Personal Finance

Here are key lessons from Trump’s 2017 tax cuts amid uncertainty

Published

4 hours ago

December 14, 2024

President Donald J. Trump signs the Tax Cut and Reform Bill in the Oval Office at The White House in Washington, DC on December 22, 2017.

Brendan Smialowski | AFP via Getty Images

There’s tax uncertainty heading into 2025 as Congress prepares to negotiate President-elect Donald Trump‘s economic agenda.

But there could be lessons for investors from his signature tax overhaul in 2017, financial experts say.

During his campaign, Trump vowed to fully extend the trillions in tax breaks he enacted via the Tax Cuts and Jobs Act, or TCJA, in 2017, which brought sweeping changes for individuals and businesses.

He also called for new policies, like no tax on tips, ending taxes on Social Security benefits for older adults and eliminating the $10,000 cap on the deduction for state and local taxes, known as SALT, among others.

While Republicans largely back Trump’s agenda, no one knows which proposals will prevail, particularly amid concerns over the federal budget deficit. That makes planning for tax changes more challenging.

Still, there are things to learn from Trump’s 2017 tax package, experts say.

Last-minute tax strategies

Without action from Congress, trillions of tax breaks enacted via the TCJA will expire after 2025, including lower tax brackets, bigger standard deductions, a more generous child tax credit and a higher estate and gift tax exemption, among other provisions.

But after securing the trifecta — control of the White House, Senate and House of Representatives — Republican lawmakers plan to address these expirations through a process known as “reconciliation,” which bypasses the filibuster.

Republicans used the same strategy to enact the TCJA in late December 2017.

Before the law’s effective date on Jan. 1, 2018, some investors used last-minute strategies, like “accelerating itemized deductions,” by prepaying property taxes and state income taxes, according to certified public accountant Duncan Campbell, who leads Baker Tilly’s private wealth practice.

The move was popular among top earners in high-tax states, like California, New Jersey and New York. Those individuals would soon be limited to $10,000 federal deduction for SALT, which includes property and state income taxes.

‘Be ready and positioned’ for changes

With several pending tax law provisions, many advisors urge clients to avoid irreversible tax plan changes until final legislation is signed into law.

“My preference is always to go with what we know will be true versus what could be true in the future,” said Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik.

My preference is always to go with what we know will be true versus what could be true in the future.

Ryan Losi

Executive vice president of Piascik

Over the past year, Losi urged clients above the estate and gift tax exemption to meet with an attorney to discuss plans to reduce taxable estates if Congress doesn’t extend the higher limits after 2025.

In 2025, the basic exclusion amount will rise to $13.99 million per person, which applies to tax-free wealth transfers during life and at death. If it expires, the exclusion will revert to 2017 levels, adjusted for inflation.

“You want to be ready and positioned” to finalize estate planning documents if Congress doesn’t extend the bigger exemptions, he said.

While extending the higher estate tax exemption could be more likely under a Republican-controlled Congress, there were several 11th-hour changes back in 2017.

“There could be another Trump Christmas present that no one expected,” Losi said.

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Expect ‘uncertainty’ if legislation passes

Enacted late in December 2017, the TCJA left advisors with little time to analyze changes before Jan. 1, 2018, said Campbell with Baker Tilly.

Plus, “there was a little bit of an uncertainty at that point,” about several newly enacted provisions, he said.

For example, there was confusion about the multi-step calculation for the so-called qualified business income deduction, worth up to 20% of eligible revenue for pass-through businesses, Campbell said.

Tax professionals often have lingering questions after Congress passes legislation. The specifics may be later addressed by IRS guidance.

Personal Finance

This is the best tax bracket for a Roth IRA conversion, advisors say

Published

22 hours ago

December 13, 2024

Business Finance News

Eleganza | E+ | Getty Images

The best tax brackets for Roth conversions

When crunching the numbers for a Roth conversion, you’ll want to consider how the transfer impacts your current tax bracket, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

If you can stay within the 12% tax bracket or lower, “that’s a no-brainer, 99% of the time,” he said. But anything above the 12% is “situational,” depending on a client’s goals and other factors.

Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik, also uses a “rule of thumb” to greenlight Roth conversions.

“If we can convert and still stay in the 24% bracket or lower, I’m a thumbs up,” he said. But bumping into the 32% bracket or higher prolongs the “recovery period” to recoup upfront taxes.

Of course, these benchmarks can change depending on a client’s unique circumstances, such as estate planning goals, experts say.

