Don’t cheer or panic yet.
There is a barrage of news stories and social media posts about what the new Administration may or may not do with the Tax Code after Inauguration Day (January 20). It can all be a little distressing when you are trying to make long range plans, but you may not have a clear idea of what those changes will be until the fall of 2025, and they probably won’t go into effect until 2026.
Changing the tax laws takes time: new tax laws must pass both the House and Senate before landing on the Resolute Desk for signature. Note that The Tax Cuts and Jobs Act was proposed early in President Trump’s first year in office, signed into law in November of that year and took effect the following year. Relying on this precedent, we may not have new tax laws until 2026.
The Tax Cuts and Jobs Act of 2017 (TCJA) made sweeping changes to the Tax Code, lowering individual and corporate tax rates, eliminating the personal exemptions, expanding the standard deduction to make it a more attractive option than itemizing. The TCJA paused certain itemized deductions, such as the deduction for investment management fees, and it capped the deduction for State And Local Taxes (SALT) at $10,000. The TCJA expanded and complicated the international reporting of U.S. taxpayers and introduced the terms GILTI, FDII and a much-hated transition tax (Code S. 965) that subjected the retained earnings of foreign companies held by U.S. expatriate shareholders to U.S. domestic taxation as well as the foreign tax already paid on those earnings.
The Qualified Business Income Deduction (QBID) was a very taxpayer friendly addition to the Tax Code resulting from the TCJA. This deduction is intended to reduce the effective federal taxation of business income earned personally, to the 21% corporate tax rate.
The TCJA also substantially raised the lifetime gift and estate tax exemption and generation-skipping transfer tax exemption. It is $13,610,000 for 2024 and will be $13,990,000 for 2025.
As transformative as it was/is, many provisions in the Tax Cuts and Jobs Act of 2017 are temporary and are set to expire at the end of 2025. The sections related to controlled foreign corporations, i.e., GILTI, FDII and Subpart F, are not set to expire at the end of 2025. If Congress doesn’t extend the TCJA, we mostly revert to the pre-2018 Code as subsequently modified by tax legislation that is more permanent in nature.
There are two main pieces of ‘permanent’ tax legislation that have transformed our tax Code and will probably outlive whatever happens with the TCJA. They are commonly known as the SECURE Act and the Inflation Reduction Act or IRA.
The Setting Every Community Up for Retirement Act of 2019, a.k.a. the SECURE Act, was enacted in December 2019. This was followed by SECURE 2.0 Act of 2022 signed into law on December 29, 2022. These two pieces of legislation combined, contain dozens of provisions which empower individuals to save more for retirement. The SECURE Act also changes the rules for withdrawals from retirement plans.
The Inflation Reduction Act (IRA) created new and expanded existing tax credits and incentives for clean energy projects, electric vehicles and green/efficient energy home construction and renovations. Not all measures in the IRA are permanent, but all are to remain in-force for 2024 and 2025 tax return filings. The new Administration may ask Congress to repeal sections of this Act, but it is difficult to predict which sections because so many consumers, investors, and businesses made economic decisions in reliance on the IRA.
Anything could happen next year. We have to move forward with what we know now.
So, let’s run the numbers, assuming that the provisions of the TCJA, SECURE, Secure 2.0, and IRA remain as tax law through December 31, 2025.
This is the tax landscape, as Cardinal Point sees it, it for 2024 and 2025…
Gifts and Estate Tax
Each individual may gift up to $18,000 in 2024 and $19,000 in 2025 per recipient without using up any of their lifetime gift and estate tax exemption. Gifts over those amounts are allowed but start to use up the lifetime exemption. Charitable donations do not use up the exemption regardless of the amount. Be aware that if you split gifts with your spouse and jointly give $36,000 to a recipient, a gift tax return will need to be filed to keep the gifts exempt. It’s reporting, not taxation.
Gifts from a U.S. citizen spouse to a non-U.S. citizen spouse are limited to $185,000 in 2024 and $190,000 in 2025. Gifts to U.S. citizen spouses enjoy an unlimited marital deduction.
The lifetime gift and estate tax basic exemption is $13,610,000 for deaths in 2024, will be $13,990,000 for deaths in 2025, and is slated to drop to half that amount for deaths in 2026 if the TCJA is not extended or Congress takes some other action with regards to estate taxation.
