Be prepared for when Trump’s tax cuts expire next year, and taxes for most Americans will increase (Episode #293)

0:30 Well, good afternoon, Michiganers. It is Tuesday, January sixteenth, twenty twenty four, and of course this is Tuesday with Tom, Michigan's only weekly podcast where we answer your questions about estate planning and a state settlement in Michigan, and we don't send you a bill. I'm your host, Tom Doyle, a state planning attorney, lifelong Michigan resident, and an ambassador for all things good in this great state of Michigan. Welcome, welcome, welcome to today's program. Just a brief note, happy to report I think I mentioned it perhaps in the last episode. We now have a new website for Tuesday with Tom, So check out the new website let us know what you think.

1:19 One of the things that you can do with the new website there's a little microphone on the website. So if you're listening to an episode and you've got some question or some thoughts on that episode, or perhaps what else you would like to have me cover in the future, just click on that microphone. You'll be able to send me a recorded message. Speaking of last week's episode, it was a twenty twenty four law update. I talked about many of the legal changes that were coming about in this year. So if you've got questions about changes in twenty twenty four law, perhaps it had to do with taxes or the pro code or anything else along those lines, then I invite you to listen to last week's episode, but kind of continuing along if you will, the same theme today's show is to be prepared for when Trump's tax cuts expire next year and taxes for most Americans will increase. But please remember what I'm about to discuss is, as always for educational purposes only.

2:30 It is not intended to be legal advice. You need to work with your attorney and your tax advisor and financial advisor to determine what is appropriate for you and your estate. Be prepared for when Trump's tax cuts expire next year and taxes for most Americans will increase. If you look at during Donald Trump's time as president, he passed and signed or he signed what had been passed as he Tax Cuts and Jobs Act, and that was in twenty seventeen. And as a result of that law, there were a number of things that happened to reduce your potential tax burden, including individual income tax bracket. There was a restructure of individual income tax brackets. The highest rate prior to that was thirty nine point six percent. It dropped down to thirty seven percent. Also, the earnings that were subject to the tax rate were also changed, so a single person had who now had earnings, they could have over five hundred

4:04 thousand dollars, where before it was four hundred and twenty seven thousand dollars. That number is actually six hundred nine thousand, three hundred and fifty dollars in twenty twenty four. Before you will be subject to that highest rate of income tax. Married people prior to the twenty seventeen tax at the amount that you could have when the tax rate started kicking in, the highest rate was four hundred and eighty thousand dollars. That number went up to six hundred thousand dollars and because of an inflation factor, it is now seven hundred and thirty one thousand, two hundred dollars in twenty twenty four. So for those of you at the highest earnings rate, significant tax savings because the rate dropped from thirty nine point six percent to thirty seven and the aunt mount of income that you could have before it was subject to that highest rate also went up. Other tax brackets a thirty five percent state at thirty five percent, thirty three percent dropped to thirty two, twenty eight dropped to twenty four, twenty five dropped to twenty two, fifteen dropped to twelve, So across the board there was a general reduction in the tax rate, and then the folks in the ten percent bracket stayed the same, So significant income tax savings for individuals as a

5:36 result of passing that statue. The problem. The problem is that those reductions in the income tax brackets and the amount of income that you can have before it's going to be subject to the highest tax bracket will expire at the end of twenty twenty five. So at the end of twenty twenty five, we're going to go back to the highest rate of being thirty nine point six percent. We're going to go back to lower amounts that you can have before it's going to be subject to that income And across the board, the thirty three percent will return, the twenty eight percent returns, the twenty five percent returns, etc et cetera. That is all assuming that Congress does not enact any new legislation in the meantime extending those cuts. Well If you look at what Congress has been up to lately, they can't seem to agree upon anything other than continuing to kick the can down the road when it comes to getting putting together a budget for the country. I'm one of those people that is pessimistic about the possibility that Congress might do anything that would positively impact those changes.

6:56 So now you need to start planning. You need to look and say, Okay, if the tax rate's going to expire, change go up and more, if my income is going to be subject to tax at the end, what can I do Now? Now's the time meet with your tax advisor to see what you might be able to do, essentially to take advantage of the lower tax rates that are set to go up in twenty twenty five possibility, and again these are things to talk to your tax advisor about. Maybe you'll consider a wroth conversion wroth IRA conversion. Take a traditional ira, convert it to a wroth. Now, when you do that, you're going to pay tax on the money, but by converting it at a lower tax rate, you might be saving yourself to tax in the long run. But if you're going to do it too, think about this. You've got two years, so you can spread the conversion over two years so you're not stuck with taking it all in one year. Another consideration, perhaps you're going to defer deductible expenses, and we're going to talk about what's going to happen with the standard deduction, but you might start looking at what expenses you've got. Maybe you can defer some of those expenses until the change in the tax law. Another possibility, maybe you confront load some of your withdrawals from your pre tax accounts,

