Several significant tax-law changes are looming on the horizon — even if they may not arrive until the end of 2025. Because changes to tax policy often can be anticipated, and certain steps are taken to lessen their impact on taxpayers, now is the time to consider the implications for your investment portfolio and financial plan.

What’s changing in tax policy at the end of 2025?

The lower tax rates authorized under the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to sunset at the end of 2025. Along with large cuts to corporate profits, the TCJA significantly slashed individual tax rates by restructuring tax brackets across the board, nearly doubling the standard deduction from $13,000 to $24,000, and decoupling the income threshold for capital gains taxes or ordinary income brackets to benefit higher-income earners. In addition, the law basically doubled the lifetime gift and estate tax exemption, from $5.5 million to $11.2 million. Barring Congressional action, the “non-permanent” changes to the law will expire on December 31, 2025, at which point the provisions will revert to pre-2017 levels.

Of course, there is plenty of time for Congress to reach some sort of agreement to extend certain provisions of TCJA. But given that marginal tax rates are near historic lows, Washington D.C. continues to be politically rancorous, and the world’s developed economies appear to lack stability, this may be a good time to explore proactive tax-planning strategies.

Income and capital gains taxes

Unless Congress acts, the top income tax bracket will increase to 39.6% from its current 37% — its pre-TCJA level. This means wealthier taxpayers can expect a bump in their effective tax rate. For that reason, this may be a good time to accelerate income when and where possible over the next year or two to take advantage of today’s lower brackets. Potential strategies include the following:

·        Taking distributions from a tax-deferred account. If you, like many investors, are top-heavy in your qualified retirement accounts, taking money out of a 401(k) plan or Traditional IRA sooner than you need it, and paying ordinary income taxes at your lower current rate, could be a sensible move. Remember that withdrawals from qualified retirement plans are taxed as ordinary income in the year received. By reinvesting your qualified distributions in a taxable account, you position yourself to pay taxes on dividends or capital gains at what could be a lower rate in the future. Of course, you also need to consider the effect of having to pay a 10% early withdrawal penalty if you’re under age 59½.

·        Converting some or all of a traditional IRA to a Roth IRA. By converting your traditional IRA to a Roth before 2026, you pay the income tax liability upfront, presumably at a lower rate, rather than at the time of distribution. Remember, you cannot use any amount of the conversion to pay the required taxes; you must use other funds to pay this liability. Unlike a traditional IRA that has required minimum distributions (RMDs) starting at age 72 and imposes ordinary income taxes and a 10% penalty before age 59½, a Roth IRA has no RMDs, and all future growth and distributions are tax-free.

·        Sidestepping new RMD spend-down rules. As a result of the SECURE 2.0 Act and beginning in 2023, beneficiaries are now required to spend down inherited IRAs or 401(k)s within 10 years. Account owners who take distributions now and pay income taxes at today’s lower current rates avoid this new requirement.

Estate and gift taxes

Today, individuals can transfer up to $12.92 million, and married couples can transfer a total of up to $25.84 million, either during their lifetimes or as part of their estate) without triggering federal gift or estate taxes. If Congress takes no action, those historically high exemption amounts will revert to pre-2017 levels for the 2026 tax year. Some potentially beneficial estate-planning strategies to consider include the following:

·        Making annual cash gifts. Individuals are allowed to gift up to $17,000 a year ($34,000 for married couples filing jointly) to as many individuals as they wish. These annual gifts aren’t subject to taxes and don’t count against your lifetime exemption. (Once you exceed the annual gift exclusion amount, you eat into the lifetime exclusion amount, and you must file a gift tax return using IRS Form 709.)

·        Funding 529 plan education accounts. Current law allows you to accelerate five years of gifts to educational accounts for your children and/or grandchildren, as well as to other friends or family — even for yourself! This means a 529 account set up for a single beneficiary can accept up to $85,000 in a single year ($170,000 for a married couple). When used for qualified educational expenses, funds in a 529 account grow tax-free and reduce your taxable estate.

·        Using trusts. Depending on your family’s circumstances and the state where you live, you may be able to provide for multiple future generations using various trust structures. Certain trusts allow you to transfer future asset income and appreciation to subsequent generations without estate or gift taxes. This is a complex topic that needs to be fully discussed with your financial advisor, attorney, and tax professional; we advise you to proceed with caution.

Keep in mind that, as with any tax-planning strategy, there is a possibility that Congress could change laws related to the gift and estate planning exemption. You’ll want to review your tax and estate planning approach each year to make sure it’s consistent with your financial goals and designed to provide you with some benefit given the current tax regime.

The original article was posted by the Pioneer Press.

By Bruce Helmer and Peg Webb, Financial Advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities are offered through LPL Financial, member FINRA/SIPC. Advisory services are offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Discuss your specific situation with a qualified tax professional.