 Trump? tax cuts could expire after 2025. Here? how top-ranked advisors are preparing |
Source |
American Shipper |
Post Date |
10/14/2024 |
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KEY POINTS
?As 2025 approaches, top-ranked advisors are bracing for a looming tax cliff when trillions of dollars in tax breaks enacted by former President Donald Trump are scheduled to expire.
?The Tax Cuts and Jobs Act included several key individual tax law changes that could sunset after 2025, including lower tax brackets, higher standard deductions and a bigger estate and gift tax exemption.
?Meanwhile, advisors are focused on estate planning strategies and tax moves such as accelerating income and deferring deductions.
As 2025 approaches, top-ranked advisors are bracing for a looming tax cliff when trillions of dollars in tax breaks are scheduled to expire.
Enacted by former President Donald Trump, the Tax Cuts and Jobs Act of 2017, or TCJA, brought a slew of temporary tax changes for individuals. Those provisions will expire after 2025 without action from Congress.
Some of the key changes included lower federal income tax brackets, bigger standard deductions, a more generous child tax credit, a 20% deduction for pass-through businesses and higher estate and gift tax exemptions, among other provisions.
It? unclear which TCJA provisions, if any, could be exted by Congress, particularly with uncertain control of the Senate, House and the White House.
In the meantime, some financial advisors have started tax planning for clients who could be affected. Here are some of their key strategies.
Estate planning is a ?arge focus?
Currently, there? a significantly higher estate and gift tax exemption under the TCJA, which allows tax-free transfers from wealthy Americans to the next generation.
In 2024, the lifetime estate and gift tax exemption is $13.61 million for individuals or $27.22 million for married couples. Next year, that limit will adjust for inflation before ping by roughly one-half after 2025 if Congress does not ext the provision.
Transfers above those thresholds could be subject to a maximum tax rate of 40%.
?hat? really been a large focus for us,?said certified financial planner Peter Traphagen Jr., managing director of Traphagen Financial Group in Oradell, New Jersey, which ranked No. 9 on CNBC? 2024 FA 100 list.
Estate planning strategies leverage the exemptions to remove assets from the estate during life. However, techniques vary by family deping on their level of wealth, goals, life expectancy and other factors.
Plans can involve trusts, gifts to beneficiaries, direct payments to education institutions or medical providers, funding a 529 college savings plan and other tactics, said Shea Abernethy, an investment advisor representative based in Winston-Salem, North Carolina.
?nce it? out of your estate, it? not gaining interest or compounding,?said Abernethy, who is also chief compliance officer for Salem Investment Counselors, which earned the No. 8 spot on the FA 100 list.
?ccelerate income?before tax hikes
Some advisors are also planning for higher federal income tax brackets after 2025.
Without changes from Congress, the brackets will revert to 2017 levels, shifting to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
?e are looking at strategies to accelerate income into the lower brackets now,?said Samantha Pahlow, wealth management chair of Ferguson Wellman Capital Management in Portland, Oregon. The firm ranked No. 10 on the FA 100 list.
For example, that could include making Roth individual retirement account conversions or recognizing business income sooner, she said.
Pass-through businesses such as sole proprietors, partnerships or S corporations may also want to accelerate income to leverage the 20% qualified business income deduction, which could also sunset after 2025, Traphagen said.
Consider ?eferring deductions?
At tax time, filers claim the standard deduction or their total itemized deductions, whichever is greater. After 2025, they?e more likely to itemize, if the standard deduction is cut in half.
For 2024, the standard deduction is $14,600 for single taxpayers and $29,200 for married couples filing jointly. That means most filers won? claim itemized tax breaks such as the deduction for i gifts, medical expenses, and state and local taxes, experts say.
But with a lower standard deduction scheduled for 2026, you may consider ?eferring deductions,?such as a donation to ity, Pahlow said.
Social Security Tax Limit Jumps 4.4% for 2025 The Social Security Administration has announced significant changes affecting millions and high earners as we approach a new year.
The Social Security Administration (SSA) just announced two key 2025 adjustments: the Social Security COLA (cost of living adjustment) and the new Social Security tax limit.
While you?e likely heard a lot about the COLA, did you know theres a cap on the amount of income subject to Social Security payroll tax? This ceiling, known as the Social Security tax limit or "wage cap," sets the maximum earnings that can be taxed to fund the Social Security program.
Social Security provides vital retirement, disability, and survivor benefits to over 68 million qualified individuals across the United States.
Social Security wage base 2025 increase
For 2025, the SSA has set the COLA at 2.5%.
The Social Security tax limit will increase by about 4.4% in 2025.
Both of these amounts are adjusted annually for inflation. However, it? important to note that they are calculated using distinct methods and data sets.
The tax limit changes are particularly significant for high-income earners, who may pay more Social Security tax next year. So, understanding the adjustment is crucial for effective financial planning.
Here? more of what you need to know.
Social Security tax rate
The Social Security tax limit will rise to $176,100 in 2025. (The 2024 tax limit is $168,600.) This 4.4% increase is less than the 5.2% jump from 2023 to 2024.
