Tax season is an ideal time to ask yourself – am I just completing a tax return, or am I executing a tax strategy?
Key provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of this year.
You should pay close attention to proposals in Washington, as key changes to tax legislation may affect your future tax strategy.
As we wrote in our most recent article, tax strategy is a crucial component to every successful financial plan. Opportunities can be as obvious as investing in choosing whether the Roth or traditional side of your company's 401K plan is more beneficial, or can be uncovered by carefully executing specific transactions, such as tax loss harvesting. Even more challenging can be figuring out who should be accountable for tax strategy. Is it you? Your CPA? Your financial planner? This year may be especially confusing for taxpayers, as key provisions in the Tax Cuts and Jobs Act (TCJA), enacted in 2017, are set to expire at the end of 2025.
The TCJA featured many changes, including lower individual income tax rates, significantly higher estate and gift tax exemptions, 20% deduction for qualified business income for pass-through entities, and a reduction in the top corporate tax rate from 35% to 21%. With the TCJA sunset approaching, these provisions could be either revised or extended, depending on future policy decisions.
The final version of new legislation, as well as the implementation and timeline for new rules to go into effect, are completely unknown. Depending on how the tax legislation horse-trading turns out in Washington, the changes could lead to higher - or lower - tax liabilities for individuals and businesses, making strategic financial and estate planning more critical than ever.
With the tax uncertainty on the horizon, what should taxpayers consider?
- Given the current lower tax rates, taxpayers could accelerate income into 2025 in a variety of ways, including Roth IRA conversions.
- The TCJA nearly doubled the standard deduction and reduced the SALT (state and local tax) deduction to $10,000. After this year, the standard deduction would drop back to pre-TCJA levels, and there is a proposal to lift the SALT cap. More taxpayers may benefit from itemizing deductions again starting in 2026.
- Leaders in large companies should map the effect of the various corporate tax rate changes currently under review. A decrease from 21% to 20% may not create substantial change, but a decrease from 21% to 15% is a massive shift which may require a company to review significant parts of its operations.
- Small business owners, especially those who are high income earners, should be prepared for agile financial planning in 2025. By the end of the year, we should have more clarity on which of the current proposals, including updates to depreciation rules and making the Section 199A deduction permanent, will make it across the finish line.
- Affluent families have benefitted from the increased estate and gift tax exemptions in the TCJA, which are now close to $14 million per person and nearly $28 million for a married couple. Without intervention, those numbers will drop by half in 2026. While the Trump administration has signaled an intention to make the current numbers permanent, those with an estate that would be taxable in 2026 may consider locking in the 2025 gift tax exclusion.
- Long-term tax planning can be challenging when the rules may change by next year. Mapping out various strategies based on the most likely tax environment and staying informed about the effects of various potential changes can make an unpredictable environment more predictable.
At BFS Advisory Group, we take the lead on tax strategy for our clients. We analyze our clients’ tax returns, model multiple scenarios, and identify opportunities to optimize tax strategies. A major tenet of our tax strategy is to “not let the tax tail wag the dog,” so taxpayers should only consider the ideas above if they align with their overall financial plan goals. We know that data-driven analysis helps our clients to make clear financial decisions that align tax benefits with their broader wealth-building goals.
Stay tuned throughout the year as tax proposals develop. In the meantime, if you want to learn more about how your financial plan can benefit from incorporating tax strategy into it, contact us at hello@bfsadvisorygroup.com.