OBBBA and Your Tax Strategies

Thank you all for joining us.

We’re delighted to have you with us today to talk about all of the new tax law changes and how you can use those strategies to understand and enhance your own personal situation.

I’m Kara Duckworth. I’m the Managing Director of Client Experience at Mercer Advisors, and I’m very pleased today to be joined by David Oh.

David is the Vice President of Wealth Strategy. And what that means is David takes all of the tax rules, the estate planning techniques, and helps us make them effective for our clients. So David is going to be diving into all of the details that I know you are all anxious to hear about all 900 pages of the new tax bill, and hopefully making those understandable and applicable.

It’s important to note that the information that we are presenting here today day is informational and educational and should not be construed as personal financial advice for your situation. We know that we’re going to be talking about a lot of concepts today that you may be interested in understanding how they apply to your situation, and we would refer you to your own wealth advisor to be able to discuss the specifics about how they apply to you.

So David, I know we have so much to go through today. A lot of it is very technical. So I want to give you the opportunity to jump in here and talk about how we’re going to structure this today and also about all of these important information that we’re going to be giving to our clients.

Thank you, Kara. This is going to be so much fun. Now, like Kara mentioned, the tax bill is around 900 pages. So if you’ve had a chance to dive into the material and you still feel somewhat confused or maybe some of the provisions aren’t as clear, do not worry because you are not alone. It was Albert Einstein himself who said that the hardest thing in the world to understand is the income tax. So you are in good company.

So the latest Tax Act was passed in July 4 of this year. And we’re going to be highlighting some of the provisions here today.

Now, while I was preparing for this presentation, I was trying to think of a really catchy title for our time together. And some of our colleagues have referred to it as a One, Big, Beautiful Bill Act. That’s not to say that we feel one way or another about this Act, it’s just that this is what it was being referred to as it was making its way through the chambers of Congress.

But I was really having a tough time because this Big, Beautiful Bill Act doesn’t really roll off the tongue. And so I’ve heard some colleagues refer to it as the OBBBA bill using the acronym, and that just sounded blah. The thing is, the technical name of this actual bill is pretty long. We don’t really see this acronym in the actual bill. If I want to tell you the long form of this bill, it’s actually called and I quote, “To Provide for Reconciliation Pursuant to Title II of House Concurrent Resolution 14,” and that’s a mouthful.

And so I guess OBBBA is easier than that, but I prefer some other acronyms. I like calling it the OBBBA bill perhaps, or sometimes I’ll refer to it as OB3 or OB Trice. Whatever it might be, I’m going to use these terms interchangeably, but just know that I’m referring to this latest Tax Act that we passed this year.

As we dive into this material, I want you to keep some things in mind. First off, a lot of these provisions are just an extension of what we passed in 2017. If you recall, during Trump’s first administration, Trump 1.0, they passed what was called the Tax Cut and Jobs Act. Actually, that’s the informal name. They try to name it that and the law failed because the name was too short. But we’re going to call it the Tax Cut and Jobs Act for today.

And the reason why we had to extend it is because we very rarely have enough votes to make tax laws permanent. We need at least 60 in the Senate and we just don’t have that. Now, that doesn’t mean that we can’t pass tax laws. You can pass it with a slim majority. It’s just that due to the budget reconciliation rules, you need to have these tax bills expire with the budget. And that’s why they’re usually the provisions sunset around six to 10 years due to the Bird rule and Senator Bird where you need to have it fit within a 10-year budget.

And so with our latest Tax Act, it passed with a vote of 51 to 50, with the vice president casting that tie-breaking vote. And to give you some context on the Tax Cut and Jobs Act, about seven years ago, that thing passed 51 to 48. And so again, we don’t have the requisite votes. And so when you read the actual bill, it’s going to say that some of these provisions are permanent, quote unquote “permanent.” But in reality, a lot of these provisions could be changed as soon as the next administration potentially. And so I don’t want to say that they’re permanent and set in stone.

The last time we did have long-standing tax reform was in 1986 under the Reagan administration. And back then the vote on that tax bill was 74 to 23. They did have enough votes there. But since then, there’s just been a cadence and rhythm of just renewing, extending, or making new tax law along the way. So that’s where we are here.

Another important thing to note is that we don’t quite yet have all the guidance and regulation yet, so we’re still waiting that from Treasury. And I wouldn’t hold your breath here, because sometimes it takes years for the Treasury to issue regulations on the laws that they just passed, and sometimes they just altogether don’t issue regulations. So we are waiting on regulations. We’ll see if they come out. IRS notices are probably going to come out as well too, along with revenue rulings.

Although we have the actual bill passed, we’re going to have to take a lot of the language at face value and then wait for more guidance along the way.

And then finally, you’re going to notice that as we get through the material, I’m going to show you what the law was, generally speaking, what it was in the Tax Cut and Jobs Act, how the OB3 bill changes it if there’s any change at all. And then I’m going to provide some commentary and some discussion on some takeaways, observations, and perhaps even some planning opportunities. So let’s get into it.

Well, before we start, David, I just want to mention that if you’ve got questions, please submit them to the Q&A. We’re certainly wanting to answer as many questions as you have.

Many of you have submitted questions in advance as well, which has been very helpful, but please use the Q&A feature. It’s located on the bottom of your screen to submit any questions here. As we go along, we’ll do our best to answer them.

So we’re going to cover individual tax rates as a whole. I’m going to cover the rates and summarize them. We’re going to go over the standard deduction. Go over the new senior personal exemption as well too. So that’s interesting. And then round out this section with the alternative minimum tax.

Somewhat good news with income tax rates is that they are staying the same. You have rates between 10 at the bottom to 37% at the highest rate. From the Tax Cut and Jobs Act, this will just move on over with the OB3 Act as well too. So there won’t be any change there. Now, the brackets will slightly change. The numbers will go up due to inflation. The income ranges are going to vary, but the tax rate themselves will remain the same.

