By George Paulsen, H&S Tax & Advisory Partner
It’s strange for me to recommend paying tax sooner rather than later, but reporting your income now will likely result in significantly less tax than paying on the same income in a year-and-a-half. The point is that Congress will not necessarily do something to raise our taxes, but it is very likely that they will do nothing. If the 2024 presidential election follows the recent past, there will not be enough change in the House and Senate to pass significant tax legislation. If neither party controls Congress, no President will be able to push their agenda to make significant law changes without cooperation from the other party.
At issue is the sweeping changes that the Tax Cuts and Jobs Act of 2017 (TCJA) made in the first year of the Trump administration. Tax brackets were lowered – with the top rate going down from 39.5% to 37% – and the lower rates adjusted to reduce income taxes. The corporate top tax rate was lowered to a flat 21%. To not hurt small non-corporate businesses, a special deduction was created for business income to bring that tax rate down as well. There were a number of other business deductions that were expanded to stimulate the economy at the time. The standard deduction was expanded to simplify the tax filing process and give some taxpayers lower tax. One of the costs was the limit of the state tax deduction to $10,000 that affected taxpayers in high income tax states. Also, estate taxes were reduced because the exemption was doubled (to now $13 million) so most deaths did not require estate tax filings.
In January of 2026, Cinderella’s coach turns back into a pumpkin and all these changes revert to pre-TCJA law.
What to do now? First, if you are worth more than $6 million now and don’t anticipate needing what you have later, consider giving it to family. For a couple, that means $12 million, and when the second spouse dies the excess will likely be taxed at 40%. Talk now with your Hood & Strong advisor and your estate attorney and don’t wait until the end of 2025 to make family gifts.
On the individual income tax side, bargains are abundant.
The big item that many advisors are promoting is the conversion of IRA accounts to Roth IRA accounts. If you have a 401(k), consider pulling out money to transfer to an IRA and then transfer that to a Roth. If you are in the top bracket, whatever you convert will cost 6% less before rates go up. If you do nothing, the required minimum IRA distribution will be taxed upon withdrawal after age 72 while Roth IRAs have no distribution requirement.
You can also do the conversions in small chunks. For example, if your income is just into the top of the 22% or bottom of the 24% bracket, you can move about $170,000 to a Roth at the 24% level in both 2024 and 2025. There are some complexities in this plan if you have made non-deductible contributions to IRA’s in the past, and if you have more than one IRA. It is important to get tax advice from your H&S team before moving the money.
Business Strategies
If you own a business, the bonus depreciation deduction goes away each year. Two years ago, business assets and real estate improvements that qualify could be 100% written off. In 2024, you can write off 60% and next year 40% until it goes away.
There are all the old tried and true methods to do in reverse. If you can bill in 2025 and collect that year, your tax will be at the lower rates. Defer repairs to 2026 when the write-off is more valuable. Do not prepay your property tax or state income tax in 2025 when they are limited to a $10,000 deduction. We recommend paying in January of 2026 so you can deduct them all.
There are many proposals floating around in Congress and some of them could get enacted if the law changes. There is talk of a Wealth Tax on extremely affluent people. And those with income over $400,000 will likely pay more taxes given reduced deductions or a higher rate. Dividends, which are currently taxed at capital gains rates, could be abolished and taxed at regular rates. The capital gains tax rate could go up to 28%, and there were proposals in the past to block Roth conversions for wealthy Americans.
In conclusion, my premise is that Congress will not be able to gain consensus on tax law changes so all of the laws expiring in 2026 will likely not be extended. If one party can control both houses of Congress with a strong majority, then that party’s plans could be pushed through to get their agenda’s goals. The election is right around the corner, so now is the time to consult with your Hood & Strong advisor so you’re prepared for whatever happens in Washington this year and next.