By Martin Belak-Berger, Ascend Advisors Partner

America is at a crossroads – an era of uncertainty akin to attending a circus without reading the program. You sit, popcorn in one hand, corn dog in the other, wondering: Will this be a spectacle of bold innovation or baffling disarray? 

Whatever the case, I admit I’m a little nervous. Or perhaps curious. Likely a combination of both. 

For us navigating these changes, particularly in finance, there’s a lot to think about. 

What is the TCJA and its benefits?

Let’s first talk about the upcoming new administration and how they may view tax policy. The  Tax Cuts and Job Act (TCJA) expires in 2025. So, what does that mean? In essence, the planning done in response to the 2018 law will either remain true or expire, requiring clients to reassess  their tax strategy. As with most policies, there are winners and losers, depending on your situation. Big dollars are at stake.

The TCJA reduced the top individual rate from 39.6% to 37%. That’s a significant decrease. To put that into perspective, the marginal tax bracket it applies to is over six hundred thousand dollars or more in adjusted annual gross income. Nothing to sneeze at! A big win for those making a seven-figure annual income. 

The 199A deduction was also introduced through the TCJA plan. This allows certain businesses – flow-through entities – to reduce net income by 20%, effectively lowering their top tax bracket to 28%. Much lower than the 37% bracket that most high-income earners are subject to. This era of tax is historically low. To put it into perspective, let's take a client who makes $20 million annually in a flow-through entity. Their yearly taxes drop by $2 million under the TCJA. Remember, the top 1% of earners in America pay approximately half of the nation’s taxes. So, when you cut here, it drastically affects Treasury revenue.

The maximum corporate tax rate was also sliced from 35% to 20% as part of the TCJA, and with those tax savings reinvested, the stock market jumped. Plus, let's not forget the  Estate Tax Exemption, which we’ve already covered. 

What happens when the TCJA sunsets?

When the TCJA sunsets, it could serve as a tax-revenue strategy to address the National Debt. Will it happen? Unlikely. The new administration wants to take the tax cuts further. Which parts of the law will change? Will everything get extended? What will be removed? These questions are being asked, prompting varying opinions on what may unfold. I think they’ll buy themselves some more time with an extension to the TCJA. In saying that, I doubt they’ll extend it more than two years because they may lose the opportunity to push through their tax agendas in the instance they lose the House or Senate in the midterms.

The National Debt is a Concern

These past few years have been challenging. During Trump’s last term, his administration was in a unique position where they increased the National Debt at a time during economic prosperity. But Biden’s handling of Covid-19 was concerning. While effective in retaining jobs, his Paycheck Protection Program (PPP) design also allowed businesses thriving during the pandemic to access funds. This highlights the complexity of addressing debt while maintaining economic stability. That same client who makes $20 million per year? They received $4 million for the PPP. Tax-free money that never has to be repaid. 

Our leaders need to consider that we’ve created an astronomical National Debt. Does the government raise taxes to combat this? Do we cut spending, which is generally politically unpopular? What else would I implement if I were the decision-maker? While I think the new administration’s version of efficiency is unrealistic, our federal bureaucracy is grossly inflated with disproportionate perks, so there should be plenty of room to save money in government. We can better incentivize retirement savings external to social security to reduce that tax burden. Lastly, I think immigration reform is essential to maintain population growth for our country’s prosperity. Even some undocumented immigrants contribute to our tax system. And, as a reminder, they make up a large percentage of our valued farm workers. An open border is not the solution. But a smart legal immigration strategy could help our nation thrive. With birth rate averages down, who will fund social security if we don’t increase population year-over-year?

The Small Things You Can Do to Prepare Your Finances

My current advice to clients is that while there’s no sense of urgency, it’s wise to consider:

• With tax rates at a historic low, now is the time to realize any deferred or upcoming income events. 
• If you haven’t filled up your 37% tax bracket, then do so, such as with additional pension distribution like a Roth IRA.
• Observe governmental changes over the next year and avoid big spikes in your income where possible so you remain in the lower tax range. 
• Strategize conservatively if you’re a start-up or entrepreneur, as things could drastically change in a short amount of time.
• Liaise closely with your tax advisor and ask questions.

In times of uncertainty, preparation is your best defense. Stay informed, work closely with advisors, and be proactive about tax advantages. As I like to say, keep your powder dry. 

The next act may be unpredictable, but a sound strategy provides a better chance of enjoying the show.