Welcome to EWM INSIGHTS, where we celebrate HUMAN CAPITAL!
In this podcast edition, we continue our advanced planning series and explore the implications of the recently enacted "One Big Beautiful Bill," focusing on tax planning and investment strategies. We examine key components of this legislation, including the permanence of extended lower income tax rates and new deductions, such as the enhanced standard deduction for individuals and married couples. Additionally, we discuss the strategic advantages of Roth IRA conversions and how these changes can optimize tax situations. We also address significant alterations to estate tax exemptions and deductions that impact wealth transfer and estate planning for families, particularly business owners.
Takeaways:
The "One Big Beautiful Act" introduced tax provisions requiring careful consideration by individuals and families.
A key feature is the permanent extension of lower federal income tax rates, presenting unique planning opportunities for taxpayers.
Understanding the complexities of recent tax changes, including potential deductions and benefits of converting traditional IRAs to Roth IRAs, is essential; consult with tax and financial professionals.
Individuals over 65 now qualify for an additional senior deduction, enhancing tax planning strategies.
The standard deduction for married couples filing jointly has substantially increased, providing further tax relief to many households.
Business owners should be aware of new provisions affecting pass-through entities that offer additional tax benefits.
This episode explores the "One Big Beautiful Bill," focusing on its implications for individual taxpayers and families. Host Paul Ellis and special guest Jim Bergeron dissect the complexities of this legislative package, which includes numerous tax provisions aimed at transforming the financial laandscape for American citizens. A primary theme is the permanence of lower federal income tax rates, previously scheduled to revert, granting individuals a unique opportunity to capitalize on these extended tax benefits.
The speakers emphasize the importance of adapting financial planning strategies in response to these changes, advocating for tax optimization strategies, such as converting traditional IRA assets into Roth IRAs. The discussion explores the rationale behind such conversions in the context of favorable tax rates and underscores the necessity of consulting financial advisors to tailor strategies to individual circumstances.
Moreover, the episode addresses the broader implications of the new tax law, including enhancements to standard and itemized deductions. The speakers encourage proactive financial planning, leveraging these changes to enhance financial well-being. Overall, this episode serves as a guide, equipping listeners with insights to navigate the new tax landscape and empowering them to make informed financial decisions that can assist in creating "One Big Beautiful... Legacy."
Additional notes and resources are attached below.
Feel free to share this episode with those in your circle who are on a similar path of learning.
We hope our conversations will help you acquire more knowledge, become even more curious about the gifts that are in and all around us, while supporting you to reach new heights as we grow together.
You can subscribe and listen to EWM INSIGHTS on Spotify, Apple Podcasts, Amazon Music, or the Ellis Wealth Management Homepage: https://elliswealthmanagement.net/podcasts/
Above all, through EWM INSIGHTS we want to encourage you to:
INVEST IN WHAT YOU LOVE!®
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Additional notes and resources are attached below.
Speakers:
Paul Bertrand Ellis, CIMA®
President and Managing Director
Ellis Wealth Management, LLC
phone: 425-405-7720
email: paul.ellis@elliswealthmanagement.net
James A. Bergeron, J.D.
Jim is an attorney and Advisor Education Consultant in the Global Learning and Development group where he and the team focus on developing and delivering intellectual capital designed to help wealth management firms and advisory practices evolve - and enhance their relationships with clients.
Jim is a graduate of Augsburg University in Minneapolis with degrees in Economics and Political Science and later received his Law Degree from Vanderbilt University in Nashville, TN. Jim currently serves on the Northern Regional Council for the American Cancer Society.
This is Paul Ellis, managing director of Ellis Wealth Management, where we encourage you to invest in what you love.
Speaker A:
Ellis Wealth Management is an independent financial services firm focused on planning, advice, coaching and investment management.
Speaker A:
We are dedicated to the families we serve and we encourage you to invest in what you love.
Speaker A:
Within Insights, we look at ways to make our world richer through focusing on sharing and developing human capital.
Speaker A:
Well, all right.
Speaker A:
What a great, great day it is in the beautiful Pacific Northwest.
Speaker A:
It's getting a little cooler.
Speaker A:
We're heading into the.
Speaker A:
Into that fall time people are preparing for back to school if they're not back to school already.
Speaker A:
And now's a great time as you go through the checklist of what students need in school and what other things need to be done to take a look at your finances.
Speaker A:
And one of the things that has come up recently is the one big beautiful bill as it is named.
Speaker A:
And people have questions and we're going to talk about that today.
Speaker A:
So with us today, we have James Bergeron and Will from Nuveen.
Speaker A:
Hello, gentlemen.
Speaker A:
How are you today?
Speaker B:
Really good, Paul, and it's good to be back with you again.
Speaker B:
And what better thing for us to be talking about than our old friend taxes and tax planning, right?
Speaker B:
I mean, for us, it's obviously part of the conversation, but I'm happy to be back with you.
Speaker A:
Excellent.
Speaker A:
And I am so glad to be spending time with you today, Will.
Speaker A:
How are you today, my friend?
Speaker B:
Doing great as well.
