Hello, thank you for tuning in to today's Emerald GEM, which stands for Get Educated in Minutes. I'm Alvina Lo, Chief Wealth Strategist for Wilmington Trust and your host for today. And in today's GEM, I'm going to answer the question, what are the potential tax law changes this year and what they may mean for you and your wealth plan.
And to start, we're going to take a little trip down memory lane. In 2017, during President Trump's first term in office, a sweeping piece of tax legislation was passed. I'm referring to, of course, the Tax Cuts and Jobs Act of 2017. Many of the tax provisions that was ushered into law have an expiration date, and that expiration date is at the end of this year.
Therefore, without any congressional action, many tax laws that are currently in place will automatically expire and will revert back to prior levels, to what we had in year 2017. So what can happen to these tax provisions? Well, there are four possibilities. First, the tax provisions could be made permanent.
Second, they could be extended for a set period of time. Third, they could be allowed to be expired, reverting back to pre 2017 levels. Or, fourth, a mix of the above. Some provisions may be extended, while others expired, and the ones that do get extended may apply to only a subset of taxpayers for a certain period of time.
The simplest path, and the path of least resistance, is the third option. Do nothing, and the tax provisions will simply expire. However, we also had an election last year, resulting in Republican control of the White House and Congress, albeit with a slim margin in both the House and the Senate. The Republicans general position, we know, is lower taxes.
And therefore, it is also likely that some, if not all, of the tax cuts would be extended. Another factor to consider is the budgetary reality and fiscal constraints. Extending tax cuts is expensive, and in this case, just the personal and estate tax provisions alone will cost 4. 2 trillion over the next 10 years.
There's clearly a lot of moving pieces, and the outcome remains uncertain. Now for our clients, the potential impact is significant. So let's break it down to four key areas that we're focusing on for our individual wealth clients. The first is the estate gift and generation skipping tax exemption. Under the current law, the Federal Estate Gift and Generation Skipping Tax Exemption are at a historical high, $13.99 million per individual, or $27.98 million for married couple. Without further congressional action, these exemptions will be roughly cut in half, dropping to approximately $7 million per individual, or $14 million for married couple. And therefore, there is significant opportunity this year, while we still have certainty of the law for clients to engage in planning.
Consider taking advantage of the current environment and making significant gifts to trust this year. A popular strategy, which has been a topic of our podcast in the past, is the Spousal Lifetime Access Trust, or SLAT, which allows for much flexibility while maximizing tax benefits. The second that we're watching for is the income tax rate for individuals.
The Tax Cuts and Jobs Act lowered the top federal individual tax rate to 37%. And if this particular provision expires, the top rate will revert back to prior level at 39. 6%. In terms of long term capital gains, while the tax rates did not change with the Tax Cuts and Jobs Act, the income threshold to which the tax rate applies did change, such that if current laws do expire, many clients will likely see a slight increase in their total capital gains tax liability.
So what's the strategy here? If you have flexibility in your income planning, consider accelerating income into 2025 while rates are lower. Similarly, if you're thinking about a Roth conversion, this might be the best time to act before tax cuts potentially rise. The third area is also on the income tax side, but on deductions specifically.
The Tax Cuts and Jobs Act impacted the availability of many income tax deductions for the individuals. This includes doubling the standard deduction, adjusting the cap to the Mortgage Interest Deduction and Home Equity Loan Deduction. A big one to watch for, especially for those living in high income and property tax day, is the so called SALT deduction, or State and Local Tax Deduction.
The Tax Cuts and Jobs Act imposes a limit of $10,000 as the maximum deduction for SALT. And if this provision is allowed to expire, the cap will be removed and the deduction will be allowed back in full. Obviously, these deductions are case dependent on one's individual situation, so understanding the potential outcome here and how it applies to your individual circumstances will be critical.
The fourth provision that we're paying close attention to is the Qualified Business Income Deduction, or the so called Section 199A deduction. Now, the Tax Cuts and Jobs Act lowers the corporate tax rate from 36 percent to 21%. But this only applies if your business is organized as a corporation. If your business is organized as a pass through entity, however, such as the LLC or a partnership, the law also did change to allow for a new deduction called the Qualified Business Income Deduction, which allowed for a maximum of 20 percent deduction on certain business income.
Now, interestingly, while the corporate tax rate cut was made permanent, this particular deduction for pass through entity was not, and will expire at the end of this year. And therefore, if you're a business owner whose business is a pass through entity, you'll want to pay close attention to whether this particular provision will expire, because it will have significant impact on your bottom line.
And if need be, those business owners may reconsider the business entity structure from the lens of an income tax optimization. Now, entity choices do carry impact beyond income tax. And switching from one type of legal entity to another may have significant transition and other implications. And therefore, it is not a decision to be taken lightly and needs careful evaluation with the help of your team.
That includes your business, legal, tax, and financial advisor. This year is shaping up to be a critical year for tax planning. Now many clients, understandably, took a wait and see approach prior to the election. But now that the election's behind us, and we have more certainty as to the priorities of this administration, now is the time to act.
While certainly nobody has a crystal ball as to what will happen with tax changes, being proactive and understanding your options and their various impact is critical to put you in ready position when the law does change. We here at Wilmington Trust will keep a close watch throughout the year on how these potential tax changes will play out and be sure to keep you, our clients, informed.
Well, thank you for joining us today and please contact your Wilmington Trust advisor if you have any questions about the pending tax law changes and how it will impact your wealth plan. We will be glad to help. See you next time.
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