure that we will keep you informed of all of these updates as they come to roost.

So another considerable area when we're talking about constant and significant change, it's with the IRS. And James, we're going to have our first polling question here. But then I look forward to hearing from you about what is happening and why listeners should be interested in what's going on at the service. So with that said, of the non TCJA related provisions being discussed, which is of the most interest to you and you have your options here. So with that I will turn it over to James and I thank you all so much for listening.

James Creech

There we go now thank you very much for taking some time out of your busy days to listen to what we have to say. My name is James Creech. I am not 12 years old. Like the picture that they flashed up earlier when the introductions. I'm a tax attorney at Baker Tilly. I do a lot of I'm just gonna call it plain weird. I do a lot of IRS audit defense. I do a lot of questionable, you know, kind of interpreting the tax law. Along with my colleagues, Washington Tax Council, we really work closely to make sure that we can deliver a lot of value for our clients. And the biggest question that I'm getting right now that frankly, a lot of people are concerned about is what is happening with the IRS. And frankly, it's why should I take my tax reporting seriously if there's not to be an IRS left to out of me and frankly, you know, and we've seen some headlines of papers suggesting that, right? You know, and I think that that's something that is kind of going out in the back of everybody's mind, especially as we're coming into filing season. We're going to have to write big extension payment checks here in the next couple weeks. And why am I doing this? Why am I taking this so seriously when all I see is the IRS is going away?

And frankly, the news has been bad for the IRS. February 20th, they fired approximately 6700 employee probationary employees, meaning employees that have been there less than a year. There's been a lot of retirements. There's been a program to incentivize IRS people to take early retirement. There's probably more coming, I mean, let's be honest. But this is not the only cut that is coming to the IRS. And especially in certain areas, there were some really significant hits. The IRS have really ramped up a lot of resources in the last year to go after partnerships.

There was a new or there was a law change that really came into effect about 2018 due to COVID. We're really starting to see some accelerated enforcement in that area. And a lot of the people that were working in that area, even if they had 30 years of experience, were new to the IRS because they had just hired them and they're gone.

And so really, why am I doing this? Why am I? Why am I taking my tax responsibility seriously?

And to kind of go back to Michael's comment a little bit about terms of cost, I think this is a significant blow to the IRS to begin with. And, and as somebody whose job is to disagree with the IRS and somebody whose job it is to push back on them and tell them why our interpretation of the law is better than their interpretation of the law and why we're entitled to this deduction.

It pains me a little bit to say, but there will always be an IRS. There will always be audits, there will always be resources going after returns that have been filed to make sure that they are accurate, complete and correct. Based upon whose interpretation we don't know. Our interpretation is we take filing compliance very seriously and we're always filing a correct return. IRS might disagree with us, but they will be there because as Michael said, the cost of the extenders of the TCJA is 4.5. And to put that in a little context, if we break it up into time, a billion seconds ago is about 31 years ago. So Patrick Mahomes was not born yet. There was no Chiefs dynasty because their quarterback didn't exist. He was born in 1995, and 31 1/2 years ago puts us back in 1994.

A trillion seconds ago is 31,000 years ago. So that's before US before the before there were any like major civilizations for humankind. 4.5 trillion seconds ago puts us before there were any humans in North America and that's how much money we're going to spend and some point that needs to be paid for. It's something like 96% of the revenue in this country comes through the IRS, even if tariffs are greatly increased it's still going to be the bulk of the revenue that comes through the IRS. And if there's a bulk of the revenue coming through the IRS, they need to exist. They need to have an enforcement component and they need to be able to make sure the people are staying honest on their tax returns.

And so where we are now, like if, I'm kind of explaining as to, you know, in any way sort of interesting manner, I think we're in the point of the Godzilla movie. You know, every time, every Godzilla movie starts with Godzilla comes out of the water, destroys the city, the fighter jets come in, the tanks come in, there's lots of explosions. Godzilla sinks below the water. Everybody celebrates and there's like 35 minutes into the movie and then everybody turns their back and then they think Godzilla's done. Then Godzilla comes out of the water, Godzilla's very angry, and all of a sudden Godzilla shoots fire out of its mouth. I think we're about right where we've just seen about 50 fighter jets come in, lots of explosions. Godzilla's sunk under the water and now we're all turning her back and saying well, IRS is done. Godzilla is dead. Let's all go celebrate.

Godzilla's coming back. And IRS audits have long horizons. And so even if right now you know first quarter, second quarter of 2025, the IRS is the target, even if it's 2026, it's the target, right? And you don't file accurately for 2024, the IRS has three years to audit. Godzilla could come back well in time to audit you.

