When Do Trump Tax Cuts Expire? What to Know for Your Retirement Planning

The Trump tax cuts are expiring in less than two years, but what does that mean for you? How many potential thousands of dollars could be in your pocket instead of the government’s? We’re going to look at a few different scenarios and show you exactly what it means when we talk about the Trump tax cuts expiring. I’m going to show you one scenario in this video where by not being proactive today leads to potentially double the amount of income taxes you pay in the future.

Comparing Current and Future Tax Brackets

First, I just want to show you a comparison between where brackets and rates are today and where they will be in just over 18 months from right now in 2026, starting in 2026. First, we have the tax rates. Tax rates are going up in a couple of years. We see here where they are currently, so 10%, 12%, 22%, 24%, 32%, 35%, 37%. That’s not the big issue. For me, the bigger issue that’s going to impact a lot of people is the brackets are going to be compressed.

I always like to just point out the 24% bracket because it’s one simple way to look at it. Right now, you can have up to $383,000, Mary filing jointly under current law, of taxable income and you’re still in the 24% bracket. Don’t pay attention to this number right here. It’s just one of the case studies. We’re looking at Roth conversions. I’m going to show you in just a minute and do a comparison of what that same tax liability will be in a couple of years.

Then if we come over here to 2026, this is once the Tax Cuts and Jobs Act expires, better known as the Trump tax cuts. We see now, the brackets are 10%, 15%, 25%, 28%, 33%, 35%, 39.6%. If we look at the same tax rate, roughly 24% in the previous example, 25% here. Now, Mary filing jointly, you can only have $197,500 of income. It’s a pretty substantial reduction, basically cut in half. Now, what does that mean?

Many of you may be saying, “Troy, well, I don’t have $197,000 of income. How does this impact me?” This is just one example. If we look again, the 15% bracket, $24,000 to $97,800. Here, the 12% bracket now is $23,200 to $94,000. Instead of paying 12% on these dollars, you’ll be paying 15%. We’re going to look at some of these numbers here. First, I just wanted to provide some context. It’s not that the rates necessarily are increasing. That’s just one component. It’s that the brackets are going to be compressed.

Why Tax Planning Matters: Mitigating Future Tax Risk

Now, for retirement purposes, where this comes into play, and I think it causes potentially the most harm to take money out of your accounts and transfer it directly to the government coffers, is when you get to required minimum distribution age. When you’re in a situation where you’re forced to take money out of your retirement accounts and that percentage that you’re required to take out is increasing every single year, that’s when you can be in a pretty tight spot.

Because as you’re taking more and more out, income that you do not need, it’s forcing you into these higher brackets. That’s when, if you have $1.2 million, $1.5 million, $2 million saved up inside retirement accounts, this does become a substantial problem down the road. The question isn’t, are you going to pay tax? You’re absolutely going to pay tax. That’s just part of the deal. The question is, when do you pay those taxes and how much will you pay?

We’re of the belief that we’d rather get control of when we pay those taxes and how much we pay as opposed to just kicking that can down the road, taking the risk that taxes are a lot higher in the future, but then also being forced to distribute from those retirement accounts when maybe you don’t need that much income, and also in an environment where tax rates could be much higher, brackets could be much smaller, new taxes could be introduced. That’s what we call “tax risk.” It’s just the uncertainty of what the future looks like from a tax perspective.

To summarize, one of the big benefits of actually taking control right now, whether through distributions and spending that money or through Roth conversions in this little over 18 months that we have left before they sunset, the tax cuts, is taking that tax risk off the table. That’s one of the big ones because, again, we don’t know what brackets will be. We don’t know what rates will be. Quite possibly, new taxes could be introduced into the system. That would leave you vulnerable to paying a lot more in taxes than you otherwise would. We know what they are today. We know they’re the lowest in our lifetimes. Why not consider a proactive approach to taxes?

Scenario Analysis: Impact of Roth Conversions

I believe that to be the primary benefit of tax planning, is taking that future tax risk off the table. Let’s look at a secondary benefit, what many of you would consider to be a primary possibly. For those of you who have never watched any of my videos, you probably think the only reason to do tax planning is to save taxes. From an investment advisor, from a planning standpoint, risk is something we’re always trying to remove from the equation because that gives us greater probability of success, more predictable outcomes.

Here, we have 2024, 2026. 65, 66 years old here, no wages, some taxable interest. I’m doing an A and B comparison here. These two are going to be identical, all the numbers. We have some dividends. I should point this out. Total dividends, $28,000. Qualified dividends, $25,000. This is typical for what you’ll see on a tax return. This is a subset of total dividends, but qualified dividends have a set of criteria that must be hit in order to be qualified dividends.