Speaker B:
Doing great as well, Paul.
Speaker B:
Thanks for having us back on.
Speaker A:
Before we begin, we have one housekeeping item that we should share, and that is Nuveen is working with Ellis Wealth Management for this podcast, but there are some components that Nuveen wants to make sure that everyone understands.
Speaker A:
Would you be willing to share that again?
Speaker B:
Sure, we'll do so here.
Speaker B:
This material is not intended to be a recommendation or investment advice, and it doesn't constitute a solicitation to buy, sell, or hold a security or an investment strategy and is not provided in a fiduciary capacity.
Speaker B:
The information provided does not take into account specifics or objectives or circumstances of any particular individual or family or suggest any specific course of action.
Speaker B:
Investment decisions should be made based on your individual objectives and circumstances and in consultation with your advisors.
Speaker B:
The views and opinions expressed here are for informational and educational purposes only as of the date of the production and may change without notice at any time based upon numerous factors such as market or other conditions.
Speaker B:
Additional risks and uncertainties may not come to pass.
Speaker B:
And so as a result, you have to Consider these as informational discussions directly.
Speaker B:
Nuveen does not provide legal or tax based information.
Speaker B:
Nuveen provides investment advisory solutions through its.
Speaker A:
Investment specialists, has a number of provisions, and it can be an opportunity for people to review what they have or an opportunity for people to renew their focuses and their desires.
Speaker B:
And you know, we we by way of title, we reference it as one big beautiful bill.
Speaker B:
Now actually one big beautiful act, I suppose you could call it, because it's it is now law.
Speaker B:
But as a part of that, it is big.
Speaker B:
e legislative package is over:
Speaker B:
In other words, as income levels rise for us as individuals, the benefits that we receive and get out of that bill may be reduced.
Speaker B:
And so those complexities are all a part of the planning process.
Speaker B:
And maybe a good place for us to start is just to talk about what are some of the big ticket items that have come by way of this new package, this new legislation that's been enacted for individuals, for those that are listening for their planning purposes.
Speaker B:
So what are the things that are most effective?
Speaker B:
That's probably a good place for us to start.
Speaker B:
Paul, One of the first things that I think is worth talking about is the fact that our income tax rates at the federal level that were scheduled to actually increase at the end of this year as a part of legislation.
Speaker B:
es where we talked about that:
Speaker B:
Well, this new law, one big beautiful act, has extended permanently some of those provisions.
Speaker B:
And one of the most notable initially is that our lower income tax rates as a part of that previous law have been extended permanently.
Speaker B:
I'll give you an example.
Speaker B:
at the federal level prior to:
Speaker B:
That bracket went down by 4 percentage points to 24%.
Speaker B:
It's where it's at today.
Speaker B:
And that bracket structure with wider income tax brackets, meaning takes more income to move to the next higher bracket and has also been extended and permanently.
Speaker B:
Now, that said, we should probably reference the fact, Paul, that permanently when it comes to tax legislation really only means until the next tax law is passed.
Speaker B:
And we are less than two years away from midterm elections and two years following that, we'll see the White House receded.
Speaker B:
And so as a part of that, the law, while it's meant to be permanent, doesn't mean that it can't be changed.
Speaker B:
And so for us, Paul, I think that means that we know that income tax rates are lower right now almost to historically low levels at the federal level, and they're going to be lower for longer.
Speaker B:
So what does that mean from a planning standpoint?
Speaker B:
How do we take advantage of those lower rates for longer?
Speaker B:
That's maybe one of the first things that we should reference from this bill and we can maybe talk about a couple of planning opportunities if you want.
Speaker A:
Yes, let's take a look at that.
Speaker B:
To me, I think of it this way.
Speaker B:
If I know, for instance, that my income tax rates are relatively low right now and maybe at a low level for me going forward based upon where my income levels might be at, I might want to take advantage of that.
Speaker B:
And now it sounds counterintuitive to be thinking about maybe paying a tax now as opposed to deferring it for as long as possible.
Speaker B:
But in some cases it might make sense.
Speaker B:
And I'll give you an example.
Speaker B:
One of those is this idea of maybe converting some of your IRA dollars into a Roth ira.
Speaker B:
And if you don't know, for instance, an IRA I think everyone recognizes is essentially a tax deferred vehicle.
Speaker B:
And so I put dollars into an IRA and those monies grow tax deferred.
Speaker B:
They compound and continue to compound over time, and they're not taxed until they come out of that ira.
Speaker B:
And in some cases, once you reach certain ages into your 70s, they're forced out of that IRA by way of something called a required minimum distribution.
Speaker B:
Now, when that money comes out, it comes out as ordinary income, taxable to you on your tax return.
Speaker B:
A Roth ira, on the other hand, one of the big benefits, and there are a few that we should go through, but one of the first is that money not only grows tax deferred, but when it comes out, it comes out tax free.
Speaker B:
So a big difference between a regular IRA is the fact that the Roth ira, that distribution is tax free.
Speaker B:
And so as a part of that, it might make sense to start thinking about and maybe acting on that, conversion of IRA assets to a Roth ira.
