7.16.2023 I Proactive Tax Planning

Your Money Radio

Changes to tax policy often can be anticipated, and certain steps are taken to lessen their impact. 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?

• Lower tax rates authorized under the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to sunset at the end of 2025.

• The law also 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.

Income and capital gains taxes

o Unless Congress acts, the top income tax bracket will increase to 39.6% from its current 37% pre-TCJA level.

• Taking distributions from a tax-deferred account.

o 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.

o Caveat: Withdrawals from qualified retirement plans are taxed as ordinary income in the year received.

• Converting some or all of a traditional IRA to a Roth IRA.

o Conversions from your traditional IRA to a Roth before 2026 allow you to pay the income tax liability upfront, presumably at a lower rate, rather than at the time of distribution.

• Sidestepping new RMD spend-down rules.

o 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.

o Account owners who take distributions now and pay income taxes at today’s lower current rates avoid this new requirement.

Estate and Gift Taxes

o 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.

• Some potentially beneficial estate-planning strategies to consider include the following:

o Making annual cash gifts

o Funding 529 plan education accounts

o Using Trusts

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• As with any tax-planning strategy, there is a possibility that Congress could change laws related to the gift and estate planning exemption.
• 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.
• You can also find a wealth of educational resources related to today’s topic on our new webpage at wealthenhancement.com/yourmoney.