There's certain exemptions to that three years. One of the big ones we see is that if you get audited and you're using an NOL the IRS can go back to look at that NOL and if that NOL is based upon something that says, look, there's no IRS anymore, let's just take the deduction that can have a very long tail.

So I think when we're doing this, I think, sorry, but I mean this, I mean when we're preparing returns, when we're trying to meet our civic obligation to file a true and complex, true, complete and accurate return, even if it is the most efficient return that we can fire the file in terms of tax being paid.

Correctness is very important because we don't know what's next and there will always be an IRS. They will always be auditing and they will always be aggressive, especially if they feel like they have been disrespected. They've been put in a political position where they're the villain. The people that remain are going to be that much more determined, that much more bent on making sure the taxpayers are paying their fair share.

And look, somebody again who disagrees with the IRS for a living and tries to pay the most efficient amount of tax possible.

You know, I just don't want any clients or any taxpayers to get complacent and say just because enforcement is down, I don't have to comply with the law because the law is separate from compliance and the law will exist as long as we need revenue and we are going to need a lot of revenue.

Some of the other questions I get, you know, in terms of, you know, what's going on, you know, it really kind of revolves around attitude and morale and it is poor, you know, and I think that as we're going through the kind of next phase, even if we don't like enforcement, I think that every American has a vested interest in an efficient modern IRS that can allow you to do things like you would do with your bank online. And a significant portion of the IRA funding that we were just talking about being frozen went toward modernization. I really think that most people stress points with the IRS really involve “I need something from them and I can't get it” or “I have a refund pending and it's been 18 months, Two years to process what is going on? Why can't they give me the services I need?

And those are challenging questions because frankly, the IRS service is awful. As somebody who again spends a lot of time on the phone with the IRS, a lot of fields, a lot of questions of where is my refund, particularly in the ERC, these are extremely painful considerations. And IRS like a healthy IRS, especially on the administrative point is a good thing for America.

And I think we're going to be facing a lot of challenges there.

And so to the extent where we can get out our crystal ball and look to see what 2026 looks like, I'm going to make a request for patience with your practitioners, your fellow citizens and Americans, because everything's just going to take a long time. It's going to take even longer than now. And now it takes a really long time. And so in the interest of making sure that my excellent colleagues also have time to talk, I'm going to wrap it up.

Please, this is an invitation to reach out if you have any questions. My contact information was on the 1st slide. We've got an open door policy here. If there's anything on your minds and you want to chat, let me know. I'm always happy to pick up the phone. And again, thank you for your time today.

Michael Wronsky

Thank you so much, James. Very, very valuable insights here. And with that said, to your point about giving our excellent colleagues some more time, Michael, if you could get into some buy, sell planning items for us, that would be greatly appreciated.

Michael Lum

Sure thing. Well, good morning or afternoon everyone, depending on where you are in the country. As Michael introduced me earlier, I am the gift and estate tax specialist within our Washington Tax Council group and was a former practicing estate planning attorney.

You know, as Michael mentioned, there has been some talk about repealing the estate tax, so this may be the last webinar you'll see of me.

So if I'm not here next year, you'll know why they repealed the estate tax.

Michael Wronsky

Well, always. There's always going to be a place for you, Michael, where you know.

Michael Lum

But anyway, thanks for attending. And you know, a state and business succession planning have always been important, but a recent court case and scheduled tax law changes make it even more critical to review existing estate plans. And you know, I'm going to cover three key topics today. Number one is the Supreme Court's mid 2024 decision in a case called Connelly

and its impact on buy sell planning. #2 we'll talk about the pending TCJA sunset and what it means for estate planning. And then lastly, I'll talk about some practical strategies to sort of navigate these changes. So let's start with the Connelly case, which again significantly impacts company owned life insurance used for buy sell agreements.

And by the way, this Connelly case is particularly important because it was decided by the US Supreme Court. The US Supreme Court doesn't take a lot of tax cases. So again, for tax practitioners especially this really was an important case. We actually got a couple of important cases last year from the Supreme Court.

Michael Wronsky

Sorry, Mike, can I stop you for just one second here so we can announce polling question #2?

Michael Lum

Oh, sure.

Michael Wronsky

Apologies. Is the IRS A increasing B decreasing, C the same or D none of the above. And then I will turn it right back over to you, Michael, Sorry.

Michael Lum

Oh yeah, no, no problem.

