President Trump campaigned on new tax reforms, including permanently extending the 2017 tax cuts. There has also been talk about eliminating federal taxes on tips, overtime pay, and Social Security benefits for retirees. However, none of those have been codified yet.
Both the House and Senate are working on tax bills, and we expect some news later this year. There is some urgency to passing a tax bill. If nothing is changed, the individual portions of the Tax Cut and Jobs Act all expire at the end of this year. That means 62% of filers would incur tax increases in 2026, according to the Tax Foundation.
The Republicans have thin majorities in both houses of Congress, so there is no guarantee we’ll see tax law changes. And we don’t know what to expect at this stage. There have been numerous ideas floated, including cutting the corporate tax rate to 15%, reducing the capital gains tax rate, eliminating credits for green energy products, eliminating the estate tax, introducing a U.S. consumption tax, abolishing the IRS, modifying the $10,000 cap on state and local taxes, creating a deduction for auto loan interest, etc.
All that uncertainly makes it hard to plan specifically for the endless variety of tax-related scenarios. However, there are things you can do to minimize your tithe to Uncle Sam, particularly if you assume that this administration will focus on lowering the tax burden.
The first step is to minimize income. That sounds counterintuitive to those of us trying to save and get ahead, but I’m not talking about giving up income, just adjusting the timing and nature of it.
There usually isn’t much you can do about earned income from your job apart from making sure you max out your 401(k)-plan contribution. However, if you are over age 62, you may be eligible for Social Security benefits. If you are still working or don’t need the income, it generally makes sense to defer Social Security at least until after you turn 67 to reduce the amount of taxes you could owe. Deferring to the age of 70 is often still better, since you get an 8% raise each year you defer.
Similarly, while you can start to draw money from qualified retirement accounts, such as IRAs, SEPs, and 401(k) plans at age 59 and a half without penalty, you may be better off waiting if you have other sources of funds to meet your living expenses. Because retirement account withdrawals are generally taxed at ordinary income tax rates, this additional income can potentially push you into a higher tax bracket. It may be best to wait until age 73 when required minimum distributions must be taken.
For those relying on investments to meet their living expenses, many investors attempt to maximize the income their portfolio produces. Income means dividends from stocks and interest from bonds, but there are other ways to access your money. Rather than maximizing income, you should think about how best to grow your assets and how to access those assets most efficiently. While it is taboo to suggest spending portfolio principal, that is usually the most tax-efficient way to access your money. We believe drawing principal from a portfolio is fine as long as the overall portfolio continues to grow. However, even taking capital gains is often less costly than drawing dividend and interest income.
Speaking of which, there are ways to structure your portfolio to help minimize the tax bite. “Asset location” is a strategy that involves using retirement accounts for tax-inefficient investments, such as bonds and alternative investments, and taxable accounts for investments like stocks, which generally produce less income. Holding stocks in your IRA or 401(k) effectively turns investments that could be taxed at lower long-term capital gains rates into investments that are taxed at generally higher ordinary income tax rates. This is because money eventually withdrawn from IRAs and 401(k) plans is taxed as ordinary income.
Harvesting tax losses is another portfolio strategy that can help reduce the amount you pay on April 15th. With the recent stock market volatility, you may have unrealized losses in your portfolio. When that happens, you can sell stocks showing a loss and immediately repurchase a similar stock (or fund). This keeps your portfolio exposure the same but gives you the economic benefit of a capital loss that you can use to offset a little ordinary income or realized capital gains. If you don’t have gains to offset, you can carry the loss forward indefinitely to offset future gains.
Some other ancillary benefits of keeping your taxable income suppressed are qualifying for a large subsidy through the Affordable Care Act Health Insurance Marketplace (Obamacare) and minimizing any IRMAA owed on Medicare payments.
There have always been many variables in tax law, and they are always changing. However, with a bit of planning, there can be opportunities for significant tax savings.
For more information about tax planning for 2025 or Armbruster Capital Management’s approach to investing, contact us via our website or call (585) 381-4180.