Speaker B:
It's worth considering with your tax advisor.
Speaker B:
And as a part of that understanding not only the benefits, but with many things, Paul Right.
Speaker B:
There is a cost, and that's something that we should chat a little bit about.
Speaker B:
But I'll pause there.
Speaker B:
That idea of a Roth conversion, something that we've maybe chatted a little bit about previously, but I think in light of this new law, it absolutely does make sense for individuals to start thinking about.
Speaker B:
What do you think?
Speaker A:
Yes, we're in the past where it may not have been advantageous to make a conversion.
Speaker A:
Now, depending upon person's particular situation, it might be beneficial.
Speaker B:
Yeah.
Speaker B:
And so from that standpoint, you know, real quickly.
Speaker B:
Sounds great, right?
Speaker B:
We get tax free income as opposed to tax deferred income.
Speaker B:
We'll see other benefits from that Roth account.
Speaker B:
For instance, I mentioned required minimum distributions.
Speaker B:
Well, they don't apply to a Roth account.
Speaker B:
So the money only has to come out when you need it doesn't even get forced out at certain ages.
Speaker B:
And one of the other benefits is not only is it tax free in your hands, but if you treat your Roth IRA as a legacy asset, in other words, you pass it through your estate, maybe to children as a part of that, that Roth account is tax free in their hands as well.
Speaker B:
Really different from an ira, which in turn, if you passed a regular or traditional IRA through your estate by naming a child as a beneficiary, it's taxed as a part of your estate.
Speaker B:
And that income that comes out of that IRA would be taxed as ordinary income in the hands of your children.
Speaker B:
So converting to a Roth absolutely makes sense.
Speaker B:
Real quickly, though, if we see these benefits, they don't come free.
Speaker B:
So what's the cost?
Speaker B:
The cost is that if I convert $1 from my traditional IRA to a Roth IRA IRA, I have $1 of additional income this year.
Speaker B:
And then you just expand out the dollars depending upon how much you actually convert.
Speaker B:
So if I convert $100,000, I have $100,000 of additional income this year.
Speaker B:
And that's where the planning aspect comes into it.
Speaker B:
We'd maybe want to start with thinking about where you might be at in your current tax brackets or where they might be this year, and how much headroom do you have before you would move maybe into the next higher marginal tax bracket.
Speaker B:
And as a result, that might be something worth considering again, along with your tax and your legal advisors around this idea of Roth conversions and essentially prepaying a tax, because once you do that conversion, everything in that account then in turn becomes tax free.
Speaker B:
Now, there are rules around that conversion process and the holding periods, but that's worth considering.
Speaker B:
And in light of the fact that this new law has now extended lower income tax rates for longer, that's just one example of how we might take advantage of that.
Speaker A:
Now when they make that conversion, those, the funds that are in that Roth need to stay in that Roth for a number of years, Correct?
Speaker B:
Correct.
Speaker B:
Five year time period.
Speaker A:
Five year time period.
Speaker B:
And by stay in it means we don't get the tax benefits that we talked about unless they're held for that five year period.
Speaker B:
We can still take them out, but they would in turn be taxable.
Speaker B:
And again, there's a tax structure around that so they're accessible, but at the same time we don't necessarily get the full benefit of that tax free status unless we hold them for five years.
Speaker A:
Yes.
Speaker A:
And so that's one of the things to consider with your professional financial team is the amount of time that five years and how much time would it take to maybe replenish the amount in taxes that one would have to pay in that conversion process.
Speaker B:
Correct.
Speaker A:
So excellent, excellent opportunity to consider, excellent opportunity to have a discussion with one's professional financial team.
Speaker A:
But as you well stated, there's not a free lunch.
Speaker A:
There are things that while it can be extremely beneficial on one side, there are some things to really consider on the other.
Speaker B:
Yeah.
Speaker B:
And I think as a part of that, the considerations then extend to and I'm going to stick with this same example where maybe we thought about and it does make sense to do a conversion of those IRA assets or some portion of them actually more a fan of smaller bite size conversions over time.
Speaker B:
But if we do that, and as we just said, if that increases income, potentially income tax might want to look for some ways to offset that additional tax.
Speaker B:
And that's where the deduction side of the income tax equation starts to come to the fore.
Speaker B:
And there are some benefits that have been provided to us by way of this new legislation, this new law on the deduction side, which in turn probably worked their way into this conversation around taking advantage of the lower income tax rates that we have and at the same time maybe taking advantage of some of these deductions.
Speaker B:
So maybe, Paul, we talk a little bit about some of the new or enhanced income tax deductions for individuals as a part of this new law.
Speaker A:
Terrific.
Speaker B:
Well, let's start with one of the first, and that is our standard deduction.
Speaker B:
So as you know, on a tax return, as you add up your income, one of the first things you get to do is to start to take deductions against that income from the sources that you have.
Speaker B:
Now those deductions fall into two broad categories.
Speaker B:
The standard deduction or the accumulation of your itemized Deductions, standard deduction.
Speaker B:
Everyone can utilize that.
Speaker B:
We only use our itemized deductions if, when we add them all up, they exceed the standard deduction.
