New Tax Laws & Year-End Strategies

Thank you all for joining us very much. We are delighted to be talking today about new tax laws and year end strategies. This is a continuation of a previous webinar that David and I hosted, so I know he’s gonna be making reference to that as we go along, but wanted to let you all know that we know that you had lots of questions that were submitted, and more importantly, what are some actionable strategies for as we approach here on year end that you may want to consider doing for your situation, and and taking into account all of the new, tax laws and things that may be happening personally. So to introduce ourselves, my name is Kara Duckworth. I’m the Managing Director of Client Experience here at Mercer Advisors, and I am very pleased to introduce my colleague, David Oh, who is our Vice President of Wealth Strategy, and I I know is spending so much time talking about these topics with our clients.

So as we move on to this presentation, it’s important to note that everything that we are presenting today should be considered educational and informational in nature, and not direct specific advice for your personal financial situation. For those types of conversations, please reach out to your wealth adviser who will be able to give you things that may be related to, you personally.

So David, there is so much information to go to. I’m gonna turn it over to you.

Yeah. Thank you, Kara, and welcome everyone. You’re back for the second part of our two part series on this new tax legislation, and, we’re gonna go cover, quite a bit today. So excited to have you.

If you recall during the last, seminar, the webinar that we had, or if you haven’t checked it out, you can always, find it on our website. But the last time we started off with our, first part of this series, I showed you a picture of Albert Einstein. Right? Kara and I showed you a picture of Albert Einstein, and the quote that he had was that the hardest thing in this world to understand was the income tax.

Well, I wanna follow-up that picture with this one right here. And some context behind this picture, is this. I want you to go on a historic journey with me. We are gonna go back to England in sixteen ninety six, and we have King William the third who is in dire need of revenue.

So he gets together with parliament, and they put their heads together, and they come up with something called a window tax. And so what they wanted to do is they wanted to tax you based on your dwelling, And the more windows you had in your property, the more tax they wanted to impose upon you. Right? So it’s two shillings per property, four shillings if you have ten windows or less, or eight shillings if you had ten windows or more.

Back then, they didn’t wanna tax you on your income because they thought that was too sacred and was very unpopular, so this is what they came up with. In response to this tax, what people started doing in England was they started breaking up their walls. Right? And I love this because number one, you’re following the rules.

Right? You’re fall you’re you’re taking action within the law. But the second reason why I love this is because it’s a flexible planning tool. Right?

You break up the window so that you have less windows to be taxed on, but it’s flexible because you could take the windows down. I also think it’s funny because it shows you how tax sensitive people are. You are giving up ventilation and sunlight to save some money on taxes. Right?

And so as we go through today, won’t you build some windows with me? Right? We’re gonna go over some planning techniques. We’re gonna go over changes of the law.

Many of you are probably Maybe before before we start, we did take all the questions that you submitted.

We’ve integrated them into a lot of the things we’re talking about, but we’re also gonna leave some time at the end, hopefully, to take some other questions. So, if you have any as we go along, please use the q and a function on the bottom of the screen to submit them, and we will work through them as much as we can. So sorry, David. Wanted to get that out there before we before we dove in.

No. Absolutely. We we definitely wanna hear from you. So thank you for that, Kara.

As we go through today, our presentation is roughly divided into three sections. Number one, I wanna do a very brief recap of some of the highlights from the last webinar. So you’re obviously welcome to go view that prior, prior session, but I do wanna highlight some of the the main points from last time. Second, I wanna go over the the new provisions in the law that I didn’t get to cover, and so we’re gonna go over some of those. And then finally, we wanna go over some year end tax planning strategies. So one, two, three, those are, some of the things that we’re gonna talk about today.

So to kick us off with what we covered last time, right, this is our income tax situation here. I love this pyramid because it encapsulates sort of the the landscape of our tax situation. If you notice down the middle of the slide, and I know that this slide is a little bit busy, but if if we keep it simple, if you notice right down the middle of the slide, those are your tax brackets. They did not change from, you know, the last text legislation in twenty eighteen.

And so from ten percent up to thirty seven percent, that’s what we have here. What does change are the numbers on the sides. Right? And these are your tax brackets.

Those are adjusted for inflation. So if you look on the left side, those are your tax brackets for single filers. And on the right side, those are your tax brackets for those filing jointly. What I want you to pay special attention to, especially for this, for this webinar, are the difference in colors.

Right? And you’ll notice at the very bottom, you have a lavender. In the middle, you have a a purple. And at the top, you have sort of a darker purple.

And the reason why I want you to pay attention to this is because these are your capital gains tax rates. At the very bottom of the pyramid, you have zero percent. So if you actually look for a joint filers, if you have income between zero and about ninety seven thousand dollars, that’s a zero percent capital gains tax, rate. And then above that is fifteen percent, and at the very top, I’m sure many of you are aware, is that twenty percent.

In addition to that, if you have a certain income threshold, the dotted lines show you that additional three point eight percent surcharge, for health care. And so, the reason why I want you to pay attention to the capital gains tax rate is because Karen and I are gonna be alluding to this later on towards the end when we talk about year end tax planning.

So let’s go over some of the highlights from the last session. Again, I’m gonna go do a brief recap. The first one I wanna touch upon is a senior personal exemption. This is new for, next year, and this is an exemption, excuse me, for this year. And this is an exemption that’s gonna go from twenty twenty five through twenty twenty eight. And this exemption is a six thousand dollar amount for our taxpayers who are sixty five and all over.

Now this does have income tax requirements. If you have, seventy five thousand dollars or more in income, this is gonna begin to phase out. But for joint filers, it’s a hundred and fifty thousand dollars. So when you go next year to file your taxes and you do meet these requirements, keep an eye out for this, for this new personal exemption.

Next up, I wanna tackle the state and local tax deduction. This is one of the big changes for our taxpayers who itemize their deduction. You recall in twenty eighteen, our SALT deduction was reduced to five thousand dollars per person or ten thousand dollars for joint filers. This is now gonna quadruple to forty thousand dollars for twenty twenty five.

