The Trump-era tax cuts for individuals are about to expire. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced income tax rates for both corporations and individuals, but the tax reductions for corporations were permanent while the tax reductions for individuals were temporary and will expire on December 31, 2025.
Unless Congress and the President pass new legislation, tax rates for individuals will revert to the higher pre-TCJA percentages. Marginal tax rates in most income brackets will rise between 3% and 4% per bracket, while the top marginal rate will increase from 37% to 39.6%. The standard deduction will be cut in half. For married couples filing jointly, the deduction will be reduced from $29,200 to $14,600, adjusted for inflation above 2024 levels. The exemption from federal estate taxation will be cut in half from $13.61 million in 2024 to $6.81 million adjusted for inflation, meaning that estates above the threshold would be subject to estate tax rates ranging from 18% to 40%. Washington residents will continue to face a $2.193 million estate tax exemption that will not be adjusted for inflation.
Regardless of the expiration of the TCJA, the upward pressure on tax rates will continue. The national debt is over $34 trillion and budget deficit projections are expected to soar in the next ten years, so it is unrealistic to expect that future tax rates will decline.
In this environment, taxpayers should consider recognizing some income before rates rise. This includes making retirement plan conversions to Roth accounts, deferring deductible expenses, and taking distributions from taxable deferred retirement accounts now to minimize required minimum distributions later at higher tax rates. The acceleration of income tax payments will also reduce the size of individuals’ taxable estate as a side benefit.
Fulcrum Wealth Advisors can integrate tax payment timing strategies as part of the financial planning process for its clients.
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