Weekend Read: The Future of the TCJA and Why It Matters
12/09/2024I take pride in personally crafting each of these emails. Unlike many others in the industry who rely on prewritten content, I write these myself from scratch. My goal is to boil down complex concepts and share relevant news in an easy-to-understand format. I hope you find them both informative and enjoyable.
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes to the tax code, many of which are set to expire after 2025. Trump has indicated he will push to extend and make these provisions permanent.
Before the election, I would have explained that extending the TCJA was a tall order, not only would Trump need to win the presidency, but Republicans would also need to control both the Senate and the House for any provisions to actually make it through congress to Trumps desk. Well, here we are, and I believe the likelihood of extension has increased dramatically. Let’s look at what the TCJA has done and why it matters.
What Does the TCJA Do?
The TCJA lowered taxes for most Americans in two key ways:
Narrowing Tax Brackets: It adjusted the income ranges for each bracket, effectively reducing the "width" of the brackets compared to pre-TCJA rules.
Lowering Tax Rates: It reduced the rates for most brackets.
What Happens If the TCJA Expires?
Without an extension, tax rates will rise, the standard deduction will shrink, and deductions like personal exemptions will return, potentially increasing the tax burden. Here’s how:
What This Means for Financial Planning
A large part of what we do in financial planning is focused on helping clients minimize future taxes. The structure of tax brackets, rates, and deductions plays a significant role in how we approach strategies like Roth conversions, which are a key tool for managing taxes in retirement.
Roth conversions involve moving money from a pre-tax retirement account, like a traditional IRA, into a Roth IRA. While the conversion is taxable in the year it’s done, the money grows tax-free in the Roth account, and qualified withdrawals in retirement are tax-free.
A Roth IRA distribution is considered qualified and therefore tax-free if it meets two conditions. First, the account must have been open for at least five years. Second, the withdrawal must occur under certain circumstances, like being at least 59½ years old, disabled, or $10,000 for a first-time home purchase. If both conditions are met, the distribution is qualified and tax-free. Otherwise, earnings may be taxed and could face a 10% penalty.
The TCJA’s lower tax rates and wider brackets made Roth conversions especially appealing because of reduced rates (e.g., 12% and 22% instead of 15% and 25%) and expanded brackets that allowed for larger conversions without spilling into higher tax rates. With the TCJA originally set to expire after 2025, there was a sense of urgency to take advantage of this "window of opportunity" before the brackets and rates reverted to their pre-TCJA levels.
However, with the likelihood of the TCJA being extended, this urgency has diminished. While Roth conversions still offer benefits, the extended tax brackets and rates change the math. Without the looming expiration, there’s less pressure to accelerate conversions within a limited timeframe. Instead, the focus shifts to long-term tax planning, optimizing conversions over multiple years without the constraints of an expiring tax code.
The likely extension of the TCJA does not eliminate the benefits of Roth conversions—it simply makes the decision less time-sensitive. Instead, the emphasis should be on balancing immediate tax costs with future tax savings, ensuring the strategy aligns with your overall financial goals.
Summary
Financial planning is dynamic, and tax laws are just one of the many variables we consider. With unified Republican control, extending the TCJA is much more likely. This would maintain the current lower rates, larger deductions for most, and simplified filing process for individuals and families. Critics, however, argue that extending these provisions could increase the already ridiculous federal deficit, raising justifiable questions about long-term fiscal sustainability.
If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
w. rafferwealthmanagement.com
e. [email protected]
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.
1https://taxfoundation.org/data/all/federal/2017-tax-brackets
2https://taxfoundation.org/data/all/federal/2024-tax-brackets
A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.
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 or changing 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.
AdTrax 7410633.1 Exp 12/25
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes to the tax code, many of which are set to expire after 2025. Trump has indicated he will push to extend and make these provisions permanent.
Before the election, I would have explained that extending the TCJA was a tall order, not only would Trump need to win the presidency, but Republicans would also need to control both the Senate and the House for any provisions to actually make it through congress to Trumps desk. Well, here we are, and I believe the likelihood of extension has increased dramatically. Let’s look at what the TCJA has done and why it matters.
