When the Tax Cuts and Jobs Act (TCJA) of 2017 was passed, it included significant tax benefits for high-net-worth individuals — specifically, reducing the tax rates of most income tax brackets. However, the TCJA will sunset (expire) at the end of 2025 unless Congress chooses to extend it. The TCJA expiration will likely bring higher taxes, especially for high earners.
Although it’s impossible to predict what will happen with future tax laws. it’s unlikely that Congress will choose to extend the TCJA (especially if the current administration is re-elected). If the current tax laws sunset, federal income tax brackets will revert to pre-TCJA settings, causing higher taxes for many Americans. Understanding how your tax liability may change gives you the opportunity to prepare ahead of time.
Income Tax Brackets Under TCJA
When it was passed in 2017, the Tax Cuts and Jobs Act lowered individual income tax rates:
- 10% (unchanged)
- 12% (was 15%)
- 22% (was 25%)
- 24% (was 28%)
- 32% (was 33%)
- 35% (unchanged)
- 37% (was 39.6%)
These changes reduced average tax rates for most income levels. If the TCJA expires, tax rates will return to their previous percentages. Unless you fall into the 10% or 35% tax brackets, you tax rate will increase starting in tax year 2026.
3 Ways to Prepare for a Tax Cuts and Jobs Act Expiration
Here are some of the ways you can take advantage of the current tax brackets to protect your assets as much as possible:
- Increase Roth contributions
- Consider backdoor Roth conversions
- Update your financial plan
Even though there’s a chance that Congress will choose to extend the TCJA (or pass a similar law to replace it). there’s no guarantee. It’s a good idea to assume that your tax rates will increase so you can start taking steps now to prepare.
1.Increase Roth Contributions
Unlike contributions to a traditional IRA, contributions to a Roth IRA must come from after-tax income. However, your withdrawals from a Roth are tax-free (including both contributions ad earrings), whereas distributions from a traditional IRA are taxed as income during retirement.
This means that a Roth IRA can be a good choice if you expect to be in a higher tax bracket when you retire ad start taking withdrawals. Those distributions won’t e taxed as income like distributions from a traditional IRA would, so they can help you keep your taxes lower during retirement.
During these (potentially) las few years of the TCJA, increasing your Roth contributions can allow you to take advantage of your current lower tax rates. Doing so helps you capitalize on the larger amount of after-tax income you have now and protect your future self from higher taxes during retirement.
Are you eligible to contribute to a Roth IRA? It depends on your income level. To contribute to a Roth IRA, your modified Adjusted Gross Income (MAGI) must be less than:
- $161,000 (for individuals in tax year 2024)
- $240,000 (for married couples filing jointly in tax year 2024)
Once you’ve determined if your eligible to contribute to a Roth, you need to know how much you can put in. The limit depends on your income.
For example, if your MAGI is under $146,00 (single) or $230,00 (married filing jointly), you can contribute up to $7,000 in tax year 2024. that limit goes up to $8,000 if you are 50 or older.
There’s also a limit on the total amount of money you can contribute to individual retirement accounts. For the 2024 tax year, the total amount you can contribute (to all of your IRAs combined) is:
- $7,000 if you’re under age 50
- $8,000 if you’re 50 or older
Now is a good time to review your IRA contributions and maximize your Roth contributions, if possible.
2.Consider Backdoor Roth Conversions
While the TCJA tax rates are still active, you might want to consider doing a backdoor Roth conversion. This strategy can be beneficial if your income is too high to contribute directly to a Roth IRA.
A backdoor Roth conversion essentially means converting a traditional IRA to a Roth IRA. When you transfer those funds, you’ll have to pay taxes on any portion (principal and earnings) that hasn’t already been taxed. If all of your contributions to your traditional IRA were made with pre-tax dollars, that means you’ll probably pay taxes on the entire amount you move from your tradition IRA to a Roth.
That might sound like a bad thing, but it’s not necessarily. if you do that conversion now while the TCJA tax rates are still in place, you’ll pay less in taxes than you might later on (if you do the conversion after the TCJA sunsets).
Doing backdoor Roth conversions now basically allows you to contribute to a Roth indirectly. You’ll pay taxes on the assets you transfer, but you’ll be doing so according to the TCJA tax brackets, which are likely to be lower now than in the future.
3.Update Your Financial Plan
Finally, you might want to consider reviewing and updating your financial plan with an eye toward future tax rates. If the TCJA sunsets, tax rates aren’t the only things that may change– your estate plan, 529 accounts, and business assets may also be affected.
The exact adjustments you may want to make to your financial plan depend on the unique facets of your financial situation. An experienced financial advisor can help you prepare for all the potential post-TCJA changes and minimize their impact on your overall net worth.
Manage Your Tax Liability with Legacy Planning
There’s always some level of unpredictability when it comes to tax planning. If you’re a high earner, however, there’s a strong possibility that your tax liability will increase if the 2017 TCJA expires at the end of 2025.
By taking action now, you can help protect yourself and your assets from higher taxes. Increasing your Roth contributions and/or doing a backdoor Roth conversion are good ways to take advantage of the current TCJA tax rates.
At Legacy Planning, we work closely with our clients to help them protect their assets now and in the future. To see if we can help you proactivity prepare for 2026 tax law changes, click here to schedule a conversation today.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
Legacy Planning does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation
