3 Must-Know Updates: Prepare for Tax Cuts & Jobs Act Expiration

September 23, 2023

The Tax Cuts and Jobs Act is currently scheduled to sunset at the end of 2025. For many taxpayers, this means their taxes will be going up.

Alex and Anthony show you a few of the most prominent adjustments, and what you can do now in preparation.

3 Must-Know Updates: Prepare for Tax Cuts & Jobs Act Expiration

Resources:

Full transcript:

SPEAKERS

Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
Recent tax reform is scheduled to sunset at the end of 2025. What this means is taxes will go up for many people. In this video, we’ll talk about prominent adjustments that you can make, as well as things you can do to prepare.

As a quick recap, the Tax Cuts and Jobs Act enacted in 2017, under President Trump, made significant changes to income and estate tax laws. These are scheduled to sunset in 2025. Unless Congress does something to go ahead and extend them.

Alex Okugawa 0:30
Yeah. So ultimately, we don’t know with 100% certainty if this sunset will occur or not. However, I’d say there’s a better chance that the sunset will occur then it doesn’t. So, most people should be prepared for this to end after 2025.

Anthony Saffer 0:47
Yeah, and that means the main change number one is that tax rates overall would go up, and the income tax brackets, you would push into those much sooner at a lower income level.

Alex Okugawa 1:00
Yeah, so let’s take a look at this chart on screen. For example, a married couple, let’s just say they have a household income of $250,000. Under the current rules, they would be they would fall under the 24% marginal tax bracket. Under the old rules, they would fall under the 33% marginal bracket. So the main takeaway here for folks is to look at your current tax situation, and what you expect your tax situation might look like in the next few years. If your current tax situation is low enough, it could make sense to do things like Roth 401K contributions, or Roth IRA contributions. If you don’t have any earned income, another option is maybe looking at like partial Roth conversions, in other words, doing things that you can in the current year to try and lock in and take advantage of these historically low tax brackets. And this is especially important as people get closer to retirement.

Anthony Saffer 2:06
And being proactive, like you mentioned, is really important. And it’s really not the same for everybody. It’s not really black and white in terms of how you would fit in and tax planning. It’s just a reminder that it’s such a big part of retirement planning. We had previously posted a guide called Five Retirement Mistakes to Avoid, we’ll go ahead and post the link to that down in the show notes. If you’ve not downloaded that previously. That’s a great resource.

All right, Alex. So main change number two, is that the standard deduction is scheduled to come down after the sunset, we recall that with the Tax Cuts and Jobs Act, the standard deduction was doubled. That means 90% of people now take the standard deduction.

Alex Okugawa 2:47
Yeah. So, in addition to that standard deduction being nearly doubled, which is the current tax benefit that we’re all enjoying today. The Con, if you will, of the current law is that your state and local income taxes are capped at a $10,000 limit, which might seem quite high. But when you live in a high-income tax state such as California, even New York as an example, those state taxes can add up really quickly, as well as your property taxes.

And so under the current law that really hurt a lot of people in high-income tax states, if we revert to the old law, at least, we’ll at least the way it’s currently written, no cap exists. And so that should benefit a lot of people in high-income tax states like California. Really, what this means is that itemized deductions are going to become a lot more popular again. So you’re probably already in the habit, but make sure you’re in the habit of tracking all of your itemized deductions to be prepared to really start reporting those more often.

One other thing I do want to add here, because this strategy became very popular, due to the current tax law system, which is qualified charitable distributions, and that is giving money directly out of your IRA, to the charity of your choice. The benefit of doing so is when you make that gift directly out of your IRA to the charity, you don’t pay any taxes. Now, just because itemized deductions and the standard deduction might be changing, which was the main reason for looking at the qualified distribution strategy. I still think this strategy is going to make a lot of sense for people going forward, even if we do revert back. So it may not necessarily change all of you know, folks, tax plans going forward.

Anthony Saffer 4:46
Yeah, that’s a great point. The QCD is a great strategy, but also, like you said, planning out your deductions based on the standard deduction and maybe if you revert back to itemized deductions is really important.

And if you’re finding this video Hopefully we’d love it. If you subscribe. We do post videos each week on how to build confidence in your retirement plan.

So Alex, again, main change number three is that the estate tax exemption is also coming down.

Alex Okugawa 5:13
Yeah, the estate tax exemption is essentially the amount that you can pass down to the next generation, without incurring the estate and gift tax. And so in 2023, a married couple can gift up to $25.84 million, which most people are not going to hit that limit. And so you can get that amount without having to pay your gift and estate taxes.

So let me give you an example. Let’s say you have a married couple, or let’s just say you have an individual person, let’s just say their estate is worth $10 million. The current law, they would be able to pass on their fullest state to the next generation without incurring the estate and gift tax, which gets really expensive in a hurry, the rate is 40%. And you reach that 40% rate very, very quickly. So you need to be careful with this. However, if we go back to the old rules, using the same example, as an individual person that has a $10 million estate, it’s very likely that their estate would be subject to the gift and estate tax, if you will.

So the main takeaway here is people need to be looking at their estate plan, if they’re anywhere in this general ballpark, because it’s very likely, that the gift and estate tax exemption is going to come back down, which is going to make estate planning even more important, it was important before, but it’s really going to become important now. So folks need to be looking at their estate plans, understanding what’s in them what happens to distributions upon first death or second death, and making sure that it’s set up in a way that maximizes inheritance to the next generation and keeps as little tax as possible. Being paid out.

Anthony Saffer 7:03
Yeah, and with that estate tax, we are talking bigger dollars that may not apply to everybody. But there are going to be people that are surprised and maybe it’s not an issue now. And if those laws do sunset, then they might find themselves with an estate tax issue, so to speak. But it’s also a very big tax upwards of 40%. We previously posted a video on how to gift money over to your children without paying tax. We’ll go ahead and post that above that may also be helpful.

Thanks for joining us. Please like and subscribe for more. Thanks for watching and we’ll catch you on the next one.

Transcribed by https://otter.ai

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