Establish Your Two-and-a-Half-Year Plan to Slash Taxes

Time is running out. You need to develop and execute a two-and-a-half year plan to avoid the major tax changes that are likely to come.

The Tax Cuts and Jobs Act, enacted in 2017, reduced taxes significantly. But to comply with congressional budgeting law, many of the law’s provisions automatically expire at the end of 2025 unless Congress acts before then.

Some of the expirations might be good. For example, personal exemptions would be reinstated as would deductions for miscellaneous itemized expenses on Schedule A.

But most of the expirations would be bad for taxpayers.

The income tax cuts in the law would end, and the higher pre-2018 tax rates would be reimposed. The standard deduction would be cut in half. The deduction of 20% of pass-through business income for sole proprietors and owners of S corporations, partnerships and many LLCs would expire.

In addition, the lifetime estate and gift tax exemption would be slashed in half, making many estates taxable again.

None of this will happen if the president and Congress agree to extend the law before the end of 2025. While a lot can change before then, right now a simple extension of the law seems unlikely.

If the government remains fairly evenly split between the parties, many of the 2017 tax cuts could be extended. But the extension would come at the cost of letting some lapse and creating additional income and estate taxes on upper-income taxpayers, such as those that were proposed in 2021 and early 2022. Higher capital gains taxes also are a possibility.

An expiration of the 2017 tax cuts, especially when added to the already-enacted SECURE Act and SECURE Act 2.0, would substantially increase income and estate taxes for many retirees and also for their families who inherit assets.

That’s why I say you need to develop a plan and implement it before December 31, 2025. You have two-and-one-half years to take advantage of the current favorable income and estate tax laws.

A good plan means rethinking and even reversing many traditional strategies.

Determine if your estate would be taxed if the 2017 law expires and the lifetime exemption is cut in half. You also need to consider that a change in power in Washington or a compromise to save income tax cuts might lead to a reduction in the exemption.

If your estate might be taxable in the future, it’s a good idea to reduce its value now.

There are many strategies for making tax-free lifetime transfers of assets to loved ones. You can make outright gifts. Or you can make gifts through trusts or other vehicles, so the value is out of your estate, but the beneficiaries still don’t have outright control of the assets.

When an estate is very valuable or has business interests, talk with your estate planner about strategies that reduce the value of assets for gift tax purposes while removing them from the estate. Such strategies include family limited partnerships, grantor retained annuity trusts and more.

Many people should stop deferring income and consider accelerating income into the next few years to ensure income taxes are paid at current rates instead of the potentially higher tax rates of the future. Such strategies should reduce the family’s lifetime income taxes.

We’ve discussed many such strategies in past issues of Retirement Watch. You might want to accelerate distributions from traditional IRAs. Or you could reposition traditional IRAs and 401(k)s as Roth IRAs, charitable remainder trusts or permanent life insurance policies. See the March 2023 and April 2023 issues for details of these and other strategies.

You also could use traditional IRAs to make charitable gifts if you are over age 70½. See the April 2022 issue and this month’s IRA Watch article for more information.

The details of the plan depend on your situation and goals. What’s important is that you can either wait to see if Congress acts to extend the 2017 tax cuts or you can take the next two-and one-half years to plan and take actions that protect your wealth from the tax increases that appear likely.