Effective tax planning means thinking about how tax rates might change.
This year is no exception. In fact, the clock is ticking on provisions of the Tax Cuts and Jobs Act (TCJA), which became law late in 2017. Pieces of this legislation, the largest overhaul of the tax code in decades, are scheduled to sunset in 2025 — just two years from now.
Tax policy is subject to change due to shifting political winds. A policy proposal can spark lengthy debate. The forces of inertia and resistance often prevail. Action often stalls amid partisan gridlock — when the two parties control different branches of government — which tends to be more common than unified, one-party control. The TCJA could expire simply because the parties fail to reach an agreement on how to extend it.
As such, it seems reasonable to at least plan for the possibility that taxes will be higher in the future.
Impact of the expiring TCJA
The TCJA lowered the tax rates for most income levels. With the built-in sunsetting of the TCJA, the lower tax brackets would expire at the end of 2025 and be replaced with the tax brackets that were in place prior to the TCJA.
Here is a comparison of how tax rates would differ upon the expiration of the TCJA.
Married couples filing a joint return:
Single filers:
*Sources: Internal Revenue Service and Putnam Research. Projected tax rates are estimated and based on an analysis of 2017 tax rates prior to the passage of the TCJA, with tax bracket figures adjusted to account for annual inflation adjustments through 2023. Figures in red indicate an increase in tax rate upon TCJA expiration. Figures in green indicate where tax rates at certain income levels would decrease upon the expiration of the TCJA.
Plan ahead
There are many strategies taxpayers may employ to try to mitigate the impact of higher tax rates in the future. For example, individuals may want to consider diversifying their wealth by the tax status of their assets in retirement.
Tax diversification is a way to strategically plan for taxes in retirement. Creating tax diversification may involve strategies such as converting a traditional IRA to a Roth IRA or utilizing municipal bond funds to generate tax-free income.
Holding assets in accounts that are taxed differently (i.e., taxable, tax-deferred, tax-free) may give savers greater flexibility in managing their tax bill based on their individual circumstances.
More change ahead
The 2024 election will likely impact how the expiration of the TCJA plays out. However, even if one party gains unified control of lawmaking, there is no guarantee that the provisions of the TCJA will simply be extended. The makeup of Congress changes over time, and so do priorities. Leadership may find the price tag of extending current tax cuts too high. The Congressional Budget Office recently forecast the cost of extending individual income tax provisions of the TCJA at over $3 trillion over the next 10 years.
It's wise to be prepared with a tax strategy that does not depend on current tax rates continuing to be the same long into the future.
BY USING THIS SITE, YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING DISCLAIMER AND TERMS AND CONDITIONS:
The third-party information accessible through this site was prepared by and is the sole responsibility of, independent providers who are not affiliated with Putnam. Putnam has not reviewed the information and does not warrant that the information is accurate, complete, or timely.
You further acknowledge and agree that (1) any security mentioned by a third party reflects the independent opinion of the third party, (2) any such third-party data or opinion is provided for your information only, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation by Putnam, (3) any information you receive may not be considered legal, tax, or investment advice provided by Putnam, and (4) Putnam is not liable for any loss or damages resulting from your use of this information.
By clicking on links to third-party sites, or using social media sharing tools, you will leave this Putnam Retail Management hosted property. Putnam Investments is not responsible for the content or services offered on linked websites. Use linked websites at your own risk. Carefully review the site's terms of service and privacy rules as they apply to you. Opinions or recommendations on any linked websites are those of independent providers and do not imply a recommendation from Putnam Investments, which is not responsible for inaccuracies or errors.
For informational purposes only. Not an investment recommendation.
Shares of mutual funds are not deposits of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested.
The mutual funds, investment products, and services listed on this site generally are not available for sale outside of the United States. The information presented is neither a solicitation nor an offer to sell these products to investors who are not U.S. persons.
Privacy, Security, Terms of Use
Putnam funds may, at times, invest in the Putnam Cash Collateral Pool, LLC. View more information about this fund.
Investment Advisory Services
Your financial representative can help you decide which investments suit your goals. Putnam offers mutual funds, separately managed accounts, and model portfolios. Key funds include Putnam Large Cap Value Fund and Putnam Large Cap Growth Fund, as well as Putnam Income Fund. Municipal bond funds that seek tax-free income include Putnam Tax Exempt Income Fund. Check out our Site Map to learn more.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus or a summary prospectus if available, containing this and other information for any Putnam fund or product, contact your financial representative, call Putnam at 1-888-4-PUTNAM (1-888-478-8626), or click on the prospectus section to view or download a prospectus. Please read the prospectus carefully before investing.
© 2023 Putnam Retail Management, a member of FINRA and SIPC
A message from Advisor Perspectives and VettaFi: Just as artificial intelligence (AI) is helping advisors create videos, write blogs, construct portfolios and coach clients, companies throughout the world are using it to deliver more value to their clients. Learn about the future of AI and the investment opportunities it is creating at our next symposium, on August 30 at 11 am ET. Click here to register.
© Putnam
Read more commentaries by Putnam
