2024 Year-end tax planning

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Hi, my name is Elizabeth Sundheim. And I'm a Banker in the JP Morgan Private Bank based in New York. I am joined today by two colleagues who over the past two years have been tracking electoral developments and their potential impact on future US tax laws. I'm joined today by Jordan Sprechman, the Practice Lead for US Wealth Advisory, and Adam Ludman, the Head of Tax Strategy in JP Morgan Private Advisory.

Over the past few weeks, we have all been spending a lot of time speaking to clients about taxes. And I'm really excited to dive into today's conversation all about taxes. But before we do, I thought it'd be helpful to share a suggestion and four things to keep in mind as we enter 2025 and think about taxes.

So let's first start with a suggestion. No matter what happens with taxes next year, if you can afford it and it makes sense in the context of your overall balance sheet, we suggest that you use your gift tax exemption and make tax efficient gifts to family and friends. We will spend time talking about both the math and the politics behind the suggestion later on in the conversation.

And now for the four things to keep in mind as we enter into 2025 and think about taxes. First, nothing will happen immediately. The legislative process is intentionally slow, even in the most urgent of times. And Congress is known not to act until it absolutely has to. Thus, it is very possible that we don't see any tax legislation enacted until the end of 2025.

Second, don't react quickly. Tax legislation that is proposed in early 2025 will likely not be the ultimate outcome. Legislators will propose amendments for messaging purposes, knowing full well that those amendments will not be enacted.

Third, expect the unexpected. As many know, just as the Republicans will control the White House and Congress in early 2025, Democrats controlled both in 2021 when the Build Back Better bill was introduced. It contains several proposals that would have had a huge impact on tax laws. In the end, despite virtually everyone's predictions, basically, none of these proposals were enacted.

And fourth and finally and most important, stay in the know. There will be lots of noise in the coming months. And our job at JP Morgan is to help cut through it and give our clients guidance. While we don't exactly what will happen yet, we at the Private Bank are monitoring this closely with our government relation team, tax policy experts, consultants, and many others. And as we learn more, we will make sure to share.

So let's dive into today's conversation. So since the election, one of the most common planning questions Adam, Jordan, and myself have been getting is what exactly is going to happen to taxes next year. And the reason for that is 23 provisions of the Tax Cuts and Jobs Act are expected to expire on midnight on December 31, 2025. And when I've been getting that question from clients, I've been saying I have no idea what's going to happen with taxes next year.

But I think we all have a pretty good idea that Congress is going to do something. And that's because even before the election, Congress made it very clear that tax legislation was going to be a priority for 2025. And President-elect Trump campaigned on a permanent extension of the Tax Cuts and Jobs Act, making it very much a priority for his administration as well. So, Adam and Jordan, let's jump in and talk about six of the expiring provisions in the Tax Cuts and Jobs Act that we believe are most relevant to our clients.

So let's start with the estate and gift exemption, QBI, or qualified business income deduction, the increase in the top income tax rate, the mortgage interest deduction, SALT, and AMT. So Jordan, let's get started with you and talk about the gift exemption, the increase in the income tax rate, and QBI. What tweaks, if any, do we expect Congress to make?

Well what I expect is going to happen is that all three of those things, the estate and gift tax exemption amounts, the qualified business deduction, the 20% qualified business income deduction, and the ordinary income tax rates are going to stay probably pretty much exactly where they are for basically three different, although all related reasons. Reason number one, I'm going to start with the ordinary income tax rates. Now the top rate is 37%. It's scheduled-- to go up to 39.6%. That's true.

But that's not the only thing about those tax rates. There are seven tax brackets. Five of the seven brackets are scheduled to go up at the end of the year. So it's not just the top bracket that matters. But it's the other four brackets that are scheduled to go up.

And not only are the rates supposed to go up, but the brackets are supposed to come down. As a consequence, what that means is that it's estimated that 62% of all taxpayers would experience a tax increase in 2026 if Congress does nothing. So there is good deal of sentiment on both sides of the aisle to probably keep those rates exactly where they are.