I’ve also included the tax rates for trusts and estates. Now, these are not for your trust, for your revocable living foundational estate plan, those types of trusts. Those really just follow your individual tax rates. The ones that help you avoid probate, help you for incapacity. Those basic revocable trusts are not subject to these tax rates. But those non-grantor trusts that are irrevocable, they do have a separate income tax rate and separate tax brackets. And those you can see them on the deck as well too.

Something important to know about trusts and estates is that when your trust incurs income, it actually gets to the top bracket with very little income. As much as 15,000 to $16,000, you’re already in the highest bracket, which is pretty stark. It’s a stark comparison and glaring difference between individuals.

Now, trustees what they’ll do is in order to get around this, they’re going to make distributions out of the trust so that beneficiaries can pay for the tax on their distribution according to their individual rates. That’s just how trustees get around this pretty high-tax rate with low-income levels. But I do want you to keep that in mind as we go on with this presentation.

And then finally, I listed the corporate tax rate here. Back during 2017 when the Tax Cut and Jobs Act was being discussed, the corporate tax rate was at 35%. What the bill did in 2017 and it became law in 2018 was a drop the corporate tax rate from 35% to 21%.

Now, I’m mentioning this not because I’m going to go over all the business changes that the act recently passed. I’m not going to go over the international provisions either. I’m really going to focus on the ones that affect your personal financial situation. But I mention this because I’m going to allude to it in two other topics later on.

The first one being the Qualified Small Business Stock under Section 1202. I’m going to briefly reference it there. And then also for the Qualified Business Income Deduction under 199A. It’s somewhat affects those two and so that’s why I mentioned it here.

I just want you to keep that in mind as we go through.

But David I do have a question here from Lorna. She’s asking, when do these tax changes go into effect?

Great question Lorna. Some of these will go into effect this year. Because of the budget reconciliation process that Congress has to go through and like all the things you need to fit into the budget to make this tax law revenue neutral, different provisions are going to have different starting times and different expiration dates as you will see.

So some of those, as we go along the way, I’ll try to point out when do they start. And then when do they expire because they’re not going to have the same starting times or finishing times either. And I think that’s why Albert Einstein thinks that income tax is more difficult than the theory of relativity. So that’s where we are here. So it’s somewhat of all-over-the-place type of situation, which is why it’s very important to do the planning with your wealth advisor.

This deck seems like there’s a lot on it, but I love illustrations. If I were to break it down simply on the left side, you have your single filers. On your right side, you have married filing jointly. As you go in the middle section, you have all your tax rates. And on the outside, you have your income tax bracket ranges. If you go from the bottom up and follow the colors, from the light purple to the dark purple, these are your capital gains tax ranges.

And then you’ll notice the dotted lines. This is your net investment income threshold. So if you make over a certain amount, like $200,000, then they’re also going to tax you on your investment income, 3.8%. So that that range too. So I like this illustration because it encompasses your individual tax situation pretty nicely and supports the prior slide.

So before we move on to this, because that little box that you had on that top of the pyramid about Roth conversions, getting a bunch of questions about that–

what is the impact on Roth conversions? What does Roth conversion opportunity mean here from Jackie? Maybe you can talk about that a little bit.

Yeah, good question. I think that financial planning is just so important here at Mercer. And so when you sit down with your planner and your advisor, you should be taking a look at the tax rates and finding those opportunistic periods of time where perhaps your income drops and we can take advantage of the Roth conversion opportunity now. Because the tax rates have to stay the same, they’re going to be indexed for inflation. They’re going to go up. So the good news is that you’re planning from back since 2018 is going to still ring true.

So I would bring out that plan. Take a look at those times in your income earning years to see when you can actually convert to Roth. Maybe take the tax hit when your income is a little bit lower so that you can take advantage of working up through these progressive tax rates along the way when you have to pay tax during the conversion. Good question.

Let’s head on to the standard deduction. So what is this actual standard deduction, and why is it a big deal, why are we talking about it? Now, the standard deduction if you take a step back, is this freebie deduction that all taxpayers get. No questions asked. If you earn money, the government is going to give you this deduction.

And if you take the standard deduction, then you get to offset your income with this. And you don’t have to itemize. You don’t have to do anything special. You don’t have to fill out a schedule for it. They’re just going to give it to you. So again, very low-audit risk. It’s something that it’s a blanket deduction that everyone gets.

And what we did at the end of 2017 beginning of 2018 is we essentially or Congress essentially doubled the standard deduction with a Tax Cut and Jobs Act. And so as you can imagine if you double this deduction, it’s just more likely, since it’s free to everyone, that more people are going to use it. So prior to the Tax Cut and Jobs Act in 2017, about 70% of taxpayers were utilizing the standard deduction. When you raise the standard deduction or doubled it, about 90% of taxpayers in our country now are utilizing this standard deduction, and that makes sense.

If the IRS isn’t going to question you for taking it, you don’t have to prove anything. And it’s difficult now to itemize to the exceed the standard deduction, then why not take it. And so that’s what we happen here. When you look at OB3, what this new act did was it just extended these rules. So for this year single filers, the standard deduction will be 15,750. You double it for married filing jointly, and then head of households, 23,625.

Something to take away from here is if you are regularly taking the standard deduction–

and let’s say that you possibly could itemize, but you’re just on the cusp every year between taking the standard or itemizing, something for you to think about is accelerating your deductions from future years into the current year, and then taking the itemized deductions for that singular year to increase your tax benefit.

And then every subsequent year, since you’ve accelerated all your deductions, just take the standard deduction like you normally would. In this way, you can maximize and optimize your tax situation by bunching your deductions together all at once and concentrating them so that you can utilize the standard deduction in future years as you normally would. So I’ll probably mention this technique again when we talk about charitable contributions, but that’s something for you to think about.

So I’ve got another question here about standard deductions. David, Carroll is asking–

I know we’re probably going to talk about the SALT tax. I know that you’ve probably heard that on the news the state and local tax deduction, which we’ll address here in a minute. But she’s asking, if you don’t itemize, meaning you’re going to take that standard deduction, can you still take a deduction for state and local taxes?

