Here is the full report from the IRS, but I’ll summarize a few of the high points and potential opportunities below…
- All marginal brackets are increasing by roughly 7%.
- This means that more of your income will fall under lower brackets, giving more space for potentially accelerating income.
- There could be planning opportunities to shift income around between years to potentially take advantage of these differences in the brackets.
- Did you know that if you fall in the 12% tax bracket, you pay 0% on any long-term capital gains or qualified dividends?
- If you are under this income threshold for whatever reason (recently retired, break in employment, recently gradated college/not working yet, etc), there could be an opportunity to realize capital gains tax-free.
- The “standard deduction” is increasing from $12,950 for single filers and $25,900 for joint to $13,850 for single and $27,700 for joint
- Brief refresh: when you take personal deductions, you have one of two choices… to itemize, or take the standard deduction
- You would typically only itemize if you can itemize more than you are allowed with the standard.
- More people itemized before 2018 when the Tax Cuts and Jobs Act was passed, which increased the standard deduction (made the barrier to itemize higher), and capped the deductible allowance for state and local taxes (SALT deduction) to 10k/year (many people were paying more than this in state and local taxes and it reduced their ability to itemize).
- If you are itemizing, there are conversations to have to make sure those expenses are recorded and captured properly, and that certain deductible expenses aren’t “wasted” in just matching the standard deduction
- If you are not itemizing, understanding what potential itemizable expenses you might have allows a discussion on timing and tracking that could potentially enhance deductions in some years and not in others (concentrate deductible expenses in one year, then take a standard deduction in the next)
- Estate tax exclusion is rising from $12.06M to 12.92M.
- If you happen to be worried about this threshold, there are proactive actions to take to manage the size of a taxable estate down or move money out of your estate all together.
- This limit is generous by historical standards, and is set to sunset with the 2018 tax cuts. If you are in this position and plan to live past 2025, it’s even more critical to have these discussions now…
- Some states also have state-specific estate thresholds that are important to be aware of in addition to the federal rules
- It should be worth noting that the 2018 Tax Cuts and Jobs Act provisions sunset at the end of 2025 (2026 will go back to old rates and rules)…. As it stands today, that will:
- Raise ordinary income rates.. the 12% bracket will go back to 15%, 22% to 25%, and 24% to 28%. The 32%, 35%, and 37% brackets will stay the same
- Bring the standard deduction back down (more will itemize, SALT cap removed)
- Though, there will be new phase-outs that are reintroduced for itemized deductions for income earners in excess of 266k (single) and 320k (joint), that offset some of this benefit
- Reduce the estate tax exemption from the current allowance back to pre-2018 levels, which were closer to 6M/person (less than 50% what they are today)
This list is certainly not fully exhaustive, as there are some more nuanced things that will change as well. Please feel free to look at the full IRS release on what is changing, and I’d be happy to have a conversation any time to discuss your specific tax situation or planning with the hope of helping you think about the broader context. I have yet to meet someone that likes paying the IRS (it’s not about avoiding taxes but more about making sure you aren’t overpaying, and are playing by the rules).
Though I am not a tax advisor, we spend time with our clients reviewing their tax situation to make sure that we are aware of their unique opportunities and challenges. It is always important to consult with your own tax advisor (whether we work with them or not), as they ultimately file the return. In a best-case scenario, we communicate with our clients’ tax preparers to create more seamless communication and avoid common errors and misses that may occur simply due to miscommunication. Your 1099’s and other tax forms don’t tell the whole story! Further context is needed in many cases….