Tax Law Changes - What Do I Do Now?
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Tax Law Changes - What Do I Do Now?
Prepared by Michael Menninger, CFP®
H2: 2025 Tax Law Changes: What to Expect as the Tax Cuts and Jobs Act Expires?
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which created the lowest income tax rates in our lifetime, and likely the lowest rates in our children’s lifetime. However, these tax laws are scheduled to “sunset” (expire) on December 31st, 2025. Once they sunset, the tax laws they are supposed to revert back to the prior tax laws which had been in place since 2001. So, what are the major impacts, and what can people do to maximize tax efficiency with these impending changes?
Listed below are two common impacts of the “new” tax laws “average” person.
2026 Tax Rates Changes with New Brackets & Higher Rates for Married Taxpayers
The current 12% and 22% tax rates become 15% and 25%, respectively. Further, a married taxpayer can now have a taxable income of $383,900 and still remain in the 24% tax bracket. In 2026, that 24% tax rate will be exceeded after only $95,000 (projected) and the tax rates reach 33% after only $291,000 (projected) of taxable income.
Impact of the TCJA on Personal Exemptions and Deductions
The TCJA eliminated the personal exemption (roughly 4,000 per household member), put a limit of $10,000 for taxes that could be claimed as a deduction, and nearly doubled the standard deduction. Except for those taxpayers who contribute large amounts to charity or have large mortgages, most taxpayers didn’t have enough deductions to itemize. As a result, those taxpayers taking the standard deduction effectively were not able to deduct mortgage interest, taxes, and charitable contributions, but that will change again in 2026.
How to Capitalize on Tax Law Changes with Key Strategies for 2024 & 2025
So how can one take advantage of the anticipated tax law changes? For most people, the greatest impact will be the increasing tax rates. We like to say that the IRS is currently on sale, and there are only two years left (2024 and 2025) to capitalize on it. Here are some ideas to consider.
Roth 401(k) and Roth IRA Conversions
We have published articles and produced multiple TV episodes on this topic, because there is a lot more to it. The rule of thumb is to estimate your marginal tax bracket now, compared to two years from now and/or in retirement. Contrary to conventional wisdom, it is quite possible that you will be in a higher margin tax bracket in retirement than you are now, and that is mainly because of the phantom taxation of Social Security. Thus, if you expect to be in a lower tax bracket for the next 2 years, you should consider contributing to your after-tax Roth 401K / Roth IRA rather than the tax-deductible Traditional 401K or IRA. Further, if you have an existing IRA, you should also consider converting some or all of it to a Roth IRA. This will require you to pay tax on it at today's lower rates, but it allows those assets to grow tax-free for retirement.
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Smart Tax Moves Deferring Mortgage Payments
There may not be a whole lot you can do in 2024 to improve tax efficiency here, but this may also present opportunities for the end of 2025. If a taxpayer takes the standard deduction in 2025 but is expected to itemize in 2026, they could defer certain items such as their December 31st mortgage payment, and pay it in January. Thus, the interest is applied to 2026 when the taxpayer can effectively deduct the interest. Similarly, if a business owner has tax-deductible purchases, they may find it better to defer those purchases until 2026 when the tax rates will be higher.
Get Expert Help to Implement These Tax Efficient Strategies
These are just a couple of ideas and strategies that one could employ for tax efficiency. We encourage you to speak with your tax professional to assist you. By consulting with a tax professional, you can tailor these strategies to your specific financial circumstances and ensure you're taking advantage of every opportunity for savings and efficiency.
Need Help With Tax Strategies? Reach Out To Menninger Today
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies may be suitable for you, consult the appropriate qualified professional prior to making a decision. Menninger & Associates Financial Planning and LPL Financial do not offer tax advice or services. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of a conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
