Plan Today for Tax Changes that May be Coming in 2026

Transcript of Podcast Episode 250

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, plan today for tax changes that may be coming in 2026.

Let’s take a look back to 2017. That was the year the Tax Cuts and Jobs Act (TCJA) was signed into law. The changes were significant. Among them, lowering the top marginal individual income tax rate from 39.6 percent to 37 percent, increasing the standard deduction, increasing the Child Tax Credit, and lowering the corporate income tax rate from 35 percent to 21 percent.

Also, the federal estate tax exemption was doubled from $5 million to $10 million, inflation adjusted. In 2023, the exemption is $12.92 million, or $25.84 million for a married couple. If your taxable estate is below these amounts if you die prior to 2026, you won’t be subject to a federal estate tax. There is also what’s called an “unlimited marital deduction,” meaning that when someone who’s married dies, they can pass any amount to the surviving spouse without an estate tax. Note that the unlimited marital deduction has been in place for decades; it was not part of the TCJA.

But there was one aspect of the TCJA that didn’t get a lot of attention when it was first signed into law: Most of its provisions are temporary. This was due to a budgetary quirk: Congress scheduled the expiration of these tax breaks in an effort to reduce the projected costs during their 10-year budget window. So, unless the law gets extended, many of the provisions in the TCJA will expire at the end of 2025, and revert to the previous tax law.

The likelihood of any extension would be dependent on the results of the 2024 elections.  Republicans would probably need to control the White House, the Senate, and the House of Representatives to pass any extension. Democrats would likely favor the expiration of the provisions and perhaps even lower the previous estate tax exemption amount and raise income taxes.

So, on the assumption that the TCJA will expire at the end of 2025, is there anything you can do now to prepare you for that?

One answer should be obvious: If you’re among the ultra-high net worth crowd, it may be a good idea to implement estate tax planning strategies, such as gradually giving away some of your assets between now and the end of 2025 to take advantage of the higher estate tax exemption amount that currently exists, or to purchase life insurance inside of an irrevocable life insurance trust. 

But what if you’re not wealthy? Here are some planning considerations for potential rising tax rates:

• With rates seemingly likely to go up, one idea may be to do a partial Roth conversion. If you have assets in a traditional IRA, you need to recognize that the money is taxed as it comes out of the account. It might be worth it to convert some of that money into a Roth IRA, and pay the taxes now, while the rates are lower.

This will also increase the tax diversity of your retirement savings. If you have a mix of traditional and Roth IRAs, you may be able to get better control of your tax bill later on in retirement. In other words, you could withdraw from your traditional IRA in a year when you have less income and are thus in a lower tax bracket and withdraw from the Roth when you’re in a higher tax bracket.

• Another possibility is to “fill in” your income up to the threshold of the next tax bracket. For example, let’s say you’re in your sixties with a sizable IRA. You’re old enough (over age 59½) that you don’t have to worry about the 10 percent premature distribution penalty, but young enough (under age 72) that you are not subject to Required Minimum Distributions. 

If you’re in the 24 percent income tax bracket in 2023 and married filing jointly, your income is somewhere between $89,450 and $190,750.[1]  You may wish to take a voluntary distribution out of your IRA that gets you closer to the top of that bracket without going over. This could get money out of the account at a relatively low tax rate.

• It’s also a good idea to take a look at any timing issues when income tax rates change. If you have the flexibility, you might consider accelerating income before the tax rates go up at the end of 2025. You could also do the opposite: Defer losses or deductions until after rates increase.
• Even if you’re not wealthy enough to have a federal estate tax issue, don’t forget that there are still quite a few states that have their own state estate and/or inheritance tax with much lower state exemption amounts so planning may still be needed.

It always pays to remember that every situation is different, and that you may need help to get through the long list of alternatives you may have. Your Security Mutual Life insurance advisor can help you sort through your options and help get the process started. Your advisor will assemble your team and coordinate with your attorney and tax professional to review your situation and to determine the plan and strategies that are appropriate for you and your family. 

[1] Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2023.” Irs.gov https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023  Accessed August 25, 2023.

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