Trump Tax Cuts Expiring Soon: Action Steps You Need to Take Now

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Several key elements of the Tax Cuts and Jobs Act (TCJA) are scheduled to lapse by 2025. This pivotal tax reform, implemented during President Trump’s tenure, brought substantial changes to the U.S. tax structure. With the expiration drawing near, it’s crucial for individuals to take proactive steps in their tax planning.

Individual Tax Rates Lowered

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The TCJA revised the tax structure by reducing tax rates across various income brackets and modifying the income ranges associated with each tax bracket.

Previously, there were seven tax brackets with respective rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Under the TCJA, these were adjusted to rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%, resulting in a reduction of taxes for the majority of taxpayers.

Standard Deduction Doubled

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The standard deduction was nearly doubled under the TCJA. It increased from $13,000 to $24,000 for joint filers and $6,500 to $12,000 for individuals.

Higher Alternative Minimum Tax (AMT) Exemption Amounts

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The TCJA also changed how the Alternative Minimum Tax (AMT) is calculated, so it applied to only high-income individuals. It now only affects fewer people due to more significant exemption amounts ($81,300 for individuals and $126,500 for couples). However, after the TCJA expires, more people might have to pay it again because the exemption amounts and income phase-out thresholds will decrease.

Child Tax Credit Doubled

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The TCJA doubled the child tax credit from $1,000 to $2,000 per child. Currently, you can get this credit for each child under 17, and it starts to phase out if you make more than $200,000 as an individual or $400,000 as a couple.

After the TCJA expires, the child tax credit will decrease to $1,000 per qualifying child, and it will start to phase out if you make more than $75,000 as an individual or $110,000 as a couple.

Retirement Planning

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When the TCJA expires, the tax brackets will go back to what they were before, which means some people might have to pay more in taxes since the top tax bracket will increase from the current 37% to 39.6%.

Given this situation, it would be prudent to explore avenues for pulling income forward within the next few years to leverage the current lower brackets. You can do this by exercising stock options now and avoiding deferred compensation plans.

Traditional IRAs require minimum distributions (RMDs) commencing at age 73 and are taxable as ordinary income. On the other hand, Roth IRAs do not impose RMDs, and all future growth and distributions remain exempt from taxation. 

One of the benefits of early retirement is that taxpayers have several years between their retirement date and RMD age to convert their IRAs to Roth IRAs in a lower tax bracket. 

If you are not planning for early retirement and your income is expected to continue to increase over the next couple of years, by converting your traditional IRA to a Roth IRA before 2026, you would assume the upfront income tax liability (potentially at a lower tax rate), rather than facing it at the time of distribution.

The SECURE Act eliminated the Stretch IRA provisions. For individuals who are subject to the 10-year rule on inherited IRAs, it is advisable to contemplate the possibility of opting for more substantial distributions before the expiration of the TCJA, especially if there is concern regarding the potential rise in tax rates during the later stages of the mandatory 10-year window for complete distribution of the account.

Capital Gains Tax

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With stock markets at record highs, investing in stocks has resulted in a lot of unrealized capital gains. With the TJCA, the tax brackets for long-term capital gains and qualified dividends are not linked to the ordinary income tax brackets. Check with your tax advisor on selling some of your stocks if you anticipate potentially higher future tax rates.

You could maximize Long Term Capital Gains while in the lower bracket for your marginal rate and harvesting losses to offset gains when appropriate. 

Lifetime Gift and Estate Tax Exemption Doubled

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The TCJA doubled the lifetime gift and estate tax exemption limits.

As of 2023, individuals are eligible to transfer up to $12.92 million, while married couples can transfer up to $25.84 million without incurring federal gift taxes or estate taxes, either during their lifetime or as part of their estate. This historically high exemption amount will be halved after the 2025 tax year. Check with your tax advisor if it is worth accelerating those gifting plans to your children and grandchildren each year. For those with even larger estates, it is time to consider possible larger lifetime gifts.

Tax strategy should be a key consideration when setting up living trusts

Trust & Will provides state-specific trusts for the protection and transfer of your most important financial assets. You can also nominate legal guardians for your children to make sure they are looked after by someone you know and trust, in case something happens to you.

 

Business Deductions

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The TCJA introduced qualified business income (QBI) deduction, facilitating pass-through businesses to deduct a maximum of 20 percent of their earnings. Notice 2019-07 introduced a new safe harbor provision for rental real estate under Section 199A of the Internal Revenue Code, making rental properties eligible for QBI. 

Under the Tax Cuts and Jobs Act (TCJA), the qualification for 100% bonus depreciation was introduced depending on the year you placed the assets into service. For real estate investing, many interior upgrades to buildings are eligible for purposes of bonus depreciation. Utilizing a cost segregation study is one of the methods to ensure eligibility for the available bonus depreciation percentage.

Current provisions allow for a quicker depreciation of certain assets, which is a boon for reducing taxable income. However, post-sunset, the elongation of this timeline could mean higher taxable income. Check with your tax advisor for capitalizing on the existing provisions by accelerating depreciation to lower your taxable bracket.

What Happens if Trump Tax Cuts Expire?

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As the TCJA provisions edge closer to their expiration date of 2025, individuals must remain proactive in their tax planning efforts. It is crucial to reassess your investment strategy and explore opportunities to take advantage of the current tax provisions.

Hope for Extension of Tax Cuts Looks Bleak

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With the 2024 Presidential election season in full swing, animosity between the parties is expected to ratchet higher. Without prompt action from Congress, the opportunity to take advantage of various tax benefits the TCJA provides is swiftly diminishing.

Although there is still time to negotiate and extend specific provisions, with the current gridlock, the automatic expiration of the various tax provisions seems more likely.

Tax planning can be complex, especially when dealing with changing tax laws. Seek guidance from a licensed tax professional to ensure your financial goals align with the evolving tax landscape.

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