Now, the problem with keeping the rates where they are from a fiscal point of view is that if the rates did go up, if those rates were to sunset and the old rates from 2017 were to come back, that would cost the government about $2 trillion over the course of the next 10 years, at least that's what it's projected to cost. And for that reason, the Congress is going to think long and hard about, do we tweak any of those rates somewhere along the line? But the big money when it comes to tax policy is in the ordinary income tax rates.

So what I expect that is going to happen is that perhaps those rates get extended but not for a full 10 years, projected to cost $2 trillion, but maybe for something less than 10 years, possibly four or five years. And that would be the way the government computes revenues for budgeting purposes. That's something that I would expect to see. That's number one.

The qualified business income tax deduction, which is projected to raise if it goes away $700 billion or so over the next 10 years, that too may get extended for maybe only four or five years. The reason that that is likely to be extended is because that deduction favors small businesses. And again, on both sides of the aisle, there's a great incentive to want to preserve what's perceived as a tax break for small businesses. Doesn't raise as much money. But it's very, very important because small businesses, frankly, need that tax break to be able to compete with large, multinational, so-called C corporations.

That's one of the breaks that they get. So I expect that we're going to see that extended as well. And then finally, on the estate and gift tax exemption, which raises basically almost no money for the government, it's projected to raise over 10 years if it sunsets at the end of 2026, only about-- only-- about 170.

So very minimal in the context of the overall picture.

Very minimal-- about $170 billion over the course of 10 years. So if you do the straight line math, it's $17 billion a year, which in the context of a $6 or $7 trillion budget is peanuts. Expect that to get extended again, probably for three or four years, only because it's an ideological issue as much as anything. It's not a real revenue raiser by any stretch of the imagination. And Republicans almost uniformly would prefer to see that extended over the course of some period of time, again, maybe only for four or five years rather than over a full 10 years.

OK, I mean, I feel like one of the toughest questions our clients face is how much can they afford to gift when you think about that lifetime gift exemption. And we have great tools at JP Morgan that can help solve for what that appropriate amount is in the context of your overall balance sheet. And so if you're interested in learning more of how we can help with that, please feel free to reach out to your JP Morgan Advisor.

And specifically on that point, the one thing-- clients all the time talk to us about, well, if the gift tax exclusion is going to drop down at the end of 2025, beginning of 2026, is that an impetus for me to be gifting wealth away? And that's actually, in my opinion, the wrong way to think about the question. The right way to think about the question is, what can I afford to give away?

And as you said, we have tools in house that can help clients determine whether they have excess capital to give or not. Because bear in mind this. If you've reached a certain level of net worth and your wealth is accumulating over time, every dollar of wealth that you're accreting, the United States government is a 40% partner in. So the sooner you give those assets away, the sooner you get the government out of that 40% partnership with you.

So I would think about it, as what can I afford to gift away, as you said, Elizabeth. And if I can afford to, do it. If I can't afford to, just keep accumulating wealth until you can.

OK, that's really helpful. So, Adam, let's move to the other three. So we have the mortgage interest deduction. We have SALT. And we have AMT.

What tweaks do we expect Congress to make to those? And I just threw out a bunch of acronyms. So if you could explain what each of those are as well, I think that would be really helpful.

Yeah, let's take them one at a time. So many are familiar with the mortgage interest deduction. Under current law, home owners are able to deduct interest paid on up to $750,000 of debt used to buy, build, or improve their primary or secondary residence. That threshold is scheduled to go up to $1 million in 2026 when the TCJA expires.

But remember that when the TCJA was being negotiated, part of the way that the Republicans paid for a number of the tax cuts that were enacted is limiting deductions. And so the mortgage interest deduction is one of those. That was limited. So if Republicans are looking to extend tax cuts in 2026 and beyond, this may be one area where they decide to keep the status quo.

On the other hand, the state and local tax deduction cap of $10,000 per year is a bit more controversial. And you've had interesting political dynamics here because you've had members of Congress on both sides of the aisle who have effectively advocated, particularly in high-tax states like New York and California, for increasing that $10,000 cap. They've been unsuccessful so far. But in 2025, there's probably going to be about a handful of Republicans from those high-tax states like New York and California, that are going to continue to advocate for increasing the SALT deduction cap.

