Tax Reform Uncertainty Looms as Election Day Approaches
As Americans head to the polls, financial advisors are bracing for potential tax changes that could significantly impact their clients’ wallets. The Tax Cuts and Jobs Act (TCJA) of 2017, enacted by former President Donald Trump, brought about sweeping changes to individual taxes, including lower tax brackets, higher standard deductions, and a more generous child tax credit. However, many of these provisions are set to expire after 2025, leaving advisors and their clients uncertain about what’s to come.
Tax Provisions Set to Sunset
Without Congressional action, more than 60% of taxpayers could face higher taxes in 2026, according to the Tax Foundation. The TCJA expirations have been a major concern for clients, says certified financial planner Jim Guarino, managing director at Baker Newman Noyes. Planning for these changes is complicated, as several tax provisions are scheduled to sunset, and it’s difficult to predict which ones Congress might extend.
Impact on Retirees
One group that could be significantly affected by the TCJA changes is retirees with sizable pretax retirement balances. Without changes from Congress, income tax brackets will revert to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% after 2025. Higher rates could be particularly challenging for retirees who need to take required minimum distributions (RMDs) from pretax retirement accounts starting at age 73.
Advisors Prepare for Change
Some advisors are already accelerating income into 2024 and 2025 to mitigate the impact of potential tax rate increases. Others are running projections to prepare for the looming TCJA changes. “Every tax profile is different,” says Mark Baran, managing director at financial services firm CBIZ’s national tax office. While some clients may not see significant changes, others could be affected by the TCJA expirations.
Estate Planning: A Long-Term Strategy
One area where advisors are taking action is estate planning, which typically involves a multiple-year strategy. With the uncertainty surrounding the TCJA provisions, estate planning can provide a sense of stability and control for clients.
Uncertainty Reigns
As the election results come in, outside groups are already preparing to battle lawmakers over various TCJA provisions, adding to the uncertainty. While some advisors are taking proactive steps to prepare for the changes, others are adopting a wait-and-see approach. One thing is certain, however: the tax landscape is likely to change, and advisors must be prepared to adapt to meet their clients’ needs.
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