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Tax changes are headed our way and here's what you can do to prepare




President Joe Biden during his State of Union address insisted that taxes will be raised for only those earning $400k or higher. This stands to reason he will be able to execute his vision as long as his tax plan passes the House of Representatives, which still seems unlikely currently. If this standstill persists, then certain tax laws that are currently on the books are set to sunset at the end of 2025, reducing and eliminating current tax cuts, driving some tax rates higher, and so on. If Congress doesn’t act, taxes are set to increase for all under this scenario. 


Tax Cuts and Jobs Act was passed in 2017 and gave relatively generous tax deductions for small businesses, introduced the state and local tax cap (SALT) - which is how much you can deduct your local taxes against your federal return, and gave a beefed up standard deduction. At sunset, the estate tax exclusion will also be reduced from $12m to $6m triggering 40% tax rates on some estate transfers. Everyone may be impacted by what’s coming, but there are some ways you could prepare.


Strategies for Investors Before the Sunset


  • Roth Conversions: With the potential for higher tax rates on the horizon, investors might consider converting traditional IRA funds to a Roth IRA. Roth conversions are taxed at the time of conversion, so executing this move while tax rates are lower could be advantageous. Future withdrawals from a Roth IRA are tax-free in retirement, which can be worthwhile if tax rates rise.

  • Realizing Capital Gains Early: Investors may also want to consider realizing capital gains before sunset. If tax rates increase, taking gains during a lower tax environment could result in significant tax savings. This strategy should be balanced with investment goals and the potential impact on portfolio allocation.

  • Accelerate Income: For those expecting higher income in future years, it may be wise to accelerate income into the current lower tax rate environment. This could include exercising stock options or selling appreciated assets.

  • Transfer Your Estate Early: If you’re on the cusp of possibly having an estate tax situation, some strategies may include gifting your assets to your beneficiaries early. Also naming your IRA account beneficiaries as charities and funding a life insurance policy inside a trust may help reduce, or even eliminate, taxes to the IRS at death. 


If President Biden passes his tax plan, there’s little mention of extending the above tax benefits, and in fact, there will be additional implications for higher earners in the following ways^1:


  • Expanding the base and increasing the rates of the net investment income tax (NIIT) and the additional Medicare tax for incomes above $400,000.

  • Taxing long-term capital gains and qualified dividends at ordinary income tax rates for income above $1 million and imposing taxes on unrealized capital gains at death above a $5 million exemption.

  • Limiting retirement account contributions for high-income taxpayers with large IRA balances and tightening rules related to the estate tax.


At Eureka Wealth Management, I help my clients, in coordination with their other tax professionals, devise tax strategies through investment management and by making retirement plan contributions to maximize tax-efficient growth. I also do insurance and estate strategy. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.




*For tax questions, consult a tax advisor.


Co-written by Chatgpt



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