Dear Clients and Friends,
Welcome to post-election madness - I think we can all agree that we’re glad it’s over with! I’d like to start this weekend reading with a quote from Benjamin Franklin: “In this world, nothing is certain except death and taxes.” The Founding Father famously said these words back in 1789 in a letter to Jean-Baptiste Le Roy, a French scientist. I would like to add a third kind of certainty: change – especially when it comes to politics.
2024 has been a landmark year in terms of political change. According to Time, 49% of the world’s population will have elections in 2024, representing 64 countries. India, the UK, Mexico, Taiwan, France and Germany have already cast their votes this year, and major policy changes are on the horizon. Needless to say, it’s time to get your popcorn ready.
Now, Trump has proposed several tax pledges and policies on the campaign trail that will have a substantial impact on all of us. In addition, the TCJA (Tax Cuts and Jobs Act), which President Trump signed into law in 2017, is set to sunset and revert to previous levels. This means that the majority of American’s tax rates are set to increase if not renewed. By how much, that’s the million-dollar question.
Trump has long pledged to renew the TCJA, and although Harris had different tax plans, she had also pledged to retain the TCJA tax brackets as currently stated for all filers earning $400,000 or less. If we take a single filer that has taxable income of $100,000, their current federal tax bracket is 24% under the TCJA. Pre-TCJA, that same level of income would have been taxed at 28%, so a difference of $4,000 in taxes that’s potentially coming out of your pocket if these pledges are not implemented.
Everything will change if the TCJA is not renewed: your personal tax rates, whether you would take the standard deduction or itemize, child tax credits, qualified business income “QBI”, and even the estate tax exemption (more on this to come), etc. Within the past few weeks, the IRS has already released the inflated figures for 2025.
With Congress nearly flipping towards Republican control as of today, it’s extremely likely that the majority of the TCJA provisions will be extended. However, it’s speculated that certain portions of the code will likely sunset, such as the $10k SALT cap.
Below, I cover some financial planning strategies that we may recommend in order to take advantage of these historically low tax rates.
•Get “Rothical”– Check out my weekend reading on the perks of building up your tax-free asset allocation with Roth-style accounts and why it may make sense to pay the taxes now rather than later.
The IRS poses income limits for Roth IRA contributions, so if your income exceeds those limits, you are unable to contribute. This isn’t the case with employer-sponsored retirement plans, so theoretically you could make $1,000,000 in wages and still be able to make Roth contributions via your 401K or 403B! The downside of making a Roth contribution is that you don’t receive the upfront tax deduction. Taking the single income filer above as an example, if your current federal tax rate is 24% and it’s expected to increase to 28%, you just saved yourself 4% by locking in today’s tax rates. For my higher-income earning folks who make amounts exceeding the IRS’s thresholds, there is a way to get dollars into a Roth IRA account called a Backdoor Roth IRA strategy.
That said, Roth IRAs and Roth 401Ks are not right for everyone. In many cases, a working individual may see a tax bracket decrease upon retirement because they are no longer earning income. Remember that American tax brackets are based on income, not wealth. In that case, it may be better to pay the taxes later instead of now. So, this is not a “no-brainer.” However, with tax brackets near historic lows, and the US running a very significant budget deficit, we believe that taxes are likely to increase at some point down the road regardless of who is in office. So right now, as I write this article, tax brackets are unusually low, thus making Roth-style accounts appealing to more people than in the past.
•Use it or lose it! - The TCJA essentially doubled the lifetime federal estate exemption amount and indexed it for inflation. For 2025, the exemption amount is $13.9M per person or $27.8M per married couple. If the lifetime exemptions don’t get extended by 2026, the exemptions are forecasted to be split in half. In 2019, the IRS announced that anyone taking advantage of this temporarily higher exclusion amount before 2026 wouldn’t be adversely impacted or have any claw-backs. If your estate exceeds the increased limits, now is the time to consider various trusts, utilizing a spouse’s lifetime exemption, transferring assets to family, or outright gifting, since federal estate taxes range from 18% -40%!
The annual gift limit is due to increase in 2025 to $19,000 per person / $38,000 per married couple, and is not expected to change much. Not to get too deep into the weeds, but five states have recently enacted their own version of a Millionaire’s tax (California, Connecticut, Maine, New Jersey, New York, along with Washington D.C.). This trend could continue.
•Recognize income earlier – Whether its exercising / selling stock options, selling a business, converting IRA dollars to Roth, or withdrawing from any pretax retirement account, consider doing so to take advantage of these historically low taxes.
•Delay harvesting losses – Got any huge unrealized losses in your nonretirement accounts? If so, here is a quick recap from my prior weekend reading. Stay tuned as a future weekend reading is in the works that will cover this more in depth.
•Charitable giving – Obviously the tax tail shouldn’t wag the dog when it comes to charitable giving, but given that the standard deduction will likely remain high and therefore, the majority of people will continue to not itemize their deductions. There is a way to still potentially get a charitable tax benefit even if you don’t itemize by using something called a Qualified Charitable Deduction via your IRA. Take a look at this former weekend reading on “QCDs.” If you’re expecting a significant increase in taxes, you could bunch (combining multiple years of giving into a single year in order to help maximize your personal savings. Other strategies include utilizing Donor Advised Funds, charitable trusts, or charitable gift annuities.
•Rethink your structure – Since corporate tax (C-corps) rates are likely to either remain at 21% or be further reduced to 15% per Trump, business owners who have businesses structured as a pass-through entity (for example, S-Corps, partnerships, or LLCs) could consider converting if the tax savings are worth it. Another reason to consider converting is that the famous Qualified Business Income deduction of 20% (199A) for passthrough businesses is set to expire, although it will likely stay intact.
Any potential changes to the tax code must be passed by both the House and the Senate, so there’s no telling what will happen. Although it’s likely the TCJA will be extended, there are many conflicting views on what’s the best approach to take in order to take advantage. Historically speaking, we are in one of the lowest periods of tax rates and with the current federal deficit hitting ~$35 TRILLION, it’s hard to believe that tax rates won’t be adjusted upward in order to fund this behemoth of a deficit at some point in the future, regardless of who’s in office. We are proactively considering these strategies in preparation for your annual financial review, so we will be bringing these ideas up during your planning meeting. You don’t want to be sitting at the beach with a Bahama Mama thinking about that extended sunset.
As always, reach out to us if you have any questions, and have a terrific weekend!
-Devin and the MORWM crew