Still, if you earn more than $168,600 this year, you haven? had to pay the Social Security payroll tax on the amount of your income that exceeds that limit.) That can result in considerable tax savings.
?Take, for example, an employee with a 2024 annual salary that exceeds the tax limit by $10,000. Since the Social Security tax rate is 6.2% (your employer also pays 6.2%), they would save $620 on Social Security taxes.
?On the other hand, someone who earns wages exceeding the base by $30,000 would receive a $1,860 tax break.
?The more you make over the tax limit, the more your Social Security tax savings.
However, the Social Security tax limit increases yearly as the national average wage index increases. When that happens, more income is subject to the Social Security tax.
Note: Some people don? have to pay Social Security taxes. (Exemptions from Social Security taxes may be available if certain requirements are met.)
Also, self-employed individuals pay the full 12.4% rate. However, if youre self-employed, you can deduct the employer-equivalent portion of that amount.
Medicare tax considerations
It? also worth noting that, unlike Social Security, Medicare tax has no income cap. The standard Medicare tax rate of 1.45% (paid by the employee, 2.9% total when added to the employer portion) applies to all earnings, regardless of income level.
High-income earners can be subject to an additional Medicare surtax of 0.9%. This applies to those with income above $200,000 for single filers or $250,000 for married couples filing jointly.
Self-employed individuals pay the employee and employer portions of Medicare tax but can claim a self-employment tax deduction. The 0.9% on high incomes may be applicable.
Social Security COLA increase 2025
Along with the wage tax base rate, the SSA announced the 2025 COLA increase, which is 2.5%.
On average, according to the SSA, Social Security retirement monthly benefits for about 68 million people are expected to grow by more than $50 ning January 2025.
Will the Social Security wage limit be eliminated?
You may have heard about proposals to eliminate the Social Security tax limit or wage base.
This debate primarily centers around increasing revenue for the Social Security program trust fund. But there are also concerns about fairness in the current tax approach.
?For example, by removing the wage base, high-income earners would contribute Social Security taxes on their entire earnings, potentially injecting significant additional revenue into the tem.
?Proponents say this could help shore up Social Security for future generations.
Some say removing the tax limit would ensure all workers, regardless of income level, contribute the same percentage of their earnings to Social Security.
However, opponents of removing the wage base cont that increasing taxes on high earners could discourage productivity and economic growth, potentially reducing overall tax revenue.
Additionally, some point out that while high-income individuals might pay more in taxes, the current Social Security benefit calculation formula would result in them receiving higher benefits in retirement, potentially straining the tem further.
2025 Social Security wage cap: Bottom line For now, pay attention to the 2024 Social Security wage cap and, for planning, this new 2025 limit.
Also, watch tax policy taking center stage in the 2024 election. Proposals to shore up Social Security could be a key issue throughout 2025 as lawmakers address tax policy to deal with looming expirations of several key Tax Cuts and Jobs Act (TCJA) provisions.
Ask an Advisor: When My Spouse Dies, Do I Get a Full Step-Up in Basis on My Home or Only the $250k Capital Gains Exemption?
What if a husband and wife own a home together that increases in value by $500,000. When one spouse dies and the other owns the property themselves, do they receive a step-up in basis? Or do they only receive a $250,000 capital gains exemption when they sell the property?
Your question deals with the rules surrounding both a step-up in basis of an inherited asset and the capital gain exclusion on the sale of a primary residence. These rules are indepent of each other, so both are true: the surviving spouse receives a step-up in basis and they only receive a $250,000 exemption. That may sound a little confusing so lets unpack it below.
About the Step-Up in Basis
In finance, the term ?asis?generally refers to the amount you pay for something. Basis matters because it? the starting point from which you calculate taxable gains. For example, assume you buy something for $100,000 ?that? your basis. If the value of the asset grows to $150,000 and you decide to sell it, you?l owe taxes on the $50,000 capital gain.
A step-up in basis occurs when the basis of an inherited asset is reset to its market value at the time the original (or co-owner?) owner? death. In other words, when a person inherits assets like stocks or real estate, the tax basis is adjusted to reflect the asset? worth at the time of the owner? passing, rather than the amount initially paid for it.
Returning to the example above, suppose you have an asset with a basis of $100,000, and by the time of your death, its value has increased to $150,000. Instead of inheriting your original basis, your heir receives a ?tepped-up?basis. In this case, their new basis is $150,000, and they won? realize a gain unless the property appreciates further.
Capital Gains and the Sale of a Primary Residence
Section 121 of the tax code provides for a capital gains tax exemption thats worth up to $500,000.
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The tax code allows you to reduce or avoid capital gains tax on the sale of a primary residence, provided that you?e lived in it for two of the previous five years. This tax break is known as the Section 121 exclusion.
