For the most avid readers of our Weekly Whiteboard you will note that last week we provided context on the election’s impact on the investment markets in the near-term. That is to say, aside from an increase in volatility leading up to and immediately following an election, there is no clear or irrefutable correlation between the party that moves into the White House and the near-term actions of public investment markets. However, there certainly – and irrefutably – will be an impact on various financial planning matters in 2025 and beyond.
Now, it is also important to note that it is the makeup of Executive and Legislative branches (i.e. the Presidency, Senate and the House of Representatives) that will drive policy in this country in the coming years. These policies will impact tax planning, estate planning, home purchasing, retirement savings, real estate investing, charitable giving, etc. East Franklin Capital is committed to staying informed on all of these topics but we also understand where our knowledge ends and another’s expertise begins. For example, we should engage your CPA with regard to planning around new tax law changes. While we are not experts in all areas, we are informed in these planning disciplines and are in a position to offer guidance and assistance.
The attached article, Election 2024: Tax considerations (Fidelity Wealth Management, 2024), highlights a few key considerations (most of these around potential changes in the tax code) that are likely to need consideration in our near future and topics that we are thinking about and whose outcomes we are planning to address. As most of you know, East Franklin Capital has no affiliation with Fidelity Investments but as an independent investment firm we read, watch, follow and attend events from many sources and I think Fidelity Learning Center offers pretty high-quality insights from time-to-time… and this is one of those times.
Investment and related financial planning in the coming months and years will require careful balancing between long-term goals and short-term adjustments. Know that we are here to help with that planning – it is our job, our focus and our commitment. To that end, please do not hesitate to reach out for a conversation, an email exchange or a meeting. In the meantime, we will remain committed to being steadfast in our education and nimble in our execution.
Election 2024: Tax considerations
Important changes may be on the horizon.
Key Takeaways
- The expiration of certain provisions of the Tax Cuts and Jobs Act at the end of 2025 could impact tax rates.
- Whether or not those provisions lapse or are extended may depend on who controls the White House and Congress.
- It may be worth consulting with a financial professional to evaluate your wealth plan and determine whether you will be affected by any of these potential changes.
No matter who wins the 2024 elections, tax policy is likely to be a significant topic in 2025. That’s because provisions of the Tax Cuts and Jobs Act (TCJA), which reduced taxes on income and estates, are set to expire. If the new Congress and President do nothing, those taxes will go up.
Former President Trump has called for an extension of those cuts, paying for the costs in part with tariffs on imports. Vice President Harris has called for an extension of cuts for those making under $400,000, allowing them to expire for wealthier Americans. Of course, the actual outcome will depend on many factors, including the makeup of Congress. Also front and center next year: rising deficits and the need to raise the debt ceiling.
“While we don’t expect these changes to the TCJA to come into effect in the next year, it’s still worth considering what strategies might make sense in a higher tax environment,” says Greg Doyle, a vice president on Fidelity’s Advanced Planning Team.
The Tax Cuts and Jobs Act
Currently, the top marginal income tax rate is 37%. This rate was set in 2017 by the TCJA, but only through the end of 2025—at that point, barring action from Congress, the rate will automatically jump back up to 39.6%. Additionally, the TCJA lifted the lifetime estate and gift tax exemption through the end of 2025. In 2024, the exemption amount is $13.61 million per person, but unless the increase is made permanent by Congress, it will revert back to its original, pre-TCJA level, which (once adjusted for inflation) could end up somewhere between $7 and $7.5 million. If the provision expires and an individual passes away with an estate that has a value greater than the exemption amount, the value that exceeds the exemption amount will be taxed at 40%.
How Should you Prepare?
Doyle points to 4 strategies that could potentially help reduce your tax burden and facilitate wealth transfer to the next generation, especially if income taxes are increased:
- Roth IRA If you are likely to be affected by an increase in the highest marginal income tax rate, converting a traditional IRA to a Roth IRA now, when the rate is still relatively low, may make sense. A Roth IRA can help provide tax-free growth potential and tax-free withdrawals in retirement or for your inheritors, especially if they live in high-tax states like New York or California.
- Bunching charitable deductions: If you itemize your deductions and plan on making a large charitable gift to a donor-advised fund, it may make sense to defer that gift if you expect to be in a higher tax bracket in future years.
- In-kind transfers: If you have a grantor trust, you may want to consider moving high-cost-basis assets into your trust and taking low-cost-basis assets of equal value out. Bringing those low-basis assets back into your estate may allow your spouse or children to “step-up” the basis of the assets to the fair market value when they inherit them, offering a substantial savings on capital gains taxes.
- Tax-smart strategies: Investors of every income level can implement strategies designed to help manage, defer, or reduce taxes, such as tax-smart asset location and tax-loss harvesting.
It’s worth noting, however, that there are proposals on Capitol Hill that may affect Roth conversions and in-kind transfers. Additionally, individuals with IRAs that have a balance greater than $10 million could end up subject to special distribution rules requiring them to withdraw a portion of the excess amount. As always, if you have concerns about your personal situation, you may want to consult your financial professional.