That’s a good question.

The State and Local Tax deduction, the SALT deduction, has been a hot topic. To answer that question, no, you need most of the take that. And so what you’re saying is, if you don’t want to take the standard deduction, your position is I can itemize enough deductions to exceed that to better my tax outcome. And so part of that is taking the SALT deduction as well as some of the other ones that we’re going to talk about in the next section. But you do need to itemize in order to benefit from that. Otherwise, you might as well just take the standard and be done with it and simplify your tax life. So good question there.

Next up, I want to talk a little bit about the personal exemption. I know there’s something new for this year. But the personal exemption in general, before we get so excited about doubling the standard deduction in response to that as well, the government also took away our personal exemption was another deduction that you had based on your family relationships, like having kids as dependents, which is too bad because I thought that’s why we had kids to get the deduction. Especially at the end of the year, it’s just very good tax planning. But it went away, and so that’s OK. But this was the whole idea of the personal exemption.

If you had a dependent, if you had a child, we gave you an extra deduction for it, that was suspended with the Tax Cut and Jobs Act. OB3 makes this suspension permanent. So now the personal exemption is gone. However, due to this promise on the campaign trail of no longer taxing Social Security, that stuff didn’t happen.

Social Security is still taxable if you meet income thresholds. So let’s be clear with that. However, to partially address this promise, they created a senior personal exemption where if you are 65 and older, you are entitled to the senior personal exemption of $6,000. If you’re 65 and older, this starts phasing out however when you start making $75,000 of modified adjusted gross income. It will begin to phase out then. And this is only in effect from this year through 2028.

And so for the next couple of years, you’re going to be able to enjoy the senior personal exemption. And then we’ll see what happens with the next administration. So just keep that in mind for this new exemption.

So I’ve got a couple of questions on this senior exemption here and maybe specifics while we’re talking about the phaseout. So someone’s asking, assuming that someone had–

Phillip is asking, if you have a modified adjusted gross income above $250,000, is there any benefit or is that completely phased out here with the senior personal exemption?

Yes.

So what I would say to that is, for everyone’s personal income situation, what I would do is I would sit down with your advisor and really crank out what that implications would be for you with respect to this. For joint filers, again, I don’t know Philip’s situation. If you’re a joint filer, it’s going to begin phasing at 150. I don’t know their situation.

I would imagine that most of that would phase out at 250. But again, you would probably have to take a look at the entire return. See what their investment income is. See all their sources. And see whether or not it would. But just hearing it off a very surface level, I probably would think that most of it would be phased out.

So certainly detailed tax planning there is your friend. And one more question before we move on related to, you mentioned here that, the Social Security benefits here remain taxable if you’re over certain income thresholds. But Steve is asking, can you get the additional senior deduction if your income is below the threshold but you’re not collecting Social Security?

Oh, good question. Yes. You don’t have to be collecting Social Security. This was just to address a separate issue. Social Security will be separate. If you’re 65 and over and you meet these income thresholds, yes, you are entitled to this exemption. So good question there.

And so last one on this before we move on. James is asking, is the senior deduction in addition to the standard deduction?

Oh, good question. Yes, it is. So you will get a personal exemption for seniors as well as a standard deduction. You can take them together. So that’s a good point to clarify as well.

Thanks.

All right, so let’s go on to the alternative minimum tax and then that’ll round out this particular section before we move on. The alternative minimum tax, if you think about it holistically, why does the alternative minimum tax exist and why is it there? To complicate our lives.

The alternative minimum tax exists for this reason. If you make too much money and you take too much in itemized deductions, sometimes you overly take a lot of deductions, sometimes you end up paying less tax than a lot of people who make less money than you, and the government thought that wasn’t fair. They’re like, wait a minute, you make a lot of money. You took all these deductions and now your tax liability is less than some taxpayers in the middle class.

And so in those situations, we want to level the playing field. So Congress came up with this system of the alternative minimum tax, which is another way to calculate your tax liability. So you may not be aware, but your tax situation is always subject to two formulas. You have your conventional formula, the one you see on your tax return. It’s pretty straightforward. You calculate all your income. Calculate all your deductions.

Then you have your taxable income and you multiply it by those rates on that chart in the instructions, and now you have your tax bill that you have to pay April of next year. That’s the conventional way. But there’s a second formula that’s parallel and invisible to that. And what they’re doing is they’re taking all your income. They’re not taking out most of your deductions. And they are taxing you at flatter rates with less tax rates as well to 26% and 28%. And they compare these two formulas, everyone.

And if your formula for the AMT is more, that is the tax that you’re going to pay. So if the second formula ends up being more than your first formula, we say you’re subject to AMT. And of course, the government wants to collect the higher amount. And so that’s what it means to be an AMT.

What did the Tax Cut and Jobs Act do? In summary, it just made it harder for taxpayers to be subject to AMT, which could be a good thing because it just simplifies your life. No one wants the news that they are going to pay more tax.

And again, dealing with a separate formula isn’t always fun. So Tax Cut and Jobs Act back in 2017 2018 made it more difficult to be subject to AMT. It gave you a bigger exemption. The phaseout was slower.

What is OB3 do in response to that? Well, it extends the rules, but it’s slightly different right. I would say it’s not as good. And the reason why is because this. That yes the general rules are going to apply moving forward. They’re made permanent moving forward. However, it’s a mixed bag because of this.

All those thresholds that were established in 2018, all the exemption amounts, they grow over time. From 2018 to 2025, they’ve been growing indexed for inflation. But what OB3 does is it resets those exemption amounts back to 2018 levels. So yes, although the rules will extend, the threshold are going to take–

you’re going to hit the reset button and you’re going to go back to 2018, which isn’t necessarily good because they’ve risen over time with inflation where they’re going to be reset.

