Plan Now, Save on Taxes Later: Tax Law Reset Is Coming

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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:

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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

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As founder and president of Michigan-based Thatcher Wealth Management, William Thatcher helps his clients create successful retirement plans tailored to their specific needs. He passed the Series 65 securities exam and is a Registered Investment Adviser Representative (RIAR). He is licensed in life and health insurance and has earned the National Social Security Association's National Social Security Adviser designation.