Now, again, as you can imagine, there are income requirements for this as well too. Once you begin making five hundred thousand dollars of income and more, it starts phasing out until you hit six hundred thousand dollars of income in which point it phases back down to ten thousand dollars. Now you won’t go below that ten thousand dollar amount, but, again, once you make enough income, this will begin to go away. This deduction is in effect until twenty thirty.

Now some planning ideas behind this, if you need more SALT deduction, are is twofold. Number one, you can think about making a pass through entity, like an LLC, partnership s corp. Right? You can deduct the taxes you pay to your state and local authorities, taxing authorities, and deduct it through the entity.

Right? And so that’s one way around this. The other way to sidestep this is by setting up a nongrantor trust. A nongrantor irrevocable trust also enjoys its very own forty thousand dollar SALT deduction.

And so, again, you can create multiple trusts and enjoy more of these if you need more SALT deduction. Again, they have different purposes and different functionalities, so don’t just go out and run out and create them. Talk to your wealth adviser before you do to see if it makes sense, but those are some ideas with respect to this.

The other main change with itemized deductions are your charitable contribution. Now this is a big change, so I want everyone to listen up here. The the rules for giving to charity are gonna change next year.

And the main change with respect to charitable contributions and your deduction is that next year, there’s gonna be something called an AGI floor, an adjusted gross income floor, meaning that the benefit to you in giving to charity might be reduced next year.

And the way that they’re gonna reduce it is this. We are going to establish a certain amount of your AGI, half a percent, and only those contributions to charity above that certain floor will be deductible on your tax return. So I’ll give you an example. Like, let’s say you make a hundred thousand dollars of income next year and you establish that half a percent AGI floor.

Well, half a percent of a hundred thousand dollars is five hundred dollars. So if you give to charity next year, only those gifts above that five hundred dollar amount will be deductible. That’s quite a bit different, from this year, alright, giving in this year because there is no AGI floor. So some planning ideas for you as we go into the years end is number one, accelerate your charitable gifts into this year if you can and if you want to.

Right? Because you don’t have to deal with the AGI floor for this year, and therefore, your charitable contribution will not be reduced in that way.

Second thing to consider is if you have retirement accounts and you are taking requirement on distributions and are at least seventy and a half, you can make, payments directly to charity from your retirement account through what’s called a qualified charitable distribution, a QCD. And the reason why you might wanna consider that is because if you go directly to the charity from your retirement account, you don’t have to worry about these rules. You don’t have to worry about the half a percent AGI floor. You also don’t have to worry about the other rules that were established in twenty eighteen, like the sixty percent AGI ceiling as well too or the thirty percent, limitation for gifting appreciated assets. So all those rules, can sort of bypass if you go stretch, straight to the charity with a QCD.

And the third, something new with our tax law that I covered last time was a scholarship tax credit. So if you go from, you know, your account straight to a qualified scholarship organization, and, these scholarship organizations have to meet certain rules. They have to be approved by the government. Can’t just give it to any scholarship organization, but there’s a new seventeen hundred dollar tax credit if you go straight to a qualified scholarship organization. So, again, bypass all these terrible rules with the ceiling and the floor. Just go straight to the organization there.

Next up, limitations on itemized deductions are back. They’ve been suspended from twenty eighteen till now, but they’re coming back for next year. And the whole idea is that, you know, there’s a formula that will reduce your itemized deductions if you make too much income. And that income that we’re talking about is the highest tax bracket, thirty seven percent.

So if you find yourself in that tax bracket, then you’re gonna wanna do everything you can to get under that. And so, some of the ideas that you can do, so that your itemized deductions are not reduced include maximize your retirement accounts and contributions to those. Number two, take a look at your investment portfolio. Do you have investment vehicles that are tax exempt and maybe you wanna consider those if you are on the fence of the thirty five and thirty seven percent tax bracket?

Then also shifting your, your income to your passive and active businesses and pass through entities. So schedule c and e on your tax return if you’re able to allocate, income to those schedules as opposed to just having it, for you individually, then that could be beneficial too. Because, again, if you are in that highest tax bracket, they wanna reduce or our tax, system now the way that the laws are written, we’re gonna reduce your itemized deductions by two thirty sevenths, which is roughly five point four percent.

Next up, we have the qualified business income deduction. If you recall, this is section one ninety nine a, and this is a, an additional deduction for people with small businesses. And the reason why this exists is because, you know, if our corporate tax rate is twenty one percent, and this is for all the big companies and the c corporations. But the if you think about the top tax value for the small businesses, what is that usually?

It’s usually the top bracket for our individual tax rate. Right? And our individual tax rate is thirty seven percent. The highest marginal rate is thirty seven percent.

So, like, why is that fair? Big companies get twenty one percent. Smaller businesses have thirty seven percent. Well, to counteract that, we have this QBI deduction.

Right? Qualified business income deduction gives you an additional twenty percent, which roughly brings down the top marginal bracket from thirty seven percent to about, twenty nine, thirty percent. And so it sort of evens a playing field here. So watch out for that.

Right? If you have an S Corp, LLC, partnership, there’s this twenty percent deduction, deduction that might be available to you.

Next up, we have estate planning. The wealth transfer tax exemptions are gonna go up for twenty twenty six. This year, it’s thirteen point nine nine million dollars for your gift tax, estate tax, generation skipping transfer tax. All of those are gonna go up to fifteen million dollars for twenty twenty six.

So what does that mean from a planning standpoint? It means that if you’re concerned about the estate tax, and the gift tax and all these wealth transfer taxes, then you stay the course on all the gifting and and the trust and the strategies that, that are available to you there. And if I were to condense all of those different trusts and techniques and strategies to mitigate this, you know, gift and estate tax, then I would really condense it down to one single idea, which is giving it away. Right?

You should think about giving it away to your kids, giving it away to your charity because at forty percent gift estate GST tax is pretty significant. And so if you’re interested in that, talk to your wealth adviser. If you are not worried about these wealth transfer tax exemption, let’s say, you know, you’re not concerned about the gift tax and the estate tax, then your strategy here with estate planning is perhaps to think about giving to someone in the older generation, like an older relative. And the reason why like parents.

And the reason why is because if you give it to an older person like a parent and you re-inherit those assets, there’s an opportunity to wipe away all of your unrealized capital gains. And so that’s a way you can use estate planning to help benefit your income tax situation.