So just a, sort of a quick overview of the facts of Conley and this would be really brief, but there were two brothers who owned a business together and they had this buy sell agreement funded with life insurance. One of those brothers passed away and when that brother passed away, the company used life insurance proceeds to buy out his share and the IRS took the position that the death benefit those proceeds that came into the company.

Increase the value for estate tax purposes, even though those proceeds were being used for the buyout. The estate argued, on the other hand, that the life insurance should be offset by the redemption obligation. In other words, you've got the proceeds come in as an asset, but the company has an obligation to redeem, which should be a liability that offsets those proceeds. So the net effect is that you know there would be no value of the company. There would be no increase in the value of the decedent's interest in that company.

Unfortunately, the IRS disagreed with the taxpayer in that case and ruled in favor of the IRS and as a result, the value of the deceased brothers interests nearly doubled.

So what does this mean for business owners? You know, if you have company owned life insurance, then you know, after Conley, the death benefit attributable to those policies could increase the value of your company for state tax purposes. So now is the time to revisit those buy sell agreements. Make sure they're doing for you what you expected them to do or what you had planned for them to do. And you may consider alternatives.

You know, such as separate life insurance LLC or separate insurance trusts to sort of plan around this economy result. And by the way, we at Baker Tilly are happy to have a conversation with you and discuss those options. But again, at a minimum revisit those, revisit those plans, get given that common decision.

Next, let's talk about the pending TCJA sunset. And this is one of the biggest changes that could happen in 2026.

Of particular interests to me is the gift and state tax exemption, which the TCJA doubled. So right now the gift and estate tax exemption is at a record high of $13.99 million per person.

But on January 1st, 2026, this exemption could be cut in half to about $7,000,000 per person.

And just by way of clarification, the gift and estate tax exemptions are basically what the amount that somebody can give during their life or at their death tax free. OK. So right now, again, it's roughly $14 million per person and it's expected to be cut in half if Congress doesn't otherwise act. And So what does that reduction in the exemption mean for you? Well, if you have more than $7,000,000 in your estate. More than $7,000,000 of assets.

At the current estate tax rate, you could owe 40% tax on the excess. So, the sort of value that you know that expiring 7 million, you take 7 million, you multiply it by 40%, well, that's an additional $2.8 million of estate tax per person, right? So, that's a big deal. So it's definitely something that you know you want to keep track of stay cognizant of and you know, it's been discussed for a number of years now. So I think that many clients do understand. But again, it's important to keep that in mind. And you know, we've had some elections obviously recently. And so there is a question about whether Congress will extend this higher exemption.

Many of the folks that I talked to, attorneys, other accountants and evaluation folks and financial advisors and the like, many of them expect that there will be an extension, but there are no guarantees, right?

As Michael kind of discussed or thoroughly discussed at the beginning of this, politically, it's really complicated. And even if it does get extended, it probably will be for some period of time, probably a shorter period of time than what we expect. And so we could face another sunset in the future. So the bottom line is if your estate is $50 million plus right, you should continue to plan as if the exemption is going to sunset in 2026. There are probably many tax and non tax reasons for you to continue and finalize those plans. And if you're in that boat, if you're in that, you know, in that range of wealth, you know you've got a number of options available to you really the full menu of options, things like you know, grass and slats and daps and eyelets, estate planners. We love our acronym. So if you have any questions about what those stand for feel free to reach out. But yeah, again, if you're in that $50 million plus range you know to borrow a quote from a good 80s nineties rock band, the Red Hot Chili Peppers. Give it away, give it away, give it away now. But all joking aside, you know you don't want to make substantial gifts without really giving a lot of thought to it, right, thinking about how does it affect my cash flow position and things like that. But and then if you're in that 20 1,000,000 to $50 million range, then maybe there's less urgency, but I still think you should plan ahead and create a structure that gives you the flexibility to adjust depending on what Congress does. And so again, if you're in that 20 to $50 million range, maybe you're unsure about making large gifts. And so a couple of sort of flexible things you could consider #1 is maybe a standby sort of plan, right. So you set up an irrevocable trust, you fund it with a small amount and if it looks like the exemption is going to drop, then you can quickly transfer assets to the trust before year end, before the end of this year. And if you're gifting publicly traded securities, your broker can transfer those electronically from a personal account to this trust account. If you're giving entity interest, then have your attorney prepare the necessary assignment documents and just hold them.