There are parameters you need to stay within to qualify for this tax break, but the broad strokes are as follows:
?Individuals can exclude up to $250,000 of gains from the sale of a primary residence
?Married couples that file a joint return can exclude up to $500,000 from the sale of a primary residence
So, assume the basis on your primary home is $300,000. If you?e single, you could sell it for up to $550,000 without incurring a capital gains tax obligation. A married couple could sell it for up to $750,00. This example ignores transaction costs to provide a simplified illustration. Youll want to work closely with your tax professional to make sure you calculate your basis correctly. (And if you need help finding a financial professional, this free tool can connect you with you to three fiduciary advisors who serve your area.) Combining the Two Rules Samuel, to see how both rules apply in the situation you?e asking about, we need to think of them in order:
?First, determine the stepped-up basis
?Second, calculate the taxable gain considering the Section 121 exclusion
Step 1: Establish Basis
The surviving spouse receives a step-up in basis when the first spouse dies. However, the value of that adjustment deps on whether they live in a community property state. In a community property state, the surviving spouse receives a full step-up in basis. Meaning their basis becomes the fair market value of the asset at the time their spouse passed.
In a non-community property (common law) state, the surviving spouse only receives a step-up in basis for half of the property? appreciation. For example, the couple? joint basis is $300,000 but the home is worth $500,000 when the first spouse dies. Half of that $200,000 gain is added to the surviving spouses basis so they have a $400,000 basis on a home that? worth $500,000.
Step 2: Calculate the Capital Gain and Apply the Exclusion After the surviving spouse has determined the stepped-up basis of the inherited home, they can then calculate how much the taxable gain would be if they were to sell the property. And remember, they would only owe capital gains tax on the portion of that gain that exceeds the Section 121 exclusion.
Here? a final example to tie it all together:
A couple that lives in a community property state owns a home that? worth $500,000 after originally paying $300,000 for it. The first spouse dies and the surviving spouses tax basis is stepped up to $500,000. The surviving spouse can then sell the home for up to $750,000 without recognizing a taxable gain because of the $250,000 exclusion.
One last bit of nuance here: The exclusion amount deps on tax filing status. The "married filing jointly" status receives a $500,000 exclusion while "single" status receives a $250,000 exclusion. Widows and widowers are allowed to maintain their married filing jointly status in the year of death. So, the surviving spouse may still be able to exclude the full $500,000 if they sell the property in the same calar year that their spouse dies. (But if you need additional help with your tax strategy, consider working with a financial advisor with tax expertise.)
A senior couple reviews the rules of the step-up in basis.
When one spouse dies and the surviving spouse decides what to do with their jointly owned home, it? important to understand the rules for the stepped-up basis and capital gains tax exclusion. A surviving spouse will receive a step-up in basis that could adjust the inherited home to its fair market value at the time of their spouse? death. If they were to sell it, they could still apply the Section 121 exclusion and avoid paying taxes on up to $250,000 in capital gains ?and in some cases, $500,000 ?on the home sale.
Tax Planning Tips
?If possible, consider delaying the sale of appreciated investments until you?e in a lower income tax bracket, like after retirement. Long-term capital gains are taxed more favorably, and if your income is low enough, you may qualify for a 0% capital gains tax rate. To see how much you may owe when you sell your assets, try our capital gains tax calculator.
?A financial advisor with tax planning and/or financial planning expertise can potentially help you determine the best time to sell assets to minimize the tax implications of the sale. Finding a financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
The most common U.S. export is an empty container A staggering 75% of inbound containers return to their origin empty, illustrating the complexities of U.S. trade dynamics In the complex world of U.S. trade, one startling statistic stands out: the most common ?xport?from the U.S. overseas is an empty container.
While the country imports a wealth of goods, including a whopping 12% of loaded containers filled with furniture, a staggering 75% of inbound containers (that is, those coming from overseas) actually return to their origin empty, according to DAT Freight & Analytics, a software company that specializes in transportation.
The three largest U.S. ports ?Los Angeles, Long Beach, and New York/New Jersey ?process nearly half of all loaded imports. In 2022, DAT found that the trio of ports collectively handled 13.8 million containers, which are commonly known as 20-foot equivalent units (TEUs). However, about three out of every four containers received by these ports returned to their overseas destinations with only ?ir,?or in other words, empty.
While furniture dominates U.S. imports and accounts for a significant portion of TEUs, the nation? top export is a lot less tangible. Empty containers signify lost potential, DAT noted.
While imports are significant, exports tell a different story. For instance, paper products lead actual exports, comprising 10% of the 12 million loaded TEUs shipped out last year. With Asia as the primary destination ?particularly India, Thailand, and Vietnam ?the U.S. lumber industry, valued at $175 billion, stands at the epicenter of exports, making wood pulp and lumber crucial commodities.
But even so, the paradox of empty containers as the most common U.S. export serves as a stark reminder of the ongoing trade imbalance, one that is likely to be exacerbated by the current East and Gulf Coast port strike. The strike has disrupted operations, further limiting the flow of goods and could potentially increase the volume of empty containers returning to ports.
As the country navigates its position in the global market while addressing workers?demand for better wages and benefits, the balance of imports and exports underscores the urgent need for a more balanced trade approach ?a topic that has garnered the attention of President Joe Biden and Vice President Kamala Harris.
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