Oh, and before I move on to qualified opportunity zone funds, I did wanna throw in there that it is a good time to think about annual gift exclusions as well too. Every year, you can give nineteen thousand dollars to as many people you want in this world without any gift tax, and so that’s something to think about as we go into December to this month and December, of of this year just because if you don’t use it, then you lose it. And so I don’t want you to lose that opportunity. Next up, we have qualified opportunity zone funds.

These are exciting, you know, because they help you mitigate capital gains tax. Right? Because what happens when you sell any asset for a gain, whether it’s stocks or real estate or whatever asset you might think of or have, you end up paying capital gains tax in April of next year. However, there’s this new program or this program established in twenty eighteen where you can take those proceeds, and you have a hundred and eighty days to invest it in a fund that helps community communities, up and coming communities sort of get started, infuses capital in them, and helps, to develop, these neighborhoods and opportunities, these designated areas to give them more opportunity.

Now these were established in twenty eighteen, and the idea behind that was if you took those proceeds, you can pay your tax bill later, like ten years later. And if you keep if you stay in these investments, we will take a haircut of your tax liability of ten percent, right, if you if you left it in here long enough. It was ten percent if you held it in for five years and another five percent if you held it for two years after that. Well, for this year, right, it they won’t let you, take as much tax off, but the rules have changed slightly.

So what you can do is starting in twenty twenty seven so, again, we’re still finishing up the old round of qualified opportunity zone. But if you look at twenty twenty seven, if you sell an asset, you have a hundred and eighty days to invest in one of these projects or these qualified opportunity zone funds. You can delay the payment of your tax. If that investment grows, you are exempt from federal tax on that investment, and, also, you get to cut ten percent of your tax liability.

So, again, the holding periods are long, but the tax opportunity is there. The new wrinkle for the new batch of qualified opportunity zone funds for twenty twenty seven is if you invest in one that’s in a rural area, they will give you a haircut of thirty percent of the tax liability from your initial transaction. And, again, it grows tax free. So when twenty twenty seven comes around, take a look at these, talk to your wealth adviser.

I’m sure we’ll have more details, and just an exciting round. And these are supposed to renew every ten years.

And the final topic for our recap from last time are Trump accounts. Trump accounts are really like mini IRAs for your minors, for your children. Right? And so they’re an exciting opportunity to help save for them.

What happens between twenty twenty five and twenty twenty eight if the government wants to give you money? They give you a thousand dollars for every child born between these years, and you can set up in a tax deferred account that’s going to follow, you know, like a mutual fund or remainder index. So if you do have a child between twenty twenty five and twenty twenty eight, yes, by all means, take advantage of this opportunity. They will seed and fund, a Trump account for your minor, to get things started for their savings.

Now after they turn eighteen, the rules of IRAs, generally apply. Right? So with IRAs, right, you can take money out, but there’s a ten percent penalty and tax on the gain. Before eighteen, right, until they’re an adult, before eighteen, you can’t take any money out.

And there’s a five thousand dollar limit of what you can contribute to one of these accounts. So it’s sort of strict, but you do still get the benefit of tax deferral.

From a planning perspective, my personal take is that I like five twenty nine plans. I actually like five twenty nine plans better than Trump accounts as well as UTMA accounts. And the reason why I’m gonna get into in the next slide as we cover some of the newer provisions of the the the tax legislation.

So that wraps up our recap from last time. I know it’s pretty quick, but you’re, you know, free to take a look at a more in-depth analysis of it in our prior webinar that Kara and I gave. Now we’re gonna get into some of the newer things that we didn’t get to last time. And so what I wanna start off with are five twenty nine plan.

This one’s near and dear to my heart. We call them five twenty nine plans because they are in the tax code section five twenty nine. They’re established thirty years ago, and they’re my favorite, you know, for minors because they continue to get better. They continue to get more flexible.

Like, anytime there’s tax legislation or or legislation with respect to finances, for example, with the secure act couple years ago, they just tend to get broader, more flexible, and just overall better. So if you recall in the tax cut and jobs act in twenty eighteen, the new change there was we were gonna the government was they were gonna allow us to use ten thousand dollars for your primary and secondary education. So that was new. Now seven seven years later, it’s gonna get even better.

Starting, next year, we’re gonna allow twenty thousand dollars for primary and secondary education.

And the general, purpose and the use for these funds is broadening out too. Right? They are expanding the definition of what you can use it for, right, with the advancement of technology and things like that. Now you can use it.

I mean, these are prior changes, but for laptops and books, room and board, and things like that. But now things for AP tests. Right? Funds can be used for educational therapy and curriculum and fees and things like that.

So, again, it’s just the use for these are expanding, and that and that’s great.

Something to think about with five twenty nine plans is, again, they’re tax deferred, but, you know, UTMA accounts don’t. I know UTMA accounts are very popular, and they’re easy to set up, but someone has to pay the tax on that growth, and oftentimes, it’s apparent. So, again, if you wanna defer tax, then Trump accounts and five twenty nine counts are something for you to think about. But, you know, with five twenty nine plans, there’s no five thousand contribution five thousand dollar contribution limit on an annual basis.

Right? You can give as much as you would like to a five twenty nine plan until you hit the policy limit, which varies by state, but it’s quite a bit more than five thousand dollars. Also with five twenty ninth, it is the only time where you can take your gift tax exclusion and take five years worth of that amount and gift it all at once. Right?

Usually, you have to pay nineteen thousand dollars per person every year. This is the only time you get to super fund a five twenty nine plan and still pay no gift tax, which is fantastic. And your planning tip with five twenty nine plans, and I say this last time is if you pair a five twenty nine plan with an irrevocable trust like a dynasty trust, you now have a vehicle that’s income tax free and estate tax free for those proceeds possibly forever. Right?

And so that’s something that I wanna leave you with with five twenty nine plans. But, again, it’s great. The secure act also changed it too. You can roll, you know, proceeds from a five twenty nine plan to a Roth IRA if you meet certain requirements.

So, again, five twenty nine plans are great.

David, before we move off five twenty nine plans, we’ve got a question from Taffy. And I think some clarity on we talked about the scholarship tax credit on the charitable donations part. She’s asking, is a contribution to a five twenty nine plan, available for the scholarship tax donation or charitable donation?

