If you view taxes as a critical factor when making investing decisions (as you should), you may already be aware that several valuable but temporary tax breaks are set to expire at the end of 2025.
If you didn’t know, forgot or simply put off taking action, consider this your heads-up: It’s crucial to prepare for those changes before many of the beneficial provisions put in place by the Tax Cuts and Jobs Act (TCJA) of 2017 go away. Congress could extend those provisions, but that would require the members to work together, which we haven’t seen a lot of lately.
If Congress fails to act, here are a few things taxpayers can expect to see on Jan. 1, 2026:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Income tax brackets will return to where they were, and rates for most taxpayers will rise.
- The standard deductions for married couples, single filers and those filing as head of household will drop.
- Estate taxes could be much higher for families when the lifetime exemption returns to $5.6 million per individual (adjusted for inflation) from the 2024 rate of $13.61 million.
Though we’ve heard plenty of promises from politicians that the provisions will be made permanent, and debates over tax policy will almost certainly be a part of the 2024 presidential campaign, nothing has happened so far. The planning window is closing, and the strategies that can have an impact on your future tax bills could take years to implement.
If you haven’t already, this is the time to start considering potential ways to mitigate future taxes and hold on to more of your hard-earned dollars (especially if you’re close to retirement or already retired).
With that in mind, a few strategies worth exploring include:
Converting funds from a 401(k) or traditional IRA to a Roth IRA
Moving your money to a Roth IRA may have several tax benefits for you and your family. Once your funds have been held in the Roth for five years (and as long as you’ve reached age 59½), all distributions, including earnings, are free of taxes or penalties — even for your heirs.
But you will have to pay taxes on the funds you convert in the year you make the withdrawal. You might want to space your withdrawals over several years or move the money in a year when your income is lower than usual. Your financial adviser can share other ideas for how to minimize the tax bite as you complete your conversion.
Paying attention to ‘asset location’
Not all assets are created equal; some are more tax-efficient than others. With help from your financial adviser, you can determine the most appropriate accounts (tax-deferred, tax-exempt, brokerage, etc.) in which to hold your various investments in order to help optimize your tax treatment.
Making strategic withdrawals
You may already have a plan for how much you’ll withdraw from your savings each year in retirement to add to other income sources, such as Social Security benefits and pension payments. But it’s also important to think about which accounts you’ll be pulling from and how that money will be taxed. Take the time to run the numbers (or ask your adviser to do it for you) to uncover a withdrawal strategy that is the right fit for you.
Ratcheting up your estate planning
If you’re concerned about the shrinking lifetime exemption on estate taxes, you may want to talk to your adviser about the many tools that could help maximize your gifting, remove assets from your estate and lower your taxes later — including life insurance and/or a variety of trust options.
Remember, too, that IRS rules allow you to gift up to $18,000 a year ($36,000 for married couples filing jointly) to as many individuals as you wish. These annual gifts aren’t subject to taxes and don’t count against your lifetime exemption.
These are just a few of the strategies you might want to explore as you prepare for a future in which tax rates will likely be higher than they are now. Even if the TCJA provisions scheduled to sunset in 2025 are extended or made permanent, there’s a good chance tax rates will increase in the years to come. The national debt is currently sitting at more than $33 trillion, and unless measures are taken to get it under control, it’s going to keep ticking up. Most experts seem to agree that any solution will likely involve raising taxes.
Don’t wait. Start building tax efficiency into your plan and enjoy a more confident financial future.
Kim Franke-Folstad contributed to this article.
Insurance products are offered through the insurance business Thatcher Wealth Management. Thatcher Wealth Management is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by Thatcher Wealth Management are not subject to Investment Advisor requirements.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
National Social Security Advisor Certificate Program (NSSA) is a certification created by the National Social Security Association, a for-profit entity.
The NSSA Certificate Program grants a Certificate to those who complete the one-day course and pass the proctored assessment. NSSA is independently accredited by The Institute in Credentialing Excellence (ICE). NSSA is not affiliated with, nor endorsed by, the Social Security Administration or any governmental agency. 1828818-6/23
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way. # 2105554 - 11/23
Related Content
-
Why Uber Stock Is Volatile After GM's Cruise AnnouncementUber stock is swinging this week following news that General Motors is restructuring its Cruise unit. Here's what you need to know.
-
UnitedHealth Stock Falls as Lawmakers Eye Insurers, PBMsUnitedHealth stock is continuing to fall Thursday after the introduction of bipartisan legislation targeting PBMs and healthcare giants. Here's what to know.
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
-
LLCs: Power Tools That Can Create Big ProblemsForming an LLC for your business might seem like a straightforward endeavor, but if you don't know exactly what you're doing, trouble could follow.
-
Never Talk About Money? For Women, That Can Spell DisasterHow can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
-
How Combining Your Home Equity and IRA Can Supercharge Your RetirementWhile many retirees own an IRA and a home, very few are considering how they could work together in a plan for retirement income.
-
The Six Estate Planning Steps Every Blended Family Must TakeWhether your blended family is newly formed or fully fledged, use these six steps to review your estate plans now and lower the risk of conflict in the future.
