Planning Ahead for the Tax Cuts and Jobs Act's Expiration
Featuring

Tax Cuts and Jobs Act Expiration: Financial Planning Implications

This year’s tax season will be history in no time, but it pays to plan now for next year—and the year after that. Manager of Financial Planning Andrew Busa provides financial planning solutions in part two of his analysis of the expiring Tax Cuts and Jobs Act (TCJA). He shares changes ushered in by Secure Act 2.0 and how we can work with you to update your financial plan.
For instance, required minimum distributions (RMDs) are being pushed out to age 73 in 2023, offering you more time to consider a Roth conversion. And new rules for 529 plan rollovers provide an additional path for wealth accumulation.

 Tax Cuts and Jobs Act Expiration: Plan Now, Profit Later

Looking ahead, the Tax Cuts and Jobs Act's expiration is coming at the end of 2025—and we have planning solutions to mitigate your exposure if Congress fails to act. Your adviser will work with you to address your specific situation ahead of time, but for now, here are some of the areas we’ll be focusing on for our clients:

  1. Protecting your estate tax exemption. ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​The unified tax credit could be cut in half in a few years. One way for high-net-worth couples to shelter their wealth is with a spousal limited access trust (SLAT). At its most basic, a SLAT can move assets outside of an estate now, locking in the current estate tax exemption. A critical component is that spouses are the beneficiaries of each other’s SLATs, meaning the family still has access to the funds in the trust.
  2. Evaluating Roth conversions. A Roth conversion now could help you avoid higher taxes later. Yes, you’re paying taxes earlier with a Roth, but if you do it at a lower tax rate, you can set yourself up for greater tax-free income down the road.
  3. Planning for incentive stock options (ISOs). When the TCJA sunsets at the end of 2025, nearly 7 million taxpayers could be subject to the alternative minimum tax (AMT) for the first time. (Those with incomes above $200,000 will be in the crosshairs.) We’ve suggested a few strategies to mitigate AMTs, but probably the most important is to create a plan if you have ISOs. Why? Because exercising ISOs does not impact your “regular” income tax, but it does affect your AMT calculation.

​​​​​​​​​​​​​​Keep in mind that these strategies need to be considered in the context of your broader financial plan, and they should be aligned with your short-, medium- and long-term goals.

Featuring

Video Transcript

There’s nothing like planning ahead. Hi, I’m Andrew Busa, Manager of Financial Planning with Today’s Adviser Takeaway.

In last week’s video, we spent some time discussing the implications of the estate and tax sunset that’s scheduled to occur here at the end of 2025. In this week’s video, we’ll spend some time talking about some financial planning solutions that you could implement in order to mitigate your exposure to estate and income taxes over the next couple of years.

Now, before going any further, it’s important to point out that any of these strategies should be analyzed in the context of your broader financial plan, just to make sure that they’re aligned with your short-, medium- and long-term financial goals.

Now, the first is to protect your estate tax exemption. One way you might consider doing that is with a strategy called a Spousal Limited Access Trust, or a SLAT. Now this is something that a married couple could implement in order to protect the currently much higher estate tax exemption before it gets essentially cut in half at the end of 2025. Now, this is something that absolutely should be discussed with your attorney before implementing, but overall, just make sure that your estate plan is good to go and update it at some point over the next couple of years before the sunset.

Number two is to evaluate a Roth conversion. Now, higher taxes later, favor doing a Roth conversion now. Now, yes, you’re paying taxes earlier than you otherwise would with a conversion, but if you know your tax rate is going to be higher in the future, odds are in favor that the Roth conversion will make you better off in the long run.

And number three is to have a plan for your Incentive Stock Options or ISOs. Now we’ve spent some time talking about this in relation to Alternative Minimum Tax, or AMT, in previous videos but nearly seven million taxpayers, when the sunset occurs, they’re going to be exposed to AMT where they weren’t before. And it’s going to be those with income above $200,000 who will be in the crosshairs.

Now the key with the ISOs here is to have a plan, have a discipline and to stick to it. Remember that the difference between the exercise price and the fair market value of a stock, that spread will be added to your AMT calculation. So, develop a plan with your adviser and your tax professional and stick to it.

Now, overall, if you have any questions, any concerns about any of these strategies, please reach out to your adviser team. We would be absolutely happy to help you.

And that’s it for today. Thanks for watching!

Show Full Transcript

Additional Tax Cuts and Jobs Act of 2017 Resources

For informational purposes only; not a recommendation to buy, hold or sell any investment product. Past performance is not an indication of future returns. Speak with a financial adviser before taking specific action. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. Always consult a professional regarding your specific situation.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.