Possible Tax Hikes: Tips from a Financial Advisor

The 2024 elections are coming soon. This brings many financial issues to light. People are talking about taxes, inflation, healthcare, and the economy.

One of the significant topics under review is the 2017 tax legislation known as the Tax Cuts and Jobs Act (TCJA). If Congress does not act, certain provisions of the law will expire at the end of 2025.

The TCJA made significant changes to the tax system. It adjusted tax brackets and reduced the top tax rate.

The standard deduction was increased. Deductions for mortgage interest and state and local taxes (SALT) were limited. The federal estate and gift tax exemption was also raised.

Former President Donald Trump supports extending the 2017 income tax cuts. Vice President Kamala Harris wants to extend the cuts only for individuals earning under $400,000. The future of these tax provisions will largely hinge on the composition of Congress.

If you think your tax rate might go up soon, consider some strategies. These can help you take advantage of today's lower tax rates.

Start Planning Ahead

Explore a Roth Conversion

If tax rates might increase, a Roth conversion could help you lock in today's lower rates. Moving money from a traditional 401(k) or IRA to a Roth IRA means you will pay taxes now. However, you will enjoy tax-free growth and tax-free withdrawals later.

Unlike traditional accounts, Roth IRAs aren’t subject to required minimum distributions (RMDs) during the owner’s lifetime. Additionally, if you’re ineligible for direct Roth contributions, you might consider a "backdoor" Roth conversion. This involves making nondeductible contributions to a traditional IRA, then converting those funds to a Roth IRA.

Use Tax-Loss Harvesting

If your portfolio has investments with big gains, think about cashing in these gains. This is wise before any possible increase in capital gains taxes.

Tax-loss harvesting lets you sell investments that are not doing well. You can replace them with similar options.

Then, you can use the losses to reduce your taxable gains. This may reduce your taxable income. If you have more losses than gains, you can use up to $3,000 each year to reduce your regular income. Any losses that are left can be carried over to future years.

Consider Gifting to Reduce Estate Tax

The estate tax threshold may drop in the future. Giving gifts now could help lower the value of your taxable estate. For 2024, the annual gift tax exclusion has risen to $18,000 per person ($36,000 for married couples using gift-splitting).

This allows you to lower your estate size without taxes. You can give this amount to as many people as you want each year. This does not affect your lifetime gift and estate tax exemption.

Gifting Considerations:

●      Gifts over the annual exclusion amount reduce the remaining lifetime exemption. File IRS Form 709 for annual gifting, and track excess gifts as they impact your lifetime exemption.

●      Anything of value can count as a gift, though some assets (like artwork) may require formal valuation.

●      Exempt gifts are those given to certain people and organizations. This includes gifts to spouses, political groups, and charities. It also includes direct payments for someone else's tuition or medical bills.

Bottom Line

With the potential for shifts in tax rates, estate planning, and capital gains, now is the time to review and adjust your financial strategies. By planning ahead with tools like Roth conversions, tax-loss harvesting, and smart gifting, you can take advantage of today's tax rules. No matter the election's outcome, planning ahead will help keep your financial goals on track in a changing economy.

Sources:

https://www.fidelity.com/learning-center/personal-finance/2024-elections-financial-plan

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information