Great question. So, contributions to five twenty nine plans will not qualify for that scholarship tax credit, unfortunately. You’re really gonna have to search and look out for certain scholarship organizations that have been approved by the government to qualify for that tax credit. You can’t just go find one and do that.

Now five twenty nine plans, once you contribute to them, you have to think about that plan as if it those assets are no longer yours. And so you won’t be able to get any individual benefit after you’ve contributed to the five twenty nine point other than getting those proceeds out of your estate. That question is also great because it reminds me that state rules are different. You know, these are the federal rules.

Check your state on whether or not certain things qualify, whether you get a tax deduction or a tax credit for contributing to a five twenty nine plan. In our state, Kara, California, we don’t, but other states, you might. So I want you to check on that. And, also, the rules for state approved five twenty nine, it’s like they might differ from federal.

Not all states conform. So, that’s a good point.

Great. Thank you. Next, let’s go on to qualified small business stock, QSPS under section twelve o two in the tax code. This is really exciting because, it allows you this law allows you to sell your business under certain conditions without having to pay a lot or all of your gain.

And the idea behind QSBS is this, if you structure your business properly properly and you sell it, the old law used to say you could exclude ten million dollars of federal gain from the sale of your business so long as you meet certain requirements. Right? You need to hold the stock for five years. You need, to have receive the stock when the business had fifty million dollars or less in assets.

Right? You need a c corporation that’s domestic. Like, you needed to meet all these rules. But at the end of the day, if you sold the business, you get to exclude ten million dollars of gain or ten times your basis, which is, you know, your purchase price of the shares or your investment in it.

What our new tax legislation did this year is they expanded and brought in the applicability of it. It’s just easier to qualify for it. So now and they increased the tax benefit too. So now if you meet these rules for qualified small business stock, you can exclude up to fifteen million dollars of gain or ten times your basis, which could be a lot more, and I’ll get into that.

The five year rule isn’t as rigid. Now you can hold the shares for three years or four years or five years. If you hold it for three years, you can get half the benefit. Four years, seventy five percent of the benefit.

And then if you hold it for the full five years, you get one hundred percent of this exclusion.

And the business needs to give you the shares when they have seventy five million dollars of assets or less. So, again, it allows the company to grow more before, you know, they issue the shares. And if you receive the shares around this time, right, it gives you more time and more leeway to, to, enjoy this benefit, if you qualify.

Now I said that the exclusion was fifteen million dollars, and that is true. However, if your investment in this company is more, right, because it can be ten times your basis, it could be significantly the the gain you can exclude could be significantly greater. Like, for example, let’s say you invest into a business and, again, you meet all these requirements for QSPS, seventy million dollars. Well, the rule says we can exclude fifteen million dollars upon the sale or ten times your investment or ten times your basis.

So if you take ten times seventy million of your investment, the the gain you could possibly exclude in this example is seven hundred million. So you’re not limited to the fifteen million. You actually could exclude a lot. Now there are a lot of considerations when you set up a business in this way and follow these rules.

Right? You do have to see you do have to have a c corporation which has its own tax features and characteristics that might not be attractive to you. But, again, you wanna talk to a specialist. You wanna talk to someone to see if it’s worth having a a structure like this so that you can qualify for qualified small business stock.

For those of you who have, businesses that qualify, the planning technique is this. You wanna give your shares away. You wanna give them away to people in your family, oftentimes your kids. And the reason why is because everyone you give it to can also enjoy the fifteen million dollar exclusion.

Right? So it’s like, if you wanna give it to your kids, it’s like, you get QSPS and you get QSPS and we all get QSPS. It’s like Oprah Winfrey. Like, you wanna give it away to everyone so that your entire family can all exclude fifteen million dollars per taxpayer.

So that’s something to think about. If you have children who are young or, you know, minors, that’s not a problem. You set up irrevocable non grantor trust for each of them, and you can contribute and gift qualified small business stock to each of them, and your family can enjoy even more. You can multiply this tax benefit for members of your family.

The other thought is that, you know, you could partially sell some shares and enjoy the fifteen million dollars exemption, but, also, you can take the remaining shares and enjoy that ten times basis of your investment or your basis there as well too. So you don’t have you’re not limited to either fifteen million or ten times your adjusted basis. You can actually enjoy both.

Next up, we have, what are called achieving a better life experience accounts. They are able account. They are in the tax code five twenty nine a. So you have five twenty nine counts accounts, and then right after you have five twenty nine a in the tax code.

And the reason why they put them together is because they function to, similarly, and, you know, they they act and are treated from a tax perspective, very similarly as well. Now ABLE accounts are established for taxpayers who have disabilities, and it’s, an opportunity for them to grow their assets income tax free. So you grow it in an account. It’s tax deferred.

And when you spend the money for qualified disability expenses, you still don’t have to pay taxes. So, again, they function very much like five twenty nine plans, which is why they’re coupled together in the tax code. The big change for tax legislation here is you needed to have a disability arise before the age of twenty six in the old law. In the new law for this year moving forward, that age has increased from age twenty six to forty six.

So, again, more applicability. It allows more people to utilize them. The new age is now forty six if you wanna set up an ABLE account.

The child tax credit, I’m not gonna spend too much time here, but the child tax credit has increased from two thousand dollars to twenty two hundred dollars. Right? This is the, tax break you get for having children and the cost offsetting the cost for raising children. This begins phasing out at two hundred thousand dollars of income or four hundred thousand dollars if you’re a joint joint filer.

So keep an eye out for that. It has gone up from two thousand to twenty two hundred. And likewise, the tax credit for child and dependent care. Right?

For the child tax credit, that’s the offsetting tax credit for having children. This is the offsetting tax credit for caring for them. So if you have dependents under the age of thirteen or, you know, adult dependents that you need to pay for their care, again, you can utilize this tax credit. It’s gonna go up from a thousand fifty to fifteen hundred dollars.

Right? So depending on your income level, if it begins to exceed seventy five thousand dollars, you’ll notice that the expenses, the amount of expenses you can have qualify for this tax credit are gonna come down. So those are the income thresholds for that.

