Brian M. Niksa, CFP® is a Senior Wealth Advisor and Partner at Capstone Financial Advisors.
Nothing about financial planning is static. As fiduciary wealth advisors, we keep our clients informed and make recommendations in their best interests. One of our current focuses for high net worth clients is planning for the tax code sunset of 2025.
In 2017, the Trump administration passed The Tax Cuts and Jobs Act (TCJA). It was the largest overhaul of the tax code we’d seen in 30 years, but they were temporary changes. Several of its provisions are set to sunset or expire on December 31, 2025. While the TCJA affects both personal and business taxes, it’s the personal side of things we’re exploring here. Even though 2025 feels like a long way off, we want to take advantage of the situation’s likely planning opportunities now.
Without getting into the minutiae, there are four main areas we’re concerned with: income tax rates and brackets, capital gains, gifting and inheritance amounts and deductions. The income tax changes will affect everyone. The Tax Cuts and Jobs Act lowered ordinary income tax rates and expanded tax brackets. If these brackets and the related tax rates revert back to prior levels, we’ll see increases in income taxes across the board. For this reason, we’re looking to accelerate income. For most people, this isn’t an easy option, but small businesses may have some flexibility.
In looking at all income streams, we’ll want to evaluate Roth IRA conversions more closely in the next two years. When you convert a traditional IRA to a Roth IRA, you pay taxes, so doing this while we know tax rates are lower may be favorable.
Likewise, retired individuals in their seventies who are taking their required minimum distribution (RMD) may want to increase their withdrawals to leverage current rates. RMDs are determined based on the account balance and the account owner’s age, so increased withdrawals will have the effect of lowering the account balance. When we get to 2026, if the sunset happens, you’ve reduced the amount you have to withdraw subject to those higher tax rates.
Because capital gains taxes may go up, we’ll look to see if selling assets with larger unrealized gains now is prudent, as well.
The estate exemption, the amount of money you can pass to the next generation through gifting or inheritance, will return to 2017 levels.
The current level is $12.92 million, and it will return to $5.49 million, the level present in 2017 prior to the TCJA, and also be indexed for inflation (estimated to be approximately $6 million). For married couples, the amount doubles. People who have high net worth planning needs will want to review their estate plans to see if the potential reduction in exemption warrants any proactive planning needs.
On the deduction side, there are some positives. The increase in the amount of mortgage interest you can deduct on your tax return will increase, and the cap on the state and local income tax, which has since been capped at $10,000, goes away.
These are just a few of the changes that may take place in the absence of any new legislative activity. Each impacts individuals differently based on their situation. At my company, we’re monitoring the situation closely, being as proactive as possible to protect our clients’ best interests. We don’t know what will happen in Washington over the next few years; however, with the impending presidential election, we’ll no doubt continue to hear more about these sunsetting provisions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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