Ed Slott: Will Congress Extend the Tax Cuts?

Key Takeaways

• Most of the provisions of the Tax Cuts and Jobs Act are set to expire at the end of 2025. The tax-cut package lowered rates across the board, increased the estate and gift tax exemption, and lowered the corporate rates. But on the other side, it took a lot of popular deductions away.
• Even if Congress does not renew the Tax Cuts and Jobs Act, the elimination of Roth recharacterizations is a permanent change, which means that all Roth conversions are permanent. Another permanent change is the undoing of the alimony deduction.
• These have often been referred to as the Trump tax cuts, and there is this widespread expectation that Republican-led Congress will move to extend them.
• Even if the Tax Cuts and Jobs Act is extended, taxpayers should still consider maneuvers to help take advantage of tax rates that are pretty low today relative to history.
• Roth direct contributions or conversions are wise to consider to take advantage of today’s low tax rates.

Christine Benz: Hi, I am Christine Benz for Morningstar. Should investors expect a Republican-led Congress to greenlight an extension of the Tax Cuts and Jobs Act that it passed during the first Trump administration? Joining me to discuss that topic and share some strategies to consider if low tax rates persist is retirement and tax planning expert Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Great to be back with you, Christine. Thanks.

Key Features of the Tax Cut and Jobs Act

Benz: It’s great to have you. Before we peer into the future, let’s discuss the Tax Cuts and Jobs Act, broadly speaking. Most of the provisions are set to expire at the end of this year, 2025. Can you talk about the key features of that tax-cut package?

Slott: Well, it lowered rates across the board, increased the estate and gift tax exemption, lowered the corporate rates, but on the other side, it took a lot of popular deductions away. Now they’re talking about—when I say now, whenever you’re watching this, this could’ve already happened; so, we don’t know, but there’s a lot of talk—and I agree, given the administration and the Congress and the Senate and the president, probably likely they’re going to do something. But what I’m hearing at this point, when we’re doing this program, that even the Republicans in Congress can’t agree because some of them still are worried about the bulging debt and deficit levels. They want to know where to pick their battle. So, that’s what will be interesting: what will survive, which cuts will be extended, and which won’t.

Tax Cuts and Jobs Act Renewal Exceptions

Benz: Is the whole shebang set to expire at the end of 2025 unless Congress takes steps to renew aspects of the TCJA?

Slott: Yes, except for a few exceptions, some minor exceptions. One is a big deal, but I don’t think it’s that big a deal, in the Roth area. Do you remember before the Tax Cuts in Jobs Act, when you did a Roth conversion, you could recharacterize, you could undo it? Say it came a tax time, you didn’t want to pay all the tax, or you could go back and forth—they killed that. The Roth recharacterization is gone, has been gone since then. So, all Roth conversions now since then have been permanent. If you are converting to a Roth, you better know how much it’s going to cost because you’re in for the long term: There are no do-overs, no backsies, no, the technical word is recharacterizations. That provision from the Tax Cuts and Jobs Act is permanent. So, even if they extend it, that’s not coming back.

Another one that’s permanent is the alimony, the undoing of the alimony deduction. Before the Tax Cuts and Jobs Act, if you paid alimony, you got to deduct it, and if you received it, it was taxable. Now it isn’t anymore. That one’s permanent. That one’s not going to change. And there may be a few others that I’m not as familiar with, but in general, most of that will be extended. Those are two big exceptions.

When and Will Tax Cuts Be Extended?

Benz: These have often been referred to as the Trump tax cuts. So, there’s this widespread expectation that Congress, Republican-led Congress, will move to extend them. Do you agree with the view that they’re likely to be extended, given the current administration in Washington?

Slott: Yes. Yes, I think they will. It’s only the fighting among themselves like I talked about, who are going to be the winners and losers because they know they can pass a bill. They have the majority in the House and the Senate and the White House, so they know they can pass something. Now it’s really just about fighting among themselves. For example, one of the big fights is over the SALT, state and local tax deductions. That affects people in high states like me in New York who pay high state taxes. It’s limited to $10,000. That threw a lot of people off. So, maybe legislators, Republican legislators in those districts might fight harder for increases. At least at this point in time, they’re talking about either increasing it unlimited or doubling it or all kinds of versions of it. I think last I saw there were five different versions of doing something so they could go home to their constituents and say, “At least I tried something for those affected by that.” That’s one area where they might be fighting against other states that don’t have high or have no state income tax, like Florida, for example.

