Personal Finance

The potential tax increase coming and what you can do about it

Published

1 year ago

April 15, 2024

Eva-katalin | E+ | Getty Images

It is common folklore, a fairy tale of sorts, that middle-class Americans received perpetual relief in the Tax Cuts and Jobs Act of 2017.

First, property taxes generate 32% of state and local income, and U.S. median single-family home property taxes have risen by more than 25% since 2019. There are also under-the-radar excise taxes imposed on the sale of things like fuel, airline tickets, tires, tobacco and other goods and services that can mitigate some of the savings from many of the federal tax cuts that are temporary and may disappear after 2025.

The devil is usually in the details, and by all accounts he’s been busy.

The provision that reduced the corporate tax rates to 21% is permanent, but the qualified business income deduction enjoyed by many small businesses, as well as the increased standard deduction and favorable tax brackets, will expire unless Congress extends these deliverables.

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Capitol Hill might very well grandfather in these tax cuts, although it’s worth noting that doing so would cost $288 billion in 2026 alone, according to the Institute on Taxation and Economic Policy and $2.7 trillion from 2024 to 2033, per the Peter G. Peterson Foundation.

Meanwhile, Uncle Sam already has his own money problems, slated to have 31% of the debt held by the public, or $7.6 trillion, coming due in 2024 at much higher rates. To add context, the United States will spend more on interest payments than it does on the military this year.

Congress will be motivated to etch all the tax cuts in stone, but it would only add fuel to the debt bonfire.

What tax changes may be on the horizon

If a divided Congress fails to make amendments, the old tax brackets will return after years of wage growth — which means more of your income may hit the older and more onerous brackets sooner.

There is also the once-unlimited state and local tax deduction that the legislation capped at $10,000, the personal exemption which was eliminated, the deduction for unreimbursed business expenses, a deduction for moving, interest on a home equity loan, a deduction for uniforms and a deduction for theft and catastrophic damage from an environmental event that are no longer available. It is currently unclear if these provisions will be returned to taxpayers.

There is also the qualified business income deduction that offers a 20% tax break for small businesses provided they are below certain income thresholds. That deduction is set to expire, a concern that has motivated the Chamber of Commerce to lobby on behalf of its constituents. All of this is in addition to crippling cost-of-living challenges from excessive government spending, the well our Treasury would have to revisit to make these tax cuts permanent.

Hope Congress fixes the problem, or look for a solution

The easiest course of action for everyday Americans is to increase contributions to their pretax retirement plans such as a 401(k), which will reduce federal and state tax exposure dollar for dollar. Once distributions are taken, however, they will be subject to regular income taxes at a time when entitlement expenses have accelerated, and the Treasury will have fewer workers paying for more retirees.

A Roth 401(k) plan may protect against future taxes but does little for current exposure and is subject to legislative risk by both the federal and state governments saddled with unfunded liabilities and pension obligations. While political obstacles make this an unlikely outcome, the math may force officials to write legislation that taxes distributions through means testing or another measure that suits their fiscal needs.

Real estate offers some reprieves because you may be able to depreciate the property over its lifetime. For instance, the IRS allows property owners to deduct 3.64% of the original purchase price for 27 years. A property purchased for $500,000, therefore, offers an estimated $18,200 annual deduction to offset any income received.

Interest rates have made real estate much less attractive. But it’s worth noting that upon the owner’s death, whatever the property value is at the time of death becomes the new cost basis — the value used to determine how much the owner can depreciate — and the beneficiaries can begin depreciating all over again at the higher value for another 27 years.

Another option is permanent life insurance. The media and financial literacy pundits have spent years highlighting the high commissions and fees associated with whole and universal life insurance policies.

Upon closer inspection, however, these vehicles offer more than a death benefit with no exposure to income taxes and have a savings component that can grow tax-deferred with the market.

Moreover, the policy owner can borrow money against the savings component of the policy, known as the cash surrender value, pay zero taxes and repay the loan with the death benefit when they pass away. Think of it as a Roth individual retirement account without income or contribution limits that pays a death benefit when you die.

Suffice it to say these solutions are viable for some people, yet each household needs a strategy that fits their own unique situation. As appealing as it may sound to reduce your tax exposure, the first call should be to your tax advisor because if you recall, it was the nuances of this legislation that many of us overlooked — namely the fact that the benefits for some were permanent and for others, temporary — that got us into this hot water in the first place.