Keep them until you need them. And so this plan helps you to ensure that you're ready, but you don't have to scramble at the last minute when advisors are particularly busy. You know, I talked to attorneys regularly and at the end of last year, I remember talking to a few and they said, you know, we're not taking any new clients in 2025. And so you're going to have situations like that where you know, the bandwidth of these advisors is really non existent and so you might be stuck in a situation where maybe you can't do the planning that you wanted to do if you waited till the last minute and couldn't find the help . For married couples another option is a QTIP typical sort of trust plan, right? So here is you would with this plan, one spouse would set up a QTIP trust for their U.S. citizen spouse and that would qualify for the marital deduction. So just by way of short background, the marital deduction allows spouses to transfer assets between each other without incurring a transfer tax, without using the exemption that we've talked about. But if you do it in trust, there's special rules for it.

That QTIP trusts would qualify under those special rules. And So what this allows you to do again is you create this trust and later on you can decide if you want to use exemption, then don't make the election to treat that trust as a QTIP trust. But if you don't want to use the exemption, then you can make that election on a timely filed gift tax return.

And then the last one is disclaimer planning. So this is another flexible option that allows beneficiaries to basically reject the gift.

Effectively unwinding the transaction and that rejecting of the gift is accomplished by the beneficiary making what's called a qualified disclaimer of the gift that's got to be done within nine months of the transfer. So it's a short decision window. But like the other strategies, it allows for last minute estate planning without a full upfront commitment. And to wrap up again, business owners review your buy, sell agreements, review those company owned life insurance policies and make sure that's doing what you want to do for high net worth individuals. Again, the gift of state tax exemptions, they can drop in 2026 and revisit those plans. And if you're unsure about making large gifts, stay flexible. You know, whether that's through, you know, standby trust, key typical trust or with disclaimers. And that's with that, that's all I have. We'll go ahead and launch the next polling question. And that question is do you plan on making substantial gifts before the gift in a state tax exemption sunsets at the end of 2025. Yes or no?

And with that, I'll pass it along to Andy Whitehair.

Andy Whitehair

All right. Thank you, Michael. So I'm the individual tax guy here on the Washington Tax Council. So just to kind of provide a little bit of context here the Committee for Responsible Federal Budget said that out of the estimated total cost of 4.8 trillion to extend the Tax Cuts and JOBS Act, something like 3.9 trillion of that was the cost to extend the individual and state provisions for 10 years, so the individual tax base is going to be a big area to watch as policy discussions play out in Washington over the next several months.

There's so many expiring provisions kind of too many to talk about without the last few minutes that we have remaining here. So I'll just kind of give you sort of the big ones that I'm looking at and I think the biggest potential change to individual taxation, should the TCJA expire at the end of the year would be the individual income tax brackets and rates. So if sunset happens, TCGTCJA goes away, we would revert back to those old TCJA levels. So you know, for example, if you're a married couple that is filing jointly, you're in the highest tax bracket right now, you're paying a tax rate of 37% and that kicks in at about $615,000 of adjusted gross income. TCJA comes back, that top rate is going to go up to 39.6% and it's going to, I'm sorry, it's going to kick in at $615,000, whereas right now those top rates kick in at $771,000. So the point is tax rates are going to go up for pretty much everybody.

The brackets are going to become more condensed, which means you're going to pay those higher rates at a lower amount of adjusted gross income, so you know, over generalizing here, but most people are going to pay more tax if TCJA goes away. Other big deduction that we're looking at that would go away would be the qualified business income deduction. This is the 20% deduction on essentially flow through income. So you know, if TCJA goes away, that deduction would go away as well, which would serve as you know, essentially about a 7 1/2 percent tax increase on that flow through income. So a lot of business owners will be carefully watching that. It'll be interesting to see what happens with the corporate rates. So if you remember when TCJA was implemented that took the top corporate tax rate down to 21% and they made that permanent. There's been some talk about lowering that top corporate rate again, this time down to 15%.

So if that happens and if something isn't extended in regards to the qualified business income deduction, we're going to have to have those conversations with clients about their choice of entity for tax purposes. And you know, does it make sense to be AC Corporation versus an LLC and S Corp? A lot more to come on that subject.

Other, you know, big expiring provision that I think a lot of people would like to see go away would be the SALT cap which Michael mentioned earlier.

This is the limit on state and local tax deductions. Limits that to $10,000 annually.

There's a lot of Republicans in blue states. You know, these are high tax states like California, Connecticut, New York, New Jersey, who are, you know, who would be happy to see that go away. So there's a lot of proposals out there that, you know, are looking to do something with that SALT cap to be a little bit more friendly for taxpayers.

