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  • Eric Walter, CFP®

Financial Planning Corner: Only Two Years Remain!

Most of the individual provisions in the 2017 Tax Cuts and Jobs Act (TCJA) are set to end after 2025. Given the current dysfunction in Congress, new legislation extending the current low-tax environment does not seem likely. Additionally, the national debt has now surpassed $34 trillion, making it even harder to envision tax rates continuing at the present level. Declines in tax revenue and continued spending have both played a significant role. The Fed’s rate hikes have compounded this further, as the government’s expense to simply carry the debt has increased dramatically – $352 billion in 2021, $476 billion in 2022, and $659 billion in 2023.


The increase in national debt has been substantial during the last two administrations. Therefore, with Trump and Biden currently the frontrunners, the outcome of the 2024 election seems unlikely to change this trajectory, at least at this moment in time. Future economic conditions will also impact how this ultimately plays out. With the assumption there will be no new legislation, income tax brackets will return to their 2017 levels for the 2026 tax year; however, there are several ways to take advantage of the TCJA over the next two years before the Act’s expiration.


Roth Conversions: Paying income tax now to move tax-deferred IRA money to a tax-free Roth IRA will save not only the incremental difference on your tax rate but it may also decrease future tax liability by decreasing IRA Required Minimum Distributions (RMDs) and providing additional tax diversification for meeting future cash needs. Future growth in the Roth IRA will also be tax-free (if you meet certain requirements).


Qualified (IRA or Annuity) Withdrawals: Like a Roth conversion, you can withdraw qualified money and pay income tax today. This will also decrease future RMDs and lower future tax liability. Even if you already have an annual RMD, you can overdraw above the required amount to create additional taxable income if still in a lower bracket.


Non-Qualified Annuity Withdrawals: Withdrawals of basis (amount invested) are untaxed since contributions are made with after-tax dollars; however, withdrawals are first considered to come from gains that are taxable as ordinary income until the basis is reached. This is different from annuitizing (initiating a stream of payments), where each payment includes a proportional amount of gain and basis and is taxed accordingly. By withdrawing gains in a lower tax bracket, you can save on tax and get to your basis sooner, expediting access to the untaxed portion of your annuity.


Realizing or Accelerating Income: Selling highly appreciated assets, (re)structuring payouts, or expediting other income into the next two years may save future tax liability. Examples include selling long-held stocks with low basis and ensuring notes payable, or a larger portion thereof, occur before 2026.


It is important to state that these are general strategies and will not make sense for everyone. Let us know if you would like to schedule a time to discuss your unique situation to see if any of the tax strategies above might work for you.



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