— By Ivory Johnson, certified financial planner and the founder of Delancey Wealth Management in Washington, D.C. He is also a member of the CNBC Financial Advisor Council.

Personal Finance

IRS’ free tax filing program is at risk amid Trump scrutiny

Published

16 hours ago

April 17, 2025

Business Finance News

Vithun Khamsong | Moment | Getty Images

The IRS’ free tax filing program is in jeopardy as the agency faces continued cuts from the Trump administration.

After a limited pilot launch in 2024, the program, known as Direct File, expanded to more than 30 million taxpayers across 25 states for the 2025 filing season.

Funded under the Inflation Reduction Act in 2022, the program has been heavily scrutinized by Republicans, who have criticized the cost and participation rate. Over the past year, Republican lawmakers from both chambers have introduced legislation to halt the IRS’ free filing program.

Now, some reports say Direct File could be at risk. Meanwhile, no decision has been made yet about the program’s future, according to a White House administration official.

During his Senate confirmation hearing in January, Treasury Secretary Scott Bessent committed to keeping Direct File active during the 2025 filing season without commenting on future years.

“I will consult and study the program and understand it better and make sure it works to serve the IRS’ three goals of collections, customer service and privacy,” Bessent told the Senate Finance Committee at the hearing.

However, the future of the free tax filing program remains unclear.

As of April 17, the Direct File website said the program would be open until Oct. 15, which is the deadline for taxpayers who filed for a federal tax extension.

Many taxpayers can also file for free via another program known as IRS Free File, which is a public-private partnership between the IRS and the Free File Alliance, a nonprofit coalition of tax software companies.

The IRS in May 2024 extended the Free File program through 2029.

Mixed reviews of IRS Direct File

Direct File supporters on Wednesday blasted the possible decision to end the program.

“No one should have to pay huge fees just to file their taxes,” Senate Finance Committee Ranking Member Ron Wyden, D-Ore., said in a statement on Wednesday.

Wyden described the program as “a massive success, saving taxpayers millions in fees, saving them time and cutting out an unnecessary middleman.”

In January, more than 130 Democrats, led by Sens. Elizabeth Warren, D-Mass., and Chris Coons, D-Del., voiced support for Direct File.

73% of Americans are financially stressed

However, opponents have criticized the program’s participation rate and cost.

During the 2024 pilot, some 423,450 taxpayers created or signed in to a Direct File account. Roughly one-third of those taxpayers, about 141,000 filers, submitted a return through Direct File, according to a March report from the Treasury Inspector General for Tax Administration.

Those figures represent a mid-season 2024 launch in 12 states for only simple returns. It’s unclear how many taxpayers used Direct File through the April 15 deadline.

The cost for Direct File through the pilot was $24.6 million, the IRS reported in May 2024. Direct File operational costs were an extra $2.4 million, according to the agency.

Personal Finance

Should investors dump U.S. stocks for international equities? Experts weigh in

Published

18 hours ago

April 17, 2025

Business Finance News

Investors should use the relief rally to reduce exposure, says Fairlead's Katie Stockton

Some investors accustomed to the dominance of U.S. stocks versus the rest of the world are making a stunning pivot toward international equities, fearing U.S. assets may have taken on more risk amid escalating trade tensions initiated by President Donald Trump.

The S&P 500 sank more than 6% since Trump first announced his tariff plan, while the Dow and Nasdaq have each tumbled more than 7%.

There was a strong argument to dial back U.S. stock holdings and adopt a more global portfolio even before the recent volatility, said Christine Benz, director of personal finance and retirement planning for Morningstar.

“But I think the case for international diversification is even greater 1744909145, given recent developments,” she said.

Jacob Manoukian, head of U.S. investment strategy at J.P. Morgan Private Bank, offered a similar assessment. “Global diversification seems like a prudent strategy,” he wrote in a research note on Monday.

U.S. had the world beat by ‘sizable margin’

Some experts, however, don’t think investors should be so quick to dump U.S. stocks and chase returns abroad.

The United States is still “a quality market that looks like a bargain,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute.

U.S. stocks had been outperforming the world for years heading into 2025.

We are in an incredible moment for those who want to bet against U.S. stocks, says Jim Cramer

The S&P 500 index had an average annual return of 11.9% from mid-2008 through 2024, beating returns of developed countries by a “sizable margin,” according to analysts at J.P. Morgan Private Bank.