Probably the ones that I've seen that I think would have the most chance of success would be to maybe keep that $10,000 limit in place for single filers, but double it for couples filing jointly or you know, maybe like a 15,000 for individuals and then a 30 for buried filing couples. What kind of to see what happens there you know, there's just, there's so many moving pieces here.

You know, not everything that if TCJA does sunset, not everything is. You know, that's not necessarily a bad thing. There are deductions and limits that would come back into play that I think would be taxpayer favorable, you know, 2% expenses. So this would be things like tax preparation fees.

Yeah, investment management expenses, those would come back into play. The old mortgage limit that used to be able to deduct interest on $1 million of debts, TCJA limited that down to 750,000 as well as limiting home equity interests.

And if TCJA sunsets, that would come back into its play as well. One thing that would potentially come back that, you know, to borrow James, is Godzilla analogy. The alternative minimum tax. You know, we can't, you know, the TCJA didn't kill off the AMT, but it effectively kind of made it go dormant. And, you know, before TCJA, something like 5 million taxpayers were subject to the alternative tax. After TCJA that number was decreased down to about 200,000. And so you know the TCJA sunsets, a lot of those exemptions that were increased would come down and so there could potentially be you know millions more taxpayers that would have to contend with that tax again.

Not everything that TCJA introduced on the individual side was temporary.

There were some permanent provisions. I don't have a lot of time here, so you know, I'll just refer you to the article that's in the show notes where you can read a little bit more on some of the provisions that won't go away.

You know, talk quickly about, you know, some of the tax policy items that we're looking at on the individual side, Michael mentioned carried interest and you know, that was something that the TCJA tried to eliminate or at least sort of reduce the favorableness of that. So we don't have any details on what that looks like right now, but that's one area that we're looking at on the individual side. The other big one would be opportunity zones. So you know, if you remember this was at CGA provision where you know if you had some gains, you could roll those gains into an opportunity zone and defer that gain until the end of 2026.

So if you didn't take advantage of that, keep in mind that that tax is going to come due, you know, next year or the year after. And so, you know, have those checkbooks ready. There has been some legislation that's been out there that hasn't passed yet. There's a lot of bipartisan support for these opportunity zones. So, you know, we could see an extension of that deferral period for another couple of years or another big concern.

And that a lot of that goes E money went to urban areas initially. And so there's been some talk about expanding those opportunity zones to, you know, maybe to have some qualified rural opportunity zones as well with some new deferral periods and maybe some new rules.

Other big kind of individual provision here, policy item that we want to talk about. So the Inflation Reduction Act introduced a lot of new green energy tax credits and the current administration has made it you know, completely obvious that you know they would like to repeal these and so if you are considering purchases that might be eligible for these credits. So this would be things like energy efficient home improvements, residential clean energy projects, EV vehicles, used EV vehicles. Just keep in mind that if you're considering those purchases you might want to accelerate those a little bit sooner because you know, those credits might not say, stay around for much longer, so there's a polling question out there. The last thing that I'll leave you with here is that you know my magic, tax my magic tax 8 Ball said this morning. I asked it this morning, you know what it thought about all of this and it said, reply hazy, try again. So I guess the advice that I would leave clients with here is that act as if TCJA is going to sunsets make an actionable plan. Yeah. If TCJA does go away, a lot of that traditional tax planning that we're used to, like the, you know deferring income, accelerating deductions that might not make sense if we're expecting higher rates next year and changes to a lot of these deductions. So get with your advisor or work with your advisor, come up with a plan to do some of this reverse tax planning, you know, accelerating income into the current year deferring deductions.

Have that plan ready to go, have an action plan and then be ready to execute that later on in the year when we hopefully know a little bit more about what's going to go on. So thank you. And I'll turn it back to Michael for the final words here.

Michael Wronsky

Andy, thank you so much and thank you to James and Michael also. Terrific stuff here and would be remiss not to thank you, our audience, for taking time today to be with us. The last parting recommendation that I would make is to subscribe to Netflix and make sure that you're getting all the old Godzilla movies in your queue because there's good stuff there to be to be seen.

But if you asked a question during today's webinar that we didn't get the chance to answer, please reach out to us. We're happy to help if you need CPE and responded to the polling questions, a CPE certificate will be mailed to you in due time. And yes, we've got a number of resources available to you on our website and again, most importantly, thank you guys so much for joining us. Thank you to our panelists for the wonderful information and good night and good luck.