The Tax Cuts and Jobs Act Will Sunset Soon
What You Stand to Lose and How to Prepare
As the Tax Cuts and Jobs Act approaches its sunset, it’s important to understand its implications and prepare accordingly. In this blog, we’ll explore what retirees need to know and how to plan for these changes.
The Tax Cuts and Jobs Act, which took effect in 2018, brought significant changes to the tax code that are set to expire at the end of 2025. Understanding what happens next and preparing for how the loss of these benefits might affect you is crucial for retirees to maintain financial stability and minimize tax liabilities.
What Changes When TCJA Ends?
When the Tax Cuts and Jobs Act sunsets, several key provisions will revert to pre-2018 tax laws. These changes include higher tax rates, reduced standard deductions, lower child tax credits, and the return of personal exemptions. Estate tax exemptions will also decrease, potentially impacting your estate planning. Let’s look at each of these categories a little closer.
Higher Income Tax Rates
One of the major changes will be higher income tax rates. Current tax brackets will revert to higher rates, meaning you could pay more in taxes on the same income. It’s important to understand how these changes will affect your overall tax burden.
Reduced Standard Deductions
The standard deduction will decrease significantly. For example, the current standard deduction for a married couple filing jointly is $29,200. That deduction amount will drop by almost half, adjusted for inflation, in tax year 2026. This change may affect your tax strategy, especially if you typically take the standard deduction. However, even with the lower standard deductions, personal exemptions will resume.
Lower Estate Tax Exemption
The estate tax exemption, currently at $13.61 million per individual, is set to revert to approximately $5.5 million. This lower exemption means more estates will be subject to estate taxes, which could impact your estate planning and the inheritance you leave to your beneficiaries.
Impact on Retirement Accounts
And that’s not all. Changes to tax rates and deductions will affect retirement account withdrawals and contributions. Higher tax rates could mean paying more taxes on distributions from traditional IRAs and 401(k)s. It’s crucial to reassess your retirement income strategy in light of these changes.
Steps to Prepare for the Changes
I know these upcoming changes aren’t the best news. So, I want to share five steps you can take to prepare for the sunset of the Tax Cuts and Jobs Act.
#1 Review and Adjust Your Tax Strategy
The first thing I recommend is that you work with a tax advisor to review and adjust your tax strategy. These adjustments might involve accelerating income or deductions before the tax rates increase, considering Roth conversions, or optimizing charitable contributions to take advantage of current deductions.
#2 Reevaluate Your Estate Plan
Secondly, take a look at your estate plan to see if you need to make any adjustments to account for the lower estate tax exemption. Consider strategies such as gifting assets during your lifetime, setting up trusts, or revising your estate planning documents to minimize estate taxes and ensure your wishes are carried out.
#3 Maximize Use of Tax-Advantaged Accounts
You’ll also want to maximize contributions to tax-advantaged accounts like IRAs and 401(k)s. Consider contributing to a Health Savings Account (HSA), if eligible, as these accounts offer triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
#4 Consider Roth Conversions
Another thing to consider is whether you’d benefit from a Roth conversion. Converting traditional IRA or 401(k) funds to a Roth account now can lock in the current lower tax rates, and provide tax-free withdrawals in the future. This strategy can be particularly beneficial if you expect to be in a higher tax bracket when the TCJA sunsets.
#5 Stay Informed and Flexible
Lastly, stay informed about tax law changes and be prepared to adjust your plans as needed. Legislative changes can happen, sometimes even at the last minute, so the changes to the current tax laws may be slightly different than merely reverting to before the act was passed, or it is possible Congress could extend some of the provisions. Being proactive and flexible with your financial planning ensures you can adapt to new circumstances and minimize negative impacts.
The end of the Tax Cuts and Jobs Act means significant changes to tax rates, deductions, and estate planning. By understanding these changes, staying alert, and taking proactive steps now, retirees can minimize their tax liabilities and ensure a more secure financial future.
Thank you for reading our blog. Remember, we believe you can have a flexible life plan to achieve more of what you love: more financial confidence, more for your family, more freedom, and more choices.
Chris Zeches is a Certified Financial Planner® and Managing Partner at Zeches Wealth Management. Zeches Wealth Management has one singular focus: To use our financial planning and tax expertise to help multi-generational families and business owners achieve more of what they love.
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