Americans should consider their tax strategies now, ahead of possible changes in late 2025, experts warn.
Trump-era legislation introduced by the Tax Cuts and Jobs Act of 2017 brought sweeping changes to the tax landscape.
This included lowering individual income tax rates, nearly doubling the standard deduction and increasing the federal estate tax exemption.
Unless these rules are extended, they will expire on January 1, 2026, bringing major changes for millions of US taxpayers.
Experts are now warning that it’s time to plan ahead to be prepared for changes in the future – and to avoid being hit with a surprise bill.
Trump-era legislation introduced by the Tax Cuts and Jobs Act in 2017 brought sweeping changes to the tax landscape
Income tax brackets will return to the higher pre-2017 levels when the current law expires at the end of 2025, impacting most taxpayers.
“We are currently in a relatively favorable tax environment for both high and low income earners, compared to historical income tax rates,” investment adviser Patrick Donnelly told DailyMail.com earlier this year.
“Our current tax law is expiring, so we already know that tax rates for most households will increase 3 to 4 percent within a few years,” he said.
People nearing retirement may want to convert some of their savings into a Roth IRA before income tax rates rise, experts advise.
They will receive one lump sum tax assessment on the conversion, but this will be at a lower rate than if they wait until 2026.
A Roth IRA or 401(K) is funded with after-tax money, while a traditional plan allows you to make pre-tax contributions.
“Saving for retirement in a Roth now essentially hedges against higher tax rates in the future. This makes Roth IRAs the most powerful wealth-building tool we have at our disposal today,” Donnelly added.
Americans must wait five years before they can withdraw earnings from a Roth IRA plan tax-free, so retirees should be sure they have enough savings to cover that period if necessary.
People nearing retirement may want to convert some of their savings into a Roth IRA before income tax rates rise, experts advise
Under current rules, an individual can transfer $12.92 million and a married couple can transfer $25.84 million to heirs before being hit with federal estate taxes.
Trump’s tax plan more than doubled the lifetime wealth tax deduction from $5.49 million in 2017 for individuals to $11.18 million — and this has continued to rise in the years since.
Depending on who ultimately controls the White House and Congress after the 2024 presidential election, the tax law could expire.
If that happens, the exemption could effectively be cut in half, leaving an individual with a taxable estate worth more than about $7 million subject to federal estate taxes if they don’t plan ahead.
While that may seem like a high figure, says Kevin O’Regan, senior wealth advisor at Kayne Anderson Rudnick The Wall Street Journal Many of his clients are surprised to learn that they could be exposed to these charges.
“We remind our clients to consider their total assets — not just what’s in an investment account,” he told the outlet.
‘When you take into account the appreciation of a primary residence, for example, as well as the growth of an investment account over time, the impact of inheritance tax can be significant.’
He said if an individual or couple has not yet exhausted the exemption, creating a trust is a way to transfer assets that may be subject to taxes if the law changes.
“We work with people to think about what they realistically need for retirement and then what they want to put aside for a beneficiary,” he said.
“There are different strategies that can be used, depending on whether someone wants the assets in the trust to grow over time or whether he or she is trying to freeze the value of certain assets at current rates.”
Experts warn that now is the time to take action to avoid being surprised by tax changes later
Americans can also reduce the size of their assets by giving away possessions (or gifts) while they are still alive.
The 2017 tax law includes a special discount for “529” education savings plans.
This allows people to make five years’ worth of cash gifts – up to $85,000 per beneficiary for individuals and up to $170,000 for couples – in a single contribution.
A 529 plan is an investment account that provides tax benefits when used to pay eligible education expenses for a beneficiary, including tuition, internship programs and student loan repayments.
Maximizing this break may be worth considering as a way to reduce the size of a taxable estate.
The Trump-era changes also increased the amount of charitable contributions that can be deducted from 50 percent of adjusted gross income to 60 percent.
This limit may be reduced again at the end of 2025.
Experts suggest that Americans considering a significant cash donation to a public charity should do so now to receive a larger tax deduction.
Isaac Bradley, director of financial planning at Homrich Berg, told The Wall Street Journal that while it may be tempting to think Congress will likely make many or all of these cuts, it is advisable to act now.
“If you don’t use all your exemptions, you lose them,” he said.
TAX MOTIONS TO BE CONSIDERED BEFORE THE 2017 RULES EXPIRY
Americans nearing retirement should consider rolling over some of their retirement savings into a Roth IRA.
Real estate taxes
Creating a trust is a way to transfer assets that could be subject to federal estate taxes after the end of 2025.
Take advantage of a special discount for ‘529’ education savings plans.
If you are considering making a significant cash donation to a public charity, do so now to receive a larger tax deduction.