Speaker B:
, that standard deduction for:
Speaker B:
Now, this new law actually has increased that standard deduction amount for this year from 30,000 on that joint return to 31,500.
Speaker B:
So we had an additional $1,500 deduction.
Speaker B:
Well, that's one of the first things that I might want to start thinking about and contemplating, because that $1,500 in turn in extra deduction on the standard deduction can offset some of that Roth conversion cost that we talked about.
Speaker B:
So factoring that into the conversation makes absolute sense.
Speaker B:
And that standard deduction will continue to be indexed for inflation each year thereafter.
Speaker B:
And again, that is a permanent restructuring of the law.
Speaker B:
When we talked about the income tax rates that were scheduled to be at least reset to higher levels at the end of this year, the new law extended those lower rates for a longer time period.
Speaker B:
The standard deduction amount was also scheduled to change and be reduced.
Speaker B:
But this new law has kept that higher amount in place and extended it permanently.
Speaker B:
And so the first opportunity is maybe it makes sense for us to take advantage of that additional deduction side.
Speaker B:
We talked about standard deductions, Paul.
Speaker B:
We should probably chat a little bit about itemized deductions as well and what they mean.
Speaker A:
Some of those have changed, haven't they?
Speaker B:
Yeah, in fact, a couple really beneficially.
Speaker B:
Let's start with one of the biggest changes that many of you probably already heard about to some degree, and that is if you reside in a state in which the state taxes your income, and in addition to that, there are property taxes and other state and local level taxes.
Speaker B:
Historically, we've been able to deduct on our federal income tax return the amount of our state and local level taxes, state level property tax, state level income tax, those taxes at that state level.
Speaker B:
One of the things that we have been dealing with for the last 10 years is a cap on the amount of those state and local taxes that can be deducted.
Speaker B:
And that cap is $10,000.
Speaker B:
So even if your state income tax and property tax, when you add all of those up, if it exceeds $10,000, we've been limited to that $10,000amount.
Speaker B:
Well, this new law changes that starting this year.
Speaker B:
Now, starting this year, that state and local level tax Cap has been moved from 10,000 all the way up to $40,000.
Speaker B:
So four times its current level.
Speaker B:
Really beneficial for those individuals that are in states that maybe have higher income tax rates, maybe those places with higher property taxes and property values dictate that property tax as well.
Speaker B:
And so as a result, really beneficial deduction for those that itemize.
Speaker B:
Now, remember, difference is if my itemized deductions don't exceed the standard deduction amount, I use the standard deduction.
Speaker B:
But if they do, this is when we start to see the benefit of itemizing.
Speaker B:
Now, with this new cap, for a lot of us, it just increases the amount of our itemized deductions that we can take advantage of.
Speaker B:
So that's maybe one of the first things for us to consider.
Speaker B:
Paul, we should also, as a part of that, talk real quickly about the fact that with, with a lot of the things that we discuss in terms of opportunities, there are some caveats, some things for us to be thinking about.
Speaker B:
Right.
Speaker B:
And let's talk a little bit about that on the state and local tax side.
Speaker B:
in size in the year:
Speaker B:
So we see this expanded cap only for a limited number of years.
Speaker B:
That's the first idea.
Speaker B:
Maybe in turn, that means we want to take best advantage of that in the near term.
Speaker B:
The other piece is that, as I mentioned at the outset, some of the benefits that we see provided by way of this new law can in some cases be reduced, depending upon income levels.
Speaker B:
And this state and local tax cap actually is one of those items.
Speaker B:
That $40,000 cap begins to be reduced if your household income exceeds $500,000.
Speaker B:
It's a big number.
Speaker B:
But at the same time, it may be, for instance, that you see a certain sale opportunity, maybe it's a business sale or something along those lines, and you can see income actually ramp up.
Speaker B:
Well, as income exceeds at the household level, $500,000, that cap begins to be reduced.
Speaker B:
By the time that income reaches $600,000, Paul, the cap gets reduced all the way back to $10,000, and it can go no lower than that.
Speaker B:
So even if your income happened to be $1 million in one year, you would still have a $10,000 state and local tax deduction that you could use.
Speaker B:
So a couple things to be aware of.
Speaker B:
Cap's been increased to $40,000.
Speaker B:
ace all the way up through to:
Speaker B:
Make sense?
Speaker A:
Yes.
Speaker A:
Sounds like a great opportunity for politicians to have something to talk about in roughly four or five years.
Speaker B:
Right?
Speaker B:
Exactly right.
Speaker B:
And that's a part of the planning process.
Speaker B:
So let's talk about a couple of others again.
Speaker B:
As we started the conversation on the income tax side, we talked a little bit about maybe taking advantage of those lower inc. Tax rates.
Speaker B:
In the example, we chatted about the idea of a Roth conversion that increased our income exposure.
Speaker B:
And so now we're starting to look for ways to offset that.
Speaker B:
The first is maybe taking advantage of this SALT or state and local tax deduction.
Speaker B:
The next thing that we can use on the itemized deduction side are charitable gifts.
