TAX ACT 2017 coming to an END! What Does is mean?
With the likely potential “sunset” or expiration of the Tax Cuts and Jobs Act of 2017 looming, can we expect to see a dramatic increase in taxes in the near future? Here’s what you need to know and how you should start preparing today.
The Tax Cuts and Jobs Act of 2017(TCJA) was passed by Congress and signed into law by President Trump. The law became effective on January 1, 2018 but it was never a permanent law. The act is set to expire or sunset on December 31, 2025. On that date our taxes will revert back to pre-2017 levels. This means the percentage of tax on virtually all tax backets will increase. For example for people filing married jointly the second lowest bracket ($22,001-$89,450) is going increase from 12% to 15%. On the surface a 3% increase may not seem like a large amount, but in reality it represents a massive 25% increase. You can see this for the other tax brackets as well. For married filers in the $180,001 to $190,750 bracket, the increase will go from 22% to 28% which would represent a 27% increase.
Another big change will be with the standard deduction. Currently married filers can take the standard deduction of $27,700. The Tax Cuts and Jobs Act of 2017 also indexed the deduction to keep up with inflation. When the law went into effect the standard deduction was $24,000 and increased each year to our current level. If the act expires, we will revert back to pre-2017 levels of $13,000. We’ve all been pretty spoiled and enjoyed taking the standard deduction and not spending hours saving our receipts and itemizing our deductions. Click this link to view IRS form schedule A for itemizing deductions.
So that you can be as prepared as posible with your retirement, you should know that we may also see increase in the taxation of dividends and capital gains. Also, parents will see a decrease in the child tax credit if the act is allowed to expire.
You might be wondering what are the prospects of Congress rewriting the act and the president signing that bill into law? There are two reasons why I don’t think this will happen. First, our national debt is approximately $32 trillion. Annually, the federal government brings in approximately $4 to $4.5 trillion in revenue. There are many members of congress who believe we cannot decrease that debt without a tax increase. Secondly, after congress passed the act and President Trump signed it into law, the media started referring to it as the Trump tax cuts. In this current contentious political environment and with a very polarizing presidential election looming, it’s hard to think congress would want to do anything that would put President Trump into a positive light.
What should you do if the Tax Cuts and Jobs Act of 2017 is possibly going to sunset? We are advising our clients to take advantage of the current low tax rates and explore converting your taxable accounts such as traditional IRAs and employer sponsored plans like 401(k)s, 403(b)s and 457 plans into tax-free Roth IRAs. In a conversion, you are paying your taxes now to avert potentially higher tax rates in the future. For our clients, we look at what the current taxable income is and what is the next tax bracket or threshold. This method means you would pay the same percentage of tax but not an excessive amount of tax. Again, a conversion will cause you to pay your taxes now which is a very high level of tax planning. We recommend consulting with your tax preparing professional or CPA before making this move. You can also meet with a firm like Montini and Company Tax Advisory Group who specialize in both tax and financial planning. Marc Montini, licensed fiduciary and financial planner can help advise as to what your planning options would look like.
Click this link to view a 12 minute webinar on Roth Conversions.
It’s incredibly possible we are going to see a tax bomb explode in just two and a half years. Take advantage of the time we still have and proactively begin your preparation for a more tax efficient retirement.