The second thing about AMT is as you enjoy this exemption, as you make more money, the rate in which you phase out of this exemption is also going to accelerate. It’s going to accelerate from 25% to 50%, that’s why I think it’s mixed. Yes, the general rules will be extended, but however, the thresholds are going to go back to 2018 and you’re going to accelerate out of them faster.

So again, alternative minimum tax can sometimes be complex. Just know that my thoughts here is I think that the permanent rules will make it harder for you to be subject to AMT, but perhaps not as good as what the Tax Cut and Jobs Act did.

So that’s your standard deduction. If you don’t take the standard deduction, then you’re going to itemize. Like I said before, when you itemize, you’re taking the position that I can add up more deductions that exceed the standard deduction so that I can pay less in tax, and that’s what we’re doing here.

So we’re going to go over the State and Local Tax deduction, that’s been the hot topic. Charitable contributions are also changing too, so you want to pay attention for that. Home mortgage interest deduction, I’ll briefly touch on this because not much has changed there. And then we’re going to talk about limiting the itemized deductions, how they might be limited especially if you’re in the highest income tax bracket.

So let’s tackle the SALT deduction. Do you remember back in 2017 especially in those high-income tax states as well as those states with high property tax? There’s a deduction that you can take on your federal return, which is paying for these state income taxes and these property taxes. Well, that deduction used to be unlimited.

I mean in 2017, what they did was they capped it to $5,000 per tax filer, $10,000 for joint. And there was pretty big uproar.

A lot of people were trying to scramble, prepaying property taxes, and trying to get their tax liability paid before the law changed, but that’s what we’ve been dealing with. We’ve been dealing with this $10,000 SALT deduction cap for a while, which was too bad for a lot of taxpayers who again had high state income tax liability. So as Congress was discussing this this year, they decided to increase this deduction to $40,000 for 2025. And this is going to increase 1% annually until 2029. At which point in 2030, we’re going to revert back to $10,000.

As if this bill wasn’t confusing enough, you’re going to have to keep track of these timelines. Again, why is it like this? Why do they make all the start dates and the ending dates? Again, budget reconciliation. We can’t afford to make all of these permanent, so some of them are going to have to expire.

The thing with this SALT deduction though, is you begin to lose it if you make too much money. So as soon as you have $500,000 of modified adjusted gross income, this thing is going to phase out. Once you hit that $600,000 marker, then you’ve completely phased out and your deduction goes from 40,000 back down to 10,000. If you go beyond that, your deduction will not go below $10,000. But that’s the range that I want you to keep track of 500,000 to $600,000, that’s when it’s going to start phasing out.

Something to think about here from a planning standpoint and a takeaway. Yes, $10,000. A lot of taxpayers didn’t think that was enough. $40,000 might be OK. But if you make too much money, that’s going to go away.

What are some other ways to get around this? Well, one of the ways is through pass through entities. You can create a pass through entity and then pay the property tax and the state income tax on the entity level, and then deduct that from your federal return. A lot of people thought that Congress was going to shut this down. They still might, but they didn’t address this in the bill and they know that it exists. So that’s something that I want you to take a look at.

Pass through entities are another way because entities enjoy their own SALT deduction as well too. And then non-grantor trusts.

A non-grantor trust enjoy their own SALT deduction as well. It involves estate planning implications though. Entities trust, it’s a way to multiply the SALT deduction if you don’t have enough. And so that’s the planning comment with the SALT deduction.

Just a question here on that too, David. You talked about strategies here.

Didier, my apologies if I mispronounced your name, is saying several provisions as you mentioned expire in four years. How should you do long-term planning based on that? What advice are you giving to our clients on strategy?

That’s a good question. We are regularly subject to legislative changes, to different regulations coming out. All we can do really is to plan for what the law is today, and be flexible enough with their planning so that we can change it moving forward. And so we’re always thinking about that.

Are we going to take a technique? Is it worth the hassle? Does it benefit you and how flexible is it? Are you boxing yourself in?

And so what we do in the approach that we take is knowing what the laws are today, that’s how we’re going to plan, because that’s what we have to work with.

There’s no one who can predict what’s going to happen in four years, 10 years, or whatever time frame is down the line. What we can do is we can plan for today. And then have that planning as flexible as possible so that we can get in it, or get out of it, collapse it, or go into something else. And so that’s a really good question. I think it’s going to apply to some of these other techniques that we’re going to talk about. So that’s great.

And one last question before we move off on this. Walt is asking, is the SALT deduction separate from the standard deduction? So maybe just clarifying the difference between the two.

Oh, good question. So a SALT deduction is an itemized deduction. So if you are taking the standard deduction you’re saying, I’m not going to itemize. Just give me the blanket deduction.

I will not fill out the schedule of deductions. I’m not going to itemize anything. And so charitable contributions, you’re not going to be taking if you take the standard. SALT deduction, you’re not going to be taking when you take the standard.

There is a slight change to the charitable contribution deduction, so I think it’s a good segue into this because this one’s slightly different.

But generally speaking if you’re going to take the standard, you’re not going to itemize. And the SALT deduction is a major itemized deduction. It’s a good question well.

Now, let’s get into some charitable contributions.

I want to take a step back and talk about the charitable contribution deduction. If you remember in 2017, there were some changes to the amount that you can contribute to charities and deduct from your adjusted gross income, your AGI. And back then, the amount was 50% of AGI you can deduct for cash gifts to charities in 2017.

Well, what happened though with the Tax Cut and Jobs Act is it doubled the standard deduction. And when you double the standard deduction, less people are incentivized or less people benefit from giving to charity because charitable contributions are itemized. The number of or the percentage of taxpayers going from itemizing to the standard, it was 70% taking the standard deduction. It got bumped up to 90%. Less people have incentive to give to charity. And the government knew this.

Congress knew this. They knew that less people were going to itemize, less people are encouraged to give to charity. So they bumped up this adjusted gross income limit. So it went from 50% in 2017 to 60% with the Tax Cut and Jobs Act because they thought the charitable giving would dip and it did. After the Tax Cut and Jobs Act, charitable giving dipped.

