Tax Filing Is Not the Same as Tax Planning

I’m Jamie Block. I’m a partner here at Mercer Advisors located in the Rochester, New York office. Joining me today, you’ll see the little box on your screen, is Jennifer Baick. She’s the vice president of our financial planning group.

Behind the scenes, not on camera, is Brian Strike. He is a CPA in our tax firm, and he is gonna answer all the questions that you have. Just kidding. He’s gonna try to answer all the questions that you submit through our q and a box.

We will be presenting a lot of material today. Our tax code is very voluminous. There’s been a lot of changes. Please note that none of this information should be construed as personal financial advice for your situation.

Please contact your wealth adviser instead if you want any information specific to your circumstances.

This presentation oh, and let me get to that fun slide of disclosures for you here.

Should not be construed as, again, your advice. It’s educational in nature and informational.

Again, we appreciate the questions that were submitted in advance. We’ll try to cover some of those along the way, And we’ll also be taking live questions as well during the presentation. To submit a question, please use the Q and A function at the bottom of the screen. We’ll try to answer as many questions as we can in the time allotted.

However, if we don’t get all the question answered, all of the questions answered, don’t fret. We’re gonna pass these questions on to your adviser for follow-up. Lastly, this session is gonna be recorded and can be found on our website, w w w dot merceradvisors dot com, under the sharing knowledge tab.

Without further ado, why don’t I turn it over here to Jennifer?

Great. I’m excited about our, topic today. We had so many we got so many great questions. I’m gonna start.

I think the way we should start is just really unpacking the difference between tax prep and tax planning. From there, we can, expand on and, like, actually just roll up our sleeves and start talking some tax planning and look at share some numbers and techniques, and then we’ll try to deep dive, towards the end of our conversation, into Roth conversions. And if we have time, take on as many questions as we can. So let me just start with framing that tax planning refers to something very separate from tax preparation. Tax planning refers to a review of a current tax return and a tax situation to identify potential planning opportunities into the future, now and in the future, to keep lifetime tax liability as low as possible. It’s different from a year to year exercise of tax preparation.

I think a lot of our clients are straight a student type clients and really love numbers and will do their own tax returns using TurboTax or a different provider online. Some will engage with a local h r block office, and others have CPAs and accountants. We work around all of those because that’s a necessity, that’s separate from tax planning. Mercer Advisors does also provide tax preparation in house. We have a separate team from our advisors who will do tax preparation.

And for the context of this conversation, we’re gonna be looking at tax planning from a financial planning lens.

Jamie, you’re a really highly decorated adviser with a myriad of designations and a lot of experience in tax. You have an accounting degree from Cornell. You have your CPA, your MBA, and you spent the first ten years of your career focused on tax. Like, tell us a little bit about why you switched, from tax preparation to tax to financial planning.

Yeah. Great question. So while I worked at the local CPA firm, I found that many clients don’t appreciate the compliance work of preparing a tax return. You get all the numbers.

You put them in the different forms. You give it back to the client. Yippee. I have a tax return.

Right? It’s not very exciting, glamorous job. And I have found that at that time, we’re to basically dealing with the hand we’re dealt and completing the paperwork after the fact. So there’s nothing I can do to change the facts and circumstances at that time.

The real value is in the planning.

Now I switched from the reactive preparation role of tax returns to the proactive planning approach by switching my career from the local accounting firm to Mercer Advisors, and no regrets since. So, again, it’s just a much more advantageous to have the planning aspect because we can be proactive, do planning strategies, reduce tax impact, or increase depending on what we wanna do, ahead of time versus getting the return information after the fact and we’re stuck.

Right. So we look at it as two different exercises, engaging maybe two different sets of professionals, really. We take a very team oriented approach here at Mercer. At Mercer, we we offer tax planning as a part of a comprehensive financial planning service, and we consider it part of financial planning.

Like, it’s a piece of the pie. I think it’s other I I I don’t think all firms in wealth management see it that way. So I also feel like it can be really overlooked, like, the impact that can happen in tax planning because it’s not about just, like, what you’ve made, but what you keep at the end of the day. That’s really where the returns.

Right? So, Jamie, tell us a little bit about how your clients engage with you to initiate tax planning.