Speaker B:
Charitable giving is powerful for a lot of reasons.
Speaker B:
And first is that I get to provide to those areas of passion that I have.
Speaker B:
It might be for us, for instance, as a family, cancer research.
Speaker B:
We are passionate about that as a family.
Speaker B:
And so when we make a gift to an entity, a public charity, for instance, that provides research in the fight against cancer, we get to deduct the amount of that gift on our federal income tax return.
Speaker B:
I add that into my other itemized deductions.
Speaker B:
And given our enhanced state and local tax deduction amount, there's a strong possibility now that when I add up that deduction, along with maybe the charitable gifts that I'm making and other itemized deductions that I can take advantage of, that they in turn exceed my standard deduction.
Speaker B:
And so it becomes powerful to start to think about maybe the idea of bunching some of our deductions.
Speaker B:
So what do I mean by that?
Speaker B:
Well, first of all, charitable gifts are an easy example of that, or at least easy discussion, because I can make the gift to a charity of my choice when I want.
Speaker B:
I can do it this year, I can do it next year.
Speaker B:
I can do it the following year.
Speaker B:
And just for example purposes, let's say that I was doing that to the tune of $10,000 a year.
Speaker B:
It's a big number, but it just makes the math a little bit easier for me.
Speaker B:
But if I were to do 10,000 this year, 10,000 the following year, 10,000 the year after that, over the course of three years, I would have given away $30,000.
Speaker B:
In my example, when we talked about the standard deduction being at around that 31,500, if I were to bunch the three years worth of my charitable gifts into this year, rather than doing it over three years, ratably, I take that $30,000amount, give it this year to charity or charities of my choice.
Speaker B:
And when I add that with my state and local level deductions and my other deductions, really strong possibility that they in turn exceed the standard deduction amount, I get to use the full benefit of those deductions.
Speaker B:
And as a part of that, again, I'm offsetting the cost of that Roth conversion.
Speaker B:
And so we're doing a couple of things now.
Speaker B:
We're taking advantage of the lower income tax rates by way of that conversion process.
Speaker B:
And now we're just taking advantage of some timing.
Speaker B:
And my numbers are such that again, makes the math a little bit easy.
Speaker B:
So $10,000 each year doing $30,000, it compares against that standard deduction amount.
Speaker B:
But Paul, the idea behind it is we think in terms of a longer time period for planning than just this year.
Speaker B:
We're thinking about maybe the next few years as a part of it.
Speaker A:
And for those that are giving to churches or to organizations annually and habitually, it's merely a matter of not changing a lifestyle because that's what you're doing annually or habitually.
Speaker A:
In that example, you're merely, as you stated, by bunching that and bringing that into a tax year write off so that you can offset that Roth conversion, you're not changing your lifestyle, you're continuing to gift the way that you have been doing.
Speaker A:
You're merely for tax purposes moving future deductions into a particular year to offset that Roth conversion.
Speaker A:
Is that, that's what I'm hearing you say?
Speaker B:
That's exactly right, Paul.
Speaker B:
That's exactly right.
Speaker B:
One other thing and one other item that we should chat about.
Speaker B:
And then maybe we can shift their dialogue a little bit into some of the estate planning components that individuals should be aware of.
Speaker B:
But sticking with the deduction side of the equation, this new law provides an additional benefit for those clients and those individuals over age 65.
Speaker B:
If you are over age 65, there is starting this year a new senior deduction.
Speaker B:
The amount is $6,000.
Speaker B:
And if you are married and both spouses are over age 65, that means that your household, you have a $12,000 additional deduction starting this year.
Speaker B:
So think about it this way.
Speaker B:
I've got an increased standard deduction amount, 31,500 for that married couple.
Speaker B:
I can stack on top of that standard deduction.
Speaker B:
This new senior deduction important point is that you don't have to itemize your deductions or use itemized deductions in order to take advantage of this new enhanced senior deduction.
Speaker B:
I can stack it on top of that standard deduction.
Speaker B:
And as a part of that, I've got now 31,500 plus 12,000 for that married couple, both spouses over age 65.
Speaker B:
arried couple to the tune of $:
Speaker B:
So I can add all of those together and in turn have a higher amount of deductions, even if I'm using the standard deduction and offset any of that potential income.
Speaker B:
So what's the rationale behind this new senior deduction?
Speaker B:
It's to fulfill against that campaign proposal that we heard during the election run up time period from then candidate Trump, now President Trump, to do away with taxes on Social Security.
Speaker B:
Turns out that it's really difficult actually to do that through the process that was used to pass one big beautiful bill.
Speaker B:
So this new deduction essentially was the workaround to doing away directly with taxes on Social Security benefits.
Speaker B:
So it's essentially meant to offset that tax that you might be paying on any Social Security benefits that you're receiving.
Speaker B:
Now, again, as we talked about before, the complexity in the law, new provision really beneficial for senior clients and those individuals over age 65, but it also has a limited time period.
Speaker B:
available through the end of:
Speaker B:
Starting in:
Speaker B:
So again, we want to take advantage of that opportunity.
