The third quarter of 2024 is officially in the books, delivering strong returns across asset classes. Large cap stocks, international stocks, and even beleaguered small cap stocks all posted respectable gains, as exemplified by 5.89%, 7.76%, and 9.17% Q3 returns of the S&P 500, MSCI All-Country World Index, and Russell 2000, respectively. Fixed income also performed well, with the Bloomberg Agg returning 5.2% in the third quarter, benefiting from lower benchmark interest rates. The tech heavy NASDAQ underperformed other equity indices with a paltry yet still positive 2.12% return, suggesting that the market may be broadening out of its tech-centric run. Inflation posted its lowest increase in three years, with the September YoY CPI coming in at 2.4%.
While the markets appear solid right now, volatility would not be surprising as we approach the November elections. We will not pretend to make any predictions on what the markets will do as we go through election season. However, there is one area somewhat related to the upcoming elections that we can discuss with more certainty: the upcoming sunset of several parts of the 2017 Tax Cuts and Jobs Act (TCJA). Unless Congress passes legislation to extend them, critical components of this act will disappear, affecting most of our clients. In this newsletter we want to highlight the most relevant changes that may be coming if the TCJA is not extended, and what you can do with your tax and legal advisors in the meantime to help mitigate any downsides to the expiration of these popular provisions.
Change #1: Individual Income Tax Rates
If Congress does not make any changes, the most immediate change that you will likely face is an increase in your federal income tax rate when the current law sunsets in 2026. Below is a helpful chart from Vanguard that shows how each of the tax brackets will be affected:
While it would be unfortunate if tax rates went up, there is an opportunity in the meantime to help insulate yourself from higher taxes in the future. As Vanguard notes, “if your tax rates are lower now than they may be in future years and you have a good source to fund the accompanying tax bill, Roth conversions might make sense. They have the potential to allow those converted funds to grow tax-free, which could equate to a larger after-tax inheritance in the future for your heirs. Roth conversions can be particularly attractive in down markets, when lower priced assets will result in a lower tax bill.” Please note, however, that before engaging in a Roth conversion, it is critical to speak with your tax advisor first.
Change #2: Estate and Gift Tax Exemptions Will Decrease
Without any legislation protecting the TCJA’s lifetime estate and gift tax exemptions, this amount will drop by half, opening estate tax liability to even more Americans. As seen in the Vanguard chart on the next page, the TCJA radically increased the amount exempted from estate and gift taxes when it was implemented in 2018.
As you can see in this chart, without an extension in the estate, gift, and generation-skipping tax exemptions, these amounts will halve in 2026. Shown here are the individual exemptions, so married couples can double these figures. Even when using both spouses’ exemptions together, the combined 2026 amount of $13,610,000 will affect more people than the current combined exemption amount of $27,220,000. In fact, the Tax Policy Center estimated in an 11/18/2022 article that the number of estate’s needing to file an estate tax return will nearly triple in 2026. Families that have never thought they would face an estate tax issue may be vulnerable to one if the exemption rates drop as far as they are slated to go. Therefore, communication with your legal advisor ahead of these changes is essential.
Families that have never thought they would face an estate tax issue may be vulnerable to one if the exemption rates drop as far as they are slated to go. Therefore, communication with your legal advisor ahead of these changes is essential.
Regardless of whether these changes to the estate and gift tax exclusions occur, now is an ideal time to review your estate plan with your attorney and tax advisor to ensure that your current plan still meets your goals. We are well over a year from when critical components of the TCJA expire, giving you ample time to mitigate the negative effects of these potential tax changes. If you are concerned about these changes, a key first step is communication with your tax and legal advisors. Compton Wealth Advisory Group cannot provide tax or legal advice, but we will bring up these topics at review meetings and help you coordinate with trusted professionals to make sure that your financial plan is properly positioned ahead of these potential changes. If you do not have a legal or tax advisor, or would like to speak with someone new, we would be more than happy to recommend a professional that we have had the pleasure of working with in the past. While we cannot predict the future of tax rates, it is prudent to start planning today with your trusted advisor so that you are prepared for what may come your way.
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Compton Wealth Advisory Group, LLC ["Compton]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Compton. Please remember to contact Compton, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Compton is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of Compton’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at http://www.comptonwealth.com. Please Note: If you are a Compton client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
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