What OB3 does is it makes this 60% adjusted gross income limit. It makes it permanent. So as much as 60% of your income can be deducted if you give cash gifts to charities, however, there’s a new change for next year, and this is going to make your charitable giving perhaps less impactful because it’s going to begin to set a 0.5% floor on your charitable giving.

So what does that mean? It means this, take all of your charitable gifts and then also take all of your income. Take your income, calculate 0.5% of your adjusted gross income.

Now, take your charitable gifts. Any of those gifts that are below this 0.5% of your adjusted gross income, will no longer be deductible. Only the amount that you give above this 0.5%

AGI floor is going to be deductible. So going to take a portion of your charitable giving, the 0.5% under your AGI. It’s not going to count it.

So it’s going to take everything in excess and you’re going to be able to deduct that. So that’s the big change here.

The other change is that, if you don’t itemize, in other words, if take the standard deduction, there’s an exception here. You can take a $1,000 additional deduction for charitable gifts, but they can’t be to donor advised funds. So yes, you can get an additional gift or our additional tax benefit for giving to charity even though you take the standard deduction. So this is a big deal. This is going to change, the impact of charitable giving to your tax situation.

With that said, there are some takeaways here for you to think about from a planning perspective. Number one, accelerate your charitable gifts to this year. This doesn’t go until next year. If you want a bigger charitable deduction, you’re able to accelerate your charitable gifts, do it in 2025 as opposed to next year when this floor is implemented.

The second thing I want you to think about is accelerating your charitable gifts in those years that you want to itemize. And again, I call this bunching with the standard deduction section, but the idea here is the same. Take all of your charitable gifts that you can take. Focus on a singular year that you’re going to itemize. And in subsequent years, just take the standard deduction because the government just gives that to you for free.

You don’t have to give to charity at all to enjoy the standard deduction. So accelerate your deductions. Get all the charitable giving done in a particular year so that you can benefit and itemize that year. And then the rest of the years you can take the blanket standard.

And the third thing that I want you to think about is making qualified charitable distribution. Once you turn 70.5, you can send us a certain amount of your retirement account. Again, it’s an annual amount that changes every year indexed for inflation. But you can send it directly from your retirement account to the charity of your choice.

Cut the check and it goes out. And that amount doesn’t hit your tax return. It doesn’t get calculated into your AGI. It’s not subject to the AGI floor or 0.5%. It’s not subject to the 60% limitation that you have for cash gifts to charities either. So in that way, you can just bypass both of the floor and the cap and get money to the charities that you care about. So those are some takeaways with the new laws on the charitable contribution deduction.

Before we move on, just a actually quite a number of questions about this floor that we talked about that half a percent. Mainly, the most questions are about, is that floor per donation or the total amount of donations that you do maybe to various organizations throughout the year?

Yeah, a good question. The tax return really is a reflection of everything that you’ve done during the year. It’s your snapshot–

all the money you’ve made, all the money deducted, all the gifts that you’ve made to charity. So it’s going to calculate at the end of the year all of your AGI. It’s going to establish that floor. And then it’s going to look at all your charitable contributions.

And then it’s going to see how much of it exceeds the 0.5%. So it’s not going to be on a gift by gift basis. You’re going to tally all that up on the tax return, and then it’s going to go from there.

If you want an example, other places that it might apply, the medical expense deduction. You can’t generally deduct medical expenses unless it exceeds 7.5% of your AGI. Same idea here, except the floor is much lower. It’s going to be at 0.5%. So you’re going to tally it up at the end of the year.

And one last question here. We talked about the non-itemizers. So that means people who are taking the standard deduction can claim up to the $1,000, 2000 filing jointly.

But they’re asking so that’s an additional on top of the standard deduction. Is that correct?

That is correct.

And is that’s subject to the floor, that 0.5%?

No, because you’re not itemizing. If you make a cash gift not to a donor advised fund, you’re just going to add that to your standard deduction, and you’re going to be able to benefit from that, have a better tax outcome from that. Good question.

Great. Thank you.

Next up, home mortgage interest deduction. The big news here is that there’s not much news at all. Not much change has gone here. If you recall in 2017 prior to the Tax Cut and Jobs Act, you used to be able to deduct the home mortgage interest on a loan of indebtedness of up to a million dollars. On top of that, you can take your home equity of like $100,000 and spend it on whatever you like.

And you can deduct the interest on that loan as well too. So a million dollars plus $100,000 of home equity spent on whatever you want. The Tax Cut and Jobs Act changed that. It decreased the amount of indebtedness to $750,000, which again hurt those states with high property values because you need bigger loans out there.

And it also did away with that $100,000 free spend deduction for the interest off that loan secured by home equity. OB3 makes this permanent. So again, we’re going to have this. It’s going to take the suspension of the rules, make it permanent.

So again, we’re still at $750,000. You still cannot take home equity as a loan and deduct the interest off of that loan for the 100,000 either. But a new wrinkle is that you can take mortgage insurance premiums and deduct that with your mortgage interest. So that’s added and that and that’s new.

So keep an eye out for that when you do your tax return.

And then finally, I want to talk about limiting your itemized deduction. Again, I’m going to go back to why this came about why it exists.

Again, before even the Tax Cut and Jobs Act, the whole idea is, if you had a high-income earner and they aggressively took–

and I’m saying legally, they’re aggressively taking itemized deductions, their tax liability ends up being very low. And why is it fair that a high-income earner would pay less tax than someone who made a lot less money than them?

So in order to address this, we had a member of the House of Representatives from Ohio. His name was Donald Pease. He came up with this idea with, we need to limit these itemized deductions to make it fair. And so that’s what we did. And this limitation we called it the Pease limitation, used to limit the amount of itemized deductions you could take by a formula if you made too much money. That was in essence what happened.

