At the end of 2025, a provision that was part of Donald Trump’s tax plan (the Tax Cuts and Jobs Act of 2017) when he was president, will expire. The plan brought many changes to the tax law, and they benefited a lot of Americans by lowering their taxes. The changes will end at the close of 2025 unless Congress decides to keep them, but nothing has happened yet to rescind the changes.
If allowed to expire, the old tax rates (before 2017) will be back in place, and many people will find it necessary to pay more taxes for the 2026 tax year. Old tax brackets will return, and the lifetime estate and gift tax exemption will end, which is currently $13.61 million per person (2024), and $27.22 million for married couples.
As of now, you can expect to pay higher taxes starting in the 2026 tax year. If you are a high-earner and approaching retirement, you should start now to reduce your taxable income and the size of your estate. There are many ways to reduce both before you pass away to enable your beneficiaries to avoid the taxes and receive a larger inheritance.
Previous Income Tax Brackets Will Return
Finding ways to reduce your income taxes is necessary because the old tax brackets will again be in place. The tax brackets also have a smaller range, causing people to pay more taxes. While the lowest bracket of 10 percent will remain, the 12 percent bracket will disappear and return to 15 percent. Right now, the 10 percent bracket is for people making $0 to $11,000 for individuals and $22,000 for married couples. When the brackets revert to their pre-2017 amounts, the lowest bracket is from $0 to $9,325 for singles and $18,650 for married couples.The highest bracket now starts at $578,126-plus for singles and $693,751 for married couples. When it reverts to pre-2017 brackets, instead of paying 37 percent in taxes, they will pay taxes at 39.6 percent. Besides the tax rate, the bracket also starts much lower at $418,401-plus for singles, and marrieds start at $470,701-plus. All other brackets will increase by 1–4 percent.
The Lifetime Estate and Gift Tax Exemption
If the Tax Cuts and Jobs Act (TCJA) is allowed to end, probably the biggest problem is the lifetime estate and gift tax exemption, which is now at $13.61 million per person. Before 2017, it was as low as $5 million. If you were to die before the end of next year, your estate would not pay federal estate taxes on anything below that number. Once 2026 starts, any estate worth more than $5.0–7.5 million (a rough inflation figure) will have to pay taxes on any amount above that figure. Also, do not forget that many states have an estate tax, and some also have an inheritance tax.The SALT Tax Deduction
Unless Congress acts, the cap on State and Local Taxes (SALT) will no longer exist after Dec. 31, 2025. Until then, a cap is in place that people cannot deduct more than $10,000 on their state and local taxes, property taxes, and foreign income taxes. Any taxes related to a trade or business are fully deductible now and do not have a cap.Spend Down Your Money
Instead of continuing to save their money, ThinkAdvisor suggests that high-earners with estates valued at more than $13.61 million have the opportunity to spend some of their money. Taking trips to other parts of the world can help reduce your assets and let you have some fun while doing it. Including some family members on your trips will let them enjoy the fun, too.Giving Gifts to Reduce Your Taxes
Because you should not wait until next year to start reducing your estate, there are some things you can do this year. One of them is to give gifts of up to $18,000 per year to individuals. You and your spouse can give up to $36,000 to an individual without paying taxes on it. The good thing about gifting to individuals is that you can give gifts to as many people as you want.Next year, you could repeat those gifts to the same people without any tax consequences. It lets you reduce your estate considerably and still enjoy seeing those people (your beneficiaries and others) benefit from your gifts. It is better to help them now (if they are old enough), rather than having them wait until you die.
Charitable Giving
Now would be a good time to consider making some charitable donations. You can donate up to 60 percent of your adjusted gross income. At the end of 2025, it drops down to 50 percent. Charitable deductions are tax deductible when made to approved charities. If a required minimum distribution (RMD) from a retirement account will put you above the lifetime estate and gift tax exemption, donations can be made directly to charity.Retirement Accounts
When RMDs from retirement accounts will put you into a higher tax bracket if you retire after 2025, you can make post-tax contributions to Roth accounts—either a Roth IRA or a Roth 401(k). Both accounts do not have RMDs, and the money is withdrawn tax-free.The Credit Shelter Trust (CST)
A credit shelter trust, Fidelity says, is a trust that is created when the first married spouse dies. It is free of the estate tax because of the unlimited marital deduction. The surviving spouse can use the assets in the trust, and they pass to the heirs when the second spouse dies. It allows the assets to pass to the heirs tax-free. This trust is also known as a family, bypass, or exemption trust. Any assets valued above the lifetime estate and gift tax exemption, which is about $7 million after 2025, can be put into the trust.You can find out how much you will pay in taxes by talking to a tax advisor or estate planning attorney. They can show you how to pay less taxes, reduce your assets, and pass them safely to your beneficiaries.
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