Yeah. So what I typically do is have my clients send me their last two years of tax returns to analyze if we aren’t already preparing the returns. So first, we’ll review the prior year and see if there’s any glaring errors. Was there any missed deductions?

Were there any missed planning opportunities? Anything we can correct going forward. You know, is withholding accurate? Is there too much withholding?

And so forth. Then what we’re gonna do is run a projection of the current year’s income and run various scenarios based on different tax planning techniques. You know, are they retiring this year and therefore their income’s gonna be a lot lower? Are you know, did they win the lottery and we have to make sure we pay enough tax in?

So we’re going to obviously tailor it to the specific client’s needs and based on their facts and circumstances and what their goals are and go from there.

Great. So we’re already getting a question that I think is apt to, answer here. It’s like it it says Cindy says, do we engage with tax planning even if we didn’t prepare the returns? But the answer is yes. That’s fine to have your own account, like, tax preparer. And now that we’re in June, most of us have actually filed the returns. It’s a great time to take that twenty twenty five return, upload it through the client portal to your adviser so that at the next meeting, you can revisit and start looking at some tax planning opportunities.

So wonderful. Alright. So let’s dig it right in to some tax figures. Like, we get really excited about these, about these resources, and I’ll just start out by saying that all of the listeners will have access after this call is over. And when this is posted, there is an opportunity to be able to download some of these cheat sheets because I know all of you will want to print it and put it up on the refrigerator door so that you can have all these numbers at your fingertips to do tax planning anytime you want. But we get excited about these tax figures, right, because they are changing constantly. Every year at a minimum, there’s incremental but very impactful changes and updates made to, like, thresholds.

And in addition to that, the treasury all year long is releasing regulations and guidance, and then the courts are constantly interpreting the current laws. So they’re always changing. Right, Jamie?

Yeah. And, yeah, I of course, I have this all over my house. You know? Coffee, table, refrigerator.

I mean, who doesn’t love these facts and figures? Right? But you’re right. There’s been a lot of changes over the last couple years.

We’ve seen the Tax Cuts and Jobs Act of two thousand seventeen, the CARES Act of twenty twenty, the Secure Act one and two, Inflation Reduction Act of twenty twenty, and then the one big beautiful bill act of twenty twenty five that’s almost a year old on July fourth. And so all these changes are things that we have to be very cognizant of so we can make sure we implement the right tax strategy.

And everything we do in our investments also impact our tax strategy. And we have to make sure we monitor this and the you know, because things change. And you can see here on this chart, you know, there’s a lot of numbers here.

Let me do

this.

Yeah. Sorry about that.

No. That’s okay. I just wanted to point out a couple things here that I think you might find interesting. And just to give you a little kind of description of what you’re looking at, because I can see this and I understand it perfectly, you might see a bunch of gibberish on the page.

So what you’re looking at are your tax filing charts. Okay? These are the tax rates. So here we have single filers on the top.

In the middle, we have married filing joint filers and surviving spouses. That is if you were widowed during the year, you still get to be married filing joint for that year.

And then down at the bottom, we have trusts and estates. So what you can see here are the different tax brackets. So if you’re single, the first twelve thousand four hundred dollars of taxable income would be taxed at ten percent.

Then the next income from twelve four one to five fifty thousand four hundred is taxed at twelve. So what’s very important to realize, we have a progressive tax structure. So if I made fifty thousand, that full fifty thousand isn’t gonna be at twelve percent. The first twelve thousand four hundred’s at ten, and then the next little bit here is at twelve. So that’s a very important distinction that I want you to make sure you understand.

Now just a quick shout out on taxes and, for the trusts and estates, you can see they reached the highest bracket at sixteen thousand dollars and for married filing joint taxpayer, sixteen thousand dollars is ten percent. So keep that in the back of your mind as we continue through this session.

Right. We have to manage those very differently and be very careful not to push people into higher brackets using investment income. Right? What else would you highlight especially with, like, deductions?

Yeah. So a couple things that I’m gonna, talk about here are the standard deductions. So couple years ago, we’re our standard deduction was a lot lower. And so not many people you know, a lot more people, I should say, itemized.

