By: Claudio Simione, Staff Writer
If you are outside the realm of accounting or tax law, you may be unaware of the impending sunsetting of the 2017 Tax Cuts and Jobs Act (TCJA) in 2025. The TCJA, signed into law by President Donald Trump on Jan. 1, 20181, served as the largest tax code overhaul in almost three decades. This act created a single flat corporate tax rate of 21%2, a large cut compared to the previous 35%, giving especially preferable tax treatments for pass-through entities. Additionally, the TCJA provided benefits for individuals in the categories of income tax rates, standard deduction, personal exemption, and more.3 However, the TCJA, as many laws are, is subject to a sunset provision, meaning a provision in a law or regulation that states the expiration date of the law.4 Congress can override sunset provisions through voting to extend the law, but herein lies the tax planning conundrum: what will be the political landscape in 2025? Regardless of whether they are permanently reverted to the rules pre-2017 or if the TCJA is extended, there are a few ways to plan for the future.
The first way to plan for the sunset of the TCJA is to maximize retirement contributions.5 Maximizing your contributions to 401(k) or IRA plans can reduce taxable income and lower tax liability in the future.6 Within this IRA analysis, the second way is to consider a Roth IRA conversion.7 A conversion to one’s Roth IRA involves shifting assets from other retirement plans you may have into your Roth IRA.8 The workaround that many of those reading this can utilize within a Roth IRA conversion is that, regardless of income, you can convert all or part of traditional IRA funds into a Roth IRA.9 This can be especially helpful if you believe your tax bracket will be higher in retirement or your accounts aren’t diversified by tax treatment.10
The final way you can plan is to review and potentially adjust your investing strategies.11 Tax-efficient investing now will set you up for later and mitigate the impact of potentially rising tax rates.12 When looking at investments, choose those that generate qualified dividends or longer-term capital gains, which yield lower rates than ordinary income.13 For the long-term investor, this can be accomplished through Exchange-Traded Funds (ETFs)14 or mutual funds that pay qualified dividends.15 Since you are likely paying less taxes in both of the accounts listed, there is room to reinvest a larger portion of earnings and boost compound interest and better returns on investment.
Even though it is still unclear whether Congress will extend the TCJA provisions or allow them to sunset, the best time to begin planning your finances is now. By understanding changes to come and taking steps now you can work to protect retirement savings and help to secure your financial future, regardless of the results of the election. By staying informed and prepared, you can navigate the TCJA’s impact and safeguard your finances not just in the near future but for retirement as well.
- https://www.congress.gov/bill/115th-congress/house-bill/1/text/eh ↩︎
- https://www.congress.gov/bill/115th-congress/house-bill/1/text/eh ↩︎
- https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/#:~:text=The%20Tax%20Cuts%20and%20Jobs%20Act%20(TCJA)%20was%20the%20largest,families%20will%20expire%20in%202025 ↩︎
- https://www.investopedia.com/terms/s/sunsetprovision.asp#:~:text=The%20purpose%20of%20a%20sunset,warrant%20such%20a%20legal%20structure ↩︎
- https://www.thetaxadviser.com/issues/2023/dec/tax-planning-for-the-tcjas-sunset.html ↩︎
- https://www.nerdwallet.com/article/investing/how-to-max-out-your-roth-ira ↩︎
- https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it ↩︎
- https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it ↩︎
- https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it ↩︎
- https://www.federatedhermes.com/us/calculators/RothIRA.html ↩︎
- https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it ↩︎
- https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025 ↩︎
- https://www.investopedia.com/terms/q/qualifieddividend.asp ↩︎
- https://www.investopedia.com/terms/e/etf.asp ↩︎
- https://www.investopedia.com/articles/investing/092215/understanding-taxes-mutual-funds-dividends.asp#:~:text=Dividends%20paid%20by%20mutual%20funds,depending%20on%20your%20overall%20income ↩︎