When the estate of a married individual is less than the applicable lifetime exemption in that year, it is usually recommended to file an estate tax return anyway and to elect portability of the Deceased Spouse’s Unused Exemption (DSUE) in favor of the surviving spouse. The absolute dollar amount of the DSUE carries to the surviving spouse and adds to their own estate tax basic exemption, whatever that may be, when the survivor passes.
Federal estate tax on the amount over the basic exemption amount is graduated from 18% to a top rate of 40% when the excess is a million dollars or more. Different states may have their own estate, gift, and inheritance tax rules.
Federal Tax Brackets for 2024 and 2025
Federal Regular Taxes (not qualified dividend and long-term capital gains rates, AMT or NIIT)
The federal tax rates for each bracket, starting from taxable income, remain through the end of 2025 at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The top tax rate of 37% kicks in for the portion of your taxable income in excess of:
- Married Filing Jointly and surviving spouse* (MFJ) – $731,200 in 2024 and $751,600 in 2025
- Married Filing separately (MFS) – $365,600 in 2024 and $375,800 in 2025 – half of the MFJ brackets
- Head of Household (HOH) – $609,350 in 2024 and $626,350 in 2025
- Single – $609,350 in 2024 and $626,350 in 2025 – same as HOH
- Estates and Non grantor Trusts – $15,200 in 2024 and $15,650 in 2025. (No, we aren’t missing any zeroes.)
*A surviving spouse may file MFJ for the calendar year that includes the death of the spouse and longer if there is a minor child as a part of the household.
Qualified Dividends and Long-term Capital Gains (QDCG Tax)
Qualified dividends and net long-term capital gains are taxed at special rates in lieu of the regular tax rates in the brackets earlier. Qualified dividends are generally taxed at 15% and long-term capital gains are taxed at 0%, 15% or 20%: 0% if taxable income is no greater than limit A, 15% if taxable income is greater than limit A and no more than limit B, and 20% if taxable income is over limit B. It also depends on your filing status. Be aware that the states often do not have special rates for QDCG, or they may have an entirely different way of taxing different baskets of income.
| 2024 | 2024 | 2025 | 2025 | |||||
| Filing status | limit A | limit B | limit A | limit B | ||||
| MFJ & Surviving Spouse | $94,050 | $583,750 | $96,700 | $600,050 | ||||
| MFS | $47,025 | $291,850 | $48,350 | $300,000 | ||||
| Head of Household | $63,000 | $551,350 | $64,750 | $566,700 | ||||
| All Other Individuals (Single) | $47,025 | $519,800 | $48,350 | $533,400 | ||||
| Estates & Non-grantor Trusts | $3,150 | $15,450 | $3,250 | $15,900 |
Net Investment Income Tax (NIIT)
The Net Investment Income Tax is an additional 3.8% tax on the lesser of: (a) your net investment income for the year, and (b) your modified adjusted gross income for the year exceeding a threshold. The thresholds vary by filing status. $250,000 MFJ, $125,000 for MFS, and $200,000 Single or HOH. The disappointing aspect of the NIIT for U.S. citizens living abroad is that the NIIT cannot be offset by foreign tax credits. A battle is currently being fought to change this and we will let you know when the battle is won.
Alternate Minimum Tax and Kiddie Tax – Let’s skip talking about these this year. No significant modifications have been made to either.
Contributing to Social Security and Medicare (FICA)
You will contribute to Social Security at 6.2% on your first $168,600 in wages for 2024 and $176,100 for 2025. You will contribute to Medicare at 1.45% on all of your wages without limit. There is also an additional Medicare tax of 0.9% on wages over $200,000 for single filers and $250,000 for joint filers.
If you are self-employed, you pay both the employer’s and the employee’s share: 12.4% to Social Security and 2.9% to Medicare, but you deduct the employer’s half from taxable income.
Standard or Itemized Deduction?
Pre-TCJA, itemized deductions were the sum of:
- Medical out of pocket subject to a 7.5% of AGI threshold,
- State and local taxes (SALT), including foreign property taxes
- Mortgage interest on home acquisition debt of up to $1 million plus a LOC of $100,000
- Investment interest
- Charitable donations
- Casualty and Theft Losses
- Gambling losses up to the amount of gambling winnings
- “the 2% itemized deductions”, which were generally employment expenses and investment management expenses and were subject to a 2% of AGI haircut.