8:28 so you got two years you know you're going to be taking the money out of your pre tax accounts. Maybe a traditional iray for one K. Whatever happens to be taking the proceeds out now at a lower tax bracket might be a strategy that your tax advisor and your financial advisor would recommend you consider. Deductible expenses. The other change another change, not the An other change that occurred as a result of that act was there was a change in the standard deduction amount. Standard deduction amount was raised from sixty five hundred to twelve thousand dollars for a single person. Standard deduction route was raised from thirteen thousand to twenty four thousand dollars for married couple. What did that do for many people? They no longer itemized deductions because we had the standard deduction that had been gone up to twelve thousand dollars for a single person. So if you didn't have itemized deductions that would account for more than twelve thousand, you were better off taking the increased deduction. Married people, if you didn't have deductions that exceeded twenty four thousand, you were better off taking that standard deduction.

9:50 Well, at the end of twenty twenty five, when these tax standard deductions increased, they are now going to go back to what they want were in twenty twenty seventeen before they went up, which is essentially cutting the standard deduction in half. Well, if you look at what you've been doing with the standard deduction, if you've been taking it, but if it goes to half of what it is now, maybe you will have deductions that will exceed that amount, and so you need to revaluate and look at with your tax advisor what impact it might have on you when the standard deduction is decreased by half at the end of twenty twenty five. So those are kind of on the income tax end of things changes. Now, as I talked about in the last week episode two, we also have to look at the federal estate tax exemption. So let me just review that one more time with you. The federal state tax exemption is the amount that you can have in your state before the federal government is going to collect and estate tax at the time of your death. That exemption amount currently in twenty twenty four is for a single person thirteen million, six hundred and ten thousand dollars, Meaning what if you die

11:20 this year and you are single, and your state when you add it all up, does not exceed thirteen thousand, six hundred and ten dollars, you don't owe a federal state tax if you have an estate that is over that. It's going to be a graduated scale that tops out at forty percent. Married people twenty twenty four, you can have an estate worth twenty seven, two hundred and twenty dollars. That's the federal estate tax exemption amount essentially for the married people. Twice is what the single amount is. And again, if you die this year and your spouse dies this year and your state not exceed that amount, you won't have a federal state tax du twenty twenty six.

12:05 So this is when the twenty seventeen law expires. That single thirteen million, six hundred and ten thousand dollars is now going to drop by half over half to five million. Married people, it's going to drop by over half to ten million dollars. Now those numbers will be adjusted for caught for an inflation factor. We're not really sure what it's going to be, but guestimates are that five million might be more in the range of six million or so, that ten million might be more in the range of twelve million. But if you're counting on a federal estate tax exemption of twenty seven million and now you only have twelve, or you're counting on a federal state tax exemption of thirteen million and now you only have six, you have some significant planning that you need to take it look at. And that planning is very much going to revolve around how can you what are the options available to you? Perhaps to start looking at shrinking the size of the estate. You might start using gifts more than you're using before, or if you hadn't been using gift strategies, to use gifts as a way to shrink the size of the estate.

13:24 You might look at five twenty nine plans as a way to shrink the size of the estate. And I've had previous episodes on the program where I talk about the advantage of using a five to twenty nine plan is that you can frontload it with five years worth of gifts, so you can take what otherwise was let's say a six million dollar exemption in twenty twenty six, front load that with five. Well, if you look at a single person, now's got thirteen million, you can frontload a lot of five twenty nine plans and look at potential federal state text safe. Now, the good news we have this concept of portability with spouses. That's how we generally say spouses have that twenty seven million, two hundred and twenty thousand, because we can essentially add both spouses federal state tax assumption together, and we're still going to have portability for spouses in twenty twenty six. But now is a time to start looking at planning. Maybe you're going to look with your financial advisor and tax advisor and conclude that, hey, my estate, our estate is such that we can't reduce it. We don't really have options available to us to reduce that estate below what it looks like the exemption amount is going to be in twenty twenty six. So today, another thing to start looking at today is a question of maybe now, and I've talked about this in previous episodes, maybe

