Podcast 90: How to Prepare for Major Changes in the Tax Law

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Below is a transcription of the Ask Gregory Podcast 90: How to Prepare for Major Changes in the Tax Law

Gregory Ricks  00:00

Hey welcome I’m your host Gregory Ricks a financial advisor here to answer your questions and help you win with your money.

Podcast Intro / Outro  00:10

On today’s episode of the Ask Gregory podcast Gregory will be discussing how to prepare for major changes that are already in our tax law. We also have a complimentary download waiting for you on this topic if you go to gregoryricks.com/podcast90. Again, that is gregoryricks.com/podcast90

Gregory Ricks  00:30

Up on my blog at gregoryricks.com/blog which is we share news articles that I read. And there’s one regarding it’s an opinion by angio, Leary and Bill ring them from MarketWatch. I’m giving you some background here on what’s coming preparing for the great sunset. What you need to know if tax code provisions expire and they are set to expire. Without policy changes the tax year of 2026 will hit boomers. Hard is the headlines on this article. According to the Federal Reserve household wealth grew by 19,000,000,000,230 7 trillion during the pandemic get that again, household wealth grew by 19 trillion. Yeah, some of that’s been given back. But increasing American household net worth by 16%. So pretty good increase as well. Baby Boomers, the first generation of retirement savers saw their nest eggs grow sharply over the past several years. In addition to being flush in cash, and growing their wealth. Boomers have benefited from selling their homes at peak prices. For this demographic, it’s no wonder that taxes would quickly risen to the top of their concerns. There’s been a great deal of tax uncertainty as the Biden administration continues to explore tax policy changes. They kind of mentioned something else this week was a little bit different than just talking about the wealthy, they actually emphasize raising taxes on those that benefited from the tax cut jobs act. That’s a lot of people.

Gregory Ricks  02:27

So sunsets are provisions of the tax code that expire at a specified time with the tax cut job Act. Congress chose to make many of the individuals provisions temporary to limit the revenue cost of tax cuts, Jobs Act to a level consistent with overall constraint on a 10 year revenue loss in the congressional budget resolution. Moreover, to comply with Senate Budget rules under the process used to pass the Tax Act, there can be no increase in the federal budget deficit after the 10th year. So that gives you some understanding of why some changes have to be made. So you know, so it’s sunsetting. Because of that, if it’s to continue, there’s there’s work to be done. The tcja made significant changes to individual income taxes as well as the state and gift taxes for individual taxpayers almost all the provisions expire or sunset at the end of 2025. While most business provisions are permanent, without additional tax policy changes. The tax year of 2026 will be a big shock to many US taxpayers and will especially hit boomers hard as many settle into retirement big taxable nasty retirement accounts, IRAs, IRAs 401 K’s tax infested accounts. What expires what the sunset what Well, here are some of the notable provisions for individuals with top individual estate and trust income tax bracket goes back up to 39.6% from the current rate of 37. The TCGA also repealed personal exemptions, but increased the standard deduction this year is 25,900 for joint filers 12,009 50. For single taxpayers. For families with dependents, it replaced dependent exemptions with an increased child tax credit by doubling the maximum child credit amount and extending it to higher income families by substantially increasing the income thresholds for the benefit phase out. The TCGA removed the phase out for the overall allowable itemized deduction impacting higher income filers with a just Did gross income above certain thresholds but also changed the structure of several major itemized deductions. Under prior prior tax law, those who could itemize could claim deductions for all state local property taxes and the greater of income or sales taxes. TCJ limited the itemized deduction for total state and local taxes to 10,000 annual for both single and joint filers and did not index that limit for inflation. The mortgage interest rate deduction also changed tcja retain the individual AMT but raise both the exemption levels and the income threshold at which AMT exemption phases out at a million for married individuals 500,000. For others, it also impacted in general deduction for charitable donations was preserved. For many boomers, the sunset of the current estate and gift tax provision provides the greatest gloom tcja doubled the estate and gift tax exemption to 11 point 2 million for single filers 22 point 4 million for couples and continue to index the exemption levels for inflation. This year, the federal estate and gift tax threshold increased to 12.0 6 million per individual or 24 point 12 million for couples. In 2026, the estate and gift exemption will revert to pre tcja levels, effectively reduced by half and expected to be in the ballpark of about 6.5 million per individual or 13 million for a married couple. The sunset of the gift of the estate and gift exemption will have significant impact on many boomers. So that just gives you an idea of what’s coming that that is in the law. And that piece by MarketWatch. There’s even more detail there other things, but to see why you should be doing tax planning now, not what you know. Yeah, take care of your taxes each year. But what are you looking at? What are the opportunities? One of the things I look at?

