Prepare for Future Tax Increases: Act Now to Minimize Your Tax Burden

Prepare for Future Tax Increases: Act Now to Minimize Your Tax Burden

As the end of 2025 approaches, it’s important to start thinking about the potential tax increases that may be on the horizon. A provision of Donald Trump’s Tax Cuts and Jobs Act of 2017 is set to expire, which could result in higher taxes for many Americans. However, there are steps you can take now to minimize your tax burden and protect your assets.

The Tax Cuts and Jobs Act brought significant changes to the tax law, benefiting many Americans by lowering their taxes. But these changes are set to end unless Congress decides to extend them. If allowed to expire, the old tax rates will return, and individuals may find themselves paying more taxes for the 2026 tax year.

One key change that may affect individuals is the return of the previous income tax brackets. The current tax brackets have a smaller range, causing people to pay more taxes. For example, the 12% bracket will revert to 15%, and the highest bracket will increase from 37% to 39.6%.

Another important consideration is the lifetime estate and gift tax exemption. Currently set at $13.61 million per person, this exemption allows individuals to pass on their assets without paying federal estate taxes. However, if the Tax Cuts and Jobs Act expires, this exemption will end, and estates worth more than $5-7.5 million may be subject to taxes.

Additionally, the cap on State and Local Taxes (SALT) deductions may no longer exist after 2025. Currently, individuals can only deduct up to $10,000 on their state and local taxes, property taxes, and foreign income taxes. This cap could be lifted, allowing individuals to deduct these expenses fully.

To minimize your tax burden and protect your assets, there are several strategies you can implement. One option is to spend down your money, particularly if you have an estate valued at more than $13.61 million. Taking trips and enjoying experiences can reduce your assets and provide enjoyment for you and your loved ones.

Another strategy is to give gifts to reduce your taxes. Currently, individuals can gift up to $18,000 per year to individuals without incurring taxes. Couples can give up to $36,000. This allows you to reduce your estate while benefiting your beneficiaries during your lifetime.

Charitable giving is another avenue to consider. Currently, you can donate up to 60% of your adjusted gross income, which will drop to 50% after 2025. Charitable deductions are tax-deductible when made to approved charities. If a required minimum distribution (RMD) from a retirement account will put you above the lifetime estate and gift tax exemption, donations can be made directly to charity.

Speaking of retirement accounts, contributing to Roth accounts can be a smart move to avoid higher taxes in the future. Roth IRAs and Roth 401(k)s do not have RMDs (required minimum distributions) and allow for tax-free withdrawals.

For those looking to protect their assets through estate planning, a credit shelter trust (CST) may be beneficial. This trust is created upon the death of the first married spouse and allows assets to pass to heirs tax-free. Any assets valued above the lifetime estate and gift tax exemption can be placed into the trust.

In conclusion, it’s crucial to begin preparing for potential tax increases now. By taking proactive steps such as spending down your money, gifting, engaging in charitable giving, and exploring retirement account options, you can minimize your tax burden and protect your assets. Consulting with a tax advisor or estate planning attorney can help you navigate these strategies and ensure you’re making the most informed decisions for your financial future.