Moves to Consider Before 2017 Tax Cuts Expire #122

In this episode host Josh Nelson talks about the Tax Cuts and Jobs Act which was signed into law back in 2017. Those tax cuts when signed into law were set with an expiration date at the end of 2025. Keystone Financial clients are wanting to know what will happen when they do. If you're wanting to know as well, this episode will be helpful for helping you make the right financial decisions for your future financial success.  

Instagram: https://www.instagram.com/keystonefin/
Twitter: https://twitter.com/Keystone_Fin?advisorid=33004651
Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com
https://www.keystonefinancial.com/team/macy-chapman

Transcript

Wiser Financial Advisor – Moves to Consider Before the 2017 Tax Cuts Expire

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.  

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we'd love it if you would pass it on to me directly: josh@keystonefinancial.com . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service.  

Let the financial fun begin! 

Today, we're going to be talking about the Tax Cuts and JOBS Act, which was signed into law back in 2017, because those tax cuts were set with an expiration date at the end of 2025. And I've had a lot of clients ask me what will happen. Of course, we don't know what will happen. It's possible that action will be taken by Congress between now and then, but if Congress does nothing, then a lot of these things will end up expiring, including some significant estate tax implications. 

Let's talk about the background here. In 2017, the Tax Cuts and JOBS Act brought changes to the tax code, which lowered rates for most individuals and businesses. Those changes were aimed at stimulating economic growth and putting more money back into Americans’ pockets. It did that to a large extent. Almost everybody ended up paying lower taxes. But fast forward to now when we're approaching the end of 2025, which will be here before we know it. So it's important to think through how this will affect all of us individually, so that we can be making some moves and doing our best to anticipate so we can plan ahead for some of these implications. 

After the JOBS Act was passed, the tax brackets were adjusted, leading to lower rates for almost everybody. Even the top tax rate dropped from 39.6% to 37%. Using that as an example, the top tax rate would go back up to 39.6% for the highest income earners. 

The standard deduction was about doubled at the time, which applied to everybody. Since then, a lot of people are no longer itemizing their taxes. In fact, the last number I saw was that over 90% of taxpayers are now taking the standard deduction because it's so high compared to what their itemized deductions were. So if you're taking the standard deduction, it could be that you will pay higher taxes if the standard deduction is reduced. 

The child tax credit was increased to $2000 per child, so about doubled. That used to be $1000. Potentially, that would go back from $2000 to $1000, which could affect families with children. 

The estate tax is another one. For a lot of people, this has been a non-issue for years and years. When I started as a financial advisor back in 1999, the estate tax limit was I think $750,000 that you could inherit without getting taxed on that inheritance. As you can imagine, many people were subject to the estate tax—but over the years those limits went up quite a bit. Then the 2017 tax bill doubled the amount of the limit to about $12 million per individual. Now, it’s more like $13 million per individual or $26 million per couple, meaning that you'd have to have a pretty large estate to be taxed on it. And if you're in that camp with a large estate, which could be the case not because you got lucky or made really good investments or something like that; maybe you inherited assets such as the family farm or business. It could be something else that wouldn't apply to what you’d think of as “rich” people. So if the tax cuts expire, the limit on the estate amount you can inherit before getting taxed will get chopped in about half, down to about seven million dollars per individual. Anything after that would be taxed, which for most people is still a lot of money, but there would be more estates affected in that case than there are now. 

Let's talk about the impact on investments. The Tax Cuts Act lowered the top corporate income tax rate from 35% to 21%, which boosted corporate profits. Many companies brought business back to the US, where they might have gone out and domiciled in some other country for a while. If the corporate tax rate goes up after 2025, that could have an impact on corporate profits and in turn, have an impact on stock prices. This may not have a direct impact on you as an individual from a tax perspective, but it may have an impact on your investments. 

Long-term capital gains tax rates were also lowered for most taxpayers. So, if these rates increase back up, it might affect you. There are estate planning considerations to think about. Depending on what Congress does with those exemption amounts, your investments, your trusts, and other strategies you might be using right now may need to be adjusted. 

As far as planning strategies, what can you actually do about this? Well, the reality is: not a whole lot. Congress is gonna do or not do what they do. Therefore, it's up to you to try to do some proactive planning for the things you can control. One of those is to be doing tax-efficient investing. If you're not taking that into account with your investment strategy, I strongly encourage you to start doing that, because it's not really about what you make—it's also about what you keep after the taxes are assessed on your investments. That means that taking advantage of accounts like IRA's, Roth IRA's, 401K's, things like that, could help you out as far as keeping more of the money, or at least deferring some of the taxes. 