Speaker B:
And without complicating things, Paul, we should probably chat a little bit about the fact that, guess what, that senior deduction benefit that has just been put in place also gets reduced at income levels that pass certain levels.
Speaker B:
Want to chat a little bit about that?
Speaker A:
Yes.
Speaker B:
And so let's talk a bit about that senior deduction.
Speaker B:
So $6,000, if your income as a single filer passes $75,000 or if you are a married couple filing a joint return, if Your income passes $150,000, two times the single deduction amount or that single threshold, if it passes those thresholds, your senior deduction begins to be reduced and it's reduced to the extent of 6% on every dollar beyond that.
Speaker B:
So I'll give you a quick example.
Speaker B:
And again, I know we're getting mired in details with numbers.
Speaker B:
It's more the concept that we want you to be aware of here.
Speaker B:
But just to give you an example, let's say that you are a single individual 65 years or older and you've got $100,000 of income.
Speaker B:
You want to take advantage of this new $6,000 senior deduction.
Speaker B:
But before you can do that, you have to determine whether or not that deduction amount is going to be reduced.
Speaker B:
How do you do that?
Speaker B:
You take your income, in my example, $100,000.
Speaker B:
Subtract the threshold for this deduction and its limitation, if any, of $75,000.
Speaker B:
Remember, that was the threshold for a single filer, a joint return, it's 150,000.
Speaker B:
But in my example, I subtract 75 from $100,000.
Speaker B:
That $25,000 remaining amount is multiplied by 6%, and I come up with $1,500.
Speaker B:
So for this particular example, the senior deduction amount of 6,000 is reduced by $1,500.
Speaker B:
And on the return, I get to take advantage of $4,500.
Speaker B:
Again, a lot of numbers and the concept, Paul, here really is the fact that this is the reason and rationale why we want to make sure that we're thinking about and contemplating where your income levels might be at and if possible, managing that income amount so that we're not losing some of the benefits that we do see this new law providing.
Speaker B:
Does that make sense?
Speaker A:
Perfectly good sense.
Speaker B:
Okay, I'm going to let you kind of guide me here, Paul.
Speaker B:
Where do you want to go next?
Speaker B:
What are the things you want to chat about?
Speaker B:
There are a lot within this new law.
Speaker A:
Well, let's talk a little bit about the estate planning update and then if we could then touch on maybe some provisions for business owners.
Speaker B:
Sure.
Speaker B:
Well, as you and I have talked about in the past, when it comes to estate and wealth transfer planning, really start with this concept that wealth for many of us means more than just our economic resources, our financial resources.
Speaker B:
That's oftentimes a big part of the conversation, including planning around the taxes that may apply there.
Speaker B:
But let's start with that idea that wealth transfer is more than just the numbers, the asset values and the like.
Speaker B:
It does and should include notions around, for instance, what are some of the values that I might have that my family has, and how do we continue to provide opportunities for those values to get represented in our plans over time.
Speaker B:
Also, we know that tax planning is a part of this.
Speaker B:
Oftentimes it is one of the four items that we talk about are related to us.
Speaker B:
When I think about the tax planning aspect, a couple things to be aware of.
Speaker B:
So this new law that was put in place January 4th or July 4th actually signed into law legislation around one big beautiful bill.
Speaker B:
That law then in turn has extended the higher estate tax exemption at the federal level.
Speaker B:
I'm not talking about any state level death tax or estate tax, but at the federal level there is a new exempt amount.
Speaker B:
And by that what I mean is that you could pass during your lifetime by way of a gift or through your estate by way of an estate transfer to any individual beneficiaries, family members oftentimes are a part of that, but any individuals, and you can pass a certain amount free of any federal gift or estate tax.
Speaker B:
So what does that amount?
Speaker B:
This year it's $13.99 million per individual, Paul.
Speaker B:
So that means a married couple can pass just underneath $28 million during their lifetime or through their estate at death and not have to worry about paying a federal estate or gift tax.
Speaker B:
Next year that number actually increases to $15 million per taxpayer per individual.
Speaker B:
So our married couple $30 million.
Speaker B:
And that's one of the big discussion points related to this new law.
Speaker B:
Without this new law directly impacting that exemption amount, the way our tax laws were written, that $14 million that I talked about for this year was actually scheduled to drop to about $7 million next year.
Speaker B:
Still really big numbers.
Speaker B:
But keep this in mind.
Speaker B:
It's the accumulation of everything that you own that's subject to this estate tax.
Speaker B:
If you don't give it away during your lifetime, subject to this estate tax.
Speaker B:
And so that includes, for instance, all of your cash marketable securities, properties, residences, it includes the death benefit of life insurance policies that you own directly.
Speaker B:
If you own a business, it includes the value of that business ownership that you have.
Speaker B:
We add up all of those things.
Speaker B:
One of the things we were concerned about earlier in the year is if that estate exemption amount drops, are more individuals going to be subject to this estate tax?
Speaker B:
inflation each year following:
Speaker B:
So the good news part of that higher exemption amounts.
Speaker B:
But Paul, as you and I have talked about, that doesn't mean that the need for estate planning has gone away.
