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With presidential elections just around the corner and the associated uncertainties, it is the perfect time to start planning for various tax scenarios, particularly the possibility of tax hikes. The current tax laws, established by the 2017 Tax Cuts and Jobs Act (TCJA) under President Trump, are set to expire at the end of 2025. That means when we wake up on January 1, 2026, we could be facing the return of higher taxes across the board, regardless of how much you earn. Preparation is the key to any successful strategy. Here is our list of ideas for making the most of the current (lower) tax rates.
Roth IRA Conversion
Converting to a Roth IRA when tax rates are lower can be a smart move. By transferring funds from a traditional IRA or 401(k) to a Roth IRA, you will pay taxes on the conversion amount now but enjoy tax-free growth and withdrawals in the future. Additionally, Roth IRAs are exempt from required minimum distributions (RMDs), giving you more flexibility in retirement. Full disclosure: Roth conversion is not for everyone, so don’t make any moves before getting professional advice on this strategy.
Accelerate Gifting
With potential changes to the federal gift and estate tax exemption, accelerating your gifting strategy might be beneficial. The annual gift tax exclusion for 2024 is $18,000, up from $17,000 in 2023. This means you can give up to $18,000 per recipient each year without incurring gift tax. Consider making more significant gifts now to reduce the value of your taxable estate before potential changes in the law.
Qualified Longevity Annuity Contracts (QLACs)
QLACs can be a valuable tool to manage your RMDs, especially if you anticipate higher tax rates. A QLAC allows you to defer a portion of your RMDs until age 85, reducing your taxable income in the interim. While the payments from a QLAC are subject to ordinary income tax, deferring the income can help you manage your tax liability over time.
Tax-Loss Harvesting
If you have investments that have decreased in value, consider tax-loss harvesting. By selling these investments and replacing them with similar ones, you can offset gains with losses, potentially reducing your taxable income. This strategy can be particularly effective if you expect higher capital gains taxes in the future. Do not forget the current administration is adamant about increasing the capital gains tax rate by a significant margin.
The Key is Staying Informed and Planning Ahead
The landscape of tax policy is likely to shift depending on the election outcome. President Biden has proposed letting the majority of TCJA tax cuts expire, while former President Trump has suggested extending the bill. What we know for sure is that the debt crisis in America will keep tax policy front and center for years to come. The composition of Congress will also influence this polarizing topic, so staying informed and ready to adapt is key.
Consult a Professional
This is where professional advice is worth the cost. Given the complexities and potential changes in tax laws, don’t delay talking with a financial or tax professional. Part of their value is tailoring strategies to your specific situation and ensuring you are prepared for whatever changes might come.
It is never a bad idea to have a plan for anything financial. Potential tax increases are looming so be sure your financial strategy is robust and flexible. By taking proactive steps, you can make the most of the current tax environment and be better prepared for the future. If you have questions about your situation, contact an OmniStar advisor, today.
