2025 Wealth Management Midyear Outlook

The Tax Cuts and Jobs Act (TCJA) of 2017 reduced income taxes for most individuals and doubled the estate tax exemption amount, among many other changes. The fact that the TCJA's provisions are scheduled to expire at the end of 2025, unless Congress acts, remains top of mind. What can we expect?

The House passed their version of a bill, and it's now with the Senate where parts of the bill will most likely be changed. The administration and the Republican majorities in Congress hope to extend the TCJA's tax cuts and add a few more, such as eliminating income taxes on tips and overtime pay.

Legislators from higher tax states such as New York and California continue their push for other provisions such as a removal of (or a substantial increase to) the current $10,000 cap on deductions of state and local taxes (known as the SALT cap), though this has been contentious.

On the estate tax front, the House bill calls for an increase to the estate tax exclusion amount to $15 million per person in 2026 and to index that amount to inflation in subsequent years.

How all of this will be paid for is expected to be a heated debate among lawmakers.

While we continue to watch the legislation, we believe that there are relatively consistent and reliable tax-aware planning and investing strategies that investors can consider, regardless of extensions or changes to tax law. These include:

1. Tap the full range of tax-advantaged investment accounts that may be available to you, including IRAs, 401(k)s, Health Saving Accounts (HSAs), and Roth accounts to help reduce, defer, or eliminate taxes.
2. Consider tax-efficient strategies including buy-and-hold investing, index funds, less active funds or strategies, and exchange traded funds (ETFs) in taxable brokerage accounts when possible and appropriate to reduce tax drag.
3. Consider municipal bonds for your bond investments, particularly if you're in the 32% tax bracket or higher (and even the 24% bracket for some investors), in taxable brokerage accounts.

We can't control markets. But identifying, and using, tax-efficient planning and investing strategies may help increase after-tax wealth.

Tariffs have eclipsed inflation in the headlines–though tariffs, according to most established economic theory, are in and of themselves generally inflationary. Will inflation pick up through the end of 2026? It seems likely. The more pressing question is two-fold: Will tariffs and possible subsequent rising inflation hurt the U.S economy and drive the country into recession? And if so, how could you respond?

In our annual outlook, we shared three suggestions to combat inflation: stay invested, consider options to buffer your portfolio from inflation, including Treasury Inflation Protected Securities (TIPS), and maintain some cash reserves to increase your ability and confidence to follow the first suggestion. Staying invested in equities, according to your time horizon and financial and/or wealth plan, is one of the best chances to outpace inflation over time.

All three suggestions still apply at the midyear mark. Keep in mind that TIPS are a long-term investment position best suited to keep pace with inflation, not beat inflation, and they can be impacted in the short term by changing interest rates.

Having a cushion of more stable investments that may not "beat" inflation, but that provide you with liquidity for possible short-term needs from your investments (for example, if you are in retirement) is increasingly helpful, in our view. See more on this below.

We're also watching interest rates for investors, and for borrowers. Rates to borrow for mortgages and housing, in particular, remain high. We don't expect that mortgage rates will drop more significantly soon.

The fires in Los Angeles, hurricane season in Florida, and other recent natural disasters shone a light on the importance of insurance and other risk management steps as part of a comprehensive financial and wealth plan. This remains true now, and always. Have you reviewed your homeowner's policies? Have the premiums gone up? Could you increase the deductible and only file a claim in the event of a major expense or catastrophe to reduce your premium costs? Consider these and other steps in an insurance review as part of your wealth plan.

Risk management applies to investing as well. The drop in the S&P 500 of more than 17% for the year, followed by a bounce back up after the administration stepped back on tariffs is a reminder–as market volatility tends to be–of the importance of having a targeted strategic portfolio allocation (roughly, the combination of stocks, bonds, and cash) that matches your time horizon, needs, and tolerance to manage dips.

We talk often about risk tolerance, or your stomach for market dips. But what's your risk capacity, or your ability to afford risk? If you have a decade or more until you need your investments (say, investments for retirement when you're in your 30s or 40s), time is on your side to help manage risk in your portfolio. If you need money sooner (say, you're nearing or in retirement or about to tap savings to fund a child's college tuition), having some more stable investments, such as cash and high-quality investment grade bonds, to fund those needs is a prudent form of risk management.

When thinking about goals for investments, think about your time horizon. In the simplest sense, most investors likely have two targets and goals: money needed soon, in the next few months out to two to four years, and money for long-term investment, meaning money for growth potential through dips and downturns. Consider allocating–or bucketing–to these two different time horizons based on your personal needs, either within a single portfolio, or if it makes sense for you, with different portfolios or accounts.

Having a cushion can help pave the path to opportunity. For longer-term goals, if you have liquidity in place, there's a good chance you'll feel more comfortable and confident sticking with a plan, even in a downturn.

2025 so far has been bouncy. A new administration, new tariff policy, and markets that have dropped then bounced back up. Let's hope the recovery trend continues. But are you positioned for whatever comes if it does not? We believe having a plan that considers opportunities, as well as risks, focused on your personal time horizon, tax situation, concerns about inflation, and other factors is the path to confidence, and wealth. Review your plan. Consider the points above. Then get help and support when you need it, to help continue to grow, but also preserve and use wealth.