2025 Year-End Planning Opportunities
POLICY CHANGES IN 2025 AFFECTING U.S. PERSONS – THE OBBBA AND WEP REPEAL
ONE BIG BEAUTIFUL BILL ACT (OBBBA) ENSHRINES MANY TAX POLICIES FROM TRUMP’S FIRST TERM
The OBBBA makes permanent several of the tax provisions from the 2017 Tax Cuts and Jobs Act that affect individuals including but not limited to:
- Reductions to many personal income tax brackets,
- The near doubling of the standard deduction amount, and inflation indexing of this amount going forward,
- The doubling of the child tax credit, and an extra boost from US$2,000 to US$2,200 thanks to the OBBBA,
- The higher federal estate and gift tax exemption, set at US$15,000,000 per tax filer as of 2026 and this number is now indexed to inflation going forward.
The OBBBA also contained two new notable temporary personal tax changes including a higher limit (from US$10,000 to US$40,000) for state and local tax (SALT) deductions and an income-tested Social Security tax deduction of up to US$6,000 for low- and middle-income households.
The 2017 Tax Cuts and Jobs Act was scheduled to expire (sunset) at the end of 2025. Since the passing of the 2017 Tax Cuts and Jobs Act, and leading up to 2025, wealth managers (like us) and accountants developed and executed strategies on behalf of their clients to limit future taxes payable related to the expiry of many provisions in the 2017 Tax Cuts and Jobs Act, particularly the reversion of estate and gift tax threshold to a much lower level. Now that the estate and gift tax threshold has been permanently set at a higher level than many expected, and is indexed to inflation going forward, many high-net-worth households will no longer be on the hook to pay estate tax at death in future.
While the number of clients potentially exposed to estate tax at death has dwindled, reviewing clients’ estate tax exposure on an annual basis remains a prudent exercise.
THE WINDFALL ELIMINATION PROVISION (WEP) WAS OFFICIALLY REPEALED
On January 6th, 2025, the bill to repeal WEP was signed into law. This means that those individuals previously affected by WEP may receive additional Social Security benefits of as much as US$7,044 per year going forward and households (with one spousal recipient) as much as US$10,566 per year going forward. Those who are receiving Social Security retirement or spousal benefits who were previously affected by WEP should have already seen their benefits increase at some point in 2025 and should have received a lump-sum for retroactive benefits back to January 2024, if applicable.
While WEP repeal simplifies retirement income planning for those affected by WEP, there is still plenty of planning to do to maximize retirement income and/or estate values! Carefully coordinating government benefits and employer pensions with the drawdown of retirement and non-retirement assets is key to maximizing retirement income as well as your estate for your beneficiaries.
WEP repeal will result in somewhat higher Social Security benefits in some cases and may allow for higher levels of available income in retirement and/or increase expected estate values which may require additional planning in terms of gifting and taxation.
We have been busy throughout 2025 updating financial plans/projections to incorporate greater Social Security benefits where applicable and assessing the impact on clients’ terminal investment asset values and potentially higher capital gains tax at death.
In some cases, longer term wealth management strategies may need to be adjusted due to higher terminal investment asset values and potentially higher capital gains tax at death. In other cases, plans to commute non-covered pensions to avoid WEP or start CPP benefits early to limit WEP will need to be revisited.
THE CLOCK IS TICKING FOR 2025 TAX PLANNING
WHEN THE SNOW IS FALLING, TAX LOSS SELLING IS CALLING!
The last few years have been kind to equity markets so tax loss selling candidates may be few and far between. That said, this most recent market advance has come with mixed performance as AI-related stocks led the pack and some other areas of the market – consumer staples, telecom, many pandemic-era winners – have lagged behind and may be in a loss position.
Tax loss selling involves selling a position that has an unrealized capital loss to offset realized capital losses triggered throughout the year, with the goal of reducing or eliminating capital gains taxes payable. For US tax purposes, excess realized capital losses up to $3,000 can be used to offset ordinary income, offering an even greater tax benefit than simply offsetting capital gains.
