It’s Time to Take Advantage of Sunsetting TCJA Tax Brackets
November 06, 2024
By Andi McNamara, CFP®
Vice President, Director of Financial Planning
Washington Trust Wealth Management
With the sunsetting of the Tax Cuts and Jobs Act (TCJA) looming in 2025, it's an ideal time to review your wealth strategy to take advantage of lower tax brackets while you can.
Here’s a look at some strategies to discuss with your wealth advisor to make the most of the current tax environment:
1. Roth Conversions
Consider converting traditional IRAs to Roth IRAs. When you convert to a Roth IRA, you’ll pay income tax on the converted amount, but withdrawals in retirement will be tax-free. Since tax brackets are likely to rise, converting now means you’ll lock in a lower tax rate on the conversion amount, potentially saving you significant taxes in the future. Roth IRAs also eliminate required minimum distributions (RMDs), giving you more control over your retirement income strategy and tax situation down the line.
2. Accelerate Income While Tax Rates Are Low
If you anticipate earning more in the future or being in a higher tax bracket, accelerating some of your income into 2024 or 2025 could help you take advantage of the currently lower tax rates. Talk to your advisor about ways to realize income early, such as bonuses, distributions, and inherited IRA withdrawals.
3. Realize Capital Gains
If you’re holding appreciated assets and considering selling them in the next few years, now might be the time. By realizing capital gains before the TCJA brackets sunset, you can potentially reduce your tax liability. While long-term capital gains rates aren’t directly impacted by the TCJA’s income tax changes, the overall tax burden on higher earners may increase as ordinary income tax rates rise.
4. Rebalance Your Portfolio
Periodic rebalancing is essential for keeping your portfolio aligned with your goals, risk tolerance, and the current tax environment. As tax rates change, so might the optimal balance between taxable and tax-deferred accounts. Consider rebalancing to reduce your tax liability over time, for example by placing assets in tax-advantaged accounts that are expected to generate the most taxable income.
Washington Trust Wealth Management Can Help
With the Tax Cuts and Jobs Acts (TCJA) set to expire in 2025, your Washington Trust Wealth Management advisors can help you review your tax strategy to take advantage of lower rates in 2024 and 2025. We will work with you to assess how these changes impact your overall financial plan, including retirement planning, to ensure you are maximizing tax efficiency now and in the future.
About the Tax Cuts and Jobs Act of 2017i
The Tax Cuts and Jobs Act (TCJA) was enacted in 2017. If Congress does not vote to extend or enact new legislation, the TCJA will expire, or sunset, on December 31, 2025.
The TCJA lowered tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. When the TCJA sunsets, individuals and married couples will pay taxes at higher rates with lower income thresholds, and the top tax rate reverts to 39.6%.
The TCJA also nearly doubled the standard deduction for all filing statuses ($12,000 for single filers and $24,000 for married filing jointly). As a result, many taxpayers have not itemized deductions. Starting in 2026, the standard deduction will be about half of what it is currently, adjusted for inflation.
The TCJA also doubled the gift and estate tax lifetime exemption from $5.6 million to $11.18 million, indexed for inflation. These will revert back to pre-TCJA levels, effectively reduced by half, indexed for inflation.
Under the TCJA, the deduction for cash contributions to charity increased from 50 percent of adjusted gross income (AGI) to 60 percent for taxpayers who itemize. At sunset, the threshold will revert to 50 percent of AGI.
Tax Bracket Changes with the Sunsetting of TCJA
What to The TCJA of 2017 lowered individual tax rates through 2025. Starting on January 1, 2026, tax rates are scheduled to revert to the higher pre-2018 levels. In addition, the brackets will be compressed, causing higher tax rates to kick in at lower income thresholds.
Current TCJA tax rate | Post-TCJA tax rate |
|---|---|
10% | 10% |
12% | 15% |
22% | 25% |
24% | 28% |
32% | 33% |
35% | 35% |
37% | 39.6% |
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