Weekend Read: The Upcoming Expiration of Trump-Era Tax Cuts and Its Impact on Investors
Hello everyone, Jeremy here with your weekend read. Today, let’s talk about something that's on the nearer term, the upcoming expiration of the Trump-era tax cuts and what it might mean for your tax brackets and income.
A Brief History of the Tax Cuts
In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, bringing major changes to the U.S. tax code. It lowered individual income tax rates, increased the standard deduction, and aimed to reduce overall tax burdens. Many of us have enjoyed these benefits over the past few years, seeing a bit more in our paychecks and a little less stress come tax season.
But here's the catch, these tax cuts weren't meant to last forever. Most of them are set to expire at the end of 2025 according to the Congressional Research Service. So, as we inch closer to this date, it’s essential to understand how these changes might impact your tax brackets and investment income.
What Could Change?
-Higher Tax Rates
One of the most significant changes will be the increase in individual income tax rates. The current tax brackets, which were lowered under the TCJA, will revert to their pre-2018 levels. This means higher tax rates across the board, which could lead to increased tax liabilities for many of us.
-Standard Deduction and Personal Exemptions
The TCJA nearly doubled the standard deduction while suspending personal exemptions. If the tax cuts expire, the standard deduction will decrease, and personal exemptions may be reinstated. This could result in higher taxable income for many taxpayers, further increasing the tax burden.
-Investment Income
For investors, changes in tax rates can have a direct impact on investment income. Capital gains and qualified dividends, currently taxed at favorable rates, may be subject to higher taxes if the overall tax brackets increase. This could affect your investment strategy, as the after-tax returns on your taxable investments might be lower.
-Tax Planning Strategies
Given the potential changes, now is a great time to consider some tax planning strategies to take advantage of the current lower tax brackets. Here are 2 ideas:
1) Accelerate Income: If possible, consider accelerating income into the current tax years when rates are lower. This might include taking distributions from retirement accounts or realizing capital gains now while we are in lower tax brackets so that later at the higher rates, it’s not as painful.
2) Roth Conversions: Converting traditional IRA funds to a Roth IRA could be beneficial. You'll pay taxes on the conversion at today’s lower rates, and future withdrawals from the Roth IRA will be tax-free. Although how much and when is something that we’ll need to carefully calculate to make sure it’s done optimally.
Please consult your tax advisor prior to pursuing these strategies.
What It Means for You
While the expiration of the Trump-era tax cuts is still a couple of years away, staying informed about these potential changes and planning accordingly is crucial. By taking advantage of the current lower tax brackets, you can potentially reduce your future tax liabilities and increase your investment returns.
If you have any concerns or questions about how the expiration of these tax cuts might affect you, or if you need assistance with tax planning, please don't hesitate to reach out. Of course, for current clients I am proactively evaluating where opportunities exist and reaching out accordingly.
Thank you for reading and enjoy your weekend!
Jeremy Raffer, MBA
Director & Partner - Wealth Manager
m. 201-747-2705
e. jeremy.raffer@stewardpartners.com
Steward Partners
Country Club Plaza
115 W. Century Rd, Suite 145
Paramus, NJ 07652
Steward Partners Investment Solutions, LLC (“Steward Partners”), its affiliates and Steward Partners Wealth Managers do not provide tax or legal advice. You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.
Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account. Tax laws are complex and subject to change.