14:54 now's the time to visit an islet and irrevocable life life insurance trust and intervocable life insurance trust isn't a tax savings it's a way to purchase life insurance, so where the proceeds of the life insurance will be used to pay any federal state tax that you have. So you buy a life insurance policy and when you die, those proceeds are used to pay off the federal state tax that otherwise you weren't able to shrink your estate enough to do that. Well, an islet, it's an irrevocable life insurance trust. It buys the insurance policy. And so if you're going to look at possibly buying insurance to provide the liquidity, maybe you're farmer who doesn't have the liquidity to pay a federal state tax, or a small business owner who doesn't have the liquidity to pay a tax. You don't want to have to sell the farm in order to pay the tax. You don't want to have to sell the business in order to pay the tax. You might using life life insurance inside of an islet to do that, But now is the time to start looking at that, because if you're looking at life insurance, as we all know, you might have some health issues that arise between now and the end of twenty twenty six that might preclude you or make it prohibitively expensive to purchase the life insurance. So now's the time to start looking at those options going forward. If you're going

16:26 to look at life insurance as a way to provide liquidity. The federal gift tax exclusion, as I talked about in last week program, that's how much can you give anyone in any one year before you have to worry about gift tax on it. In twenty twenty four, that amount is eighteen thousand dollars. It's expected that that's going to go up to nineteen thousand dollars next year. But kind of a strategy that is oftentimes being used is can you make gifts keeping them below that eighteen thousand or nineteen thousand, so that you can shrink the size of your estate that would now be subject to federal estate taxes.

17:08 And the good news, and I talked about this in previous episodes, is let's say a single person today gave away thirteen million, six hundred and ten thousand dollars that's the amount of the federal estate tax exemption, and then they die. They would not have any exemption left because they used it all up by deferring paying gift taxes on that thirteen million, six hundred and ten thousand. The good news is, according to the IRS, if you take advantage of that federal estate tax exemption. Now, let's say you gave away thirteen thousand, six hundred and ten dollars, but now you die in twenty twenty six, when the exemption amount is only five million, because you took advantage of the thirteen million, six hundred and ten thousand, that is still going to be good for you. It's not like when taxes are going to be calculated, they'll be working from that five million dollar number. So there can be advantages potentially in making what otherwise would be taxable gifts and using up some of that federal state tax exemption between now and the end of twenty twenty six. Now, one thing, one thing that the statute, the Tax Cuts and Jobs Act did do, which is quote unquote permanent. If you think about anything that Congress is doing is permanent. Is before that the maximum

18:42 corporate tax rate was topped out at thirty five percent. That change to a flat twenty one percent tax rate, So for corporations there was a big change a tax savings, and the good news for corporations is that that continues on past twenty twenty five. So really talking about the impact that all of this is going to have on your individual taxes and your estate, not talking about your corporate tax rate. So again you need to start thinking about it and looking at it and planning for it, because if you wait until the end of twenty twenty six, it might be too late if you needed to take advantage of let's again say doing a roth Ira conversion over a couple of years, or defront loading withdrawals from your pre tax accounts over a couple of years, which is why you need to start looking at that with your tax advisors now rather than later. Of course, even though Amanda and I are not

20:15 tax advisors, we can certainly look at how that impacts your estate, what a state options you have, Maybe you need that islet created for you. That's certainly something that we can do. Maybe you need some adjustments to your state plan, distributions, et cetera. Those are certainly things that we can work on with. So we would love to have the opportunity to help you. Whether it's amending a plan that you already have, putting a plan in place that will protect your loved ones by having an appropriate state planning in place, or perhaps you need assistance in settling your state. All of those things are certainly things that we can help you out with. Simply go to DOYLEAWPC dot com. Go to our website. There you're going to find information on how you can schedule a consultation with it with us. It might be a zoom or telephone conference, it might be an in person consultation at the East Lansing office. All of that information is available at Doyle LAWPC dot com.

21:15 Also, just a simpler reminder, if all you're looking for is a new document, maybe all you need is a new durable power of attorney. You can simply go to the legal store, which you're going to find at Doyle LAWPC dot com. Click on the link there and you will see information on how you can actually order individual documents from us that we'll be able to be prepared and sent to you for execution. Well, that's going to be it for today's show. As always, though, if you have a comment about the program or a topic that you'd like to have me discuss, perhaps questions that you'd like to have answered, send me an email Tom at Tuesday with Tom dot com or by using the new website, whether you're doing it on a computer or doing it on your smartphone, simply click on that microphone button and leave us the voicemail on a topic that you would like to have us discuss or comments about the program. Also encourage you to follow us on Facebook that would be Tuesday with Tom dot com, follow the office at Doyle LAWPC, and of course we would request and encourage you to invite your friends and family to follow us as well. Remember to program is available on Apple Podcasts,

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23:27 Well, thanks again for spending some of your time with us to do and as always, I hope that you have an awesome day and an awesome week. Stay warm and stay safe. Tuesday with Tom has been brought to you by the estate planning attorneys at Doyle Law PC. To learn how we can help you with your estate plan or with settling a loved one's estate, please call us today at five one seven two three seven three six six. That's five one seven three two three seven three six six