The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017¹.This legislation went into effect in 2018 and it impacted nearly every part of the tax code. However, one of its most unique features is its “sunset” in 2026, at which point most of the changes to the tax rules revert to their 2017 levels.

Although 2026 is still two years away, there are a few strategies that you can use now to take advantage of the current rules before they lapse. An important part of your year-end planning is to evaluate your current financial situation with your Mesirow Wealth Advisor and your tax and estate professionals to see if any these opportunities apply.

Take advantage of lower marginal income tax brackets

TCJA added new brackets for calculating your federal income tax. Most of these brackets resulted in a lower tax rate than before, with two of the brackets providing taxpayers with significant savings.

• In 2024, taxable income between $47,150 and $100,525 (single taxpayers) or $94,300 and $201,050 (married filing jointly) is taxed at marginal tax rate of 22%. In 2017 and before, this income was taxed at 25%².

• In 2023, taxable income between $100,525 and $94,300 (single taxpayers) or $201,050 and $383,900 (married filing jointly) is taxed at a marginal tax rate of 24%. In 2017 and before, this income was taxed at 33% or 28%.

One way to take advantage of these lower tax rates is to fund your Roth IRA and/or Roth 401(k) accounts. For example, if you already have a lot of pre-tax retirement savings, you may want to consider making Roth 401(k) contributions if you're in the 22% or 24% bracket³.

Since Roth contributions are funded with after-tax dollars, your withdrawals in retirement are made tax-free. Additionally, since Roth IRAs are not subject to Required Minimum Distributions, you can keep your money working for you longer.

It may also be good time to consider making a Roth IRA conversion of some or all your pre-tax accounts.

Maximize the tax benefits of charitable giving by using a multi-year plan

When calculating taxable income, you can elect to “itemize” your deductions for items like your state and local taxes, mortgage interest, and charitable contributions, or use the “standard” deduction available to every taxpayer.

TCJA had two provisions that significantly affected the way you might plan your tax deductions:

• TCJA increased the amount of the standard deduction to $14,600 (single taxpayers) or $29,200 (married filing jointly) from $6,500 or $13,000 in 2017.

• TCJA decreased the amount you deduct for your state and local taxes (SALT) by capping this amount at the greater of $10,000 or the actual taxes paid.

The net effect of these changes is that more taxpayers will use the standard deduction rather than itemizing. This could change the way that you plan your charitable giving.

While charitable gifts are still deductible from your taxable income (subject to limits based on your AGI), the tax benefits of these deductions are lessened unless you itemize. This is when a “bunching” strategy can be an important part of your charitable gifting plans⁴.

For example, rather than gifting $5,000 per year for three years, you could gift $15,000 in one year. With this larger amount, you’re more likely to exceed the amount of the standard deduction ($14,600 or $29,200) and receive more of the tax benefit by itemizing your deductions.

This doesn’t have to affect timing of your charitable gifts either. Gifts to a Donor-Advised Fund (DAF) can be deducted from your income in the year that they’re made, invested in the DAF, and directed to your preferred charity later.

Don’t forget that taxpayers older than 70½ can take advantage of Qualified Charitable Distributions (QCDs). Since QCDs are excluded directly from your income, this gifting strategy doesn’t require you to itemize to receive a tax benefit from your gifts⁵.

Prepare for the changes to the lifetime estate tax exclusion

The Estate & Gift Tax Basic Exclusion is the amount of wealth that can be excluded from your estate when calculating whether estate taxes will be due after your death. Since the federal estate tax rate can be as high as 40%, it’s essential to plan your how you transfer wealth to your loved ones and charitable missions during your lifetime.

TCJA nearly doubled the amount of this lifetime exclusion. In 2024, the lifetime estate tax basic exclusion is $13.6 million per person. In 2026, this reverts to approx. $7 million per person.

During the next few years, it’s important to monitor potential changes to the estate tax laws and be prepared to work with your estate tax professional to draft contingency plans.

In the meantime, you should continue to take advantage of some of the typical methods to transfer wealth, such as the annual gift exclusions (of $18,000 per donor per receipt per year), §529 contributions, and charitable giving. These strategies have the benefit of removing both the current value of the gift along with any future appreciation from the value of your estate in the future.

Now is the time to check in with your Mesirow Wealth Advisor, along with you your tax and estate professionals, to review your family’s investment and financial goals to be sure that planning is in place to navigate these upcoming changes.

¹https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

²https://taxfoundation.org/data/all/federal/2024-tax-brackets/

³https://www.irs.gov/publications/p590a

⁴https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

⁵https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity

Published March 2024