As we approach the 2024 presidential elections, there is a growing sense of uncertainty about the future of various financial policies, especially those related to taxes. At the center of these discussions is the Tax Cuts and Jobs Act (TCJA) of 2017, a significant piece of legislation that brought about extensive changes to the U.S. tax code. With the TCJA set to sunset at the end of 2025, the upcoming election could have profound implications for your finances.
The Political Landscape and Potential Changes
President Biden has indicated a preference for allowing many of the TCJA tax cuts to expire. This would mean a return to higher tax rates for many individuals and corporations. On the other hand, former President Trump, while not yet explicit about his tax plans, has previously supported extending parts of the TCJA. The ultimate outcome will heavily depend on the makeup of Congress post-election.
Key Provisions of the TCJA
The TCJA introduced several important changes to the tax landscape:
- Expanded Tax Brackets and Lowered Top Tax Rate: The act broadened the income ranges for different tax brackets and reduced the highest individual income tax rate.
- Increased Standard Deduction: This nearly doubled, making it more beneficial for many taxpayers to take the standard deduction rather than itemizing.
- Capped Deductions: The mortgage interest and state and local tax (SALT) deductions were capped, limiting the amount taxpayers could deduct.
- Federal Gift and Estate Tax Exemption: The exemption amount was significantly increased, allowing individuals to transfer more wealth tax-free.
Planning Ahead: Steps to Consider
With potential tax increases on the horizon, proactive planning is essential. Here are several strategies to consider:
1. Roth Conversions
A Roth conversion involves transferring money from a traditional 401(k) or IRA to a Roth 401(k) or Roth IRA. While you’ll pay taxes on the converted amount, the benefits include tax-free growth potential and qualified withdrawals that aren’t subject to required minimum distributions (RMDs). Additionally, a “backdoor” Roth conversion can be achieved by making nondeductible contributions to a traditional IRA and then converting those funds to a Roth IRA.
2. Tax-Loss Harvesting
If you have significant gains in your investment portfolio, it might be wise to realize those gains this year, in case capital gains taxes increase next year. Tax-loss harvesting allows you to sell investments that have lost value, replace them with similar ones, and offset realized gains with those losses, potentially reducing your overall tax bill. If your capital losses exceed your gains, you can use up to $3,000 annually to offset ordinary income on federal taxes, carrying over any excess to future years.
3. Gifting to Lower Your Taxable Estate
The current estate tax threshold of $13.61 million for single individuals and $27.22 million for married couples is set to be cut in half without an extension. Accelerating gifting now can help reduce the value of your taxable estate. The annual gift tax exclusion for 2024 is $18,000, allowing you to give this amount to as many people as you like each year without incurring gift tax liabilities. Married couples can combine their exclusions to give up to $36,000 per recipient.
Important Considerations for Gifting:
- Exceeding the Annual Exclusion: If you give more than the annual limit to any single person, the excess will reduce your lifetime exemption and affect your estate tax liability upon death.
- Valuation of Gifts: While most gifts are valued at fair market value, some, like artwork, may require formal valuation.
- Exempt Gifts: Gifts to spouses, political organizations, charitable organizations, and payments for tuition or medical care are generally exempt from gift taxes.
4. Qualified Longevity Annuity Contracts (QLACs)
Considering new strategies for RMDs can be crucial if you anticipate being in a higher tax bracket. A QLAC, a deferred income annuity funded with retirement savings from a traditional IRA or 401(k), allows you to defer income until age 85. The invested amount is removed from RMD calculations, and you won’t pay income tax until you begin receiving payments.
Navigating Uncertainty
The potential changes to tax laws following the 2024 elections add a layer of complexity to financial planning. While it can be challenging to plan amid such uncertainty, staying engaged and preparing for various scenarios is vital. Each person’s financial situation is unique, so it’s crucial to consult with a financial or tax professional to tailor a strategy that fits your needs.
Conclusion
As we head towards the 2024 presidential elections, the future of tax policies remains uncertain. However, by understanding the potential changes and taking proactive steps now, you can position yourself to better navigate whatever changes may come. From considering Roth conversions and tax-loss harvesting to making strategic gifts and exploring QLACs, there are several strategies to help mitigate the impact of potential tax hikes. Stay informed, remain proactive, and seek professional advice to ensure your financial plan is robust enough to withstand the shifting political landscape.
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