by Barry Brindise, CFP ®, MBA | Financial Planning Director
Recent Federal Legislation Affecting Taxes And Retirement Are Set To Expire Unless They Are Extended Or Made Permanent By Congress. It’s Not Too Early To Start Planning For These Looming Changes
Since 2018 we have seen a great deal of legislation affecting individual taxes and retirement planning. Some of these changes are listed below with a summary of their original goals. It can be difficult to keep track of these laws and importantly, some will be expiring over the next couple of years unless they are extended or made permanent by Congress. As 2023 closes and we enter 2024, it is a good time to highlight some of these looming changes and to start planning for them now.
The Tax Cuts and Jobs Act (2017) This nearly 200-page Act focused on cutting individual, corporate, and estate tax rates. It was passed during the Trump presidency and was controversial due to the large corporate tax cuts and concerns about the effect on the U.S. budget deficit. This Act also meaningfully changed the U.S. tax code for individual filers regarding what and how much could be deducted for certain expenses and tax credits.
SECURE Act 1.0 (2019) This bill included significant provisions aimed at increasing access to tax-advantaged retirement savings accounts. This was the first legislation to increase the IRA Required Minimum Distributions (RMD) age in over 30 years.
CARES Act (2020) Covid response – provided rapid and direct economic assistance for American workers, families, small businesses, and industries.
The American Rescue Plan (ARP) (2021) Similar to CARES, intended to provide fast and direct economic assistance for American workers, families, small businesses, and industries. In addition, the ARP placed greater emphasis on funding state, local, and tribal governments.
SECURE Act 2.0 (2022) Further changed retirement account tax rules, including 401(k), 403(b), IRA, and Roth accounts. This act also increases the RMD age to 73 from 72 (beginning 1/1/2024) and then up to age 75 (from 72) by 2033.
Inflation Reduction Act (IRA) (2022) Aimed to curb inflation by reducing the federal government budget deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy.
Some of the laws created by these acts are scheduled to sunset in the next couple of years. It is possible that between now and expiration, some of these laws could be modified, extended, or even made permanent by Congress. Therefore, make note of any looming changes that apply to your personal circumstances and consult with your tax preparer so you can make anticipatory adjustments to your personal tax strategy.
2026 could be a big year for tax law changes:
1) In 2026 Federal Tax Brackets will revert to their 2017 levels adjusted for inflation. The personal tax brackets will go back to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. On average, these will represent an increase to the average taxpayer.
TIP: Consider accelerating controllable income from 2026 into 2025 or evaluate a Roth IRA conversion if you are in a lower tax bracket and have room for the conversion amount below the next higher tax bracket.
2) In 2026, the Standard Deduction will decline to 2017 levels after adjusting for inflation. In addition, Personal and Dependent Exemptions will be reinstated. This was previously $4,150 per qualifying taxpayer and dependent.
a. As a result, the standard deduction will be reduced by almost half. This could greatly increase the possibility that you will be itemizing your deductions going forward.
b. Other 2026 considerations for Itemized Deductions:
i. The $10k limitation on state and local taxes (state income taxes, real estate taxes, personal property taxes, etc.) will be removed.
ii. Mortgage interest will be deductible on debt up to $1 million, up from $750k, and expands to include up to $100k in home equity debt.
iii. Miscellaneous itemized deductions, most notably unreimbursed employee expenses, will be allowed.
iv. Personal casualty and theft loss deductions will be reinstated.
v. The Pease limitation will be reinstated at certain income levels, which puts a cap on total deductible itemized deductions.
TIP: If you believe you will begin to itemize in 2026, consider which deductible expenses could legally be delayed from 2025 to 2026. For example, if you start itemizing again and your favorite charity can wait, consider pushing some 2025 gifts to 2026.
3) The Child Tax Credit amount will be reduced and income eligibility will be phased out. The credit for dependents who are not a qualifying child (under age 17) will also be removed.
4) The Qualified Business Income deduction (QBI), which allows pass-through businesses to deduct up to 20 percent of their income, will expire. This is a deduction most small businesses take today. It applies to Sole Proprietors, Partnerships, S-Corps (not C-Corps) so long as, for 2023, income is below $364,200 for married couples filing jointly or $182,100 for single filers.
TIP: Consider pushing some 2025 business expenses into 2026 when you won’t have the benefit of QBI to help reduce taxable profit. This move could also help with the shift to, on average, higher tax brackets.
5) In estate planning, the “Gift Tax Exclusion” applies to gifts you give when you’re alive, and there is a similar exclusion that applies to assets you leave to beneficiaries when you die, known as the “Estate Tax Exclusion.” Together, these exclusions are known as the “Unified Tax Exemption” or “Unified Tax Credit”. In the short run, the federal lifetime gift and estate tax exclusion will increase from $12.06 million in 2022 to $12.92 million for 2023. There could also be increases for inflation for both 2024 and 2025. That means close to $26 million in exclusion for a married couple. However, without a change in the laws, this amount could drop in half for 2026.
TIP: For high-net-worth families with assets of greater than $10 million, revisit your estate plan and clarify the role, if any, of “Family Trusts” and “Marital Trusts” (a.k.a. “A/B Trusts” or “Bypass Trusts”) which can be used to maximize both spouses’ unified exemptions.
TIP: You can start to distribute your assets to qualified charities or your family before you die. Gifts to family can utilize The Annual Gift Tax Exclusion. In 2023 this amount is $17,000 per single recipient.
TIP: Donor Advised Funds (DAF) present a way to reduce your taxable estate by gifting appreciated assets (typically highly appreciated stocks) to charity.
2026 feels like a long way off but before we know it, the 2024 election will be behind us just a little over a year from now… We will keep monitoring for changes on our end and if you have any questions in the meantime, please don’t hesitate to contact us here at Brightwater Advisory.
Sources:
The Joint Committee on Taxation (Congress) Publications JCX-1-23 (January 18, 2023)
U.S. Department of the Treasury Website Home:> Covid-=190 Economic Relief (August 2023)
Investopedia: “How the TCJA Tax Law Affects Your Personal Finances” (December 2022)
Investopedia: “What Is the Secure Act and How Could It Affect Your Retirement” (February 2022)
Kiplinger: “SECURE 2.0 Act Summary: new Retirement Plan Rules to Know” (July 2023)
Wikipedia: “Inflation Reduction Act.” (August 2023)
U.S. Department of the Treasury Website, “About the CARES Act and the Consolidated Appropriations Act” Home>Covid-19 Economic Relief (August 2023)
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