Some other miscellaneous items, I wanna cover, you know, some random provisions that might impact you or you just might be curious about them. The first one is, is, unfortunately, a deduction that’s gone away. It was, you know, referred to as a miscellaneous itemized deduction that we used to have. It was suspended in twenty eighteen, and now, we the new tax legislation has made them permanently unavailable.

But if you recall, we had this random bucket of things we used to be able to deduct so long as we met the two percent AGI floor. So whatever your AGI is, your adjusted gross income, multiply that by two percent. Everything above that was deductible if you met one of these random things in this bucket. So things like unreimbursed employee expenses, tax preparation fees, investment advisory fees, legal fees as well too with respect to your finances and for your taxes.

Like, they all used to be deductible, but no longer the case. This, suspension of this deduction now will be permanent again. And it’s only permanent in so much as, you know, the next congress or the next administration might wanna pick this back up. But for now, you know, it’s technically permanently removed and eliminated.

Other things to keep track of, you know, the deduction for gambling losses are now reduced and limited to ninety percent of your winnings. Right? Like, you used to be able to offset the full amount. Now with the new tax legislation, you can only deduct up to ninety percent of your winnings.

So that’s new, moving forward. Next up, you know, bicycle commuting reimbursements are no longer excluded. Right? That’s gonna be included back into your income.

So, you know, consider that moving forward. We used to get a deduction for moving. Like, if you have to move for work and you move to a certain area outside of, you know, where you lived before, you used to be able to get a moving deduction. That is now, permanently eliminated.

And there’s a an endowment tax as well too. So if you remember in twenty eighteen, there was an an endowment tax imposed on certain educational institutions that had relatively large endowments. And so that new tax was one point four percent back in twenty eighteen. That, has been expanded for this year moving forward.

Now it’s a tiered system where, you know, colleges and institutions, if they had an endowment tax, it could now be one point four four percent, but it can be increased to four percent or eight percent depending on the size of your endowment. So, again, institutions are monitoring that. And, basically, you know, clean energy tax incentives, a lot of those have been eliminated as well too. I’m sure you’ve noticed, but, you know, tax credits and things for automobiles as well as other programs, are now gone.

So that’s it for the new tax legislation. Now we’re gonna go into the final part of our agenda today, which is some year end tax planning. So we’re very excited to get into this because it just gives you an opportunity to just, you know, take stock of what you have and, you know, take a look at how the year has gone, but also, you know, looking at the next year, you know, what are things that we can do in order to perhaps potentially save some taxes, some strategies to implement, and also maybe to think about the next year of what you wanna do if you miss an opportunity this year. And so the four things to think about when we go into year end tax planning, and I’m sure Kara’s thinking about this as well too, as well as many of our wealth advisers are, you know, number one, how do we minimize taxes in your portfolio?

Right? Like, what are we gonna do not only to minimize taxes in your portfolio, but perhaps in other areas of your financial life? Right? Like, how can it impact that?

Number two, charitable giving. I know I’ve talked about changes with charitable giving already with the new tax legislation, the new AGI floor and all of that and some strategies there. But I do wanna briefly touch upon this just because it’s an important part of many of, our taxpayers plans and how we can use that to perhaps offset some income tax. Third, we’re gonna cover Roth conversions.

Kara is gonna cover this part. I know many of you had questions about this and you’re wanting to learn more about Roth conversions, you know, whether or not it’s an appropriate time to do so. So Kara is gonna go over the details of that. And then finally, capital gains recognition.

Like, when does it make sense to trigger a gain? Why would you wanna do so? And that’s how we’re gonna wrap things up. So let’s get into it.

You know, when we think about minimizing taxes in your portfolio, you know, really thinking about the main method of what’s called tax loss harvesting. Right? And the idea of tax loss harvesting is that you would take a look at your portfolio and, basically, you would strategically sell those positions in your portfolio that have gone below your basis, or in other words, it have gone below your purchase price. Now why would you ever wanna do this?

Right? You know, we’re not ever trying to make, to go for losses, or that’s not our objective. But in a well diversified portfolio, it’s inevitable. And so you take a look at those and you would call them.

Right? Like, you would go and you would sell them to bank that loss and you would hold that loss. Right? Put it on the books.

And the reason why is because it can help you offset some gain in the future. So if you have another position that’s done very well and you end up selling that for rebalancing purposes or for diversification, right, you can use some of the losses that you have to offset the gain. And when you offset them, you don’t have to pay tax on it. And what you can do is you can take those tax savings and you can invest them even more.

Now you compound the benefit by using tax loss harvesting. Some things to keep in mind is you again, you’re going to offset the amount of gain that you have. But if you have excess losses, you can also actually every year offset thirty three thousand dollars of ordinary income as well too. So that’s something to keep in mind, when you are tax loss harvesting.

Now if you are doing so, right, and it’s a good time to do so towards, year end, but, you know, it’s even better to do it throughout the year. But if you are going to tax loss harvest, then, I want you to keep in mind that there are certain times, a certain time window when you conduct this transaction. I don’t want you to take the loss and then buy something back that’s substantially identical right after just to bank the loss and then get back into the market. You have to be very careful with that.

And the reason why is because of something called the wash sale rule. So if you sell something to recognize the loss, if you buy it too soon, the IRS is gonna disallow that loss. And the amount of time you need to wait is a sixty time sixty day window that surrounds this transaction. So thirty days before and thirty days after the transaction, you need to avoid that time period in order to steer clear of what’s called the wash sale rule.

So there’s something very important to consider as you tax loss harvest. And I say, you know, a lot of times, you know, people will sort of, overlook this, and so that’s something that I don’t want you to do.

So, David, a question about the wash sale rules before we move on here. Yeah. Question the question is, is it wash sale per account or per across all your holdings? So if I own Coke in one of my brokerage accounts and I sell it, can I buy it in a different one of my brokerage accounts, or is it everything that rolls up to me is considered for the wash sale rules?

Yeah. To answer that question, it’s it’s like your universal financial picture. So, you know, to be honest, like, it is harder to keep track in different accounts, which is why, again, you should talk to your wealth adviser about the whole landscape of your financial situation because you might be doing something in one account that’s violating something in the other account. And so it’s just good to have a broader picture, which is why your wealth adviser would love to take a look at everything so that you don’t violate anything, especially with the wash sale rule. So great question there.

