What Does the Expiration of the 2018 Tax Cuts and Jobs Act (TCJA) Mean For You?
On December 31, 2025, the 2018 Tax Cuts and Jobs Act (TCJA) is scheduled to expire. The expiration of these tax rules will add additional uncertainty to an already complex investing world. Assuming there is not an extension of these rules (or a similar replacement), there are some changes you need to be aware of. As Benjamin Franklin famously said: An ounce of prevention is worth a pound of cure.
Income Tax Rates are set to rise.
Individual tax rates are set to revert to their 2017 amounts. Income brackets will also return to their previous ranges, indexed for inflation. For clients who will be especially penalized by the old tax rates, tax planning will become critical.
There are a handful of methods to reduce current year income tax: Itemized Deductions, Bunching of Itemized Expenses, Charitable Giving, Tax Loss Harvesting, HSA Contributions, Qualified Charitable Distributions from IRA’s are some of the most popular. In addition, we can also protect ourselves from future tax liability with Mega Backdoor Roth Contributions and Roth Conversions.
Roth Conversions are a great way to pre-pay taxes.
The amount of taxes you pay over your lifetime is a massive headwind to wealth creation and preservation. One way we can reduce the lifetime amount we pay is with a Roth Conversion. This tax strategy involves pre-paying taxes on retirement funds, like those held in a traditional IRA, into a Roth IRA. This is ideally done at a lower tax rate than anticipated in the future or filling up your current tax bracket assuming it is lower than your future anticipated tax backet. This will also reduce Required Minimum Distributions in the future.
Mega Backdoor Roth Strategy is the most underutilized strategy!
The Mega Backdoor Roth Strategy is an advanced retirement planning technique that involves making after-tax contributions to a designated retirement account, often a 401(k) or similar employer-sponsored plan. These after-tax contributions are distinct from traditional pre-tax contributions, such as those made to a traditional 401(k), and are not subject to the standard contribution limits imposed on other retirement accounts.
Once after-tax contributions are made to the retirement account, the strategy involves converting these after-tax funds into a Roth IRA. This conversion is crucial, as Roth IRAs offer the advantage of tax-free withdrawals in retirement. By using this strategy, individuals can effectively "backdoor" their way into a Roth IRA, even if their income exceeds the limits for direct Roth IRA contributions.
Estate Tax Planning:
For those with estates of $6 million or more, either currently or anticipated in the future, there is a notable opportunity to take advantage of prior to the 2025 sunset: the increased estate and gift tax exemption. This exemption amount will dramatically cut your personal exemption ($6.2 million in 2026 after accounting for inflation). This will impact ALL clients who are above the $6 million threshold, not just those who are above $12.06 million.
The IRS has acknowledged the changing estate laws and has issued rulings (Regs. Sec. 20.2010-1(c)) allowing clients to “lock in” their enhanced exemption without fear of a clawback. The only caveat: You must use the anticipated exemption first and then any overage carries forward; If you give away $2 million today, that will not count towards the enhanced exemption.
Should you choose to utilize the enhanced gifting, there are several trusts than can be established in addition to gifting straight cash and appreciated securities: Spousal Lifetime Access Trusts, Irrevocable Grantor Trusts, Charitable Remainder Trusts, Irrevocable Life Insurance Trusts, and others. Depending on your preferences, one or multiple uses of these strategies can be used to positively impact your legacy goals.
Other Common Tax Changes to Know:
- Due to reduction of the standard deduction, more clients will likely itemize their deductions.
- SALT taxes (State Income Taxes, Property Taxes etc.) will no longer be capped at $10,000.
- Deductions for mortgage interest will apply to debts up to $1 million, an increase from $750,000, and will encompass up to $100,000 in home equity debt.
If you have questions and want to know how the expiring tax policy will impact you? Please reach out to schedule an appointment. At Sevey Wealth, we are a Wealth Consulting firm. We partner with you, bringing you the latest portfolio and tax analysis software as well as over 20 years of experience for you to leverage.
Our goal is simple: Help you manage your own wealth, save you money and give you more control in order to enhance your financial future.
How can we help you?