The MSCI EAFE index — which tracks stock returns in developed markets outside of the U.S. and Canada — was up 3.6% per year over the same period, on average, they wrote.

However, the story is different this year, experts say.

“In a surprising twist, the U.S. equity market has just offered investors a timely reminder about why diversification matters,” the analysts at J.P. Morgan Private Bank wrote. “Although U.S. outperformance has been a familiar feature of global equity markets since mid-2008, change is possible.”

The Trump administration’s tariff policy and an escalating trade war with China have raised concerns about the growth of the U.S. economy.

U.S. markets have been under pressure ever since the White House first announced country-specific tariffs on April 2. Trump imposed tariffs on many nations, including a 145% levy on imports from China.

As of Thursday morning, the S&P 500 was down roughly 10% year-to-date, while the Nasdaq Composite has pulled back more than 16% in 2025. The Dow Jones Industrial Average had lost nearly 8%. Alternatively, the EAFE was up about 7%.

Is U.S. exceptionalism dead?

The sharp sell-off in U.S. markets has raised doubts as to whether U.S. assets “are as attractive to foreigners now as they once were and, perhaps as a consequence, whether ‘U.S. [equity] market exceptionalism’ could be on the way out,” market analysts at Capital Economics wrote Thursday.

At the same time, rising global trade tensions have taken a toll on the bond market, threatening to shake the confidence of holders of U.S. debt. The U.S. dollar has also weakened, nearing a one-year low as of Thursday morning.

It’s unusual for U.S. stocks, bonds and the dollar to fall at the same time, analysts said.

Former Treasury Secretary Janet Yellen said Monday that President Donald Trump’s tariffs have made it more difficult for Americans to find comfort in the U.S. financial system.

“This is really creating an environment in which households and businesses feel paralyzed by the uncertainty about what’s going to happen,” Yellen told CNBC during a “Squawk Box” interview. “It makes planning almost impossible.”

The U.S. fire had ‘already been burning’

A trader works on the floor of the New York Stock Exchange at the opening bell in New York City, on April 17, 2025.

Timothy A. Clary | AFP | Getty Images

That said, international and U.S. stock returns tend to ebb and flow in cycles, with each showing multi-year periods of relative strength and weakness.

Since 1975, U.S. stock returns have outperformed those of international stocks for stretches of about eight years, on average, according to an analysis by Hartford Funds through 2024. Then, U.S. stocks cede the mantle to international stocks, it said.

Based on history, non-U.S. equities are overdue to reclaim the top spot: The U.S. is currently 13.8 years into the current cycle of stock outperformance, according to the Hartford Funds analysis.

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U.S. markets had already showed weakness heading into the year amid concerns about the health of the economy grew and as “air came out the valuations of ‘big-tech’ stocks,” according to Capital Economics analysts.

“In that respect, ‘Liberation Day’ — which accentuated these moves — only added fuel to a fire that had already been burning,” they wrote.

Advisors: ‘Tread carefully here’

A good starting point for investors would be to mirror a global stock fund like the Vanguard Total World Stock Index Fund ETF (VT), said Benz of Morningstar. That fund holds about 63% of assets in U.S. stocks and 37% in non-U.S. stocks.

It may make sense to pare back exposure to international stocks as individual investors approach retirement, she said, to reduce the volatility that comes from fluctuations in foreign exchange rates.

“Part of our core models for clients have always had international exposure, it’s traditionally part of any risk-adjusted portfolio,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.

Financial advisor or business people meeting discussing financial figures. They are discussing finance charts and graphs on a laptop computer. Rear view of sitting in an office and are discussing performance

Courtneyk | E+ | Getty Images

Even though those asset classes didn’t perform as well over the last few years, “they’ve done a pretty good job here of helping reduce the brunt of this tariff volatility,” said Boneparth, a member of the CNBC Financial Advisor Council.

Still, Boneparth cautions investors against making any sudden moves to add non-U.S. equities to their portfolios.

“If you are thinking about making changes now, be careful,” he said. “Do you lock in losses to U.S. stocks to gain international exposure? You want to tread carefully here,” he said. “Are you chasing or timing? You usually don’t want to do those things.”

However, this may be a good time to check your investments to make sure you are still allocated properly and rebalance as needed, he added. “By rebalancing, you can rotate out of less risky assets into equities, strategically buying the dip.”