What Tax Cut and Jobs Act did was it came in and they said, we don’t like this limitation. We’re going to suspend it, and that’s what it did. The Pease limitation was suspended.

The OB3 bill came in, made that suspension permanent. So Section 68 is now done away with for now. That suspension is permanent, but they replaced it with another limitation formula.

Now, the formula is pretty complex. Essentially what it says is, if you are in the highest tax bracket, you earn the 37%, we’re going to start limiting your itemized deductions. We can go over the complex formula offline and see how it affects your personal situation, but that’s essentially the summary of this limitation.

If you’re in the highest bracket, 37%, then we’re going to limit it. So what’s the takeaway? What’s the planning technique here? Try to stay out of the 37% bracket.

Take advantage of your retirement account, all of your employer benefits. Take a look at how your investments are producing income. Maybe consider some tax exempt vehicles, tax exempt investment. So take a look at that and then try to shift your deductions into Schedule C and E.

These are your business schedules.

Schedule C for sole prop. Schedule E for your passthroughs, because deductions are not limited on these schedules. But once they hit your individual situation, then the limitation will start applying. So those are some takeaways there on the limitation of itemized deductions.

So that’s roundup that section. We’re going to go ahead and move on to some additional extensions, some other topics that will continue on. And so these are some exciting topics to go over here.

I want to start off with the Qualified Business Income deduction under section 199A. This is a new creature or relatively new creature of the law. It was created back in 2017 with the Tax Cut and Jobs Act. And at the time Congress, in its infinite wisdom, decided that or determined that there were these special class of taxpayers that were severely disadvantaged, distressed, and they were in need of a 20% deduction.

The deck was always stacked against them. They couldn’t catch a break. And this special class of taxpayers, the severely disadvantaged taxpayers included your doctors, your lawyers, and your real estate moguls.

I mean, these taxpayers do enjoy this deduction.

But in all seriousness, why did we come up with this? The reason why is because this, earlier in this presentation, I alluded to a 21% corporate tax rate and that’s relatively low. And the thing is with small businesses like an S Corp, LLCs, partnerships, sole props, what’s their highest tax rate? Well, they’re taxed at individual tax rates. So the highest tax rate is at 37%. So if you compare a small mom and pop business, 37%, you compare it to a corporate tax rate of 21%, how is that fair? How are you supposed to compete with that?

And so in response to this disparity, Congress is like, well, we should get another deduction for these small BUSINESSES, And so this is why they created 199A. And so if you take this 20% deduction and there were some conversations about changing it as Congress was moving this bill through the chambers, maybe as high as 23%, but it remained at 20%.

If you take 20% off the highest individual income tax rate, 37% take off 20%, that’s still 29.6% So, yes, it got better, 21% versus 29.6%, but still not completely there. So that’s why it came about.

This is why we have it. The OB3 bill extends the Tax Cut and Jobs Act rule for it. So now it’s still 20%. The slight change here though, is that the range in which you’re able to qualify for the QBI deduction is going to increase.

And so what does that mean and how does it affect you? It means that more people are going to be able to qualify for it even if you make more money. So the range in which you would be able to qualify for this deduction, the range used to be $50,000 for single filer. Now, it’s going to increase to $75,000.

And for joint, the range is going to increase to $150,000, which again, just means that you have more room to make income and still qualify for this deduction. And so that’s what’s going to continue on here. You’ll notice it on your tax return. But again, I suggest that you do some planning. Make sure that you meet with your advisor to see how it affects your personal tax situation.

Next up, we have the wealth transfer tax exemption. This one’s near and dear to my heart because I’m an estate planning attorney by background.

The trinity of your wealth transfer taxes include your gift tax, your estate tax, and your generation skipping transfer tax. In all of those exemption amounts, we’re at $13.99 million per taxpayer. You would double that for married.

And as this was being discussed in Congress, there was discussions surrounding whether or not we should get rid of it. John Thune, who’s the Senate majority leader, in all the pieces of legislation he throws out there, he wants to get rid of the estate tax. It’s just something that he likes to do.

Now, given that, I think both proposals had this idea of eliminating the estate tax. The chances of it really going away probably not so great. The estate tax has been successfully running for the past 110 years. And so getting rid of that would have been a pretty big deal. I know in 2010 it went away for a little bit. But for the most part, it’s been going pretty strong.

And so what we have here is with the OB3 Bill, the OB3 Act, we’ve increased the exemption about 14 million per person to $15 million per person. So now, again, we just have an extension. Not much difference has been there.

But what does this mean for our personal situation? How do we plan for this? What do we do?

For our taxpayers who are well above this exemption, far above the $15 million per person, planning stays the same. All the techniques and strategies of gifting and all the different types of trusts that you can utilize to mitigate that 40% gift tax, that 40% estate tax, and the generation skipping transfer tax, they’re all there available to you. And you go on business as usual. You can still employ them. You should consider them, again, because 40% is pretty high. It’s pretty significant.

For those who are under the exemption amount, you’re not really concerned about the wealth transfer taxes, then you should really focus on using estate planning for income tax situations. So my clients here who are going to have a big liquidation event, or if you have a concentrated position in a particular sport, charitable remainder trust are a great technique to defer and mitigate your income tax situation.

Or let’s say that you have assets that have appreciated in value a lot, and you don’t want to sell it because you don’t want to pay the tax, you can use estate planning to help you mitigate the built-in gain. What you can do is you can gift assets through estate planning to a senior generation like a parent, and have them hold on to it because when they pass away and you inherit those assets, all your capital gains disappear. We call this technique upstream gifting.

And we utilize the step-up in basis under Section 1014 in order to wipe out your income tax liability. So those are just some ideas there. With the huge exemption that we have per person, gifting upwards may be a viable option. Again, it’s not for everyone, but just something for you to think about and I talk about it because it’s so difficult to get rid of capital gains.