Weigh rebalancing in lower-income years

When completing a Roth conversion, advisors typically aim to fill a specific tax bracket with income without spilling into the next one.

But you could miss other planning opportunities by focusing solely on Roth conversions, Lucas said.

For example, if you’re sitting on a large brokerage account with sizable gains, you could leverage your lower tax brackets to rebalance your portfolio, he said.

The strategy, known as “tax gain harvesting” involves strategically selling profitable assets during lower-income years.

For 2024, you may qualify for the 0% long-term capital gains rate with a taxable income of up to $47,025 if you’re a single filer or up to $94,050 for married couples filing jointly.

These figures would include assets sold from your brokerage account.

Roth conversions on the rise: Here's what to know

Personal Finance

Here’s how to retire a millionaire, according to finance pros

Published

23 hours ago

December 13, 2024

Business Finance News

Goran Babic | E+ | Getty Images

Building a $1 million nest egg may seem an impossible feat.

However, amassing such retirement wealth is within reach for almost anyone — provided they take certain steps, financial advisors say.

“You might think that, ‘Well, I have to become a Silicon Valley entrepreneur to become rich,'” said Brad Klontz, a financial psychologist and certified financial planner.

In fact, you can be a fast-food worker your whole life and amass wealth, said Klontz, a member of the CNBC Financial Advisor Council and the CNBC Global Financial Wellness Advisory Board.

The calculus is simple, he said.

Every time you’re paid a dollar, save and invest a percentage toward your “financial freedom,” Klontz said.

With this mindset, “you can work almost any job and retire a millionaire,” he said.

It’s not necessarily a ‘Herculean task’

Saving $1 million may sound like a “Herculean task” but it “might not be as hard as you think,” Karen Wallace, a CFP and former director of investor education at Morningstar, wrote in 2021.

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The key is to start saving early, perhaps in a 401(k) plan, individual retirement account or taxable brokerage account, experts said. This allows investors to harness the magic of compound interest over decades. In other words, you “let your investments do as much heavy lifting as possible,” Wallace wrote.

About 79% of American millionaires say their net worth was “self-made,” according to a Northwestern Mutual poll published in September. Just 11% said they inherited their wealth, while 6% got it from a windfall event like winning the lottery, according to the survey of 4,588 U.S. adults, fielded from Jan. 3 to Jan. 17, 2024.

There were 544,000 Americans with 401(k) balances of more than $1 million as of Sept. 30, according to Fidelity Investments, which is the largest administrator of workplace retirement plans. There were also more than 418,000 IRA millionaires.

In fact, the number of 401(k) millionaires grew by 9.5%, or 47,000 people, between the second and third quarter of 2024, largely due to stock-market gains.

How to get to $1 million

Wera Rodsawang | Moment | Getty Images

Winnie Sun, a financial advisor, provides an example of the math that links $1 million of wealth with consistent saving.

Let’s say a 30-year-old makes $60,000 a year after tax. If they were to save $500 a month — or, 10% of their annual income — they’d have $1 million by age 70, assuming average market returns of 7%, she said.

This doesn’t account for financial factors that might boost savings over that period, like a company 401(k) match, bonuses or raises.

You can work almost any job and retire a millionaire.

Brad Klontz

financial psychologist and certified financial planner

“In 40 years, you’ll have over $1 million, and that’s doing nothing else but $500 a month,” said Sun, co-founder of Sun Group Wealth Partners, based in Irvine, California, and a member of CNBC’s Financial Advisor Council.

It’s also important to avoid debt, which is probably the “biggest cavity” for building savings, and try not to increase expenses too much, Sun explained.

Timing is more important than being perfect, Sun said.

She recommends starting with a low-cost index fund — like one tracking the S&P 500, which diversifies savings across the largest publicly traded U.S. companies — and building from there.

“Even waiting a year can make a dramatic difference in reaching that $1 million point,” Sun said. “Stop and take action.”

What is the right amount of savings?

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Of course, $1 million in retirement may not be the right amount for everyone.

An oft-cited rule of thumb — known as the 4% rule — indicates a typical retiree can draw about $40,000 a year from a $1 million nest egg in order to safely assume they won’t run out of money in retirement. (That annual withdrawal is adjusted annually for inflation.)

For many, this sum would be supplemented by Social Security.

Fidelity suggests a savings goal based on income. For example, by age 67 a worker should aim to have saved 10 times their annual salary to ensure for a comfortable retirement.

