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An Update On Taxes And Elections Thumbnail

An Update On Taxes And Elections

Financial Planning Investments Tax Planning

Taxes

The Tax Cuts and Jobs Act (TCJA), enacted in late 2017, made many changes to the tax code, including reducing the corporate tax rate, increasing the standard deduction, and increasing the applicable exclusion amounts for estate taxes. While some TCJA changes are permanent, but many are set to expire or sunset at the end of 2025.

As a result, there are several notable provisions to keep in mind as we do our tax planning over the next 18 months:

  • Tax Rates
    • Income tax rates will reset to the 2017 levels, which is approximately a 3% increase for most taxpayers.
  • Standard Deduction or Itemized Deduction
    • The Standard Deduction will return to 2017 levels, approximately a 50% reduction from current levels. For 2024, the Standard Deduction is $29,200. We found that most taxpayers do not itemize deductions in favor of the higher standard deduction. The reason for this is the $10,000 deduction limit on State and Local Taxes, which is also set to expire at the end of 2025.  
  • Personal Exemptions
    • Personal exemptions were suspended in 2018 but will return in 2026.
  • Estate and Gift Tax
    • The estate tax exemption was doubled in 2018 and is currently $13,610,000. A married couple can pass $27,220,000 to their heirs free from estate and gift tax. That is a significant amount, or should we say bigly! We are expecting the exemption to be cut in half.

We are all wondering if TCJA could be extended. Extension is a possibility, but the act will automatically expire if Congress does nothing, and Congress is pretty good at doing nothing. We will wait and see.

Either way, we anticipate higher taxes in the future with or without a TCJA extension.

Elections 

Our current election cycle is heating up and investors can become fixated on the connection between the results and their portfolio. It’s helpful to maintain a historical perspective on the impact of election results on the market to avoid making poor investment decisions.

Here are a few key points to keep in mind:

  • Investing is a long-term strategy and not based on short-term events
  • Markets are generally politically agnostic and presidential elections do not typically move the market
  • Since 1950, U.S. stocks have averaged 9.1% in election years
  • Market performance is generally the same under a Democratic or Republican president


What should you be doing now?

  • Take advantage of our current tax environment:
    • Fill up the lower tax brackets with Roth IRA Conversion
    • If you are taking Required Minimum Distributions (RMDs), utilize a Qualified Charitable Deduction (QCD) and take advantage of the higher standard deduction
  • “Vote in the voting booth and not with your portfolio.” - Anu Gaggar, Fidelity Capital Markets Strategist

If you are concerned about the markets, taxes or how the current political landscape may impact your portfolio, please contact your Advisor. We are here to help you navigate in uncertain times.