$28,000 of total dividends, $25,000 taxed at what’s known as the qualified dividend tax rate, the preferential rates. Okay, they want to spend $75,000 in retirement. Most of their money, this is about $2 million inside a retirement account, is inside the IRA, so it has to be distributed from there. They also want to do some Roth conversions. This is also the combined Social Security. We have the same situation over here.

Okay, so because of the Roth conversions, we see adjusted gross income of $314,000 in both of these scenarios. Here’s the first big thing that we see. The standard deduction is going back to prior year levels. Right now, it’s about $32,300 in this example because they’re over the age of 65. They get an additional deduction, $19,550. Now, with that said, personal exemptions are coming back with the sunset of the Trump tax cuts.

In addition to personal exemptions, it may be more advantageous for some of you to itemize your deductions. It’s possible you won’t be taking the standard deduction. If you remember, if you’ve ever done any work with taxes and you can remember back, there is a 2% of adjusted gross income limitation for many miscellaneous itemized deductions. Those are all coming back. One thing is for certain is that doing your taxes will become more complicated again.

Now, how big of a deal is that? Maybe. Maybe not. Your CPA is probably going to deal with most of it if you do it yourself. You understand what I’m talking about. Taxes will become more complicated again. First thing, though, we’re just going to assume standard deduction for both scenarios. Two exemptions here brings a taxable income to $281,000, $283,000. Here’s the number. Under today’s rates, you would pay $52,887 in taxes. The same income, the same scenario, $60,795.

Even though it’s a 4% increase in your marginal tax bracket and not even a 3% increase in the effective rate on the total income, it’s an additional, let’s call it $8,000 in taxes. From a percentage basis, this is almost 15% more in dollars. Again, a 4% increase in your marginal rate, meaning the tax rate that you pay on every additional dollar that’s withdrawn from your IRA, meaning if you were to withdraw one more dollar from your retirement account than what we have here, it would be taxed at 28% versus 24%.

Long-Term Tax Implications of Inaction

Okay, so the point there was to show you very clearly that if you do a Roth conversion now, what it will cost you? Then just by waiting two years under those same circumstances, how much more it’s going to cost you. An additional $8,000 out of pocket, all the variables identical there. Now, I want to show you a potential scenario down the road, the difference between, let’s say you do those Roth conversions while rates are a little bit lower now and possibly even into 2026 and beyond, versus if you do not do any of those conversions.

Again, for educational purposes only, but we’re looking at a general scenario. We see if we do some conversions, this is what the blue line represents, your required minimum distributions in the future. The same situation I was talking about earlier, roughly $2 million in the retirement account. A lot of the Roth conversion plans that we put in place, we’re not converting the entire retirement account.

What we’re trying to do is to convert enough to where we create this visibility into the future to where we say, okay, if we convert x amount, this is our projected required distribution in the future. This is our projected spending need. This is our Social Security. Where is that point of equilibrium where the money we’re forced to take out is sufficient to meet our needs? We’re not taking excess income.

All of the green here is if we do no conversions and we just let that tax-deferred account continue to balloon, balloon, balloon. We can clearly see where $150,000, $165,000, $197,000, $200,000, $300,000, so not doing any conversions. This is what I’m talking about. We’re moving it out into the future, the distributions from those accounts. You’re not avoiding the tax. You’re simply kicking the can down the road. This is all the tax risk.

We don’t know what tax rates will be. We don’t know what tax brackets will be. We don’t know if there will be additional taxes introduced that will be levied on this type of income. This could force you into a means testing. We’ve been talking a lot about Social Security means testing. You may not want to spend much more than $60,000 or $70,000. By not taking money from your retirement account, not dealing with the problem, now you’re forced to take all this out. What if there is a means testing for Social Security recipients that says if you have $150,000 or $200,000 of income, you’re considered wealthy and you don’t need half of your Social Security.

I’m making this up as an example, but that’s what means testing ultimately is. Many people, I believe, will fall into something like this inadvertently because they failed to address the tax infestation in their retirement accounts today. They get into a position where they’re forced to take these large RMDs. You add your Social Security on top of that, any other source of income you may have. You could very easily see how, in 10 years or so, you may have income of $200,000, $220,000, $250,000. All of a sudden, you’re wealthy. Now, a certain percentage of your Social Security isn’t yours anymore.

Okay, a little sidetrack there, but that’s important stuff too. We’re showing you now what required minimum distributions could be on that $2 million IRA in the future. Again, this is for educational purposes, but we want to compare that to what happens if we did some Roth conversions, what happens if we don’t do some Roth conversions, and how the impact of the Trump tax cuts going away, how that impacts our tax liability in the future.

Considering Different Income Levels and Impacts

What we’re doing here is we’re simply looking at an estimate of two different income scenarios. Here, if we did some conversions, but we didn’t convert everything, we still have a $70,000 RMD. Social Security is inflated a bit here. We have dividends. Same thing that we looked at just a few minutes ago. Our RMD is a lot less. Whereas over here, our RMD is more because we did not do any conversions in the earlier years.

