What You Can Do Before Trump Tax Cuts Expire

The TCJA lowered tax rates for different income levels and adjusted income thresholds for different tax brackets.

Individual Tax Rates, Standard Deduction, and Child Tax Credit

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There used to be seven tax brackets with rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The TCJA changed these rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, which generally led to lower taxes for most people. 

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The standard deduction was nearly doubled under the TCJA. It increased from $13,000 to $24,000 for joint filers and $6,500 to $12,000 for individuals.  The TCJA also changed how the Alternative Minimum Tax (AMT) is calculated, so it applied to only high-income individuals.  

It now only affects fewer people due to more significant exemption amounts ($81,300 for individuals and $126,500 for couples). However, after the TCJA expires, more people might have to pay it again because the exemption amounts and income phase-out thresholds will decrease. 

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The TCJA doubled the child tax credit from $1,000 to $2,000 per child. Currently, you can get this credit for each child under 17, and it starts to phase out if you make more than $200,000 as an individual or $400,000 as a couple.  After the TCJA expires, the child tax credit will decrease to $1,000 per qualifying child, and it will start to phase out if you make more than $75,000 as an individual or $110,000 as a couple. 

When the TCJA expires, the tax brackets will go back to what they were before, which means some people likely will pay more in taxes. The top tax bracket will increase from the current 37% to 39.6%. 

Traditional IRAs require minimum distributions (RMDs) commencing at age 73 and are taxable as ordinary income. On the other hand, Roth IRAs do not impose RMDs, and all future growth and distributions remain exempt from taxation. 

Traditional And Roth IRA

One of the benefits of early retirement is that taxpayers have several years between their retirement date and RMD age to convert their IRAs to Roth IRAs in a lower tax bracket.  If you are not planning for early retirement and your income is expected to continue to increase over the next couple of years, by converting your traditional IRA to a Roth IRA before 2026, you would assume the upfront income tax liability (potentially at a lower tax rate), rather than facing it at the time of distribution.  

The SECURE Act eliminated the Stretch IRA provisions. For individuals who are subject to the 10-year rule on inherited IRAs, it is advisable to contemplate the possibility of opting for more substantial distributions before the expiration of the TCJA, especially if there is concern regarding the potential rise in tax rates during the later stages of the mandatory 10-year window for complete distribution of the account.