Tax Cuts Sunsetting in 2025
Most people do not realize that the 2017 Tax Cuts and Jobs Act includes a number of temporary tax cuts and provisions that are expiring in 2025. As a result, it could be beneficial to plan ahead. Given that Congress appears divided, the Federal Government is struggling with persistent high federal deficits, and Democrats in the White House, it’s entirely conceivable that Congress lets these temporary tax cuts sunset.
Income Taxes & Roth Conversion
Barring action from Congress, income-tax brackets will revert to their higher pre-2017 levels when the tax law expires in 2025. This will have an impact on most taxpayers. However, people near retirement, who may be at their peak earnings level, could see the biggest income-tax bump as the top rate will go from 37% to 39.6%. Given this situation, it could make sense to recognize as much income as possible now, For example, people considering converting their IRA to a Roth IRA, might want to do it now. They will get a one-time lump-sum tax bill on the total amount of the conversion, but it will be at a lower rate than if they wait and convert in 2026 and beyond. Roth conversions come with a five-year waiting period before earnings can be withdrawn tax-free. As such, advisers say retirees should make sure to have enough money set aside to cover that period if necessary.
Estate Taxes & Trusts
According to current Internal Revenue Service rules, married couples can transfer a total of $25.84 million and individuals up to $12.92 million to beneficiaries without triggering federal estate taxes. Any amount over that exclusion limit could be subject to federal estate taxes, which can range from 18% to 40%. If the tax law expires, the size of that exemption will be cut roughly in half. That means a taxable estate worth more than approximately $7 million for an individual or $13 million for
If an individual or couple hasn’t used up the exemption yet, creating a trust is one way to transfer assets that might be subject to taxes after 2025. There are a variety of trust structures that can be used, depending on the needs of an individual, couple or family. A spousal trust, for example, provides for a surviving spouse without the survivor having to pay federal estate taxes. A couple also may decide to put a portion of their estate in a trust for their children, allowing it to grow over time without being subject to federal estate taxes.
529 Gifts
Individuals and couples can shrink the size of their taxable estates by giving away money and assets while they are still alive. Such gifts could include contributions to a “529” education-savings plan. The 2017 tax law includes a special break for 529s that might be worth considering. It allows people to front-load five years’ worth of cash gifts—up to $85,000 per beneficiary this year for individuals and up to $170,000 for couples—into a single contribution. Maxing out 529 gifts now allows people to shrink the size of their taxable estates, and results in a 529 plan that is larger and grows tax-free longer.
Charitable Giving Now
The tax law increased the annual deduction limit for cash contributions to public charities to 60% of adjusted gross income from 50%. The limit will go back down to 50% in 2026. So for those considering a significant cash donation to charity, doing it now will result in a bigger tax deduction.