Make sure you're looking at your own portfolio and understanding capital gains rates and taxable accounts or trust accounts. You want to understand what kind of turnover you have and what kind of tax management strategy you have in those investments. If you have equity awards from your company’s restricted stock units or stock options, for example, these things all need to be taken into account. Of course, these are first world problems, but they still are problems. We want to make sure we're not leaving money on the table. So as a Certified financial Planner, I would strongly encourage you to be taking this into account. If you're only talking about investments with your financial planner, they are not earning their keep right now. They need to be talking to you about all aspects of your financial plan. Taxes can have a huge impact. 

Regarding retirement planning, continue to contribute to your retirement accounts, but keep in mind that it may make a difference as far as what type of account you're adding your money into. If you have a Roth option versus a Traditional option for your IRA, you're either paying your taxes now or choosing to defer them into the future. So maximize your contributions, but make sure that you understand the locations—and if there are any conversions to be done, you can often convert money from a Traditional pre-tax asset to a Roth after-tax asset. That could be beneficial for you, especially if you've got a long time horizon. 

Sometimes though, when you think about those tax rates going up, you might be looking at the tax rates that we have right now. Is it the best it's going to get, or maybe it'll get better. It's possible the tax rates will go lower. I don't think so. I think the $34 trillion of debt that we've got right now and Social Security and Medicare that need to be paid for in the future, probably won’t lead to tax rates going down from where they're at right now. That's just my guess. 

So if you can set up your retirement contributions to prepay those taxes at today's rates, knowing what they are, that means that you've got 2024 and 2025 (unless the rules change between now and then) to do Roth conversions. Make Roth contributions while the rates are still lower. 

Regarding estate planning, work with your estate planning attorney and your Certified Financial Planner to review your stuff. It could be that you haven't looked at your documents for a while. A good recommendation always is to locate where your will and your trust and other documents are, then do a read-through. Make sure those documents are still relevant. If you have a larger estate, you might consider doing some things between now and then. It could be some gifting. It could be that you'll set up different types of trusts or other things like that which could make a difference. It could be you're doing Roth conversions so you're prepaying the income taxes on retirement funds. 

These recommendations are not just for the ultra-wealthy. Everybody's got an estate. We all have stuff. We've all got assets of some sort and those will need to be managed someday. When we pass, we just want to make sure that we're taking advantage of the rules and taking advantage of the power of anticipation. Get ahead and see what we can do now that will benefit the future. 

Regarding diversification—as always, a good financial planner is going to tell you to diversify your investments to mitigate risks. Part of that also is not just investment diversification, but tax diversification as an important part of a well-diversified portfolio. This means that you probably shouldn't have all your money in pretax retirement. 

The location of assets can make a difference. If you have accounts that are not tax-sheltered, (like if they are not in something like a Roth or Traditional retirement plan), then every year that there are dividends, there are capital gains. That’s going to be a tax bill for you. So it it makes a difference as far as how we're managing those things. 

If you think you have way too much money, one thing you might think about is doing some gifting, because right now the rule is that you can annually do up to $17,000 per individual or up to $34,000 per married couple, and that can be to anybody. It doesn't even have to be a family member. If your intention is for your kids or somebody else to inherit a long-term amount, you might consider starting to gift them that annual amount, simply because it gets it out of your estate and gets it into theirs. The side benefit is you get to see them enjoy it and use it. And they could probably use it more now than they will someday many years from now when you pass away. 

Gifting can be done in the guise of a 529 account savings plan. There are some special rules with that, but as you can imagine there are lots of different implications here. There are also several ways to gift to charities that can be beneficial to your taxes, including donor-advised funds. There are many things you can do that benefit others from a philanthropic standpoint, but also benefit you tax-wise. 

In conclusion, 2025 is coming up very quickly. It's hard to imagine it's been this many years already since those tax cuts were put into place originally, but they are going to be expiring. Who knows, maybe Congress will do something between now and then, but I wouldn't count on them right now. I would count on those tax cuts expiring and that there could be things you do right now that would be beneficial both from a financial planning standpoint but also a tax and estate planning standpoint and your long-term legacy.

Thanks for joining me today. If there's any questions that you have, certainly reach out to us. www.keystonefinancial.com is the easiest way to find me and our team. We've got a great team of financial professionals with decades of experience and we want to do what we can to support you and your family. Remember, when it comes to financial and estate planning and tax planning, knowledge is power. Being proactive can make a world of difference. And for those who dare to dig into this stuff and ask the hard questions and do the planning around this, know that your odds of being successful over time are much higher. 

Thank you so much for your support. Thanks for subscribing. Thanks for giving us a rating on your favorite podcast service. Have a great week. God bless!

The opinions expressed in the Wiser Financial Advisor show with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor prior to investing. Investment Advisory services offered through Keystone Financial Services, an SEC registered investment advisor.