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Features


WHAT TO DO BEFORE THE TAX CUTS AND JOBS ACT PROVISIONS SUNSET

Parts of TCJA (also known as the Trump tax cuts) are set to expire by the end of
2025, so the sooner you act, the more options you’ll have to take advantage of
today's lower taxes.

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(Image credit: Getty Images)

By Martin Schamis, CFP®
published June 12, 2023

The Tax Cuts and Jobs Act (TCJA) of 2017 is currently scheduled to sunset at the
end of 2025, meaning significant changes are on the horizon for taxpayers. Now
is the time to understand those implications and consider strategies to help
mitigate the potential tax risks — and this article can help you get started.



Pay the Taxes You Owe and Not a Cent More

TCJA brought sweeping changes to the tax code for both businesses and
individuals. Along with large, permanent tax cuts to corporate profits, the TCJA
lowered individual tax rates by restructuring the tax brackets, almost doubled
the standard deduction from $13,000 to $24,000, decoupled the income threshold
for capital gains taxes from ordinary income tax brackets to benefit
higher-income taxpayers and effectively doubled the lifetime gift and estate tax
exemption (from $5.6 million to $11.2 million). All these “non-permanent”
changes, however, are set to expire on Dec. 31, 2025 — at which point they will
revert to pre-TCJA levels.



So, how exactly might this impact your financial plan?


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Barring any action on the part of Congress, the window is quickly closing on
several of the tax mitigation benefits afforded by the TCJA. Certainly, there
remains time to reach an agreement that would extend at least some of these
provisions. But through continued political tension and the general unsteadiness
of global economies (including the U.S.), this may be an opportune time to
explore some of the following strategies.

House Republican Tax Package Revealed


ESTATE AND GIFT TAX CONSIDERATIONS

As of 2023, individuals can currently transfer up to $12.92 million, and a
married couple can transfer a total of up to $25.84 million (either during your
life or as part of your estate) without triggering federal gift taxes or estate
taxes. If no legislative action is taken, however, that historically high
exemption amount will be cut in half for the 2026 tax year. As a result, if your
taxable estate exceeds the existing exemption amount, some estate planning
strategies that may prove beneficial to explore include:


 * Annual cash gifts. You are permitted to gift up to $17,000 a year ($34,000
   for married couples filing jointly) to as many individuals as you wish. These
   annual gifts aren’t subject to taxes and don’t count against your lifetime
   exemption. If you have a large extended family, this can offer an easy way to
   transfer considerable wealth to the next generation.
 * 529 plan accelerated gifts. Current tax law allows you to accelerate five
   years of gifts to educational accounts for your children and grandchildren
   (as well as any other friends or relatives). This means you could gift up to
   $85,000 in a single year ($170,000 for a married couple) to each individual.
   It’s an ideal way to help them save for future qualified educational expenses
   (where the funds grow tax-free) while reducing your taxable estate.
 * Dynasty trusts. If you haven’t yet used a major chunk of your lifetime gift
   and estate tax exemption, you may want to consider establishing a dynasty
   trust. It’s a great way to provide for multiple future generations for as
   long as state law permits the trust to exist. Any future trust asset income
   and appreciation can then be transferred between subsequent generations
   without estate or gift taxes. And by funding the trust with a life insurance
   policy, you can further increase the trust’s value.
 * Irrevocable life insurance trusts (ILITs). Purchasing a survivorship policy
   owned by an ILIT is one of the most common ways to transfer wealth outside of
   your taxable estate. In addition, the death benefit paid out to your
   beneficiaries is income that’s also considered tax-free.


INCOME AND CAPITAL GAINS TAX CONSIDERATIONS

Since income tax brackets are also slated to revert back to pre-TCJA levels
(e.g., the top tax bracket increasing to 39.6% from its current 37%), many
wealthier taxpayers can expect a measurable increase in their effective tax
rate. In light of this, you may wish to explore opportunities to accelerate
income when and where possible over the next couple years to take advantage of
the lower brackets, including:

 * Converting a traditional IRA to a Roth IRA. Whereas required minimum
   distributions (RMDs) from traditional IRAs start at age 72 (see note below),
   taxed as ordinary income and subject to a 10% penalty prior to age 59½, Roth
   IRAs have no RMDs, and all future growth and distributions are tax-free. By
   converting your traditional IRA to a Roth before 2026, you pay the income tax
   liability upfront (potentially at a lower tax rate) rather than at the time
   of distribution.
 * Harvesting capital gains. If you anticipate potentially higher capital gains
   tax rates in the future, you may want to consider selling some of your highly
   appreciated securities prior to the expiration of the TCJA. While such sales
   would produce a taxable gain, it may be less than at some point in the
   future. And since wash sale rules only apply to harvesting losses (not
   gains), you could then turn around and repurchase the same securities at a
   stepped-up cost basis to help reduce future recognized gains while still
   retaining the investment.


PUTTING AN EFFECTIVE PLAN IN PLACE

While none of us knows what the future holds, as with any form of planning, the
more time you have to prepare, the more options you’ll have available to you.

Proper diversification of your assets is regarded as the primary tool for
reducing risk without sacrificing return potential. Furthermore, establishing a
well-thought-out plan for when it comes time to draw down from your assets for
retirement income is vital.

Will You Pay Higher Taxes in Retirement?

With the help of a tax professional and financial adviser, you can explore
strategies to increase your likelihood of controlling future tax liability while
maintaining liquidity leading up to and through retirement.

Note: Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin
taking RMDs to age 73. According to the IRS, if you reach age 72 in 2023, the
required beginning date for your first RMD is April 1, 2025, for 2024. If you
reach age 73 in 2023, you were 72 in 2022 and subject to the age 72 RMD rule in
effect for 2022. If you reached age 72 in 2022:
     - Your first RMD was due by April 1, 2023, based on your account balance on
      Dec. 31, 2021.
    - Your second RMD is due by Dec. 31, 2023, based on your account balance on
     Dec. 31, 2022.

DISCLAIMER

This article was written by and presents the views of our contributing adviser,
not the Kiplinger editorial staff. You can check adviser records with the SEC or
with FINRA.



Martin Schamis, CFP®
Social Links Navigation
Vice President & Head of Wealth Planning, Janney Montgomery Scott

Martin Schamis is the head of wealth planning at Janney Montgomery Scott, a
full-service financial services firm, providing comprehensive financial advice
and service to individual, corporate and institutional investors. In his current
role, he is responsible for the strategic direction of the Wealth Planning Team,
supporting more than 850 financial advisers who advise Janney’s private retail
client base. Martin is a Certified Financial Planner™ professional.



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