Gregory Ricks  07:29

From a standpoint is what I call margin. What is the gap margin means a lot of things to me, but it means extra? Do you have margin in your household budget? Or do you have more coming in than going out? That’s your margin tax bracket, where you’re at in your tax bracket? How much room? Do you have left over in that tax bracket before you would move into the next tax bracket? I call that margin as well? What is that gap? I don’t want it to go wasted at all? I do not. So that’s something to consider. What is that margin that you have? And is there an opportunity to convert that as well? Can you convert some of that to Roth, and then for some cases, there might be more, you know, take a look at 2022 tax rates. And the sweet spot I think is in the 22 to 24% range yet sorry. And we’re speaking of married filing jointly here for this example, but 10% is zero to 20,005 50 12% is 20,005 5183 550. Example of margin would be somebody’s income, for example, is say 60,000. Well, they’ve got 23,000 of margin in the next tax bracket. Knowing that rate is going up to 15% and 2026. And that bracketing changes to 18,006 51 to 75,922 to 24% tax bracket I think really is a sweet spot that ranges a total of 83,551 to $340,100. In compasses the 22 to 24% range. That gap at the top of the 22% is $178,150 then it jumps 2% For the rest of the way up to 340,100. Now that brackets changing in 2026 to 25 to 20 80% and the range combined of the two is $75,901 to $233,550. See you got a wide berth their own ability to shift money. And Bing, we’ve got a few years to do that. And yeah, I was at a Ed slot conference a few weeks back I, I attend a couple of those a year, to be up to speed on changes to qualified accounts. And I’ve been doing that for years. One thing that adds mentioned at the end of the conference, as we were wrapping up, he was taking a few questions. And he basically somebody asked him, What about high net worth? Should they be converting money and his response, and actually, he got a bit passionate there about he said, Absolutely. He said, If you’re high with net worth, now you’re likely to be high net worth in the future, you’re likely to be high net worth, meaning high income in retirement as well. And that means you’re going to pay even more in taxes in the future, and you’re paying, you could be paying top range. Now, you’re probably always going to be paying top range of the taxes. And we know the top range is going up and get this for those that have large incomes. Right now, for married filing jointly, that 37% bracket, the top of it, is $647,851 or more, here’s what it’s going to in 2026, it’s going to 39.6%. So it’s increasing 2.6%. But the bracket drops to 240. I’m sorry, $470,701 or more, it’s dropping from 647,000. I’m rounding to 470,000 or more, so it’s going up. And those of you that’s in the 35%. Now.