Speaker B:
And that's part of what I fear and that I see more and more articles in mainstream press even talking about the fact that for many individuals because of this higher exemption amount, you don't need to worry about estate planning anymore.
Speaker B:
Nothing could be further from the truth.
Speaker A:
When one takes a look at all of one's assets and as you mentioned, homes, cars, land, insurance collectibles, and with inflation, those numbers do tend to exceed what many people think that their estate structure would actually be.
Speaker B:
You're right, Paul.
Speaker B:
And I think as a part of that, thinking about that and thinking about the fact that while estate and wealth transfer planning includes more than just tax planning, we don't want to ignore it either.
Speaker B:
And so the way I think about it is that if you are a married couple and if your wealth level, when you add up all of these things that you just mentioned and that we've talked about in the past, when you add up all of them, if it's less than $30 million, maybe even pick that number at around $20 million, if it's less than an amount, estate taxes may not be your biggest issue or concern.
Speaker B:
But it doesn't mean that we shouldn't be thinking about tax planning overall.
Speaker B:
What it really has done is changed the estate tax conversation into an income tax conversation.
Speaker B:
And there are a lot of pieces to that.
Speaker B:
But the most notable may be best understood by way of a quick example.
Speaker B:
Let's say that I'm going to give to my son $100,000.
Speaker B:
By the way, my son is listening.
Speaker B:
You have no hope of getting $100,000 in the near term by way of a gift.
Speaker B:
But if I were to give him a $100,000 today, he would get that $100,000 and he would get my income tax basis in that $100,000.
Speaker B:
And let's say that it was something that I purchased at really low values and it took off, it appreciated.
Speaker B:
It's a stock, for instance, that blew up in value.
Speaker B:
And so my basis may be next to nothing in it.
Speaker B:
What I paid for that stock.
Speaker B:
If I give it to him during my lifetime, he gets the $100,000 in stock plus my basis in it, carryover basis.
Speaker B:
If he were to sell it right away, he'd have close to $100,000 in capital gains that he would be exposed to and would have to pay the tax on.
Speaker B:
Now, if I gave that same asset away through my estate at death, that asset gets stepped up in basis value to its fair market value at the date of my death.
Speaker B:
So it's included in my estate.
Speaker B:
We already talked about the fact that the estate exemption amount probably high enough that I don't have to worry about paying an estate tax.
Speaker B:
And the benefit now is that my son receives that $100,000 with a basis equal to $100,000.
Speaker B:
And if he were to turn around and sell it immediately, zero tax.
Speaker B:
It's a powerful planning tool.
Speaker B:
But as a part of that, the understanding is that he's not getting it today.
Speaker B:
If I give it to him today, it's in his hands today, net of whatever tax amount.
Speaker B:
If I pass it through my estate at death, it gets a step up in basis, the full value available to him.
Speaker B:
But there's a waiting time period.
Speaker B:
And my hope is that in this example it's a long waiting time period because I'm not looking to the point of passing through my estate assets really soon.
Speaker B:
But what that does point out though is that there is opportunity for us to think about that planning around that step up in basis.
Speaker B:
And there are a lot of tools that are available to us to take advantage of that that may not necessarily require my death in order to get that step up in basis.
Speaker B:
And we can take advantage of those planning tools in a lot of different ways.
Speaker B:
But the main point here, for many individuals, estate tax planning has turned into income tax planning.
Speaker A:
That's extremely powerful.
Speaker B:
And I think, Paul, you know, as we've talked about, and this is where it probably makes sense for us to discuss the fact that wealth and estate planning, as we've talked about is more than just the economic resources.
Speaker B:
It includes so many other things that are important to a family, not the least of which is how you in turn build into that plan, that wealth transfer plan.
Speaker B:
Opportunities to continue, discussions continue, values, discussions continue, the things that make a family who they are.
Speaker B:
And we can encourage and solidify that through the estate planning process.
Speaker B:
The opportunity and maybe even the need to do that has not been changed in any way, shape or form by way of this new law.
Speaker A:
Well, I believe that, I believe that communication is the key to a proper estate plan.
Speaker A:
Communication is key to a well functioning family.
Speaker A:
And those values through that communication have an opportunity to be passed down through generations which ultimately are more important than mere assets.
Speaker A:
It's the driving force behind a family mission and the success of a family legacy.
Speaker A:
Before we wrap up, let's talk a little bit about provisions for business owners.
Speaker B:
I think there are a couple of provisions within this, in fact, even more than a couple of provisions that impact business owners.
Speaker B:
Way too many for us to talk about in this discussion today.
Speaker B:
But it is worth maybe referencing a couple of those items.
Speaker B:
And then, Paul, maybe it makes sense for us to have a broader conversation around business, business structure, planning and some of those things at some point down the road.
Speaker B:
But as you know, if you are a business owner or if you're contemplating starting a business from scratch, there are a few different types of structures that you can take advantage of.
Speaker B:
First, there is something called the traditional C corporation, and these are parts of the Tax code.
Speaker B:
A C corporation generally means that the entity itself is its own standalone tax entity.