And given the very slim levels of majority control the Republicans have, particularly in the House, that group of Republicans is going to have significant influence and could effectively say, we're not going to vote for any tax bill that does not address the SALT deduction cap. And I would also add that President-elect Trump campaigned on eliminating the state and local tax deduction cap. So I think something could happen here. I think it's likely something could happen here. Probably unlikely it goes away entirely, though.

And the reason for that is that it's very costly to get rid of that cap on deductions. Some have estimated it could be as much as $1 trillion over 10 years. But I think some modest increase to the SALT deduction cap amount could placate those Republicans who could form a block to prevent any bill from passing. So I think we may see some movement there next year.

The AMT, alternative minimum tax, is something that many of our clients haven't had to think about for the last several years because the Tax Cuts and Jobs Act really reduced significantly the number of taxpayers who had to file for AMT and subject to AMT. And just to recap on how that works, your CPA, when they're figuring out their tax liability, will basically compute your regular tax liability and then your alternative minimum tax liability. And you pay the higher amount between the two.

Now, when you calculate AMT, it's subject to tax at a lower rate but on a broader base of income. And you get fewer deductions. So things like the state and local tax deduction are not even applicable under the AMT. You're not allowed to take it. And so also, if the Tax Cuts and Jobs Act does not get extended in 2026 and beyond, then you're going to have millions more taxpayers who are back in AMT.

And so there's an argument that if that were to change, then it would make taxes significantly more complicated for many Americans. And so I think we may see some movement here. But the big question is really, what is all of this going to cost? And at the end of the day, Congress is going to have to make the math work. And one of the things they might think about if they want to increase the SALT deduction cap, for example, is potentially modifying the AMT thresholds and turning the dials either there or somewhere else in order to make the numbers work.

Yeah, because you mentioned a few provisions. Jordan did as well. It seems as though Congress can't look at each of these in isolation. They're going to be playing around with all of them to make the numbers work overall.

Completely agree. I mean, we tend to look at these in isolation. And many clients might as well, just to figure out how one thing impacts, how one provision impacts them or their business. But really, Congress is looking at this holistically.

And they're going to look at the political aspects. But they also have to make the numbers work. And so I think that's going to be a big part of it, kind of tweaking the numbers, similar to what they did back in 2017, just to ultimately make the math work.

OK, so as Congress sits down and spends time on the Tax Cuts and Jobs Act, what provisions do you think could be added that are not already included? I think there's been some talk about bonus depreciation, qualified opportunity zones, and other business-friendly provisions. Can you spend a few minutes on what we could see that we don't already see there today?

Yeah, so many of our business-owner clients are focused on a lot of these provisions. And I would say probably at or near the top of the list is bonus depreciation. So when the Tax Cuts and Jobs Act was passed back in 2017, it allowed business owners who were buying, let's say, equipment, vehicles, machinery in their trade or business to be able to fully deduct or immediately expense the cost of that equipment used in their trade or business. That bonus depreciation has been phasing out over time at a rate of 20% per year.

And so this year, in 2024, we're looking at 60% bonus depreciation. And that amount is going to be fully phased out by 2027. There's been a lot of talk, and there was a bill that was actually passed in the House, in the Republican-led House, earlier this year that would have restored and expanded bonus depreciation. It didn't make it through the Senate for a variety of reasons.

But I think that's something that, again, President-elect Trump has campaigned on extending bonus depreciation. I think that's one area where we could see an impact. You also mentioned qualified opportunity zones. And that's something we're watching, too. So this is a program that effectively is meant to incentivize investment in economically disadvantaged areas.

And so the way it works is if an investor has a capital gains event-- let's say they sell a business or they sell stock or something like that-- they were allowed to roll the proceeds into a qualified opportunity zone investment provided they meet all of the requirements. Then they can get the benefit of a number of different tax provisions. And the benefits are really three-fold. One is they're able to defer the capital gains event until the end of 2026.

The second benefit, which is no longer around, is if you met a holding period requirement, you'd effectively get a step up in basis, a free step up in basis. And so that would reduce your gains recognized, ultimately, when you sell the qualified opportunity zone investment. The third biggest benefit is probably the ability to if you hold the qualified opportunity zone investment for over 10 years, you can wipe out the capital gains tax on future appreciation, and so really a significant program there, a number of different tax benefits.

