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Tax hikes may be coming

Key takeaways

  • With election uncertainty it's important to plan for a variety of tax scenarios.
  • A conversion to a Roth IRA when tax rates are lower could help save you money later.
  • You might also want to consider accelerating gifting to lower the value of your estate.
  • A qualified longevity annuity contract (QLAC) could help lower your required minimum distribution (RMD) amount.

The 2024 elections are still several months away. At stake are a host of critical pocketbook issues ranging from taxes to inflation, health care, and the economy.

One thing that's sure to be debated is the 2017 tax law known as the Tax Cuts and Jobs Act (TCJA), which will sunset at the end of 2025. The act made substantial changes to the tax code, including expanding tax brackets and lowering the top tax rate, increasing the standard deduction, capping the mortgage interest and state and local tax (SALT) deductions, as well as increasing the federal gift and estate tax exemption.

President Biden has proposed allowing many of the TCJA tax cuts to expire. Former President Trump has yet to lay out his plan but in the past has said he would extend parts of the bill. Of course, much will also depend on the makeup of Congress.

If you think your tax rate could increase in the coming years, here are a few things you can think about to take advantage of the lower tax rates that currently exist.

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  • Consider a Roth conversion. With tax increases possible, a Roth conversion lets you transfer money held in either a traditional 401(k) or IRA to a Roth 401(k) or Roth IRA. You'll pay taxes on the converted amount, but then the money has growth potential and you can take qualified withdrawals tax-free—and they aren't subject to required minimum distributions for the life of the owner.1 You can also consider a "backdoor" Roth conversion, which is a way of moving money into a Roth IRA accomplished by making nondeductible contributions—or contributions on which you do not take a tax deduction—to a traditional IRA and then converting those funds into a Roth IRA. It's different from a traditional Roth conversion, which is the transfer of tax-deductible contributions in a traditional IRA to a Roth IRA.
  • Tax-loss harvesting. If you have significant gains in your portfolio, consider realizing gains this year in case capital gains taxes rise next year. Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses, potentially reducing your tax bill. If you have more capital losses than gains, you may be able to use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.
  • Consider gifting to lower the value of your taxable estate. Without an extension, the current estate tax threshold of $13.61 million for single people and $27.22 million for married couples could be cut in half. Now may be the time to accelerate gifting. The annual gift tax exclusion for 2024 increased to $18,000 from $17,000 in 2023. That means you can give up to $18,000 to as many people as you like each year without incurring any gift tax liabilities. Married couples can use gift-splitting to give up to $36,000 without the gift being considered taxable. The gifts can also help reduce the value of your estate, without using up your lifetime gift and estate tax exemption.

Here are some other details to keep in mind about gifting:

  • If you give above the annual exclusion limit to any single person, you will reduce the available amount of your lifetime exemption, and the amount available upon your death to reduce your estate tax liability. It's good practice to file an IRS Form 709 when using an annual gifting strategy. But if you give more than your annual limit, it's necessary to keep track of the amount, because the excess will reduce your lifetime exemption.
  • Gifts are considered anything of value. Usually the value of gifts is easily determined, using the fair market value on the date of the gift. However, certain gifts may require a formal valuation, such as artwork. In most cases, if tax is owed, the donor pays the tax.
  • Generally, gifts to a spouse, political organizations, charitable organizations (subject to certain income limitations during life based on the type of gift given), tuition or medical care for someone else paid directly to the providers, are exempt from gift taxes.
  • Consider qualified longevity annuity contracts (QLACs). Similarly, you may need some new strategies for taking RMDs, which are taxed at ordinary income rates. If you think you might be in the new higher bracket, you could consider a QLAC, which is a deferred income annuity2 purchased with retirement funds typically held in a traditional IRA or 401(k). A QLAC allows you to defer taking income until the maximum age of 85. While QLAC payments are subject to ordinary income tax, the portion you invest is removed from RMD calculations, and you won’t pay income tax until your payments begin. The maximum lifetime funding amount for a QLAC is $200,000.

Uncertainty can be challenging, and a lot can happen between now and when a new Congress starts to debate tax policy and potential changes. That's why it's important to stay engaged and plan for a variety of tax scenarios.

Remember, everyone's situation is different. Consider speaking with a financial or tax professional about your individual needs as the election year gets underway.

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Tips on taxes

Ideas to help lower taxes on income, investments, and savings.
1. A qualified distribution from a Roth IRA is tax-free and penalty-free. To be considered a qualified distribution, the 5-year aging requirement has to be satisfied and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them). 2. Deferred income annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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