If you want the honest answer, it’s “we simply don’t know.” In fact, no one does…and they may not until December 31, 2025, when the act is set to expire, as we all know Congress will be happy to kick this can down the road until the very last minute in hopes of favorable leverage and trade-offs. But you should keep reading, as the continuation or expiration of this important set of tax laws could have a significant impact on your financial plan.
The second question you might be asking is “Why should we be thinking about this ~28 months before anything is likely to happen?” After all, we haven’t even made it through the all-important 2024 elections, which will likely play a huge role in determining the fate of the TJCA.
Before we go any further, it’s helpful to take a step back. What is the TJCA anyway, and what’s this about it expiring? The TJCA is perhaps better known as the “Trump Tax Cuts,” and it was passed in late 2017 (effective January 1, 2018). Due to budget rules in Congress, an expiration date had to be put on a majority of the Act’s provisions, leaving most of it to expire at the end of 2025 (the lowered corporate tax rate and the long-term capital gains rate continue indefinitely).
What are some of the key provisions that are set to expire?
- Lower tax rates across most of the income tax tables.
- Approximate doubling of the standard deduction.
- Elimination of certain itemized deductions.
- Cap on the SALT (State and Local Income Tax) deduction at $10,000.
- Expansion of the child tax credit value and eligibility.
- Significant increase to AMT (Alternative Minimum Tax) exemption and income phase-out amounts (reduced exposure to AMT for many taxpayers).
- Advent of the “Qualified Business Income (QBI)” deduction.
- Adjustments to how long-term capital gains rates are calculated.
- Significant expansion of the lifetime gift and estate tax exemption (currently $12.92 million individually, $25.84 for a married couple).
We have been thinking about this topic for awhile, trying to incorporate considerations around into recently-built or updated financial plans. In fact, our planning software (eMoney) has a feature that allows us to run plans under either scenario:
- TJCA expires at end of 2025
- TJCA does not sunset (continues indefinitely)
This has enabled us to see the impact of these different tax rates on each client’s financial plan, as the impacts are certainly different depending on your circumstances. It then enables us to start thinking about ways to adjust a financial plan depending on your outlook for the future of the TJCA.
We’ll finally get to the “What can you be doing?” part in just a bit. First, let’s understand just how meaningful the tax rate changes can be. For some married couples, their marginal income tax rates could climb as much as 9%, as seen in the chart below. Only one group (a narrow band of higher earners) will see their marginal rate fall (by 2%). Let’s take a couple with net taxable income of $364,200. How much more would they pay in federal income taxes if the rates reverted, per the table below? $16,813 – a 22.7% increase from prior (there you see the cumulative impacts of the rate increases at the lower end of the brackets).
Source: Putnam (Accessed 8/22/23)
Single filers will also see changes, some positive and some negative. As an example, a single filer with a net taxable income of $182,100 will see their tax bill increase by $5,621 – a 15.2% bump in the wrong direction.
Source: Putnam (Accessed 8/22/23)
Keep in mind, these are just the marginal rates (item #1 from our list above). The expiration of other provisions will either increase or decrease your tax bill, depending on your circumstances.
So, what are some of those things that you can be doing now if you expect the TJCA provisions to expire?
Accelerate income
- Convert Traditional IRA assets to a Roth IRA while the lower rates apply. This can help reduce your overall tax burden and also give you increased flexibility with future income tax planning.
- This could be a good idea, even if you expect the TJCA rates will be extended. It is a highly personalized consideration, so reach out to us to discuss.
- Consider exercising stock options, avoiding deferred compensation, or electing out of installment stales as a means of accelerating income into more favorable tax years.
- Harvest capital gains prior to the end of 2025. If you’re in Washington, just be mindful of the new capital gains tax that applies (7% on gains over $250,000). [Click here to learn more]
- Consider taking larger IRA distributions in 2023-2025 to “fill up” favorable tax brackets (see Roth conversion idea as a likely better means of accomplishing this goal, subject to one caveat).
- For those with inherited IRAs subject to the 10-year rule, consider taking larger distributions before the TJCA expires. This is a topic rife with planning opportunities, so reach out to learn more about your own circumstances.
Delay deductions
- Defer losses or deductions to the time when tax rates increase. This can apply to both individual taxpayers and non C-corp businesses (with pass-thru income).
Give it away…now
- Donate IRA assets to charity via a Qualified Charitable Distribution, if you are age 70-1/2 or older. This helps draw down taxable retirement assets, thus reducing the amount of future required minimum distributions. [Click here to learn more]
- Gift income-producing property to family members who may be in lower tax brackets
- Accelerate your plans to gift assets to your heirs using the expanded lifetime gift and estate tax currently in effect. For wealthier individuals and couples, this could translate to tens, if not hundreds, of thousands of tax savings for their heirs.
- This gets into complex trust planning, which is beyond the scope of this piece. Consult with us and your estate and tax professionals for further details.
- This is above-and-beyond the annual gift tax exemption amount (currently $17,000 per recipient), which you should consider using as well if you are concerned about estate tax liabilities and will still be left with sufficient assets to meet your needs.
- Use the accelerated gifting option available when funding 529 plans (5x the annual exemption amount ($17,000 * 5=$85,000 this year)). As a bonus, it recently became very favorable to own these 529 accounts in the name of grandparents (for the benefit of grandchildren), a major shift from prior student loan eligibility considerations.
- Consider use of an Irrevocable Life Insurance Trust (ILIT) as a means of transferring substantial wealth outside of your taxable estate.
Note that all of this is on top of the changes stemming from SECURE Act 2.0 that was passed at the end of 2022. Most of the key provisions from that retirement-focused legislation go into effect on January 1, 2024 (some are already in effect). [Click here to learn more]. You will want to carefully consider those as you also consider the changes potentially looming with the TJCA.
Oh, and if you are wondering what my opinion is on the odds of the TJCA expiring…here you go. Personally, I think it will be a difficult road to raise taxes, particularly at the middle and lower end of the tax brackets, especially if inflation continues to persist and the economy is not showing signs of significant strengthening. At the same time, I think there will be significant pressures to raise taxes on the upper end, leading to major adjustments to some of the provisions listed above. There is too much time between now and the end of 2025 to speak with any level of confidence, but if I were a betting man, I would wager that most of the key provisions of the TJCA will be extended. If any get eliminated, it will likely be the expanded estate tax exemption, the lower marginal rates at the upper end of the brackets, and the cap on the SALT deduction (as a compromise on the other two). But since I never win any bets, take this all with a grain of salt, and instead start doing some planning for different contingencies. We’re here to help!