The tax-overhaul law signed by President Trump in 2017 brought significant changes, including lower individual income-tax rates, a higher standard deduction, and a raised estate-tax exemption. However, many of these provisions are set to expire in 2025, potentially leading to changes. Retirees and near-retirees should consider reviewing their tax strategies now to avoid any surprises in the future.
Here’s what financial advisers suggest:
Income Taxes: If Congress doesn’t take action, income-tax brackets will return to their higher pre-2017 levels. This could particularly impact individuals near retirement who may be at their peak earnings level, as the top rate will increase from 37% to 39.6%. Advisers recommend considering converting a portion of retirement savings to a Roth IRA now to take advantage of lower tax rates. Keep in mind that Roth conversions have a five-year waiting period before earnings can be withdrawn tax-free, so make sure to have enough funds set aside.
Estate Taxes: Currently, married couples can transfer a total of $25.84 million and individuals up to $12.92 million to beneficiaries without triggering federal estate taxes. If the tax law expires, the exemption will be cut in half, potentially subjecting taxable estates worth more than $7 million for individuals or $13 million for couples to federal estate taxes. It’s crucial to plan ahead to avoid these taxes. Utilizing trusts and other strategies can help protect assets and minimize tax liabilities.
Gifts: Individuals and couples can reduce the size of their taxable estates by making gifts while they are still alive. Contributions to a “529” education-savings plan are one option. Currently, individuals can give up to $17,000 each year to beneficiaries without triggering gift taxes. The 2017 tax law allows for front-loading five years’ worth of cash gifts, up to $85,000 per beneficiary for individuals and $170,000 for couples, into a single contribution. This can help shrink taxable estates and maximize the growth potential of a 529 plan. Consider strategic gifting with higher-value assets, considering the “carry-over basis” implications.
Charitable Deductions: The tax law increased the deduction limit for cash contributions to public charities. However, this limit will decrease in 2026. If you’re considering a significant cash donation, making it now will result in a larger tax deduction.
The key takeaway here is to act now. Even though Congress has extended tax cuts in the past, there’s no guarantee they’ll do it again. Don’t miss out on utilizing exemptions and deductions that could save you money in the long run.
Erik C. Sussman, CLU®, ChFC®, CFP®, and CEO of The Institute of Financial Wellness founded the company to provide financial education, resources, and services that help people live their best lives.
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