The 2018 Tax Cuts and Jobs Act (TCJA) brought significant changes to the tax landscape for both individuals and corporations. While many of the corporate tax changes were made permanent, several key provisions affecting individuals are set to expire after the 2025 tax year. As we approach this expiration date, it’s crucial for taxpayers to understand the implications and consider strategic planning to maximize tax savings. At All Seasons Wealth, we’re dedicated to helping our clients navigate these changes and optimize their financial strategies.
Individual Income Tax Rates
One of the most notable aspects of the TCJA is the adjustment of individual income tax rates. These rates are currently set at lower levels but are scheduled to revert to their 2017 amounts after 2025. Additionally, income brackets will return to their previous ranges, indexed for inflation. This impending change presents both challenges and opportunities for taxpayers.
Roth Conversions
For individuals expecting lower income in the years leading up to 2026, such as those approaching retirement, Roth conversions present a compelling opportunity. By converting pre-tax retirement funds, such as those held in a traditional IRA, to a Roth IRA before the tax rates rise, taxpayers can potentially save significant amounts in taxes over the long term.
A Roth conversion involves paying taxes on the converted amount at current, presumably lower, tax rates. Once in the Roth IRA, the funds can grow tax-free, and qualified withdrawals are tax-exempt. This strategy becomes especially advantageous for married couples, considering the impending increase in tax rates, particularly in the 25% and higher tax brackets.
Roth conversions also offer flexibility in retirement planning, allowing individuals to manage their tax liabilities more effectively in the future. By strategically timing conversions to take advantage of lower tax rates before 2026, taxpayers can optimize their retirement income streams and minimize their overall tax burden.
Estate Tax Exemption
Another critical consideration before the 2025 tax cuts expire is the estate tax exemption. Currently set at $13.61 million per individual, this exemption is scheduled to be reduced after 2025, potentially impacting estates of varying sizes. Individuals with sizable estates have an opportunity to take advantage of the current higher exemption by making lifetime gifts.
Utilizing Increased Exemption Amounts
Making lifetime gifts now allows individuals to utilize the current, more generous exemption amounts, shielding assets from future estate taxation. It’s essential to act before the exemption is reduced, as any gifts made during the increased exemption period will not be subject to clawback, even if the exemption amount decreases in the future.
For instance, gifting assets exceeding the anticipated future exemption amount ensures that the full benefit of the higher exemption is retained, regardless of subsequent changes to tax laws. However, it’s crucial to consult with a financial planner to assess individual circumstances and develop a personalized strategy.
Other Impending Changes
In addition to individual income tax rates and estate tax exemptions, several other provisions of the TCJA are set to expire, affecting various aspects of taxpayers’ financial planning.
Itemized Deductions
Changes to itemized deductions include adjustments to the standard deduction, removal of the $10,000 limitation on state and local taxes, reinstatement of deductions for personal casualty and theft losses, and modifications to mortgage interest deductions. Taxpayers should familiarize themselves with these changes to optimize their tax planning strategies.
Family Benefits
Reinstatement of personal and dependent exemptions, coupled with modifications to child tax credits, will impact families’ tax obligations. Understanding these changes and their implications is crucial for families seeking to minimize their tax liabilities.
Other Provisions
Provisions such as the elimination of the 20% qualified business income deduction for pass-through entities and reductions in alternative minimum tax exemption amounts will also affect taxpayers’ financial planning strategies.
Why It’s Important to Prepare Tax Cuts with Financial Advisors Like Us At All Seasons Wealth
In the ever-changing landscape of tax laws and financial regulations, the guidance of experienced financial advisors becomes invaluable. At All Seasons Wealth, we understand the complexities of tax planning and the importance of staying ahead of legislative changes to safeguard our clients’ financial well-being. Here’s why it’s crucial to partner with us as you navigate the impending expiration of tax cuts in 2025:
Expertise and Knowledge
Our team of seasoned financial advisors possess expertise involving tax planning strategies and wealth management. We stay abreast of the latest developments in tax laws and regulations, allowing us to provide informed guidance tailored to your unique financial situation. With our knowledge and experience, we can help you navigate the complexities of tax planning and identify opportunities to optimize your tax strategy in coordination with your tax advisor.
Personalized Guidance
At All Seasons Wealth, we understand that every individual’s financial situation is unique. That’s why we take a personalized approach to financial planning, taking the time to understand your goals, priorities, and concerns. Whether you’re considering Roth conversions, estate planning strategies, or maximizing deductions, we’ll work closely with you to develop a customized plan that aligns with your objectives.
Proactive Planning
With the expiration of tax cuts looming in 2025, proactive planning is more critical than ever. By partnering with All Seasons Wealth, you’ll have access to proactive tax planning strategies designed to minimize your tax liabilities and maximize your financial outcomes. We’ll help you stay ahead of legislative changes and adjust your tax strategy accordingly to ensure you’re well-positioned for the future.
Comprehensive Approach
Tax planning is just one component of a comprehensive wealth management strategy. At All Seasons Wealth, we take a holistic approach to financial planning, considering all aspects of your financial life, including investments, retirement planning, estate planning, and risk management. By addressing your financial needs comprehensively, we can help you achieve your long-term financial goals with confidence.
Ongoing Support
Our commitment to our clients extends beyond the initial planning stages. We provide ongoing support and guidance to help you navigate life’s transitions and adjust your financial plan as needed. Whether you’re planning for retirement, funding a child’s education, or navigating a major life event, we’ll be by your side every step of the way, providing the support and guidance you need to make informed decisions.
Stay Ahead and Be Prepared with All Seasons Wealth
As we approach the expiration of the tax cuts introduced by the TCJA, taxpayers face a complex and evolving tax landscape. By understanding the impending changes and proactively planning for them, individuals can mitigate their tax liabilities and optimize their financial outcomes. Whether through Roth conversions, strategic estate planning, or maximizing deductions and credits, careful consideration of these factors is essential in preparing for the post-2025 tax environment.
Consulting with a qualified financial advisor can provide personalized guidance tailored to individual circumstances, ensuring that taxpayers make informed decisions to achieve their financial goals. At All Seasons Wealth, we’re here to assist you in navigating these changes and developing a comprehensive tax strategy that aligns with your long-term financial objectives. Contact us today to learn more about our services.
Any opinions are those of All Seasons Wealth and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance is not indicative of future results.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
