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 3. tax planning

Features


WHAT YOU CAN DO NOW TO AVOID PAYING HIGHER TAXES IN 2026

Tax rates are set to increase once the Tax Cuts and Jobs Act sunsets at the end
of 2025, but steps you take now could put you in a better financial position.

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(Image credit: Getty Images)

By Joe F. Schmitz Jr., CFP®, ChFC®
published December 11, 2023

The Tax Cuts and Jobs Act of 2017 resulted in lower tax rates for Americans. The
act is scheduled to expire at the end of 2025 — and when it does, tax rates will
revert to 2017 levels unless Congress takes action before then.



The TCJA's sunset means the majority of Americans will see an increase in how
much they owe in taxes. Take a look at how income tax brackets and rates
compared in 2017 and 2023:



(Image credit: Joe F. Schmitz Jr.)

As you can see, if you are in the 12% bracket in 2023, you would fall into the
15% bracket with the same income once the TCJA expires. If you’re currently in
the 22% bracket, you will move to the 25% bracket in 2026. And if you fall in
the 24% bracket in 2023, you could jump to the 28% bracket when rates increase.


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Many Americans also benefited from an increase in the standard deduction amount,
which doubled following the TCJA. Here’s how standard deductions and personal
exemptions changed from 2017 to 2023:



(Image credit: Joe F. Schmitz Jr.)

The higher tax rates and expanded tax brackets plus a lower standard deduction
mean many Americans could end up paying about 20% more in taxes when the TCJA
expires. Here’s a breakdown of a real-life example of how much more one couple
might end up paying in 2026 vs 2023:





(Image credit: Joe F. Schmitz Jr.)

I like to think of our current low-tax-rate environment as a “tax sale.” Just as
we would stock up on items at the grocery store during a big sale, most of us
would benefit from paying taxes now, rather than waiting until rates go up. If
we don’t do it now, we may be forced to pay higher rates on distributions from
tax-deferred investments like 401(k)s and IRAs in retirement.



We can take advantage of lower rates by implementing proactive tax planning
strategies and be what I call “tax smart.” One way to do this is through a Roth
IRA conversion, where money from tax-deferred accounts is moved to a Roth IRA
account. You will pay taxes on the amount converted now, but you won’t pay taxes
on withdrawals made later. This strategy could result in more money to live on
in retirement.

At our firm, we’ve used this strategy with many of our clients, who often ask
us, “Why didn’t my previous financial planner suggest a Roth IRA conversion
earlier?” My answer is that many financial planners don’t specialize in tax
planning. Instead, most focus only on investment management and not the other
four pillars of a complete financial plan: taxes, estate planning, health care
and income. I encourage you to find a team of financial planners who specialize
in all five pillars to ensure you are getting the financial plan you deserve.

Interested in more information on the TCJA expiration or other tax planning
strategies? Read my book, I Hate Taxes: Lower Your Taxes, Own Your Retirement,
to learn more.

The appearances in Kiplinger were obtained through a public relations program.
The columnist received assistance from a public relations firm in preparing this
piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.


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DISCLAIMER

This article was written by and presents the views of our contributing adviser,
not the Kiplinger editorial staff. You can check adviser records with the SEC or
with FINRA.



Joe F. Schmitz Jr., CFP®, ChFC®
Social Links Navigation
Founder and CEO, Peak Retirement Planning

As Founder and CEO of Peak Retirement Planning, Inc., Joe Schmitz Jr. has built
a comprehensive retirement planning company focused on helping clients grow and
preserve their wealth. Under Joe’s leadership, a team of experienced financial
advisers use tax-efficient strategies, investment management, income planning
and proactive health care planning to help clients feel confident in their
financial future — and the legacy they leave behind. Joe has also written
a book, titled I HATE TAXES. You can find Joe on YouTube, where he creates
educational videos for those in or near retirement. If you would like to talk to
Joe’s team, you can schedule a meeting.






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