By Jason LaBarge, Financial Advisor and President of LaBarge Financial
With a decisive electoral victory, Donald Trump will return to the White House in January, bolstered by Republican control of both houses of Congress.
This election will have an impact on our finances and, as with most things in life, there are pros and cons. One huge potential impact is on our tax rates.
The Tax Cuts and Jobs Act (TCJA) is due to expire at the end of 2025. Should that happen, most Americans will see an increase in their tax rates. With the Republican victory, the chances that at least some of the provisions of the TCJA will be renewed have increased. However, because Republicans did not secure a filibuster-proof 60-seat majority in the Senate, they will have to get at least some buy-in from Democrats to do so.
Provisions more likely to be renewed include the Child Tax Credit expansion and the increased standard deduction, both of which Democrats largely support.
However, other provisions may be on shakier ground. Unless Senate Republicans can convince enough Democrats to turn away from their stance against lowered tax rates and higher bracket income limits, those stand a good chance of expiring at the end of next year.
Looking farther into the future, it’s likely taxes will go up at some point. The nonpartisan Tax Policy Center found that the TCJA will add anywhere from $1 trillion to 2 trillion to the national debt over a decade. That’s a significant percentage of the overall debt which currently stands at just under $36 trillion.
In many ways, handling debt is like dieting. If you exercise a little more when you notice you’re 10 pounds overweight, you can slim down with little trouble. If you wait until you’re 100 pounds overweight, it’s considerably harder and requires more extreme measures. Similarly, the high national debt means it will take more extreme measures to get it under control — these will almost certainly require increasing income regardless of how much the government decreases expenditures.
The prudent saver could position themselves to absorb the nearly inevitable tax increases with minimal harm to their finances, if right for them. Over the years, you may have read or heard about Roth Conversions. A Roth conversion is converting your traditional tax-deferred retirement accounts to their Roth equivalents. You pay taxes on those conversions now, at the lower TCJA rates, but the money will grow and may be withdrawn tax-free when taxes are likely to be higher.
An important consideration when converting money to a Roth account is what it will do to your taxes this year. Because a Roth conversion is considered income, converting too much at once can surprise the unwary investor by catapulting them into a higher tax bracket. That can be an unpleasant reality to discover when you’re preparing your tax returns! That’s why this time of year is often considered “Roth season.” Because you now have a good idea of what your tax picture will look like, you may more easily avoid those bracket-jumping surprises from your Roth conversion.
Roth conversions and other tax-efficient strategies are complicated and require a deep understanding of your unique financial situation to know which ones are right for you. It’s important to sit down with a financial advisor to form a plan that’s suited to your needs and that of your plan.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Please remember that converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Jason LaBarge, Financial Advisor and President of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 443-647-4321
www.LaBargeFinancial.com
Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. MAS and LaBarge Financial are not affiliated entities. 2715009-11/24
How did the TCJA affect the federal budget outlook? | Tax Policy Center