It’s understandable to assume when entering a high-impact presidential election year that nothing major is happening on the public policy front with, for example, taxes.
That would be an incorrect assumption, however.
The combination of scheduled escalation changes, recent legislation and upcoming tax deadlines adds up to a whole lot of tax policy changes in 2024. Responsible financial advisors and planners need to account for tax changes that take effect as soon as Jan. 1.
Then there’s the bigger picture. The November 2024 election between President Joe Biden, the presumptive Democratic nominee, and his Republican challenger will have a decisive impact on the future of American tax policy.
Former President Donald Trump signed the massive $1.5 trillion Tax Cuts and Jobs Act into law on Dec. 22, 2017. It cut corporate taxes permanently and individual taxes temporarily. Those individual tax cuts expire at the end of 2025.
“We have been in relatively low tax environments, and individuals will have to prepare themselves to pay on average an estimated 1% to 4% more in income taxes,” said Andrew Flores, a financial professional with Equitable Advisors. “In addition to a likely increase in income tax rates, the standard deduction will be reduced by almost half.”
Get those RMDs in
While 2024 is right around the corner, it’s worth noting tax changes for 2023. Specifically, in required minimum distributions, or RMDs. For a long time, the age for RMDs was set at 70.5 years old. But the 2019 SECURE Act and its follow-up, SECURE 2.0, passed in 2022, were responsible for significant changes to RMDs.
First, the age for RMDs was hiked to 73 in 2023 and will eventually be set at 75. For now, your first RMD must be taken by April 1 of the year after which you turn 73. The amount you must withdraw depends on the balance in your account and your life expectancy as defined by the IRS.
“There are reasons that people really like to delay those RMDs,” said Christine Benz, director of personal finance and retirement planning for Morningstar. “One is that it can push them into a higher tax bracket. It can cause some knock-on tax effects, and so pushing out the date offers some tax-planning opportunities between retirement age, which, say, is mid-60s for many people, until that RMD age.”
In another bit of good news, the penalty for missing an RMD has been cut in half. Previously, the penalty was 50% on any amount you should have taken, but that is now 25%. And if you can prove that missing an RMD was a mistake, the IRS might drop the penalty to 10%.
But Benz waved off the notion that the IRS has suddenly gone soft.
“What I hear from people who focus on tax planning is that they think that the IRS may actually be a little bit more serious about actually levying this penalty on people who do miss their RMDs,” she said in a recent video posted by Morningstar. “So, as always, it’s a date that you don’t want to monkey around with. You need to get that RMD out by Dec. 31 of the tax year.”
Roth catch-up opportunity
In late August, the IRS published a notice that could be of significant help to those saving for retirement. The notice provided initial guidance on and a two-year delay of the SECURE 2.0 Act requirement related to Roth catch-up contributions for high earners.
This rule is now delayed until Jan. 1, 2026. There will be a two-year “administrative transition period” with respect to the rule, during which it will not be enforced, and most importantly, participants will continue to be able to make catch-up contributions.
The IRS intends to issue further, more detailed guidance about this rule during the next two years. For now, the delay is a big win for plan sponsors and participants because it prevents sponsors from having to choose between eliminating catch-up contributions effective Jan. 1, 2024, or trying to implement a rule with so many unknowns.
Changes to Roth IRA rules featured prominently in SECURE 2.0.
Starting in 2024, up to $35,000 of unused 529 plan assets can be moved to a Roth IRA so long as certain conditions are met, Vanguard noted in a blog post. The 529 plan must have been in existence for 15 years, funds must be in the 529 for five years before they can be moved and they must be transferred to an IRA for the same beneficiary as the 529.
Relatedly, Roth 401(k) accounts will no longer be subject to RMD rules during the account holder’s lifetime, effective in 2024.
SECURE 2.0 also repealed the 25% limit on retirement plan balances for the tax-free transfer of assets on the purchase of a qualified longevity annuity contract, known as a QLAC. In addition, the maximum dollar amount increased to $200,000, adjusted for inflation each year, boosting the level of funds that may be shielded from RMDs.
