The Tax Cuts and Jobs Act Could Sunset

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A topic that's on the mind of many financial professionals and their clients is whether the Tax Cuts and Jobs Act will sunset as planned, at the end of 2025.

When the TCJA was enacted in 2017, it significantly altered the tax landscape.

Among various provisions, it provided tax cuts for individuals and businesses.

However, unless it is extended by December 31, 2025, many of its individual tax provisions will expire — leading to possible tax increases for individual taxpayers compared to today's rates.

While the potential for this change is still more than a year away, it provides an opportunity for financial professionals to consider strategies and opportunities to help prepare clients, particularly in managing non-qualified capital gains.

On Possible Tool: Non-Qualified Annuities

Non-qualified annuities can be a valuable tool in tax planning, especially in the context of potentially higher taxes.

Unlike qualified annuities, which are funded with pre-tax dollars and often come with contribution limits, non-qualified annuities are funded with after-tax dollars and have no contribution limits.

The key advantage here is tax deferral.

Earnings on non-qualified annuities grow tax-deferred until the funds are withdrawn, which can be a crucial benefit when anticipating potentially higher future tax rates.

Consider the following example of John, who has a substantial portfolio of non-qualified assets.

With the impending increase in capital gains tax rates post-2025, John may have concerns about the tax impact of recurring interest and capital gains generated by the non-qualified portfolio.

By working with his financial professional, John decides to leverage non-qualified annuities to defer taxes on his capital gains.

Other options for John to consider include investment strategies with low turnover ratios. This can minimize capital gains that reoccur each year in the portfolio.

John may also want to consider tax loss harvesting. This is when John sells his non-qualified asset at a loss and then purchases another non-substantially identical asset.

This strategy can be useful when you see a market pullback.

Communicating With Clients

Many clients may not fully grasp the complexities of tax legislation or the specific advantages of certain financial products.

Therefore, it's key to break down these concepts into understandable terms and clearly illustrate the potential savings and growth benefits.

While each client's strategy may look different based on their needs and goals, starting conversations now before potential changes happen can help your clients understand strategic options.

Leveraging the power of various tax strategies and communicating their benefits clearly can position you as an invaluable resource, guiding your clients toward reaching their goals in an ever-changing environment.

Tyler De Haan is director of advanced sales at Sammons Institutional Group.categ