Personal Finance
The potential tax increase coming and what you can do about it
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.
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.
Morehouse College President David Thomas speaks during Morehouse College’s graduation ceremony, before US President Joe Biden delivers his commencement address, in Atlanta, Georgia on May 19, 2024.
Andrew Caballero-Reynolds | Afp | Getty Images
David Thomas, the president of Morehouse College, said his office fielded a surge of calls this week from worried students and their families concerned the Trump Administration’s “federal funding freeze” would directly impact college access.
The sudden scramble was “perhaps only rivaled by what happened in March of 2020 when we realized that the Covid pandemic was truly a threat,” Thomas told CNBC. He became president of Morehouse, one of the country’s top historically Black colleges and universities, or HBCUs, in 2018.
This freeze on federal aid “would create another existential threat as great as the pandemic,” he said.
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Thomas’ comments come amid ongoing confusion about how a freeze on federal grants and loans could potentially impact students and schools.
A Jan. 27 memo issued by the Office of Management and Budget, which would affect billions of dollars in aid, said the pause on federal grants and loans “does not include assistance provided directly to individuals.”
Although the memo was later rescinded, the White House said a “federal funding freeze” remains in “full force and effect.” It is currently on hold amid legal challenges.
Thomas, who is also on the Board of Trustees at Yale University, said college leaders across the country have spent the better part of the week focused on “the consequences of this action.” Morehouse immediately initiated a hiring freeze in preparation for a potentially significant financial disruption.
“All of the institutions are still in limbo,” he said.
What college aid may be affected
At Morehouse College, about 40% of the student body relies on Federal Pell Grants, a type of federal aid available to low-income families.
Following the memo’s release, the Education Department announced that the freeze would not affect student loans or Pell Grants.
“The temporary pause does not impact Title I, IDEA, or other formula grants, nor does it apply to Federal Pell Grants and Direct Loans under Title IV [of the Higher Education Act],” Education Department spokesperson Madi Biedermann said in a statement.
In addition to the federal financial aid programs that fall under Title IV, Title I provides financial assistance to school districts with children from low-income families. The Individuals with Disabilities Education Act, or IDEA, provides funding for students with disabilities.
The funding pause “only applies to discretionary grants at the Department of Education,” Biedermann said. “These will be reviewed by Department leadership for alignment with Trump Administration priorities.”
But questions remain about other aid for college.
The freeze could affect federal work-study programs and the Federal Supplemental Educational Opportunity Grant, which are provided in bulk to colleges to provide to students, according to Kalman Chany, a financial aid consultant and author of The Princeton Review’s “Paying for College.”
The disruption to federally backed research funding also poses a threat to college programs and staff.
‘Lots of reasons to still be concerned’
“There are lots of reasons to still be concerned,” said Jonathan Fansmith, a senior vice president at the American Council on Education.
“The administration has made it clear the executive orders will have implications for a huge range of existing awards and grants,” he said. “Those have implications for campuses and there is no more clarity in that regard than there was before.”
At Morehouse, “a huge portion of our faculty is supported by grants,” Thomas said. “If we can’t run the college, colleges like ours will probably be forced to drastically shrink themselves or close.”
Morehouse, located in Atlanta and founded in 1867, has more than 2,200 students.
Millions of families claim the child tax credit every year — and filing mistakes can delay the processing of your return and receipt of your refund, according to tax experts.
For 2024 returns, the child tax credit is worth up to $2,000 per kid under age 17, and decreases once adjusted gross income exceeds $200,000 for single taxpayers or $400,000 for married couples filing jointly.
The refundable portion, known as the additional child tax credit, or ACTC, is up to $1,700. Filers can claim the ACTC even without taxes owed, which often benefits lower earners.
However, a lower-income family who doesn’t know how to claim the credit “misses out on thousands of dollars,” National Taxpayer Advocate Erin Collins wrote in her annual report to Congress released in January.
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More than 18 million filers claimed the additional child tax credit in 2022, according to the latest IRS estimates.
By law, the IRS can’t issue ACTC refunds before mid-February. But the Where’s My Refund portal should have status updates by Feb. 22 for most early filers, according to the IRS.
Here’s how to avoid common child tax credit mistakes that could further delay your refund.
Know if you have a ‘qualifying child’
One child tax credit mistake is not knowing eligibility.
The rules can be “very confusing,” according to Tom O’Saben, an enrolled agent and director of tax content and government relations at the National Association of Tax Professionals.
To claim the child tax credit or ACTC, you must have a “qualifying child,” according to the IRS. The qualifying child guidelines include:
- Age: 17 years old at the end of the tax year
- Relationship: Your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendant of these
- Dependent status: Dependent on your tax return
- Filing status: Child is not filing jointly
- Residency: Lived with you for more than half the year
- Support: Didn’t pay for more than half of their living expenses
- Citizenship: U.S. citizen, U.S. national or a U.S. resident alien
- Social Security number: Valid Social Security number by tax due date (including extensions)
You may avoid some eligibility errors by filing via tax software or using a preparer versus filing a paper return on your own, O’Saben said. Tax software typically includes credit eligibility, which can minimize errors.
Missing Social Security number
Typically, parents apply for a Social Security number in the hospital when completing their baby’s birth certificate. But it can take one to six weeks from application to receive that number, according to the agency, which can create time pressure for families with a new addition around tax season.
Filing a tax return and claiming the child tax credit before receiving the Social Security number is a mistake, O’Saben said.
“I have seen [the child tax credit] denied for people who have filed before they got the Social Security number for a dependent,” he said. “And there’s no going back.”
If you don’t have the number before the tax deadline, you should request an extension, which gives you six months more to file your return, O’Saben explained.
However, you still must pay taxes owed by the original deadline.
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