Total income, $167,000 versus $250,000. Standard deductions like I talked about in both of these scenarios where these are both in the future, all right? This is not Trump tax cuts versus once they expire. Both of these scenarios are in the future. Just this one is we did Roth conversions earlier in retirement or prior to retirement. This one, we did not. Okay, here’s your total tax liability, $20,800 versus $41,000. More than 100% increase in out-of-pocket taxes paid.

Again, this doesn’t assume that taxes could be much higher than what they’re projected to be once the tax cuts expire in a couple of years. This is just based on what we know now. Again, I can’t stress this enough. This is for educational purposes because your situation is different. Your neighbor’s situation is different. Your friends, your coworkers, everyone you know. There’s a lot of assumptions that go into this, but we can look at various analyses to help create the most information to be available at your fingertips as possible.

The goal is to simply make better decisions. Of course, we want to stay connected to this because the inputs change, the laws change. We gain more information as time progresses. That’s what’s really important about having a relationship with someone who can help you do this. Very clearly see, this is more than double the out-of-pocket taxes paid. Even though the effective rate’s only 3%, 4% more, the marginal rate is the same, but that’s a whole lot more money in taxes.

Right now, I want to look at– okay, so say I don’t do any Roth conversions and I don’t have that much money. Is the Trump tax cuts expiring? Is that still going to impact me? What I have here is about $10,000 of taxable interest. We have some IRA distributions of $20,000. Again, 2024, 2026. Social Security still of $60,000. Not nearly as much income, no Roth conversions, no dividends. We have total income of $49,600.

How do we get to $49,600 of total income when Social Security by itself is $60,000 in this example? Well, Social Security receives preferential tax treatment. Here, we have $10,000 of interest, $20,000 of IRA distributions, but only $19,600 of Social Security is taxable. $20,000, $30,000, $19,600 brings us to $49,600. Now, keep in mind that the more we take out of our IRA or if we had other incomes such as dividends or capital gains, it phases in more and more of your Social Security to taxation.

As we had other income sources, whether it’s from a pension or wherever, more of this Social Security would become taxable. You get to a certain point where 85% of the Social Security is taxable just like we looked at in the previous example. $49,600 is the total income here. Take the standard deduction. Compare the two different scenarios. Brings us to our taxable income because we also get the exemption when Trump tax cuts expire.

Look, total tax is $1,730 versus $1,955. Not a huge difference here. In the lower income ranges, there’s obviously some savings here. The more income that you have, the more dividends, the more IRA distributions, the wider that gap is going to become. If you’re in one of two scenarios, one, you don’t have a ton of income and you don’t plan on having a ton of income, it may not be that big of a deal for you.

Making Proactive Tax Decisions for Retirement

This is why I say a lot of the times that when we do this analysis, people usually come see us. They have $1 million, $1.5 million, $2 million, some number like that inside their retirement accounts. About 85% of the time, it makes sense to be proactive with IRA distributions or Roth conversions. That other 15%, it’s when we work with someone that has $500,000 or $700,000 or maybe those particular people with a bit more money, but they have large spending needs.

We don’t have to do as big of Roth conversions. I just want to make sure that you understand that, yes, the Trump tax cuts are expiring. Depending on your personal circumstance, there’s a varying degree of impact that it will have on your retirement in going through and understanding these different scenarios, how they pertain to you. That’s how you can make better decisions about your personal finances.

The second scenario where the expiration of the Trump tax cuts wanted to impact you, and this may be your taxable income situation, is if you’re willingly deferring your IRA into the future, meaning you’re not taking money out now. You’re not doing Roth conversions. You’re choosing to let that account grow, grow, grow, grow, and you’re just going to deal with the problem later. You very well could pay very minimal taxes by withdrawing from your non-qualified accounts, your savings, investment accounts, and deferring those IRAs, turning Social Security on, receiving the preferential treatment. The question is, how much will you be paying later?

Okay, big picture here to summarize. You can take more money out of your retirement account, whether through distributions or Roth conversions, than any time in your life and pay the least amount of tax. Should you do it? Talk to your CPA. Do an analysis. Find a trusted professional. One of the big benefits, I believe, of taking advantage of this opportunity is the removal of certain tax risks off the table or mitigating future tax risks by making those proactive decisions today.

Again, we don’t know what rates will be in the future. We don’t know what brackets will be. We don’t know what new legislation may be introduced, which brings along with it additional taxes. If you’ve accumulated a significant amount or a decent amount, whatever that number is, $400,000, $800,000, $1.5 million, $2 million, take this opportunity to make a positive impact on your retirement.

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