There's been talk-- again, there's been bipartisan support for extending these provisions. It hasn't gone anywhere yet in Congress. But expect that to be back in the conversation next year, I think. There's a number of Republicans, particularly, who have been in favor of expanding or extending the qualified opportunity zone program.

OK, thank you. So one thing that we didn't talk about yet-- Jordan, I'm going to ask you this-- is tariffs.

Mm-hmm.

How do tariffs play into taxes in this whole conversation that we're having today?

Well, a tariff is a form of tax, of course. And as with all taxes, they have a negative effect on economic growth and development. There are an awful lot of Republicans who aren't in favor of tariffs. Now, Congress, under the Constitution, is the entity that is entitled to impose tariffs and duties-- it says in the Constitution. Congress has delegated a lot of that authority to the President.

One question which remains to be determined is how much will tariffs be a part of any tax bill. The problem with including tariffs as part of any tax bill is a revenue offset. The purpose of the tariffs are obviously to generate revenue. Is there, as Adam alluded to before, there are some Republicans in Congress who strongly support qualified opportunity zones.

There are also a lot of Republicans in Congress who are free traders and don't like the idea of imposing tariffs at all, whether for national security or general economic reasons. So part of the political calculus that the administration and Congress are going to play is say, should we include tariffs in any tax bill as a revenue offset? Or is that going to cost too much Republican support? We can assume the Democrats are going to oppose whatever the Republicans in the House and Senate come up with.

It's uncertain-- two things-- one, whether tariffs are going to be imposed at all by Congress, and second, to what extent they're going to raise revenue. It may be something that's used, as Adam alluded to before, to dial up the revenue numbers that are needed. But there are awful lot of political headwinds.

And when President Trump is President, he can impose a lot of those tariffs unilaterally and not have to rely on Congress to do so. So he may just unilaterally do it. And so therefore, no tariffs. My guess right now is it will not be part of any tax bill.

So it's something to watch, though, over the coming months.

Without question, we're going to hear an awful lot of rhetoric around it. And again, tariffs in context aren't going to raise a tremendous amount of revenue unless the tariffs are so high that they have a punitive effect on the import of those goods. And that, again, will have deleterious economic consequences, which gets back to the question of from a holistic point of view, is that really in the best interest of the country as a whole?

OK, helpful. So now let's spend a few minutes on timing. And Jordan, you spent a little bit of time talking about this earlier. If the TCJA actually expires at the end of 2025, 62% of taxpayers will be paying higher taxes.

That's the estimate, yes.

Right? When you take all that into account, it could cost $4.6 trillion, though, to extend this for another 10 years. And that number would probably even be higher as you look at 2025 estimates.

Mm-hmm.

So when you take all of this into account, what are the limits on how long the TCJA could get extended for?

I think realistically the TCJA, if extended completely in whole wouldn't get extended for probably more than four or five years. It just-- the math isn't going to work.

So it's not 10 years.

I consider it highly unlikely. And there may be some picking and choosing going on. It may be well, we'll extend, for instance, the ordinary income tax rates. And again, those are the big numbers-- might extend that for the full 10 years. But we would extend the qualified business income provisions only five or the estate and gift tax provisions only five.

Or we may play around with the SALT deduction cap for three or four. All of those things are possible. Again, as Adam alluded to, it's going to be a matter of playing with the numbers so as to come up with a total cost to the government that is politically feasible. And again, what's politically feasible? That's in the eyes of those who are going to try to pass this legislation.

OK, so now let's move to the timeline and process for actually getting this tax legislation passed. Adam, I think something you've said over and over again is Republican control means reconciliation. What exactly does that mean? And what does that process look like? Is that easy?

It's easier than usual. And the reason is Republicans control the House, the Senate, and the White House. And as you said, they'll have the ability to use the budget reconciliation process. That's a term we're going to start hearing a lot more about in the coming months.

And I'd say there's really two things to remember about reconciliation. The first it is easier to pass tax legislation because you can do it with a simple majority in the House and the Senate. Ordinarily, to pass legislation through the Senate, you would need 60 votes. And here, you only need a simple majority.

The second thing to remember is that it is a special procedure. It has its own special rules. It generally can only be used on revenue spending and the debt limit. And so you have restrictions in terms of what can be included. So some might try to include other policy issues in there.

