By Deborah Jeanne Sergeant
Unless further legislation intervenes, a few aspects of the Tax Cuts and Jobs Act (TCJA) will phase out by the end of 2025 and 2026, making tax brackets higher for most households.
The Trump-era TCJA, passed in 2017, lowered taxes for an estimated 65% of households and raised them for 6%, according to the Tax Policy Center in Washington, D.C. Planning can help mitigate the effects of losing those tax cuts for both households and businesses.
Until it ends, the effects of the TCJA include 27% of the lowest income households receiving a tax break; those between $49,000 and $86,000 receiving an average tax cut of 1.4% of their after-tax income; those with incomes between $308,000 and $733,000 received a 3.4% cut; and the highest bracket of those more than $733,000 received a 2.2% break.
“The TCJA tax brackets are the lowest personal income tax rates during my entire career in financial planning,” said Randy Zeigler, certified financial planner and private wealth adviser in Oswego with Ameriprise. “I have been working with my clients for the past several years to fully maximize these brackets as it appears that the government will allow these rates to expire, given the amount of total US government debt, the financial pressure on the US budget caused by this debt load and the magnitude of the budget deficits of the past few years.
“Tax planning always involves an effort to look at a person’s or couples’ current income and their tax rate and project ahead to determine if it makes sense to defer taxation into the future at possibly higher tax rates, although one may have a lower income at that time or to purposely trigger additional taxable income now at our low current tax rates.”
Zeigler suggested possible strategies for working people to discuss with their financial adviser:
“If future tax rate is expected to be lower due a decline in future income (i.e., during retirement) then current tax deductibility and deferral usually make sense in most mathematical models (pre-tax 401(k) payroll deductions, pre-tax employee medical benefit plans, etcetera), even with somewhat higher income tax rates.
“If future income will not be lower, then deferring a portion of one’s employee 401(k) contribution payroll deferrals could be a smart strategy. This idea would forfeit current tax deduction for future tax-free withdrawals while avoiding the higher future tax cost.”
He added that retirees with large pre-tax retirement plans should look at their present and projected income tax rates, considering their investment positioning. They may want to maximize their 12% tax bracket now by taking taxable distributions from their pre-tax retirement plans or by making Roth conversions of their traditional IRA balances.
“This is an especially important strategy for married couples as the tax brackets and standard tax deduction drop in half once one of the spouses dies, so it is much more difficult for the survivor to remain in the 12% federal tax bracket if they hold a large pre-tax IRA balance,” Zeigler explained.
Of course, these are broad strategies that cannot possibly address every scenario. Numerous factors affect financial planning, making individual advice from a financial planner the best way to go.
Businesses will also feel the effects of losing aspects of the TCJA. John C. Saunders, owner of John C. Saunders CPA PC in Rochester, believes that the biggest TCJA effects that will impact people will be expense deductions and depreciation, along with benefits for investing capital gains into small businesses.
“There’s a scaling back of accelerated depreciation that will be widely felt,” Saunders said. “There were some very good things that came from this Tax Cuts and Jobs Act to be stimulative to the economy.”
He views the coming repeal of these measures as particularly injurious to the business world considering the continued fallout from businesses shaken by the pandemic’s effects. Many business owners incurred significant setbacks from lost business, skyrocketing costs and rising wages.
“There’s a lot of stuff that’s getting to critical failure level, particularly as the government seeks to take more and more control over every personal and business decision,” he said.
Discussing the upcoming changes with a tax preparer or other financial professional and how these changes relate to a particular household or business can help mitigate some of the negative effects of losing aspect of the TCJA for those impacted.