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With trillions of dollars in tax breaks set to expire after 2025, financial advisors are working with clients to prepare for the looming tax cliff.
The Tax Cuts and Jobs Act of 2017, or TCJA, which was enacted by former President Donald Trump, included lower federal income tax brackets, larger standard deductions, and higher exemptions from gift and estate taxes.
If Congress doesn't take action, these tax breaks will disappear after 2025. And if the TCJA provisions expire, more than 60% of tax filers could face higher taxes, according to the Tax Foundation.
Although there are still about 18 months left before the deadlines expire, now is the time for clients to focus on the basics of tax planning, says certified financial planner Jim Guarino, 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 is difficult to predict which, if any, TCJA provisions could be expanded.
Still, without advanced preparation, some taxpayers could have to resort to Hail Mary planning in late 2025, said Guarino, who is also a certified public accountant.
Here are some tax strategies that advisors discuss with their clients.
Consider 'accelerating revenue'
The TCJA temporarily lowered federal income tax rates, dropping the top rate from 39.6% to 37% through 2025. In the meantime, consider accelerating revenues before 2025 to maximize lower rates and expand tax rates, Guarino said.
For example, some retirees may take early or increased pre-tax withdrawals from their retirement accounts that are “above and beyond” their capabilities. required minimum distributions, he said.
Another way to take advantage of temporarily lower tax brackets is through so-called Roth conversions of individual retirement accounts, according to CFP Nayan Lapsiwala, director of wealth management and partner at Aspiriant in Mountain View, California.
You can use the strategy to transfer pre-tax or non-deductible IRA funds to a Roth IRA for future tax-free growth. Although taxes are due in advance on the converted balance, your bill is typically smaller in lower tax years.
However, before generating additional income, consider how higher income could trigger the so-called net investment income tax or affect the phase-out of tax deductions or credits, Guarino warned.
In addition, additional income typically requires you to make quarterly tax payments to avoid underpayment penalties, he said.
Weigh 'lifetime gifts' for large estates
The temporary increased Exemption from gift and inheritance taxes is an important provision for wealthy families, experts say.
Adjusted for inflation, the exemption rose to $13.61 million per individual or $27.22 million for married couples in 2024. But those limits will drop by about half after 2025.
“No one has control over when they die, but there are benefits to making lifelong gifts,” says Jane Ditelberg, director of tax planning at Northern Trust in Chicago.
Individuals or married couples can remove assets from their estate by making lifetime gifts before the higher thresholds expire.
“But it really only applies to people who are in a position to make a gift of more than $7 million,” Ditelberg said.