This chart shows you a comparison between two taxpayers in a similar situation. One tax payer in identical situation, one taxpayer is tax loss harvesting, taking those taxes you’re saving and reinvesting those assets, the other person is not. They’re buying and holding, and they’re just staying put. Again, with active planning and, you know, active tax loss harvesting, you can have a better outcome. So something for you to consider, something for you to discuss as you get in to the end of the year.

Something great about these losses that you bank, you can carry them forward indefinitely. And so, you know, as you do it and this is why, you know, Karen and I, when we think about taxless harvesting, like, you wanna do it regularly. You wanna do it throughout the year. You just don’t wanna do it at the end of the year, although that’s a natural time to think about.

You wanna do it regularly throughout the year because, again, they aren’t they serve as an asset on your balance sheet that can offset some future tax liability with whatever it is, whether it’s in your portfolio, which we oftentimes see, or if there are other gains that you recognize, in your financial life. Right? So if you sell real estate or something like that, right, they can it can help you offset that as well too. So you keep track of these carry loss these losses carried forward on your tax return.

Right? And that’s sort of your ledger where you keep track of it. And so you can save them for a rainy day. They, you know, they do go on for a while.

They don’t expire. However, you do wanna use them before you pass away because then all of your basis for your assets get stepped up or stepped down. Right? So you it’s use it or lose it, but, again, you get to carry them forward in perpetuity.

Next up, we have charitable giving. Right? And we’ve discussed this already with the new tax legislation. You’re gonna have a new half a percent floor, and I gave you some techniques to consider.

Right? Like, accelerating gifts for this year, qualified charitable distributions, scholarship tax credit. But you know what? Like, the most powerful thing that you can do from a tax perspective and charitable giving, I would say, is probably the simplest thing you can do, which is to donate appreciated assets.

Again, I don’t want you to do this to chase the tax deduction, but if you give to charity and that’s something that you’re already doing and that’s part of your financial plan, then, you know, gifting appreciated assets is probably the most powerful thing you can do. Because if you think about it, right, if you gift an asset to a charity that’s gone up, you know, you don’t have to liquidate it to give them cash rather. Right? And and, again, you would have to pay tax on that liquidation if it’s gone up.

You just give that to the charity. You get the full deduction. You get the full tax deduction of the fair market value of the thing you’re donating without having to pay tax on it. So, again, you’re benefiting with a greater deduction.

You don’t pay tax on it. It goes to the charity, and they don’t pay tax on it. Right? Because they’re a tax exempt organization.

It’s a win win. Right? And so if you’re thinking about giving to charity instead of cash, I highly recommend that you consider giving appreciated assets. You know, very few things, if any, are more powerful than that from a philanthropic tax standpoint.

And if you do that, then I would also have you consider donating to your own donor advised fund. Right? DAF for short. It’s like having your own charity.

It’s your own charitable account. It’s considered a five zero one c three, right, usually ran by pretty large institutions. And the great thing about this is that you don’t have to decide which charity you’re gonna give to right away, but you do get to enjoy your tax benefit right away. So if you donate assets and you’re not quite sure if you wanna donate assets and you’re not quite sure where it’s supposed to go, you can, again, transfer assets from your taxable account to your donor advised fund, immediately recognize the tax benefit, and then later, you can decide which charities you wanna support.

Right? Which five zero one c threes you would like to distribute out to, and the donor advised fund helps you do that. So those are some things to think about with charitable giving.

Next up, we have Roth conversions. I wanna hand it over to Kara to go into this in more depth. I know a lot of our audience is wanting to hear about this and the benefits of it and, when the timing would be great about it. So, Kara, I’m gonna hand it over to you.

Great. Well, I will say that certainly for, your wealth advisers, all of us here at Mercer Advisors, November and December is Roth conversion season here. And there there is a lot of reasons that we do it at this time of year. We have a good picture of what your tax situation is expected to look like for the year, we’re able to at least more accurately estimate where we’re going to be. So if you’re unfamiliar with what a Roth conversion is, you basically are taking assets out of your, your pretax, your traditional IRA where you made that contribution, and you are recharacterizing them into a Roth IRA.

And then you think why is it that someone would do that? Well, the benefits of having a Roth IRA would be that you get tax free growth in your Roth IRA account. There are no required minimum distributions out of a Roth IRA like there are in a traditional IRA. And if you have moved assets from your traditional IRA over to your Roth IRA, the amount of that required minimum distribution, which is taxable income when it comes out of your traditional IRA, is reduced. So there are multiple benefits there to do that, but there are some things to think about when you’re considering this.

So the first I think, is why do you do it and when do you do it? We’ve talked about why you do it, but there are some times that are ideal times to do this. So if you are in a lower tax bracket than you perhaps have been in in previous years, Perhaps you’ve retired recently. You’ve got some time where you’re expecting your, your regular taxable income to be lower.

Before you take Social Security benefits, again, slightly lower taxable income, and then also prior to taking your required minimum distributions, which now start at age seventy three. So we’ve got an example here, on the next slide, is when is it that you do that? So this is a thing that really detailed planning with your wealth advisor will help you determine if there is an optimal time for you to take that. Being able to use kind of your year end tax projection to see if there’s a point in time when your ordinary income has come down and help you project what that means the Roth conversion amount would add to your taxable income from the year.

And there are some sensitivities there. You do wanna be careful with when you are increasing your taxable income in a year that you understand any of the limitations that may come from some of the governmental programs, things that you may qualify for, are, also Medicare premiums come in into play here. So again, really important to do the detailed planning, on the Roth conversion for that.

And oftentimes, we recommend that clients do this over several years because your tax situation may vary between certain years. You may be looking at those limitations on the government program. So a systematic Roth conversion where you’re doing a portion of this conversion over multiple years is oftentimes very helpful.

And then we we also get the question about what happens if I have to withdraw some of these funds that I converted over to, a Roth IRA. So if you do withdraw any of the converted funds that you did within five years of the conversion, you do pay a ten percent penalty on that. So, again, something you wanna make sure that you, aren’t intending to need some of those funds within that five years. But I will note the reason why we do this in November and December of the year, that five year clock actually starts January first of the year you do the conversion. So even if you don’t convert it until November, December of this year, that five year clock started on January first of twenty twenty five.

