Planning for Coming Tax Changes
2017 was a year of massive tax reform in the United States by way of The Tax Cuts Jobs Act (TCJA). The TCJA provided numerous tax breaks to businesses and individuals, but many of those breaks are set to expire in the coming years. I want to highlight a few changes that will affect individuals over the next few years and some ideas that may help decrease your burden.
Individual marginal tax rates will increase after 12/31/2025.
The tax tables above show you the significant differences between the 2022 tax rates and the coming 2025 tax rates. In addition to marginal tax rate increases, the standard deduction will also revert to the lower standard deduction from 2017. The standard deduction will decrease from $12,950 to $6,350 for individual filers and from $25,900 to $12,700 for married couples who file jointly.
What do these changes represent in real dollars? if an individual makes $100,000 per year, not accounting for any deductions beyond the standard, that individual would pay approximately $14,822.66 in 2022 federal taxes. That same person would pay approximately $19,203.75 under the 2025 tax code; all else being equal.
Here are some potential planning steps we can take now to prepare for these changes:
1. Roth Conversion – If you have an individual IRA, we should evaluate whether converting some of that money to Roth would make sense. We could pay taxes now, at a lower rate, to provide tax free income later.
2. Tax Loss Selling – If your account has some positions with losses, it may make sense to realize some of those losses to carry over to apply to the years where your tax liability may be higher.
3. Use tax free income producing securities in your brokerage account with maturity dates in 2025 to provide tax free income as a supplement to retirement income needs.
2025 is still a long way away, but if we do not start planning for changes now, it will be too late. The plans we put in place today provide us with benefits in the years to come. Our job as financial advisors and planners is to look ahead and help you position yourself as advantageously as possible. No matter what your financial situation is, these changes will have an effect on you. Please call our office to discuss any questions you may have.
Tax laws are subject to change. There could be new changes to the tax code in the future.
Pomerleau, K. (2016, November 10). Tax Foundation. Retrieved from taxfoundation.org: https://taxfoundation.org/2017-tax-brackets
York, E. (2021, November 10). Tax Foundation. Retrieved from taxfoundation.org: https://taxfoundation.org/2022-tax-brackets/