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Unless Congress acts, these tax cuts will be phased out after 2025. And once the TCJA provisions expire, Over 60% According to the Tax Foundation, taxpayers could face higher taxes.
With about 18 months until the deadline, “now is the time for clients to focus on the fundamentals of tax planning,” said Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts.
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Of course, with control of Congress and the White House uncertain, it’s difficult to predict which provisions of the TCJA may and may not be extended.
Still, without advance preparation, some taxpayers may have to resort to a “Hail Mary plan” at the end of 2025, said Guarino, who is also a certified public accountant.
Below are some of the tax strategies that tax advisors discuss with their clients.
The TCJA temporarily reduced federal income tax rates, lowering the top rate from 39.6% to 37% through 2025. In the meantime, Guarino said people could consider “accelerating their income” before 2025 to take full advantage of the lower tax rates and expanded tax brackets.
For example, some retirees are withdrawing amounts early or increasing amounts from their pre-tax retirement accounts that “exceed” required minimum distributions, he said.
Another way to take advantage of a temporarily lower tax bracket is to convert to a so-called Roth individual retirement account, says Nayan Lapsiwala, CFP, partner and director of wealth management at Aspiriant in Mountain View, California.
This strategy allows you to transfer pretax or nondeductible IRA funds to a Roth IRA to allow for future tax-free growth. Although you’ll owe taxes up front on the converted balance, your bill will typically be smaller in lower tax years.
But before taking on the extra income, people should consider whether the increased income will be subject to so-called net investment income tax or how it will affect the phase-out of tax credits and credits, Guarino warned.
Additionally, as your income increases, you usually have to pay taxes quarterly to avoid underpayment penalties, he said.
Experts say the temporary increase in gift and inheritance tax exemptions is a key provision for the wealthy.
Adjusted for inflation, the exemption would increase to $13.61 million for individuals and $27.22 million for married couples in 2024. But those limits would be cut by nearly half after 2025.
“While none of us can control when we die, there are benefits to making gifts during your lifetime,” said Jane Dittelberg, director of tax planning at Northern Trust in Chicago.
An individual or couple can remove assets from their estate by making lifetime gifts before the higher basis expires.
“But this really only applies to people who are in a position to donate more than $7 million,” Dittelberg said.