Pre-TCJA, personal exemptions for each of the eligible people in your household were deductible along with itemized deductions to arrive at taxable income.
Under TCJA, SALT is capped at $10,000 and only U.S. property taxes are allowed. Interest on home acquisition debt is limited to $750K of the mortgage, and the 2% deductions are not deductible at all. Personal exemptions have disappeared, but the standard deduction has been increased dramatically. Below, we show the standard deduction by filing status. There is an additional amount added for taxpayers who are 65 or older, or who are blind. These additional amounts can be doubled up for spouses and for spouses who meet both tests.
| Standard Deduction | Addtl if 65+ or Blind | |||||
| Filing Status | 2024 | 2025 | 2024 | 2025 | ||
| MFJ & Surviving Spouse | $29,200 | $30,000 | $1,550 | $1,600 | ||
| MFS | $14,600 | $15,000 | $1,550 | $1,600 | ||
| Head of Household | $21,900 | $22,500 | $1,950 | $2,000 | ||
| Single | $14,600 | $15,000 | $1,950 | $2,000 | ||
Retirement Plan Contributions and Catch-ups
The annual contribution limit for both traditional and Roth IRAs is $7,000 for 2024 and 2025. An additional $1,000 catch-up contribution can be made each year by individuals who are at least 50 years of age.
Roth IRA contributions may be disallowed if your income is greater than certain thresholds.
Traditional IRA contributions are subject to deductibility phase-outs depending on filing status and income level if the single taxpayer, or one of a married couple, is covered by a qualified retirement plan.
Remember that Roth IRA contributions are not deductible, but the income is also not taxable when it comes out, as long as you have met the five-year holding period. If you expect your income to increase (or income tax rates to rise) in the future, consider Roth contributions or Roth conversions that allow for tax-free withdrawals in retirement. If income is expected to decrease in the future, traditional contributions may be more tax effective.
There is something to be said for diversifying long-term tax strategies, rather than betting everything on one strategy. Going all-in on tax deferral is generally a bad idea: tax deferral makes a heavy bet on more favorable tax treatment in future years. Because we can’t know the future, consider instead building a wealth structure with tax-free, tax-deferred, and presently taxable assets. Such a wealth structure offers you freedom of choice in retirement: to draw from three pools, with three very different tax implications, depending on what your situation is at that moment. Talk with your Cardinal Point Private Wealth Manager about diversifying your tax strategies.
IRA contributions may be made up to the filing deadline of April 15th and still be counted for the tax year just ended but must be made before the return is filed.
Business owners, whether these businesses are sole proprietorships, Subchapter S corporations or C corporations, have the option to set up retirement plans with higher annual contribution limits. Talk to your Private Wealth Manager about solo 401(k)s, Roth solo 401(k)s and SEP (Simplified Employee Plan) IRAs.
For the most popular Qualified Retirement Plans, here are the maximum contributions.
| Maximum Elective Deferrals to Qualified Plans | 2024 | Catch-up 50yrs + 2024 | 2025 | Catch-up 50yrs + 2025 | Catch-up 60 – 63yrs* 2025 | ||
| Retirement plans e.g. 401(k), 403(b), 457 (employee contribution) | $23,000 | $7,500 | $23,500 | $7,500 | $11,250 | ||
| Starter 401(k) | $6,000 | $1,000 | $6,000 | $1,000 | |||
| Simple IRAs | $16,000 | $3,500 | $16,500 | $3,500 | |||
| Defined contribution plans or SEPs | $69,000 | $70,000 | |||||
| * The $11,250 catch-up contribution is in place of, not in addition to the $7,500 for age 50 plus | |||||||
Required Minimum Distributions (RMDs)
If you are making a Required Minimum Distribution for the first time, be sure to take it by the end of the calendar year. Yes, you can delay your first RMD until April 15 of the following year, but you will still need to make an RMD for that year as well. Consider what that will do to your taxable income in the second year before deciding to double up.