What Does the TCJA Do?
The TCJA lowered taxes for most Americans in two key ways:
Narrowing Tax Brackets: It adjusted the income ranges for each bracket, effectively reducing the "width" of the brackets compared to pre-TCJA rules.
Lowering Tax Rates: It reduced the rates for most brackets.
Comparison of Tax Brackets for Married Filing Jointly
| Tax Rate | Pre-TCJA (2017)1 | TCJA (2024)2 |
| 10% | $0 – $18,650 | $0 – $23,200 |
| 12% (was 15%) | $18,651 – $75,900 | $23,201 – $94,300 |
| 22% (was 25%) | $75,901 – $153,100 | $94,301 – $201,050 |
| 24% (was 28%) | $153,101 – $233,350 | $201,051 – $383,900 |
| 32% (was 33%) | $233,351 – $416,700 | $383,901 – $487,450 |
| 35% | $416,701 – $470,700 | $487,451 – $731,200 |
| 37% (was 39.6%) | $470,701+ | $731,201+ |
What Happens If the TCJA Expires?
Without an extension, tax rates will rise, the standard deduction will shrink, and deductions like personal exemptions will return, potentially increasing the tax burden. Here’s how:
- The 12% bracket would revert to 15%, and the 22% bracket would revert to 25%, and so on, increasing taxes for those with incomes in these ranges.
- The standard deduction would fall back to pre-TCJA levels, increasing taxable income for those who don’t itemize.
- The SALT deduction cap would expire, which might help those in high-tax states.
What This Means for Financial Planning
A large part of what we do in financial planning is focused on helping clients minimize future taxes. The structure of tax brackets, rates, and deductions plays a significant role in how we approach strategies like Roth conversions, which are a key tool for managing taxes in retirement.
Roth conversions involve moving money from a pre-tax retirement account, like a traditional IRA, into a Roth IRA. While the conversion is taxable in the year it’s done, the money grows tax-free in the Roth account, and qualified withdrawals in retirement are tax-free.
A Roth IRA distribution is considered qualified and therefore tax-free if it meets two conditions. First, the account must have been open for at least five years. Second, the withdrawal must occur under certain circumstances, like being at least 59½ years old, disabled, or $10,000 for a first-time home purchase. If both conditions are met, the distribution is qualified and tax-free. Otherwise, earnings may be taxed and could face a 10% penalty.
The TCJA’s lower tax rates and wider brackets made Roth conversions especially appealing because of reduced rates (e.g., 12% and 22% instead of 15% and 25%) and expanded brackets that allowed for larger conversions without spilling into higher tax rates. With the TCJA originally set to expire after 2025, there was a sense of urgency to take advantage of this "window of opportunity" before the brackets and rates reverted to their pre-TCJA levels.
However, with the likelihood of the TCJA being extended, this urgency has diminished. While Roth conversions still offer benefits, the extended tax brackets and rates change the math. Without the looming expiration, there’s less pressure to accelerate conversions within a limited timeframe. Instead, the focus shifts to long-term tax planning, optimizing conversions over multiple years without the constraints of an expiring tax code.
The likely extension of the TCJA does not eliminate the benefits of Roth conversions—it simply makes the decision less time-sensitive. Instead, the emphasis should be on balancing immediate tax costs with future tax savings, ensuring the strategy aligns with your overall financial goals.
Summary
Financial planning is dynamic, and tax laws are just one of the many variables we consider. With unified Republican control, extending the TCJA is much more likely. This would maintain the current lower rates, larger deductions for most, and simplified filing process for individuals and families. Critics, however, argue that extending these provisions could increase the already ridiculous federal deficit, raising justifiable questions about long-term fiscal sustainability.
If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
w. rafferwealthmanagement.com
e. [email protected]
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.
1https://taxfoundation.org/data/all/federal/2017-tax-brackets
2https://taxfoundation.org/data/all/federal/2024-tax-brackets
A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.
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 or changing 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.
AdTrax 7410633.1 Exp 12/25