Not surprisingly, Biden’s tax priorities are much different from those of his Republican counterparts. A peek into Biden’s fiscal year 2024 budget proposal reveals his long-standing tax priorities.
» Key business tax provisions include a proposal to increase the U.S. corporate income tax rate from 21% to 28% and proposed reforms of U.S. international tax rules that include raising the tax rate on the foreign earnings of U.S. multinational corporations from 10.5% to 21% and adopting an undertaxed profits rule.
» The budget proposed to increase from 1% to 4% the corporate stock repurchase excise tax that was enacted as part of the 2022 Inflation Reduction Act. The budget included other tax proposals that would affect corporate and pass-through businesses.
» Key individual tax increase provisions include measures increasing the top individual ordinary income tax rate from 37% to 39.6%, taxing capital gains income for high earners at ordinary rates and imposing a 25% “minimum income tax” on the wealthiest taxpayers.
Those higher tax plans evaporated in a debt-limit deal Biden reached with congressional Republicans and signed in June.
The deal to cap discretionary spending and suspend the debt ceiling contains no tax rate changes to raise revenue; it also slashes new funding Biden had allocated to the hollowed-out Internal Revenue Service.
However, Biden consistently pushed his corporate and individual tax hikes from the time he began campaigning for president, so they are certain to return should he be elected to a second term.
The agreement gave Republicans a win in their ongoing defense of the debt-boosting 2017 Trump tax cuts, turning back the latest attempt by Biden and Democrats to reverse them for wealthy Americans.
Unless Democrats sweep the White House and both chambers of Congress in 2024, which pollsters deem unlikely, major changes to the U.S. tax code are now seen as largely off the table until the end of 2025, when the 2017 individual tax cuts expire, Reuters reported.
That deadline will likely force lawmakers to agree on a major tax revamp.
“I am concerned that some of these changes may come quicker than we think,” Flores said. “Discussions about tax reform have been going on for years. The upcoming elections could also play a pivotal role in any legislative updates.”
Battle lines being drawn
Senate Democrats are already gearing up for a fight over whether to extend the Trump tax cuts. The caucus frequently refers to a finding by the nonpartisan Congressional Budget Office that extending the Trump tax cuts would add $3.5 trillion to the deficit through 2033.
Here are some of the key tax provisions set to expire at the end of 2025.
Income tax rates: Individual income tax rates were temporarily reduced. The top tax rate for individuals is 37%. As of Jan. 1, 2026, the top tax rate for individuals will return to 39.6%.
“This will likely reduce take-home pay for people in the workforce, tax deductions will be reduced, tax returns may be more complicated and the tax benefit of Roth IRA conversions will not be as favorable for many taxpayers,” said Rob Burnette, investment advisor representative and professional tax preparer at Outlook Financial Center in Troy, Ohio.
Estate and gift tax exemption emount: The base estate and gift tax exemption amount was doubled from $5 million to $10 million for 2018 to 2025, adjusted for inflation. The current 2023 estate and gift tax exemption is $12.92 million per person. As of Jan. 1, 2026, the exemption amount will revert to $5 million.
“Estate planning techniques such as grantor trusts, family-limited partnerships and charitable planning considerations should be discussed before tax laws sunset,” Flores said.
State and local tax (SALT) deduction: For taxpayers claiming itemized deductions, the Tax Cuts and Jobs Act temporarily capped SALT deductions at $10,000 a year, or $5,000 if married and filing separately. The cap on SALT deductions is one of the provisions that will expire in 2026.
Mortgage and home equity interest deduction limitation: The deduction for interest on home equity loans was eliminated for 2018 to 2025. Mortgage interest deductions were limited to debt up to $750,000. After the 2025 sunset, mortgage interest will be deductible on debt up to $1 million and home equity interest will be deductible on debt up to $100,000.
“The best advice we are giving to our clients is ‘Don’t wait until the last minute,’” Flores said. “Given the uncertainty of where the tax environment may end up, a lot of people have chosen a wait-and-see planning method. We are cautious on this strategy, as it could inadvertently result in missing huge opportunities to reposition assets and take advantage of the current low tax rates and high gift exemption amounts for those with a potential estate tax exposure.”