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Last Call for Tax Savings: Act Before 2017 Cuts Run Out

In 2017, an extensive tax reform bill was enacted during the tenure of former President Trump, introducing a wide array of substantial alterations to the taxation system. These modifications included lowering individual income tax rates, an increase in the standard deduction, and a boost in the estate tax exemption. It's crucial to note that a considerable portion of these legislative provisions is set to terminate by the close of 2025. This impending cutoff date should encourage individuals to reassess their tax strategies with the aim of safeguarding their financial future.

Tax Moves You Should Consider

1. Convert Retirement Savings into a Roth IRA

In the absence of Congressional action to prolong the existing tax law, the income tax brackets will revert to their pre-2017 levels in 2026. This shift will have an impact on most taxpayers, but those who fall into the higher tax brackets might experience the most substantial repercussions. Specifically, the highest income tax rate is poised to escalate from 37% to 39.6%. 

For individuals in this scenario who intend to convert a portion of their retirement savings into a Roth IRA, it's advisable to act sooner rather than later. By doing so promptly, they can secure a more favorable tax rate for this one-time lump-sum conversion, which would substantially increase post-2025. Nonetheless, it's essential to emphasize that Roth conversions entail a mandatory waiting period of five years before any earnings can be withdrawn without tax implications.

2. Implement a Trust to Manage Estate Taxes

 Estate taxes currently have a number of benefits that will expire with the bill at the end of 2025. In accordance with the existing regulations of the Internal Revenue Service, married couples have the liberty to transfer a maximum of $25.84 million, while individuals can transfer up to $12.92 million to their chosen beneficiaries without triggering federal estate taxes. Any sum exceeding this exclusion threshold may potentially become subject to estate taxes, varying in the range of 18% to 40%. However, if the current tax law lapses, the size of this exemption will be reduced by half, thereby exposing estates valued at roughly over $7 million for individuals or $13 million for couples to the prospect of federal estate taxes.

To address this risk, the prudent approach is to implement a trust, a recommended strategy for individuals or couples who haven't utilized their exemption to its fullest extent. Diverse trust structures are at one's disposal, tailored to meet the distinct requirements of individuals, couples, or families. For instance, a spousal trust ensures the financial well-being of the surviving spouse without the imposition of estate taxes. 

3. Revisit Charitable Contributions

The 2017 tax law raised the annual deduction limit for cash contributions to public charities to 60% of adjusted gross income, up from 50%. This limit is set to revert to 50% in 2026. 

Therefore, those contemplating substantial cash donations to charities can maximize their tax deductions by acting now.

Taxpayers are encouraged to act now to take advantage of the 2017 tax reforms before these provisions sunset after December 31, 2025. Evolved provides sophisticated private client tax services that will help you make the most of every opportunity available now.

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Evolved is a tax compliance and advisory firm with offices in New York City and Philadelphia, and clients nationally throughout the US.  We provide tax provision, private equity and venture capital services alongside advisory for high net-worth tax and family office tax.

Matthew John McNally
Matthew is an enrolled agent with two decades of tax planning, compliance, and advisory experience, much of it at Big Four accounting firms, where he guided clients with wide-reaching financial concerns.