Planning and Investing for Tax Reform 

With the 2024 election around the corner, one area of policy differentiation garnering a lot of attention is tax policy. The Tax Cuts and Jobs Act (TCJA), passed in 2017, has many provisions set to expire at the end of 2025 and revert back to the law in place prior to 2018, making tax policy a likely priority for whomever becomes the next president. Tax policy is one that depends on the makeup of Congress and so what gets talked about on the campaign trail can look quite different when it becomes law. Nevertheless, it is important to be aware of how these potential changes could affect your estate and investment planning.

Planning for Potential Tax Law Changes

While President Trump’s focus would be to extend and/or make some changes to elements of the TCJA that are expiring at the end of 2025, Harris’ tax plan proposal is more progressive. Depending on the outcome of the election, not only who wins the White House, but also the makeup of Congress, these potential changes could impact your wealth. Let’s look at key areas of the candidates’ tax policy platforms.

While Harris has pledged no income tax increases for individuals earning less than $400,000, those who earn above that amount could see their marginal tax rate increase to 39.6%. Meanwhile, capital gains and dividend tax rates could increase from a maximum of 23.8% to a maximum of 40.8% to 43.4% for taxpayers with income above $1 million.

It Is Never Too Early to Plan

Although we don’t know what the ultimate tax policy changes will be, there are a few early action items you can consider from an investment and planning perspective ahead of potential tax law changes.

Uncover the Power of Tax-Managed Investing: In terms of investment portfolios, the importance of tax-managed investing, which focuses on helping to maximize after-tax returns, only increases in a higher tax environment. Tax-managed investing strategies incorporate tax-loss harvesting, which allows you to sell investments that are down, replace them with a similar investment, and use that loss to offset a realized gain, thereby lowering your tax bill. But rather than execute this strategy at year end, as many do, our tax-managed investing strategies looks for opportunities to harvest losses in a systematic way year-round. Whether executed through our index-replication Tax-Managed Equity strategy or our actively managed Tax-Managed Fixed Income strategy, these approaches have a record of enhancing after-tax returns for clients,¹ allowing them to keep more of what they earn.

Take Advantage of Municipal Bonds: Municipal bonds offer taxable investors the advantage of tax-free income. But with the potential for the individual tax rate for high income earnings moving higher, municipal bonds could become more attractive as their tax-equivalent yields increase as tax rates rise. For example, a municipal bond with a yield of 5% equates to a tax-equivalent yield of 8.5% under today’s highest tax bracket of 37% plus the net investment income surtax of 3.8%. It amounts to 40.8%. But if the top bracket were to increase to 39.6% as it could under a Harris administration, a 5% yield becomes equivalent to an 8.8% yield on taxable bonds.

Consider a Roth Conversion: With individual taxes potentially moving higher, those with a traditional IRA may want to consider converting to a Roth IRA, thereby paying income taxes on the conversion at a lower rate than would be the case if the conversion is done after 2025. Funds in a Roth IRA continue growing tax free. Roth IRAs generally have no required minimum distributions and withdrawals are tax exempt once the owner reaches age 59½ and the account is at least five years old.

Consider Gifting to Lower the Value of Your Taxable Estate: Leverage the current $13.61 million ($27.22 million for married couples) federal estate, gift and generation-skipping transfer tax (GSTT) exemption before it sunsets in 2026, or is reduced by legislation, to transfer wealth and potentially mitigate some of the estate and/or gift tax burden. For married couples, consider using one spouse’s full exemption instead of using a portion of each spouse’s exemption by electing to “split” the gift. If the exemption is reduced, the other spouse will have their reduced exemption intact.

Let Us Help

Although we don’t know what the ultimate tax policy changes will be, the expiring provisions of the TCJA will likely make tax reform a priority when a new Congress starts. At BNY Wealth, we believe the key to creating and sustaining wealth is our Active Wealth approach across five key strategies: investing to maximize compounding, borrowing strategically, spending dynamically, protecting legacy and managing taxes. Being able to plan now and prepare for the possibility of tax law changes can make a difference. We are here to help you consider the right changes to your wealth plan based on your situation and long-term goals.