Expert insight
Stay ahead: Proactive tax-planning strategies
May 08, 2025
Investors and financial advisors face a complex tax landscape in navigating 2025 and beyond. Without new legislation, key provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire in December, and while new tax legislation is expected later this year, much remains unknown. Conventional advice says to accelerate income to benefit from current tax rates; however, a deeper analysis reveals that individual circumstances can significantly influence the best approach.
As the landscape of tax legislation evolves, taxpayers find themselves navigating a complex and ever-changing environment. Each investor’s financial situation is unique, influenced by a myriad of factors such as income, investments, and family circumstances, making personalized tax planning more crucial than ever. However, amidst the uncertainty, there are certain proactive strategies that can benefit taxpayers regardless of the specific legislative changes that may come.
Let’s look at some of the TCJA provisions and how changes to them could affect various groups of taxpayers, along with some planning tips for taxpayers and advisors to consider:
Shifting tax brackets and rates
One of the biggest TCJA changes was the lowering of some marginal tax rates and the shifting of income ranges for each tax bracket. If this provision expires, it appears most taxpayers would see their taxes increase. However, when Vanguard analyzed more than 80,000 personas representing all relevant client demographics we found that some taxpayers—single and head of household filers with income ranging from $200,000 to $550,000—could see lower rates.1
Personal exemptions
The TCJA replaced personal exemptions—deductions based on number of dependents—with higher standard deductions. The reintroduction of personal exemptions could lower taxable income for households not subject to the personal exemption phase-out by offsetting other possible tax impacts. For example, if the higher standard deduction expires, a three-person household that files jointly could receive enough personal exemptions to offset the reduction.
"Each client's unique financial situation can lead to different outcomes under potential tax changes," said Joel Dickson, Ph.D., Vanguard Global Head of Enterprise Advice Methodology. "It's crucial to tailor planning strategies to individual circumstances."
Below-the-line deductions
Known as below-the-line deductions because they’re deducted after the taxpayer determines their AGI, itemized deductions are another area that changed under the TCJA. The legislation eliminated the income-based phase out, or “Pease limitation,” and added static caps on the two most common itemized deductions—state and local tax (SALT) and mortgage interest. The SALT deduction was capped at $10,000 regardless of income, and the mortgage interest deduction was limited to the interest paid on up to a $750,000 mortgage.
These limitation provisions are big drivers of tax outcomes and are complex to evaluate. Our data suggests that itemized deduction caps have a significant impact on overall taxes. Here are some examples of that impact:
- If the Pease limitation returns, 78% of relevant personas would see their taxes increase.
- Of the 22% who would see a tax decrease from a return of the Pease limitation, 96% of those are driven by the elimination of the itemized deduction caps.
If the standard deduction were to be reduced, this could have a significant effect on relevant taxpayers, depending on the size of the reduction. When we modeled a return to pre-TCJA standard deductions, 95% of the personas taking the standard deduction saw a tax increase.
Making informed decisions
The 2025 tax landscape is complex, with the potential for significant changes that could impact investors and their financial planning. By understanding their unique individual circumstances and considering the interplay of various tax provisions, investors and their advisors can make informed decisions to optimize their tax outcomes.
"Staying informed and consulting with a tax professional is essential to navigate these changes effectively," said Garrett Harbron, J.D., CFA, CFP®, Vanguard’s head of Global Wealth Planning Methodology. “We’ll also continue to closely monitor potential legislative changes and plan to address proposals as they become part of proposed legislation.”
1 To examine various tax legislation scenarios and their possible impacts, Vanguard created a range of 80,000 investor profiles (personas) representing all relevant client demographics, such as varying income levels, deduction amounts, household sizes, and the number of itemized deduction caps and applications.
Notes:
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions, and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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