Benz: You mentioned you really don’t have a sense of whether and when this would happen.

Slott: No, I think it will happen. I don’t know when. I just think they have the majority. How could it not happen? I mean, unless they fight among themselves.

Benz: Right. So, in terms of the timing, we’ve had a history of these things coming down to the wire in Congress, whatever the decision is. Do you think this will be one of those things that might be like December, even late December of 2025? Or do you think if Congress takes action, it’ll happen earlier?

Slott: I think it’ll happen quickly, but again, I don’t have any inside information. I just think the way he’s operating now at the time we’re doing this recording, a lot of things are happening quickly as of the date we’re doing this, we’re in mid-February now. There are bills on the table already.

Strategies to Take Advantage of Low Tax Rates

Benz: You think that even if the TCJA is extended, taxpayers should still consider maneuvers to help take advantage of tax rates that are pretty low today relative to history. Maybe you can talk about the kinds of strategies that might make sense to take advantage of these low tax rates in place today and possibly into the future.

Slott: That’s an excellent question, and that’s come up quite a bit. I say to people, “Don’t take your foot off the gas.” Because I’ve seen articles, they say, “Oh, you can rest assured,” like in the gift and estate area, they say, “Oh, you don’t have to get rid of your money. We are going to have these higher estate ...” But you don’t know what the future is going to bring. Every year, you have low tax brackets like we have now. Take advantage of them every year. Don’t start slowing down just because you know you may have more years of this. Take advantage of every year you have, especially in the estate and gift area. Yes, we have very high personal estate and gift tax exemptions for 2025. It’s almost unbelievable to say $14 million per person. So that’s around $28 million, a little under that, $28 million per married couple. So most people think, “Well, I don’t have to do anything.” But there are people with significant assets that it still may pay to start reducing the estate and using these big exemptions because if they go down at any point, you may not have that opportunity in the future.

Why Consider Roths?

Benz: It seems like another thing that you come back to again and again in this context of fairly low tax rates today is that Roth anything, whether direct contributions or conversions, are wise to consider to take advantage of today’s low tax rates. Can you talk about that?

Slott: Yes. The Roth, as I always say, is a big bet on today’s rates versus future rates. And if we can’t keep having low rates, take advantage of Roths, pile up on these Roths, stockpile them, whatever you want to call it, while we can get them on sale. Taxes are on sale. Everybody likes a sale. Look what happens on Friday after Thanksgiving. Everybody tramples each other to death to save $10 on a TV. You can get tens of thousands of tax savings now. So, think about it like that. If taxes were on sale year after year, take advantage of that.

How Roths Hold Up Against Congress' Tendency to Keep Taxes Low

Benz: A bigger picture question in all of this is whether Congress will ever increase taxes. It seems like the general trend, gosh, for the past couple of decades has been down. What’s your take on that question, and how does it square with your preference for funding Roths? If a big part of the thesis is that taxes will eventually go up, how do you square that with Congress’ seeming tendency to keep taxes really, really low?

Slott: You mean to kick the can down the road and ignore the deficit and debt levels?

Benz: Right.

Slott: At some point, I have to believe in the math that the chickens are going to, whatever that’s saying, come home to roost. But even if tax rates stay the same, if you do nothing, your IRA ... Because what’s the other option? Do nothing. Keep building tax-deferred IRAs and 401(k)s. The larger they get, even if rates stay the same, could still push you in a higher bracket in retirement when you are forced to take money out: RMDs, required minimum distributions at age 73. When taxes are low now, you can voluntarily control your rates. Once you’re forced to take money out, it’s out of your control. So, that’s a big difference. When you can control the rates you pay each year using up the low brackets, that’s a big advantage in this game.

So, even if they keep the rates the same and never raise them, your personal rates could go up. You could jump a higher bracket. Maybe the rates will be the same, but it could push you to a higher rate, a higher bracket because you did nothing and the account grew so large that now your RMDs could exceed. And I’ve seen it happen. Your best working years, when people think, “Well, I’ll be in retirement. My income’s got to be low,” and all of a sudden, they get RMDs that exceed their best years working, or if not them, the beneficiaries that will get hit under the Secure Act, under the 10-year rule. If you pile all that income into one year, those beneficiaries are going to have their brackets busted.

Benz: Ed, thank you so much for being here to share your perspective. We really appreciate it.

Slott: Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch Do Market Forecasts Really Matter? for more from Christine Benz.