Before we get too hasty, it is important to remember a few things:
- Tax loss selling is an optional exercise, not a core activity in investing (i.e. don’t disrupt your long-term investment strategy/plan to net a short-term tax benefit).
- Look to offset short-term gains (positions held for less than 12 months) first because they are taxed at a higher marginal rate.
- Be cognizant of wash sale rules that arise when buying and selling the same security within 30 calendar days. Violating wash sale rules can result in the IRS disallowing realizing the capital loss.
PRIORITIZE ANNUAL GIFTS TO FRIENDS AND FAMILY TO REDUCE YOUR TERMINAL ESTATE VALUE AND MAINTAIN YOUR FULL GIFT AND ESTATE TAX EXEMPTION
The gift and estate tax base exclusion amount/exemption is $13.99 million per individual in 2025. As discussed above, OBBBA made the $15 million USD (2025) base exclusion amount permanent and this threshold is now inflation indexed. This makes gifting assets to family while living to fully utilize the gift and estate tax exemption a less time-sensitive planning item. Still important but less pressing of an issue than it was when the 2017 Tax Cuts and Jobs Act was set to expire (sunset) at the end of 2025.
Perhaps more pressing is for individuals and families that expect to have terminal estate values of more than $15 or $30 million, respectively, to take full advantage of the U.S. federal annual gift tax exclusion of $19,000 (2025) per recipient.
Each spouse can gift up to $19,000 per year to any recipient so a household can potentially gift hundreds of thousands to family and friends each year, reducing their terminal estate value(s), maintaining their full gift and estate tax exemption(s), and limiting or eliminating estate taxes payable at death.
Note that gifts you give to adult children are not subject to Canadian tax attribution rules but may trigger Canadian capital gains if you give assets that have increased in value from your Canadian cost base.
AFTER YEARS ON PANDEMIC ERA FOG, THE IRS PROVIDES CLARITY ON RMDS FOR POST-SECURE ACT INHERITED IRAS
The SECURE Act, which introduced the 10-year rule for inherited IRAs for most non-spouse beneficiaries of someone who died in 2020 or later, initially seemed to necessitate no annual required minimum distributions (RMDs) and that the only requirement was that the inherited IRA be fully paid out to the beneficiary by the end of the 10th calendar year following death.
The IRS has since clarified that it will expect RMDs be paid each year starting in the 2025 tax year and will apply a 25% excise tax to any RMD amounts not paid in the 2025 tax year and beyond. This applies to both inherited traditional and inherited Roth IRAs.
In addition to this recent change, be mindful of RMD rules for all traditional IRAs:
- Your first RMD can be delayed until April 1 of the year after you are required to start the RMDs. If you delay, however, you must also take your second RMD in the same tax year. This can inflate your income, which may push you into a higher tax bracket.
- Subsequent RMDs must be taken no later than December 31 of each calendar year.
- You can always withdraw more than the required minimum from the IRA but be mindful of how taking a distribution will impact your taxable income or tax bracket.
Feel free to reach out to Steele Wealth Management about IRA withdrawal strategies and how you can reduce taxation in the current and future tax years.
EVALUATE ANY MAJOR LIFE CHANGES THAT IMPACT YOUR TAXABLE INCOME NOW OR IN THE FUTURE
Major life changes – job loss, promotion, strong sales year, new retirement plans, births or deaths in the family, or divorce, to name a few – can have a significant impact on your current and future taxable income as well as change your savings rates and savings priorities. Each of these changes opens the door to new planning opportunities and is something that should be discussed with your advisory team. Many of these changes create opportunities that may be best completed before the end of the tax year so if life is throwing you a curveball, or you’ve chosen to take a different path on your life journey, reach out to Steele Wealth Management and we’ll explore next steps.
We’re here to help so reach out anytime!