The RMDs from certain types of plans may be aggregated, which means you may be able to take a single distribution to cover the RMDs of multiple plans. RMDs from employer plans and inherited IRAs will need to be taken separately. The rules for calculating your RMD on inherited accounts have drastically changed throughout the SECURE Act and SECURE Act 2.0. Talk to your advisor about your specific RMD requirements if you inherited a retirement account after 2019.
Qualified Business Income Deduction (QBID)
Business Income on your personal tax return may be from your own self-employment “Schedule C income,” REIT dividends in your investment portfolio, or from a pass-through entity “K-1 income”. Only U.S. domestic business income qualifies for the QBID. Be aware that there are two categories of Qualified Business Income. Specified Service Business income is your typical consulting or professional practice where the business is built upon and reliant on the special skills or reputation of the individual business owner. The QBID phases out at different income levels for Specified Service Businesses.
Children and Dependents
We are jumping now from retirees to young families. The Child Tax Credit is up to $2,000 per qualifying dependent child. Up to $1,700 of this is a refundable credit. The credit phases out if the parent(s) income exceeds $200,000 for a single filer, or $400,000 for joint filers. It is especially important to note that a qualifying dependent child is a U.S. citizen, national or resident alien. The child must be under 17 years of age, have lived with you for at least half the year, be an eligible dependent and have a valid U.S. social security number at the end of the year. There is no change to the Child Tax Credit for 2025.
Be aware that there is an Adoption Tax Credit and a Credit for Dependent Care that may apply to you.
Consider setting up a 529 plan to fund your child’s education. Like a traditional IRA, income earned within the account is tax deferred, and you never pay tax at all on distributions to pay (or reimburse) for qualifying educational expenses. This is usually considered as saving for post-secondary education, but up to $10,000 per child per year may also be used for private K-12 education tuition. While the 529 plan is a great concept, be careful not to over-fund it: there will be tax penalties to take distributions for non-qualifying expenses or to unwind the account after your child completes his/her education.
If you or your dependents are currently post-secondary (college) students, take a look at which education credits you may be eligible for. Currently, there are really only two education credits: the American Opportunity Tax Credit for the first four calendar years of college, and the Lifetime Learning Credit for education beyond that. Each credit has different rules. These credits are phased out for higher income taxpayers.
Charitable Giving
Consider being charitable every other year in order to make the most of itemizing deductions alternately with taking the standard deductions. We call this ‘donation bunching.’ Donations to U.S. charities are deductible to the extent of 60% of your U.S. adjusted gross income (AGI), although there are limited circumstances where qualified donations can be deductible up to 100% of AGI. Donations to Canadian and Israeli charities are also deductible to the extent of 60% of the income sourced from each of those countries.
When you donate appreciated securities, you receive a donation deduction for the fair market value of the security at the date of gift, but you do not have to include the capital gain in your income. This is a big win for both the charity and the donor.
Lastly, if you have an RMD from your retirement plan, you can donate some or all of that RMD to charity. The Qualified Charitable Donation (QCD) meets the RMD requirement but is not included in your income.
Energy Credits
Since the incoming President has indicated that he doesn’t support the measures and tax credits in the Inflation Reduction Act, you may want to act quickly to take, or otherwise crystallize, your tax credits for electric vehicles (new and used), residential clean energy property, and energy efficiency improvements to your home. Contact your tax advisor to find out how each of these credits work.
And there is more…
U.S. tax law and regulations are voluminous and complicated. We hope the above helps you identify the key provisions to manage your everyday federal income tax burden as low as possible. Seven U.S. states have no personal income tax, which means that forty-three states have an income tax that may be similar or completely different from the federal system. Ask your tax professional about your state’s add-backs, deductions, and tax credits. Some states allow a deduction for contributions to a 529 plan or a foreign tax credit for taxes paid to other states or countries. Other states only tax investment income. Thirteen states do not recognize the U.S. – Canada Tax Treaty. Although Washington State does not have a personal income tax, it does have a capital gains tax and an estate tax.
In this environment of rapid change, it is easy to be anxious about tax planning. We get it. Rest assured that your Cardinal Point Team is continually monitoring the tax scene for changes that may affect you. Stay in touch with your Private Wealth Manager and team at Cardinal Point Wealth Management as well as your tax preparers. Keep us informed of your life events that may warrant changes in your planning, particularly your tax planning.