You are facing a likely significant tax increase as the Tax Cuts and Jobs Act (TCJA) of 2017 will soon end. In 2026, we revert to pre-2018 tax levels, which will lead to higher tax bills for most everyone, even middle class Americans. If Congress does nothing, then old tax rates apply. This unwelcome news has a silver lining as you still have time to prepare and possibly reduce your future taxes.
Assuming the current tax law sunsets, here are three key ways your tax burden could increase:
Income tax rates will increase. Income tax rates are scheduled to increase to the higher 2017 rates. As an example, the current bottom three tax rates of 10%-12%-22% will slide up to the old rates of 10%-15%-25%.
The standard deduction will be cut in half. Currently, a married couple can reduce their taxable income by just under $30,000 ($14,600 for single persons) with this deduction. The IRS will reduce this in half, thus more of your income is subject to the increased tax rate above.
Alternative Minimum Tax (AMT) will apply to more taxpayers. This forgotten tax requires certain “high income” taxpayers to calculate their taxes in two ways, and then pay the higher tax. With the sunset in place, it is estimated that 50% of those with income more than $200,000 will be subject to this increased tax calculation.
A positive implication of the upcoming expected tax deadline is the elimination of the State and Local Tax cap (SALT). The current tax law limits you to $10,000 in SALT deductions on your federal return. However, when the law sunsets, this will return to the unlimited deduction, which will benefit those in high tax states.
Preparation is the Key to Tax Savings
With these anticipated changes just a few months away, it makes sense to begin changes that could benefit you in the new tax environment.
Diversify your taxable savings strategy. Tax diversification is critical when considering a retirement plan. You should have taxable, tax-deferred, and tax-advantaged savings buckets in place.
Take income currently rather than defer the taxable portion of your asset. Depending on your current situation, accelerating income in the next few months could reduce your tax burden in the future.
Consider gifting strategies. If you are getting income that you do not spend from assets, consider gifting to family or charities now rather than later. This can reduce your current income and the size of your taxable estate.
Get Professional Advice
Finally, you do not have to do this all on your own. Collaborating with a financial planner and tax advisor can help you define and implement strategies to protect and grow your wealth in a more tax-efficient way.
Comments