Gregory Ricks  12:23

Yeah, you’re going to the max tax bracket, those in the max tax bracket, it’s going higher. But those that 35%. Now, you can see what’s happening for a good portion of you in that you’re jumping into the highest tax bracket, as well. So it is something to think about regardless of income tax bracket, you should be considering how do I take advantage of this opportunity. And we’ve had this opportunity for seven years now. You know, since 2017. So you should be thinking about how can we take advantage of that this does and then you probably shouldn’t be doing it after that, because I think taxes are going up in the future beyond what they’re showing here, especially for the upper half of that. But they may be tax rates don’t necessarily go up but they start getting us in other ways, you know, fees, here and there. Subtle changes gets more tax revenue. So what is your margin? What is your opportunity? One of the simple ways I look at it, what if over the next three years, we could shift $100,000, you know, simple math around the hits about 33,000 a year and some change and get 100,000 shifted into Roth, pay taxes as you go, of course, there’s a tax bill with Roth conversions moving at money from an IRA to a Roth. And then what if that’s all you did, and let’s say that puts you at age 60. And you have that money working. And you’ve done some of it during this market downturn. So you know, there’s upside coming, as the market rebounds, as it always does. We just don’t know when but it will. And we’ll get back to record highs. So you’re going to get some of that upside on that tax free generating money tax free income, generating money, but you get to 100,000 in three years, and let’s say you’re age 60 And let’s just use simple math. 7.2% means our money would double every 10 years. So you got 100,000 at age 60 So that would take you to age 70 and get you 200 $3,000 But you don’t need it. So you’re going to let it roll. So then 200,000 At age 80 gets you to 400,090 800,000. Oh, yeah, you’re probably going to live to 101 of you are. So that gets you to $1.6 million. Use it? Well, heck, I didn’t need it, I will leave it behind, you know, with how they changed the tax rules. When leaving qualified money to your heirs, non spouse beneficiaries, they have to take that money out over 10 years completely deplete the account. Within the 10th year, there’s more complications to it. But fundamentally, that’s what Congress did. Not too long ago with the secure act. You have to spin that down. So if you’re leaving behind those tax infested accounts to them, it’s impacting their tax brackets, their income, they’ve got to add this and take money out every year. And what’s that probably doing? It’s not unusual to see retirement accounts with 500,000 $800,001.2 million. So you’re leaving tax infested account, they’ve got to split that. So that’s another 100,000 or so possibly, every year, having to come out on top of their income, could be pushing them into that future of 3335 39% tax brackets. But if you left them behind a $1.6 million Roth account, yeah, they have to deplete that too. But is it taxable? It is not, does not impact them, you’re, you’re you, you paid this money in today’s time and 3040 years from now, you leave it behind in a tax free way that benefits them greatly and doesn’t disrupt their ordinary income tax brackets in the future. So that, yeah, they have to deplete at the Cantley compounding, but it could be a situation where you leave it the 1.6 million to them, let’s say you died at age 100, you’re leaving behind $1.6 million.

Gregory Ricks  17:25

Think about that. If that doubles, you’re leaving behind $3.2 million. So they may not have to take it out two year 10 the full amount, they could just let it roll. But at year 10, they have to pull the account. It’s doubled. For them. If they were to get 7.2% over that period of time talking about a generational life changing gift to leave behind. They’re just with a portion of your qualified money. It’s something to think about. We don’t have to task and shift to everything that that would be really great if we had all of our money built in a way where it generates tax free income. But with that said, what if we’re working on a portion, you know how to eat an elephant and somebody said, Well, how do I convert it all? It’s the same way you eat an elephant you know how you know if anybody want to share, share, one bite at a time, Roth conversions, do one bite at a time. What what’s in in your margin there? Or what can be your stretch every year have a game plan of that. Now remember all Roth conversions once you convert it, it’s done. You can’t like change your mind. Like oh my god, I didn’t know the tax was gonna be that Well, that should have been a discussion on the front end. Thanks so much for listening to ask Gregory where we answer your financial questions. You can find us anywhere Podcasts can be found and on YouTube and Facebook Live every Saturday from 10 to one subscribe, leave a review and tune in next time.

Podcast Intro / Outro  19:15

Thanks everyone for tuning in to this week’s episode of the Ask Gregory podcast don’t forget we’ve got a complimentary download waiting for you on this topic. If you go to gregoryricks.com/podcast90. Again that is gregoryricks.com/podcast90

Podcast Intro / Outro  19:32

Gregory Ricks & Associates is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Gregory Ricks & Associates are not affiliated companies. Gregory Ricks & Associates, The Total Wealth Authority is our trademarked tagline, it does not promise or guarantee investment results or preservation of principal nor does it represent a certain level of skill. Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Gregory Ricks & Associates is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Gregory Ricks & Associates. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Gregory Ricks & Associates is stated or implied Gregory Ricks & Associates has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. AEWM, Gregory Ricks & Associates, WJ Blanchard Law, LLC, J Heath & Co. and Mortgage Gumbo are not affiliated companies. This show is a paid placement.