Speaker B:
So income that comes into that business can be taxed at the entity level subject to its own set of tax returns and tax rates in brackets.
Speaker B:
And then that remaining income amount could be passed out to the shareholders or to the individuals working for the C corporation.
Speaker B:
So there's the potential for there to be an entity or business tax as well as a potential tax at the individual shareholder or employee level.
Speaker B:
Other types of tax structures include what we would refer to as pass through entities.
Speaker B:
And by pass through what we're really talking about is that the income and all of its accordant attributes.
Speaker B:
So if it's ordinary income, capital gains income, even if it's something like municipal income, its tax free nature as municipal income would be passed through the entity structure into the hands of the owners of that entity directly.
Speaker B:
It's called a pass through entity.
Speaker B:
And the types of pass through entities, the main ones we talk about oftentimes are things such as a subchapter S subchapter of the tax code.
Speaker B:
But an S corporation is a pass through entity.
Speaker B:
No tax at the business level.
Speaker B:
All of the income that's there and available within that business gets passed through to the S corporation shareholders.
Speaker B:
Other opportunities partnerships for instance, are pass through entities.
Speaker B:
Limited liability companies, LLCs are pass through entities.
Speaker B:
Now part of what's in this new law are some provisions that relate to the holders of interest in these pass through entities.
Speaker B:
The first is that for certain pass through entities, and by the way, in this definition, a pass through entity can also include something that we refer to as a private placement real estate investment trust.
Speaker B:
If those pass through entities have ordinary income and that's passed through to the interest holders, those that own an interest in the entity that pass through entity, it gets an additional 20% deduction on that individual's return.
Speaker B:
Now that benefit was scheduled to expire at the end of this year.
Speaker B:
Paul, this new law that was just passed has extended that benefit permanently.
Speaker B:
And so it's something to be aware of.
Speaker B:
And then one other quick item and then maybe we start to think about wrapping up today's conversation.
Speaker B:
But for our business owner clients, especially those that are pass through entity owners, if you already own a business, for instance, maybe it's a C corporation or possibly a pass through S Corp. Partnership llc, there are some new provisions in the tax law that accrue to those individuals that own shares in something called a qualified small business.
Speaker B:
If I own stock in this small business, the tax laws offer me an opportunity to exclude certain amounts of gain when I sell that stock.
Speaker B:
And the exclusions are pretty significant, can be up to $15 million in gain can be excluded or 10 times the amount of your basis.
Speaker B:
Really beneficial.
Speaker B:
But a couple of things to be aware of.
Speaker B:
First, in order to take advantage of this, it has to be stock from a C corporation.
Speaker B:
That C corporation structure.
Speaker B:
If you recall from a conversation we just had, there's potential for there to be a tax at the entity level and a tax on the income at the individual shareholder level.
Speaker B:
We can plan around a lot of that.
Speaker B:
But this exclusion that I just talked about is available only for those businesses that are organized as a C corporation.
Speaker B:
And in addition to that, the asset value of that entity, that corporation has to be less than $75 million.
Speaker B:
And so as a result some rules around it.
Speaker B:
But if you own a small business, it's maybe worth a quick conversation with your tax and legal advisors around the entity structure.
Speaker B:
C Corporation or pass through and maybe if it's a pass through entity, maybe re examining does it make sense for us to consider converting to a C corporation in order to get some of these benefits?
Speaker B:
Now there's a lot that go into that, Paul, a lot of discussions and variables that go into it.
Speaker B:
But at the same time these enhanced benefits are really valuable and it's worth at least considering and then in turn make a determination does it make sense?
Speaker B:
Or if not, we set it aside.
Speaker B:
But at least we've considered it, Paul.
Speaker B:
We've talked about an awful lot and now probably time for us to maybe start thinking about wrapping up.
Speaker B:
But what do you think?
Speaker A:
Well, to that point, as you take a look as a business owner and the entity structure, I look at it the same way as I would with any investment and that is understand why you're doing what you're doing.
Speaker A:
If you don't understand it, don't do it.
Speaker A:
However, also if you don't understand it, try and get a good grasp by speaking with professionals that can explain it to you.
Speaker A:
If it's not a good move for you, then don't do it.
Speaker A:
Ultimately you always want to understand why you're doing what you're doing.
Speaker A:
Communication is the key.
Speaker A:
I think, Jim, that it is the key in everything that we do.
Speaker A:
And this is one of the beautiful things for legacy.
Speaker A:
It's a beautiful thing in education.
Speaker A:
And so I want to thank you and Will for spending your time today helping communicate some of these changes that have gone along with the one big beautiful bill.
Speaker A:
How does they impact us today?
Speaker A:
How we can use them to plan for benefits, possibly tomorrow, and to use them as tools as we continue to invest in what we love.
Speaker A:
So until next time, Jim Will, thank you so much for joining us today.
Speaker A:
And thank you for all of your input and your wise insight.
Speaker B:
It's our pleasure being with you, Paul.
Speaker B:
And cheers, everyone.
Speaker A:
Thank you for listening.
Speaker A:
And until next time, this is Paul Ellis reminding you to invest in what you love.