So David, as we’re talking about the wealth transfer tax, we’ve got a question from Barry asking, are there any estate planning updates advised on this passing? And if I’m understanding what you’re saying is, the numbers may have changed as a result of this new bill, but your advice is still. We continue to find value in estate planning, in gift planning, and doing all of this regardless of what this number is. Am I understanding what you said correctly?

Yeah, that’s absolutely correct.

It’s our position at Mercer that everyone needs an estate plan. So basic estate planning, everyone needs advanced planning deals with saving on taxes. All of those things that applied back when the exemption here today at $14 million. All of these same techniques we have, the same options will apply next year too.

I mean, the exemption will have increased a million dollars, yes. But if we just gone on with a $14 million amount and if it was indexed for inflation, we probably would have been close to 15 million anyways. Not quite there, but we would have been there anyways and so consider that.

40% tax at every generation in your family is pretty significant if you can do something about it. And there are some strategies out there that are pretty high reward, low risk. And we can help you with the administration of it. I think you should consider it. I think you should consider it. Sit down with your advisor. Let’s talk about it.

Great, thanks.

Speaking of Capital Gains Tax, I want to talk about qualified opportunity zones.

We talk about these strategies because, again, it’s so difficult to get rid of capital gains tax because the government already feels like they’re giving us a tax break on it. Hey, just hold the asset for a year and we’re going to give you lower tax rates. Why should we help you or allow you to get rid of it all together? And that’s why when we come up with these strategies like upstream gifting, like charitable remainder trust, like qualified opportunity zones, it’s worth mentioning again because getting rid of capital gains tax is so difficult.

So when you sell any asset, when do you owe the tax on that thing? You sell it for a gain. You realize the gain. When do you have to pay tax? You have to pay tax on it April of next year.

Even if you extend your return, you owe the tax on April 15. That said, wouldn’t it be nice if we could take the proceeds from the sale and just defer the payment of that tax? That’s what qualified opportunity zones allow you to do.

Now, back in 2017 under the Tax Cut and Jobs Act, what we had created was this program where each state in this country would recognize neighborhoods and areas within their state that could be designated as a qualified opportunity zone. And if you were to invest in these different neighborhoods and areas that were up and coming, and they just required some capital infusion to get their local economy up and started, then we were going to give you some tax benefit for it. And oftentimes this infusion of capital and these investments came in the form of real estate.

And so if you went into one of these opportunity zone funds and you sold something, you have 180 days to enter into an investment. And if you held these investments long enough, we’re going to give you a tax break. 10% if you held it for five years. Another 5% if you held it for an additional two, so 15% if you hold it for seven.

Oh, by the way, you don’t have to pay your tax bill until you get out of it. Plus any appreciation of these investments you’re going into are tax exempt. From a tax perspective, this is a win-win-win. Some of the dangers of qualified opportunity zone funds include, how do you know if the investment is going to do well.

You don’t. It’s like any other investment. You can’t guarantee its success right. So if it goes to 0, what good are the tax benefits?

None.

Also fees. As you go along the way, you have to pay fees and the illiquidity. You have to hold these for pretty long time periods–

five years, seven years, 10 years to take full advantage of all the tax benefits. So those are the downsides, but at least they were available.

What OB3 is doing is, as this first batch of qualified opportunity zone funds expire, again, they were started in 2018. They’re going to expire at the end of 2026. A new batch is going to be introduced January 1 of 2027. And from there on out, they’re going to be new rolling opportunity zone funds every 10 years.

And again, so the rules are pretty similar. If you realize a pretty big capital gain, you can think about investing in one of these zone funds to get into probably a real estate investment that helps you defer your capital gain.

Something new however for this new round that’s coming up, is that you can go into rural areas now. And if you go into a rural area because the knock on qualified opportunity zone funds where, hey, you’re just going into a hot area anyways and you’re deferring tax. You get all these tax benefits. But it’s a really popular neighborhood. It’s not really one that’s in need of capital.

There was some criticism about that, which I think led to this change of hey, if you go into a rural area and you hold it for long enough, we’ll give you a 30% break on your capital gains if you hold it long enough for that five year holding period. So there’s going to be a distinction there.

This isn’t coming out till 2027, so we have some time. And also all the rules around it aren’t quite all there yet.

Regulations aren’t out. Guidance isn’t out. I’m sure there will be more or I hope there will be more released as they come out, more details to come. But qualified opportunity zone funds are coming back, and so that’s the takeaway here.

So that rounds out some provisions that have been extended. Let’s talk about some new provisions. A lot of these we heard on the campaign trail, how are these going to be treated, what are the rules around them. So let’s go over some of the new provisions that the OB3 introduces.

First off, no tax on tips. So the prior rule is that tips are usually taxable. You self-report them. You have to pay tax on them. They’re a form of income. Congress can tax you on them, that’s the old rule.

Here with the OB3, tips are taxed to a certain limit. And the amount of tax that you can avoid in the form of tips is $25,000 so long as you don’t make over a certain income threshold. And that income threshold is $150,000 for single filers, $300,000 for joint.

So once you start making over that amount, this deduction that you get for these tips that you’ve accrued will start going away. Now, this is going to last until December 31, 2028, which is when the current administration is going to end. So I don’t think it’s any coincidence that they timed it like this, but this is one of those that is going to sunset pretty soon, at the end of 2028. So there’s no tax on tips.

It’s something that was promised. This is the result of the discussions that Congress has had.

Now before you go out and attempt to recharacterize all your income as tip income, something to keep in mind is that, the rules explained, that it has to be employment that customarily receives tip. So you can’t just take your 95 and tell your employer that I want to consider some of these tips. It has to be employment that usually generally customarily receives tips. So that’s something to keep in mind there.

Also, service fees–

whether or not service fees are going to count as tips are in question. I think the code says that you need to have tips fee on a voluntary basis. And if you go in with a party more than six, a lot of these service fees are mandatory. They just put it on the bottom line.

So it’s not really voluntary in that nature. So you’re going to have to keep an eye out for that.