And you could argue that really, any type of policy has a revenue or spending impact. But it's not intended and generally cannot include items that have an incidental impact on revenue or spending. So tax legislation fits right in that wheelhouse. And so we can expect when the new Congress is sworn in on January 3, that they will get to work on a budget reconciliation package to address tax legislation.

And so how long do we think it'll take before legislation could get passed? What does history tell us in scenarios like this?

I don't see it being enacted-- anything being enacted before, really, in the first half of 2025. I think this is more a second half of 2025 event. And there's a couple of reasons for that. I mean, first of all, we know that tax policy is a top priority of the incoming Congress, if not the top priority. It's also a top priority for the incoming administration.

But all of this takes a lot of time. And just getting back to the reconciliation process, the first thing Congress has to do is set the parameters of a reconciliation package. And that involves figuring out what Congress is going to spend over the next 10 years. So to your point, Jordan, I mean, the TCJA, a full extension, is going to be very expensive. And you're obviously going to have some in Congress who are sensitive to increasing the national debt.

And so they're going to have to agree on those numbers and figure out how much they want to spend over a 10-year period. And I think with very slim majorities of Republican control, particularly in the House, that can be difficult to do. You're effectively going to have to-- the Republicans will have to negotiate among themselves to reach agreement on that point. Once they set the parameters of reconciliation, then they can get to the details of tax legislation.

And just looking back to what happened back in 2017 when the TCJA was enacted, the Republicans basically said, we don't want to spend-- we don't want to increase the deficit by more than 1 and 1/2 trillion dollars over 10 years. And then when they reached agreement on that, then they sorted out the details. And there's a possibility that you could have multiple rounds of legislation and different proposals that are included here.

And so they're really going to have to figure out what those details are in order to sort out timing. Congress works best on a deadline. I think the deadline they're working against here is December 31, 2025, because that's when many of those provisions of the TCJA do expire. So working back from there, expect something to happen really in the second half.

So you believe that something could get enacted January 1, 2026? You don't see anything enacted before then?

I would say the second half of 2025.

OK.

Yeah, I mean, certainly possible it could go beyond the end of the year in 2025. That wouldn't be a new event. That has happened historically with expiring tax cuts. But I think, really, Congress is focused on this.

I think there's some momentum. Republicans will be focused on extending the tax cuts for a lot of the reasons that Jordan said. And so I think something may happen near the end of 2025.

OK, well, we covered a lot today-- a lot of exciting things around taxes. Anything else you'd like to add as we close out today?

The only thing that I would like to add is, again-- Elizabeth, you made this point earlier-- don't react to every single thing that you see in the headlines. A lot of rhetoric that you will hear will be whether senators or representatives-- messaging certain points that he or she would like to specifically message. They may float ideas that have no realistic chance of passage.

The thing to do is to stay informed and stay in the know and make sure that this is all part of the undulations that go into passing significant legislation. I mean, in theory, it's entirely possible that nothing passes. But I think it's way more likely than not that something does pass. And I agree with Adam. It's more likely that something will happen towards the end of next year.

And don't be surprised if a bill gets proposed and then gets shot down for some of the reasons that Adam alluded to. For instance, the SALT deduction cap caucus among Republicans in the House may shoot a bill down maybe in the middle of the year because they say it's not generous enough to the taxpayers in their specific states. And then it will get revisited and revived.

OK, Adam, anything you'd add here?

I completely agree. There's going to be a lot of noise in the coming months. I think we're really not going to see details until we see the text of legislation. And then we're going to have reactions from various members of Congress and start to get a sense as to who would support what and so I think just kind of cutting through the noise and staying focused.

There's a lot of political messaging that we'll expect in the coming months. And I also tend to agree that your idea of potentially a short-term extension, not necessarily over a 10-year period, is a very realistic possibility. I think the politics of this are going to be very interesting, given the anticipated costs of the full extension of the Tax Cuts and Jobs Act.

Well, thank you both for joining me today. And we hope that you all found today's discussion to be valuable. Your JP Morgan team is here if you would like to learn more about anything that we discussed today. Thank you for putting your trust in JP Morgan.

Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional in your JP Morgan Team. This concludes today's webcast. You may now disconnect.

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