Big Changes?

A dramatic set of proposals could reshape the tax landscape and incur significant costs for the unprepared.

No matter who wins the next election, we anticipate significant changes to our tax system. Both leading presidential candidates have expressed strong opinions regarding the U.S. tax code. In this article, we’ll take a closer look at the current administration’s policy proposals.

The President’s Budget Cuts Taxes for Working Families and Makes Big Corporations and the Wealthy Pay Their Fair Share was published on the White House website this spring. While the title may be cumbersome, the policies it outlines are straightforward about potential changes for families and small businesses.

Among the policies proposed are tax hikes for higher earners (raising the top bracket back to 39.6%), limits on the tax benefits of 1031 property exchanges, and increases in the capital gains tax rate to 39.6% for households with over a million dollars of income.

While any big changes to your investing approach or financial strategy should be discussed in detail with a trusted advisor, here are a few strategies you may want to consider before these proposals have a chance to become law:

Give with a warm hand. If you are considering gifting to your kids or grandchildren, do so sooner rather than later. The lifetime gift tax exemption will be halved on 1/1/2026 barring an extension of the Tax Cuts and Jobs Act’s provisions.

Accelerate income by converting pre-tax assets to Roth assets. Roth conversions are taxed at ordinary income rates, so consider Roth conversions in 2024 and 2025. Once assets are inside Roth accounts, they are protected from any tax in the future. And, while Roth IRAs have an income limit, you may still contribute to the Roth feature of your 401(k) no matter your income.

Have a plan for the potential increase in the capital gain tax rate. If you plan to sell the family business in the next couple of years, you may want to accelerate your timeline to stay ahead of any unfavorable changes to the capital gains rate.

If you’re planning to sell a property, beware of potential challenges to 1031 exchanges. Recently, 1031s have come under more scrutiny. This code section allows tax deferral of gains on real estate sales if the proceeds are reinvested into another piece of real estate. If you plan on selling a piece of property in the future, it may be best to accelerate your timeline to take advantage of the current rules.

While there are no sure things in politics and there’s no way to know what will happen this fall or beyond, it’s important to know which way the prevailing tax winds are blowing.