Ideally, households would aim to save 15% to 20% of their income, Sun said. This is a rule of thumb often cited by financial planners.

How much wealth you want — and how quickly you want to be rich — will determine the percentage, Klontz said.

He’s personally aimed for a 30% savings rate, but knows people who’ve shot for close to 90%. Saving such large chunks of one’s income is a common thread of the so-called FIRE movement, which stands for Financial Independence, Retire Early.

How do they do it?

“They didn’t move out of their parents’ house, they minimized everything, they don’t buy new clothes, they take the bus, they shave their head instead of paying for haircuts,” Klontz said. “There’s all sorts of hacks you can do if you want to get there faster.”

How to enjoy today and save for tomorrow

Of course, there’s a tension here for people who want to enjoy life today and save for tomorrow.

“We weren’t meant to only survive and save money,” Sun said. “There has to be that good quality of life and that happy medium.”

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One strategy is to allocate 20% of household expenses toward the thing or things that are most important to you — perhaps big vacations, fancy cars, or the newest technology, Sun said.

Make some concessions — i.e., “scrimp and save” — on the other 80% of household costs, she said. This helps savers feel like they’re not reducing their quality of life, she said.

Personal Finance

What that means for you

Published

1 day ago

December 13, 2024

Business Finance News

What to expect from next week's Fed meeting

The Federal Reserve is expected to lower interest rates by another quarter point at the end of its two-day meeting on Dec. 18. That would mark the third rate cut in a row — altogether shaving a full percentage point off the federal funds rate since September.

So far, the central bank has moved slowly as they recalibrate policy after swiftly hiking rates when inflation hit a 40-year high.

“This could be the last cut for a while,” said Jacob Channel, senior economic analyst at LendingTree.

The Fed might choose to take “a wait-and-see approach” because there is some uncertainty around President-elect Donald Trump’s fiscal policy when he begins his second term, he said.

In the meantime, high interest rates have impacted all sorts of consumer borrowing costs from auto loans to credit cards.

The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

A December cut could lower the Fed’s overnight borrowing rate by a quarter percentage point, or 25 basis points, to a range of 4.25% to 4.50% from its current 4.50% to 4.75% level.

That “will exert some margin of easing of financial pressure,” said Brett House, economics professor at Columbia Business School — but not across the board.

“Some of the most important interest rates that people face don’t benchmark off the Fed rate,” he said.

From credit card to car loans to mortgages, here’s a breakdown of how it works:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to 20.25% today, according to Bankrate — near an all-time high.

Even though the central bank started cutting interest rates in September, the average credit card interest rate has barely budged. Card issuers are often slower to respond to Fed decreases, said Greg McBride, Bankrate’s chief financial analyst.

“The rate will go a step lower but with a lag up to three months,” Mc Bride said.

A better move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he explained.

“Interest rates are not going to fall fast enough to do the heavy lifting for debt-burdened consumers,” he said.

Mortgage rates

Because 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are not falling in step with Fed policy. And since most people have fixed-rate mortgages, their rate won’t change unless they refinance or sell their current home and buy another property.

As of the week ending Dec. 6, the average rate for a 30-year, fixed-rate mortgage is 6.67%, according to the Mortgage Bankers Association.

Those rates are down somewhat from the previous month, but well above the 2024 low of 6.08% in late September.

“Going forward, mortgage rates will likely continue to fluctuate on a week-to-week basis and it’s impossible to say for certain where they’ll end up,” Channel said.

Auto loans

Auto loans are fixed. However, payments have been getting bigger because car prices are rising and that has resulted in less affordable monthly payments.

The average rate on a five-year new car loan is now around 7.59%, according to Bankrate.

While anyone planning to finance a new car could benefit from lower rates to come, the Fed’s next move will not have any material effect on what you get, said Bankrate’s McBride. “Sticker prices are high and the amounts being financed by borrowers are very, very high,” he said — around $40,000, on average.

“Even at very low rates, that is a budget-busting monthly payment.”

Student loans

Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates, which means as the Fed cuts rates, the rates on private student loans will come down as well.

Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.

However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he said, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.”

Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result of the Fed’s string of rate hikes in recent years, top-yielding online savings account rates have offered the best returns in decades and still pay nearly 5%, according to Bankrate’s McBride.

“This is still a good time to be a saver and a good time for cash,” he said. “The most competitive offers are still well ahead of inflation and that’s likely to persist.”