It’ll be interesting to see what employers do. Do they keep the service fee and allow their employees not to enjoy this tax benefit or do they get rid of it and allow employees to enjoy this benefit? We’ll have to see. The other thing employers need to worry about is how are they going to report this income on their tax forms–

W-2, 1099. How is the amount of tips going to be reported for those employers? Something that they’ll have to figure out with the forms. But that’s the whole summary on no tax on tips.

Likewise, no tax on overtime. The deduction amount is half that that we just saw for tips. But you can get a deduction for overtime pay of up to $12,500, 25,000 for joint. And again, the phaseout income threshold is the same, which is why I’m grouping them together, $150,000. Once you start making above that amount, then it’s going to begin to phase out.

So similar to the deduction on tips, it’s going to expire December 31, 2028. So the takeaway here is again, keep an eye out for this on your tax forms. You’re going to have to report this properly on your return to get this benefit. How will your employer report that as well too?

How? If you prepare tax returns on your own, take a look at your W-2. Take a look at your 1099, that could be changing. So when you prepare your return for things like tips and overtime, you’re going to probably have to fill that in a separate field.

So keep an eye out for that.

And then next up, we have no tax on new car loan interest. This one’s exciting because who doesn’t like the smell of a new car? So for new cars, if you purchase one, you can get a deduction so long as you meet certain rules, and these rules include final assembly in the US.

Now, this $10,000 deduction is a total sum. So if you can’t just go out there and buy five new cars and expect $10,000 of deduction on the loans for these cars for each automobile. This is a totality thing. For all of those new car loans that you have, you can deduct up to $10,000 of that loan interest.

Available for taxpayers who make $100,000 of income, and begins to phase out $150,000 for joint. But this is new and so you get this deduction.

Planning takeaway for this is interesting. If it’s not out already, we’re going to release an article soon using this new deduction and buying a new car and comparing it with just buying a certified pre-owned car. I think at the end of the day, just buying a used car due to the depreciation still wins out. But keep an eye out for that article as well too. It’ll compare your financial implications of going either path and what it means for you. So this is new for the OB3 Act.

Scholarship credits. This is an interesting one. As we discussed earlier on with charitable contributions, that’s going to be limited. We’ve always had that cap on adjusted gross income of 60% or prior to that 50%.

But with that new 0.5% AGI floor, it complicates things. It makes your charitable giving a little bit less effective. And so this is something new to help address scholarship contribution.

So what you can do is instead of taking the charitable contribution, if you go directly to a scholarship organization, and again, states are going to have to comply with certain rules with the treasury to qualify for this program. But if your state does, you can go give to a scholarship program. Instead of giving to the school, go to an actual program, give for the purpose of the organization. You can get up to a $7,500 credit that’s applied to your taxable income just for this particular carved out scenario.

So usually we would go through the charitable contribution route. If you gave to a scholarship organization, this is something new. This is something separate. And again, it’s a tax credit.

It’s not a deduction. And so instead of going through the charitable contribution route, take a look at this. If your state applies, that’s the big thing. Make sure that your state participates in this before you do make this contribution.

Otherwise, you might be stuck with the charitable contribution deduction.

And then I want to talk a little bit about Trump accounts. These are essentially IRAs for youngsters. For kids, we’re going to follow IRA rules. But essentially what this new provision of the OB3 does is it gives you a $1,000 if your child is born between 2025 and 2028. Now, there are several rules involved and so I’ll try to summarize them here. You need to claim this account before your child turns eight.

The maximum amount that you can contribute in totality to this account is $5,000 per year. And this thing will grow like an IRA. It’s going to grow tax exempt. If you withdraw from it, then again, you’re going to be penalized, and you’re going to have to pay the income tax on it as well too. Soon employers are going to be able to contribute to them as well to up to 2,500 a year. That will not be part of an employee’s income. However, it will count towards the $5,000 maximum contribution that you can do it.

So my thoughts on the Trump account, if you qualify for it, if you have a child born in this year to 2028, take advantage of it. Go claim it. The logistics of it are still up in the air, but I imagine that you would go to a financial institution, show proper documentation to claim it, open up an account.

Most likely this account will be invested in a low-cost mutual fund, probably tracking a major index like an S&P or the whole market. And then it can grow tax free until your youngster is ready to take it out.

My planning takeaway here is, I still like 529 plans. Definitely claim the $1,000 the government is giving you is seeding these accounts with $1,000. Definitely claim it. But for future contributions, 529 plans are something for you to think about just because there isn’t any limit that you can put in per year. I mean, there’s a limit overall for the plan, but not for a particular year.

And also I like them over UTMA account as well too, because UTMA accounts you have to pay tax on. 529 plans, you don’t.

The uses of 529 plans and the flexibility of them are just growing over time more and more. I’m about to talk about them next, but I would consider them. Sit down with your advisor, see which one of these accounts for your youngster makes sense. I just tend to lean towards 529 plans more than the others.

We just have one minute left here. And I know we’ve got a lot of things left to go through.

I thought it might be helpful just to say for everyone now we have recorded this. We will be posting it on our website, merceradvisors.com, on our insights tab for the replay so that this information will be available to you. In addition to that, we have recorded all of the questions that we haven’t had an opportunity to get to and we’ll be forwarding them. If you put in your name, we’ll be forwarded them to your advisor so that they can follow up with you.

And we also have other materials available. We’ll be doing an overview summary.

All the provisions that we talked about today as well that will be available to you to review.

And, David, there’s so much. This is such dense content.

And so I think that you will agree with me that our best advice and out of this is, a time to really do detailed tax planning with your advisor. Understand your personal situation, how all of these things apply to your situation, and have the best possible outcome for you.

Absolutely. There’s so much to talk about. And just to get your arms around this thing, I think warrants meeting with your advisor just to discuss how it affects you personally. But it’s very exciting. The planning opportunities are there. And so I would encourage you to speak to someone at Mercer.

Thank you all for attending. We appreciate your interest and we’ll have more to come. Thank you so much.