So maybe we go to the next diagram. So and I think this builds if we’re looking at what the long term value of of proactive Roth conversion shows. So if if what we’re looking at and what we’re balancing here for Roth conversions is what’s the balance of your traditional IRA over time? You’re doing a Roth conversion balance.

What does that grow into? And how does that change the minimum required distribution that you have to take out of your IRA and what you would have to take out of your IRA if you do the Roth conversion? So I think if you click it, David, a couple times, it’ll give you a whole bunch more graphs. There we go.

So what we’re looking at here, and I know it gets a little bit busy, is you are looking at if you do these systematic conversions that we talked about. Let’s say you do these ten years of Roth conversions here on the left. We are reducing over time that traditional IRA balance, and we are putting it into the Roth IRA, which is the dark gray line. So over time, that Roth balance is growing. And again, there are no required minimum distributions and there’s tax free growth in your Roth IRA.

If you have your traditional IRA without doing any Roth conversions, this bright pink line that’s here, that would be what your minimum RMD, required minimum distribution would be out of your traditional IRA. You can see it increases your taxable income. If you’ve done the Roth conversions using that, now you can see the purple line that kinda runs through the middle. It reduces the amount of your, required minimum distribution if you’ve done the Roth conversions.

So again, this is a really important planning tool that you can have, but you need to go through and do very detailed planning for that. And I see a question that popped up here is when do you have to do this by? You may have heard before you could make an IRA contribution for a given tax year by your tax filing deadline. So for twenty twenty five, you could make a traditional IRA contribution by April fifteenth of twenty twenty six when you file your taxes. That is not the case for Roth conversions. Roth conversions need to be completed by December thirty first of the tax year that you’re doing that in. So now is really the time to act to speak with your wealth advisor about if this makes sense for you and what your plan should be for that.

Any other thoughts there, David? I didn’t look at the questions there. I’m sure we’ve got plenty. So why don’t you talk about the giving to charity and sort of that strategy? If we do the Roth conversion, you increase your taxable income, but there’s some powerful planning tools I think too that we compare that to make it even make more sense for certain clients.

Yeah. You know, that’s why planning is so important, you know, meeting with your wealth advisor because when you’re simultaneously converting to raw, you’re you’re strategically wreck you’re gonna strategically recognize some income. And so you can offset that with certain chariot with certain, you know, strategies that we’ve already talked about, like charitable giving. Right?

And so if you do a certain amount, you wanna know the tax liability that it’s gonna be you know, that you’re gonna have to pay at the end of the day. And if you match it with certain deductions, and maybe even if you bunch those deductions for that year knowing that you’re gonna convert to raw, then that might be helpful. Like, let’s say you regularly give to charity, I don’t know, a thousand dollars a year. Maybe in a year that you are going to convert, you just take five years worth of, charitable giving and you do it in a singular year.

You know? And so in that way, you can sort of offset and, time, you know, the the timing and when you’re gonna convert to Roth as well as when you’re going to take bigger deductions and, you know, bunching them together. And so that’s what I would be thinking about, and that’s what planning, I think, is so important overall for, for our clients.

Before we move on from that, David, there is a question about how does the, from Howie, how does the Roth conversion graph apply if you are already using your RMD amount to do that qualified charitable donation?

Yeah. You know, that’s a good question. You know, we run we would love to run your own personal graph, to see how it would affect because it’ll depend on, like, how much you’re giving for maximizing. You know, this year, it’s a hundred and eight thousand dollars per taxpayer.

Next year, it’ll be a hundred eleven thousand. So it’s really gonna depend on are you maximizing that or not. And then it’s also going to, depend on, like, your overall financial situation. So we’d love to run the numbers with you, with all of you to see how it would impact it.

But that that’s a great question. That’s a great question.

So I think the the nuance there is definitely there’s various ways to pair this gifting to charity. Sometimes the QCD, the qualified charitable donation is best out of the IRA. Some you might wanna do a Roth conversion because you’ve got some other donation strategies going. There’s lots of different ways to accomplish that, and your wealth advisor will be able to help you determine what’s most effective.

Absolutely. And then, two final thoughts as we go on to the the next and the final point is, you know, if you know, and we’re talking about converting to Roth, but if you do have a taxable retirement account, make sure you take your RMD this year. Right? That’s that’s also part of year end tax planning. So, make sure you talk to your wealth advisor about that. And the second thing that I think about with Roth conversions is that if you are concerned about the gift and the estate tax, and, again, I’m an estate planner at heart, then you might wanna be thinking about converting to Roth because you are reducing the size of your estate, thus being less subject to the wealth transfer taxes of forty percent. So, again, you know, it might not make sense for everyone, but if you do have a taxable estate, converting to Roth is probably a consideration you should at least explore.

It’s a great segue into, recognizing capital gain, you know, like a big part of tax planning is just timing, the amount of tax you’re gonna have. You’re generally trying to accelerate deductions and defer income to the best you can. That’s what they teach us in tax one zero one. You wanna do those to the greatest extent possible.

But if you are in a situation where you’re thinking about converting to Roth because you have those notch years that Kara was talking about, then another thought for you then, you know, to think about with your Roth conversion is, do I wanna recognize some gain? Like, if I have a period in my life where I’m gonna have lower income, then maybe it makes sense to trigger strategically trigger some gain and sell some of my winners. And the reason why you would wanna do that is because as you remember that pyramid we alluded to in the beginning, we showed you that pyramid. There are tax brackets and income ranges where you could recognize zero percent capital gain.

Right? And there’s fifteen and twenty on top of that. And you can choose, like, maybe if you, if a fifteen percent capital gains tax rate is acceptable to you, maybe you wanna make sure that you, you’re able to have that tax rate applied to your tax liability. Right?

