Financial Planning Concepts
The Tax Cuts and Jobs Act of 2017 (TCJA), often called the “Trump Tax Cuts,” is scheduled to expire December 31, 2025. Although this feels like quite a long way off, planning now will help you minimize your taxes if the tax cuts are not renewed.
Provisions of the TCJA
The TCJA brought significant changes to the tax code. The marginal tax brackets were lowered and for joint filers the standard deduction was increased from just $13,000 to $24,000. Charitable contribution limits were increased from 50% to 60% of AGI and the medical expense deduction threshold was reduced from 10% of AGI to 7.5% of AGI. The TCJA also eliminated the Pease limitation, which reduced the itemized deductions by 3% of every dollar above a certain income threshold. Finally, the amount families may pass tax-free was increased substantially and is now (2023) $12.92MM for an individual. These are all great provisions for lowering your taxes.
However, it was not all good news in 2017. The state and local taxes (SALT) deductions were capped at $10,000, the mortgage interest deduction was limited to the first $750,000 (instead of $1MM) of mortgage debt, and the interest on home equity loans was no longer deductible unless it was used to buy, build, or improve the home. These changes negatively impacted taxpayers.
How to Prepare for the Sunset
There are a few strategies we can help you employ to prepare for the possibility the tax law changes will sunset in 2025: First, Roth conversions help move money from your taxable IRAs to your tax-free Roth accounts. If the marginal brackets should revert to the higher rates, everything in a tax-free account will look even better! Especially if you are forced to take RMDs you do not use, Roth conversions at the right times will help you avoid the higher taxes.
Second, it may be beneficial to begin harvesting capital gains and preserve your capital losses if you expect to be in a higher tax bracket in 2026. As we get closer to the sunset, we will help you prepare a multi-year tax plan to see if capturing gains or accelerating income makes sense for your plan.
To prepare for lower estate tax thresholds, it may be beneficial to begin a regular gifting program to your heirs. You may want to give appreciated assets (like stocks, mutual funds, or ETFs) to your heirs (instead of cash) to postpone or possibly even lower the tax liability on the sale of these assets. You can also accelerate gifts to 529 plans for your relatives for higher education. Current tax law allows you to gift $85,000 in a single year ($170,000 for married couples) to each individual and the assets are then out of your estate.
It may be beneficial to consider tax-free bonds in your taxable investment portfolio. With the lower tax rates, tax-free bonds have been somewhat less compelling. With higher bond yields and higher tax brackets, they become far more interesting.
Finally, as we get closer to the sunset, you may want to consider postponing your large charitable gifts. You will want to maximize your gifts during the years when tax rates are higher so you may postpone your gifts until 2026. We’ll know more as we get closer.
Sources:
1. https://www.kiplinger.com/taxes/what-to-do-before-tax-cuts-and-jobs-act-tcja-provisions-sunset, https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions#:~:text=The%20TCJA%20eliminated%20or%20restricted,because%20of%20the%20tax%20overhaul