For many Americans, taxes are an essential consideration in their financial planning. As they should be! Because the tax code changes frequently, it’s critical to pay close attention to how they could impact your bottom line.
Although Congress hasn’t passed any new tax legislation in the last few years, tax law changes could still affect many taxpayers. For example, the passage of the Inflation Reduction Act and the SECURE 2.0 Act in 2022 introduced a number of new tax provisions—some of which we are just now seeing come into play.
For starters, under the current tax code, there are certain changes that occur automatically because they are indexed to inflation.
Plus, there are actually several key provisions from the Tax Cuts and Jobs Act (TC&JA) of 2017 that are scheduled to expire in the next couple of years which could throw a wrench in some of your financial plans.
And if those weren’t enough, the IRS is constantly issuing new rules on existing tax laws that can catch people off guard if they’re not paying attention.
But you want to know, “How do tax law changes affect me?”
Here are some of the key facets of your financial plan that could be affected by changes to the tax code over the next few years:
- Adjustments to Income Thresholds for Tax Rates
It’s always important to stay on top of the changing income thresholds that determine your tax rate. In most years, they are adjusted for inflation, making it possible for your adjusted gross income to be taxed at a lower rate. For example, for married couples filing jointly in 2022, the income threshold 22% tax bracket was $83,551 to $178,150. In 2023, it was adjusted to $89,451 to $190,750. So, if your 2023 income was roughly the same as your 2022 income, the threshold likely dropped you into the 12% bracket.[i]
- Possible Increase in 2026 Tax Brackets
The most significant change you will see regarding your tax bracket could occur starting in 2026 with the expiration of many provisions of the 2017 TC&JA. The sunset provision in the law means tax brackets will revert to their pre-TC&JA levels while decreasing the income thresholds, resulting in a significant tax hike unless Congress takes action.[ii]
For example, the current top tax bracket of 37% will revert to 39.6%, and the income threshold of $693,750 for joint filers will decrease to $470,700. There will be similar adjustments for all the tax brackets.[iii]
- Deductions and Credits
It’s important always to be aware of adjustments to the standard deduction, which increases yearly. The 2023 standard deduction for joint filers was increased to $27,700 from $25,900.[iv]
The Inflation Reduction Act extended tax credits for homeowners adding solar and wind power systems as well as energy-efficient water heaters through 2032. Tax credits have also been extended for the purchase of new and used electric vehicles through 2032.[v]
- Retirement Planning[vi]
The SECURE 2.0 Act made several changes to the tax code to enhance your retirement planning efforts. A big one is the additional delay in the starting age for Required Minimum Distributions (RMDs). Effective January 1, 2023, the threshold age to begin RMDs is raised to 73 from 72. It will gradually be increased to 75 by 2033. This allows you to delay distributions and defer taxes associated with them. However, it can also result in larger distributions over a shorter lifespan, resulting in larger tax liabilities.
Another significant change is an upward adjustment to the annual catch-up contributions individuals 50 and older can make to workplace retirement plans—increased starting in 2023 to $7,500 from $6,500. Beginning in 2025, workers age 60 to 63 will be able to make catch-up contributions of up to $11,250 per year.
- College Planning
Another SECURE 2.0 change offers a boost to college savers as it allows unused balances of up to $35,000 in 529 college savings plans to be transferred free of tax and penalty to a Roth IRA. To be eligible, 529 plans must be established for at least 15 years, and the fund transfer can’t exceed the standard Roth IRA contribution limit (currently $6,500 per year, $7,500 if age 50 or older).[vii]
- Estate and Gift Planning
Another expiring provision of the TC&JA is the unified estate and gift tax deduction increase, which nearly doubled from $11.2 million for couples to $22.3 million in 2018. The exemption has risen over the years due to inflation, reaching $24 million in 2023. When the provision expires in 2026, the exemption will be cut in half to $6.8 million. This will impact wealth transfer and lifetime gifting strategies.[viii]
Keeping Up with the Taxes
With a divided Congress until at least 2024, we believe it’s doubtful we’ll see any new tax legislation in the next few years. However, there are still plenty of changes due to automatic adjustments, expiring tax laws, and provisions added to non-tax legislation, such as the TC&JA and SECURE 2.0 Act, to make visiting with your financial advisor and tax professional at least once a year worthwhile.
Tax rules keep shifting, and let’s be honest, they can be a real headache to keep up with. From changes in how much we pay to what we can write off, there’s a lot to track. With some big rule changes coming up, it’s a smart move to check in and make sure you’re on the right path.
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