And so timing is a big, consideration when you think about tax planning. The other thought is that, you know, you could if you make gifts or if you support someone, whether, you know, it’s someone who doesn’t make as much income as you, maybe it’s a child or maybe it’s someone, a friend or someone again who’s not in the same income tax bracket, as you and you regularly give them cash gifts, you could give them appreciated assets to the extent that they enjoy that zero percent tax bracket. Right? Let’s just think about, I don’t know, like a graduate student or someone again who pays their own taxes, but they’re not making as much income to you.

If you regularly support them or you give them financial resources, maybe you think about giving them enough to recognize a zero percent capital gains tax. So that’s the whole idea of timing and recognizing them as strategic moments in your life. Right? Whether it’s a Roth conversion, whether it’s, you know, actively recognizing capital gain.

Because again, right now, you might be able to enjoy a lower tax rate than future years and you wanna take advantage of that before RMDs kick in or what have you, then, you know, the timing might be ripe for now. And so that’s something that we encourage you to take a look at as we get into years end. You know, what are the strategies? What’s the timing?

How is it gonna impact your, tax liability? Your wealth advisor is happy to do all of that and run the numbers with you throughout the year end tax planning time.

Kara, I’m gonna hand it back to you just to wrap us up and to see if there’s any questions that, the audience might have.

Well, there are quite a number of questions. I don’t think we’re gonna get to them all, but rest assured we have, recorded them. So any of them that we have your name, we will follow-up, with your wealth advisor to get those answered for you. But there’s a few here that I think, are pertinent that we we can get to. We have a question from Thomas that’s that’s asking about we talked about the the annual gift exclusion, that nineteen thousand dollars a year for twenty twenty five. And his question is, if my parent is wanting to give me an an amount in excess of nineteen thousand dollars, what happens? I’ve heard about a form seven zero nine.

It’s a great question. That’s a fantastic question. You know, we have a an limited amount we can give during our lifetime. That’s our lifetime exemption.

And next year, it’s gonna be fifteen million dollars. And then every year, you have your own separate bucket of nineteen thousand dollars you can give. Now what happens is that if you go over that nineteen thousand dollar amount, a married couple can double it, give thirty eight thousand. But if you go over that nineteen thousand dollar amount, some people you know, the misconception is that you might owe gift tax.

That’s not necessarily true because what happens after you go above that nineteen thousand dollar amount is you start dipping into your exemption amount of fifteen million. That’s your backstop. So, you know, many people Google over nineteen thousand, don’t have to pay any estate tax because they have a fifteen million dollar reserve. But if you are concerned about that, you know, what this is what the the law If you go over a nineteen thousand dollar amount, you need to file what’s called a form seven zero nine gift tax return.

The only, and this is not an exception to filing, but the only time you can go over that nineteen thousand dollar amount and not really have it impact your gift tax liabilities through five twenty nine plans, which we covered. Right? You can take five years of that. You still have to file a seven zero nine gift tax return, but that’s the only time you can gather them together five years at a time.

You should file a form seven zero nine gift tax return. That gift tax return, if you don’t you know, if you have a the entire amount of your exemption left, will just show the IRS, hey.

You know, this is the nineteen thousand dollar we’re giving. This is the amount of lifetime exemption we’re giving, and zero taxes due. At the end of the day, if you have all your exemption, at the bottom, it’s just gonna say zero tax liability in most cases. So, no tax due.

You do have to file a form seven zero nine technically. What happens if you don’t? Well, if you don’t ever end up paying any tax, then there’s no penalty in interest that accrues. It just you know, you’ve used up your exemption.

You just never reported it. A lot of times people will file that form seven zero nine because it starts the statute of limitations for the IRS. So if the IRS if you show them you made this gift and they wait three years, and they don’t audit you, they can never come back and challenge you on that gift. So that’s one of the benefits of filing that tax return.

It starts that statute of limitation.

Great.

And maybe, while we’re talking about the wealth transfer, Vartan is asking, so this thirteen point nine nine, whatever that number was, David, you said it there. That’s right.

A little over little over thirteen million.

It’s going up next year.

Does it include real estate? So maybe talk about how the estate is calculated for that exemption amount.

Great question. You know, the estate tax return is form seven zero six. The gift tax return is form seven zero nine. And the way that the tax is calculated, so the you know, when you give something during lifetime, they take a snapshot on the date of the gift of the value of it.

When you pass away, they take a snapshot of all the assets that you own, and they value it. Right? So all your real estate, all your portfolio, your retirement accounts, your life insurance, every almost every type of assets, like, even weird unique assets, artwork, your farmland, your livestock, like, your sports team, they take everything and they value it on the day of your passing, and then they they implement your exemption. Right?

Fifteen million per person. And everything in excess of that is forty percent. Now here’s the thing. People overlook the generation skipping transfer taxes.

Well, too, like, a lot of people are aware of the gift in the state tax is forty percent when you pass away. Like, a lot of us are aware of that, but a lot you know, many of our clients are generous grandparents. So if they give to their grandparents or to their grandchildren too aggressively, there’s an additional forty percent tax. So if you don’t plan well for your estate, there can be a forty percent estate tax as well as a forty percent generation skipping transfer.

That’s an eighty percent tax on your wealth, which is why we stress estate planning here at Mercer Advisors. Like, we just want to make sure that, again, your your financial plan, your estate plan, and your tax plan all are consistent and they go together and they’re, and they’re aware of each other so that we can make sure that the best outcome is there for your family so we can preserve your wealth. So, yes, to answer that question, it’s a long way to say yes. It does include your real estate.

That’s great.

Yeah.

Well, as we come here to the end of our session, we know that we covered so much information and and all of these changes, tax planning, estate planning, financial planning, they’re all very technical. We absolutely know that, and we are here to help you. Please reach out to your wealth advisor. We’re able to help work through all these situations for you personally, help you come up with an actionable plan that is most effective for you and your family.

So we hope our our our bottom line message here, David, is you’re in tax planning is important. Lots of things have changed. Please reach out to your wealth advisor so that we can help you navigate all of this. So, we also saw a ton of questions about will this recording be available, this information.

So, yes, this will be recorded and it will be posted to the Mercer advisors dot com website. Look for our insights tab. It usually takes us about forty eight business hours to, be able to get that posted, but it will be available. So thank you so much for joining us, David.

Thank you all for attending. And, again, we’ll follow-up with any questions that we didn’t get to about this important topic.