There have been very few times in history when clients asked about increasing their investments overseas, “which is happening now,” said CFP Barry Glassman, the founder and president of Glassman Wealth Services.

“Given that both stocks and currency are outperforming U.S. indices it’s no wonder there is greater interest in foreign stocks today,” said Glassman, who is also a member of the CNBC Advisor Council.

“Even in the past, when U.S. stocks have fallen, the dollar’s gains helped to offset a portion of the losses. In the past two weeks, that has not been the case,” he said.

Glassman said he maintains a two-thirds to one-third ratio of U.S. stocks to foreign stock funds in the portfolios he manages.

“We are not making any moves now,” he said. “The moves for us were made over time to maintain what we consider the appropriate foreign allocation.”

Personal Finance

Here’s why retirees shouldn’t fully ditch stocks

Published

2 days ago

April 16, 2025

Business Finance News

Lordhenrivoton | E+ | Getty Images

Retirees may think moving all their investments to cash and bonds — and out of stocks — protects their nest egg from risk.

They would be wrong, experts say.

Most, if not all, retirees need stocks — the growth engine of an investment portfolio — to ensure they don’t run out of money during a retirement that might last decades, experts said.

“It’s important for retirees to have some equities in their portfolio to increase the long-term returns,” said David Blanchett, head of retirement research for PGIM, an investment management arm of Prudential Financial.

Longevity is biggest financial risk

Longevity risk — the risk of outliving one’s savings — is the biggest financial danger for retirees, Blanchett said.

The average life span has increased from about 68 years in 1950 to to 78.4 in 2023, according to the Centers for Disease Control and Prevention. What’s more, the number of 100-year-olds in the U.S. is expected to quadruple over the next three decades, according to Pew Research Center.

Retirees may feel that shifting out of stocks — especially during bouts of volatility like the recent tariff-induced selloff — insulates their portfolio from risk.

Seeking safety amid market volatility: Strategies to keep your money safe

They would be correct in one sense: cash and bonds are generally less volatile than stocks and therefore buffer retirees from short-term gyrations in the stock market.

Indeed, finance experts recommend dialing back stock exposure over time and boosting allocations to bonds and cash. The thinking is that investors don’t want to subject a huge chunk of their portfolio to steep losses if they need to access those funds in the short term.

Dialing back too much from stocks, however, poses a risk, too, experts said.

Retirees who pare their stock exposure back too much may have a harder time keeping up with inflation and they raise the risk of outliving their savings, Blanchett said.

Stocks have had a historical return of about 10% per year, outperforming bonds by about five percentage points, Blanchett said. Of course, this means that over the long term, investing in stocks has yielded higher returns compared to investing in bonds.

“Retirement can last up to three decades or more, meaning your portfolio will still need to grow in order to support you,” wrote Judith Ward and Roger Young, certified financial planners at T. Rowe Price, an asset manager.

What’s a good stock allocation for retirees?

So, what’s a good number?

One rule of thumb is for investors to subtract their age from 110 or 120 to determine the percentage of their portfolio they should allocate to stocks, Blanchett said.

For example, a roughly 50/50 allocation to stocks and bonds would be a reasonable starting point for the typical 65-year-old, he said.

An investor in their 60s might hold 45% to 65% of their portfolio in stocks; 30% to 50% in bonds; and 0% to 10% in cash, Ward and Young of T. Rowe Price wrote.

Someone in their 70s and older might have 30% to 50% in stocks; 40% to 60% in bonds; and 0% to 20% in cash, they said.

Why your stock allocation may differ

However, every investor is different, Blanchett said. They have different abilities to take risk, he said.

For example, investors who’ve saved too much money, or can fund their lifestyles with guaranteed income like pensions and Social Security — can choose to take less risk with their investment portfolios because they don’t need the long-term investment growth, Blanchett said.

The less important consideration for investors is risk “appetite,” he said.

This is essentially their stomach for risk. A retiree who knows they’ll panic in a downturn should probably not have more than 50% to 60% in stocks, Blanchett said.

The more comfortable with volatility and the better-funded a retiree is, the more aggressive they can be, Blanchett said.

Other key considerations

There are a few other important considerations for retirees, experts said.

Diversification. Investing in “stocks” doesn’t mean putting all of one’s money in an individual stock like Nvidia or a few technology stocks, Blanchett said. Instead, investors would be well-suited by putting their money in a total market index fund that tracks the broad stock market, he said.