And what does that mean, Jamie? What is a itemized deduction versus standard deduction? The IRS gives you thirty two thousand two hundred if you’re married filing joint and sixteen thousand one hundred if you’re a single taxpayer that you can take off your tax return and offset your income with. And anything left over, then you pay tax on.

That’s a very simplified version of the tax form.

And so the important thing to note is that you can take thirty two thousand two hundred dollars of income and then not and not have any tax if that’s all your income is because your income minus your standard deduction then gives you the zero taxable income.

But as I digress, standard deduction is what you get from the statute, freebie from the government.

Now the itemized deductions are things that you add up that if it’s higher than the standard deduction, then you will take that instead. Things that are itemized deductions include real estate taxes paid, state and local income taxes, home mortgage interest, charitable deductions, medical expenses. And, of course, there are some limits within there that we’ll discuss a little bit later. But if the total of all those is higher than the standard deduction, then you’ll itemize your, deductions instead of taking that standard.

Yeah. That’s gonna be a big change this year. A good exercise I think we all should be doing is making sure we run the projection both ways. Is it better to do standard or itemize? I think in the last few years, people were really just using the standard, but this is a good year to address that and look at it again.

Another thing that a a question did pop up around, like, as a wage earner and somebody who has a w two and works for a company, like, what can they do to sort of reduce their income tax?

Yeah. That’s a great question that we get all the time. You know, you get a set income and and besides deferring income into the next year, if there’s a bonus that you have control over, some things that you can do maximize your contributions to your retirement account, whether that’s a four zero one k or a four zero three b. You can have the, money taken out pretax, and so it reduces your income now.

But be careful. When you take the money out later, you have to pay tax on it. So best to talk to your adviser to see whether you should be putting that money in pretax or after tax if that’s an option at your firm. The other thing you can do is make sure that you’re maximizing things like health savings accounts.

If you have a high deductible plan, you should be making sure you maximize those health savings accounts. And if you don’t or if you have, like, a flex spending account to for medical reimbursement, making sure you take advantage of those. Money comes out pretax, and then you get reimbursed for any medical expenses you pay. And lastly, day care.

And we’ll talk about this a little bit, so I don’t wanna steal my thunder, but day care FSAs are another one that you can put money in pretax and get it reimbursed as well.

I love the ones that you highlighted. So everybody can just reference those once you’ve downloaded this to make sure you’ve checked. This is a great checkpoint. It’s midyear. Am I on track to, like, take advantage of all the things that we can do to sort of bring down income? Because the numbers have changed a lot over the last year a couple years.

So let’s move on to big changes. We had the one big beautiful bill act, BOBA, that passed, and we’ve sort of like, it’s it’s a huge change, but we’ve pulled out six major changes that I think are most relevant for those who have tuned in today, and we’re gonna go through some of those. So, Jimmy, walk us through the highlights.

Yeah. So like you said, there’s a lot of changes. This is not inclusive of everything. So, again, make sure you, you know, talk with your, you know, CPA and or adviser to make sure that all the things that do apply to you are covered. So the first big one, and this one was, very controversial, and it’s great for people like myself that live in states like New York that you can now deduct up to forty thousand dollars of your state and local income taxes and real estate taxes as long as your income is under five hundred thousand married filing joint or single. Now if you’re married filing separate, that income is reduced. That limit’s down to two hundred and fifty thousand.

And then as you start as your income goes over that limit, it starts phasing out. And if you’re married filing joint, your income’s over six hundred thousand, so sorry. You’re back down to that ten thousand dollar limit that we had in the past.

So before you move on to another the other boxes, I’m gonna emphasize how big this is because I have seen we have run projections with and without this law passing and the change in impact to some of these clients who live in high income tax states, like you said, New York, New Jersey, California. I’ve seen savings of up to, like, ten, eleven thousand dollars, on just from this change. And like you said, you have to be really careful because, like, some clients will inadvertently recognize some income, throw themselves over that number, and then disqualify themselves from this big deduction.

Yeah. And that’s one thing a a little kind of hint in point is make sure you provide all this information to your accountant because in the past, you may not have itemized, but you may now. So if you don’t give it to your accountant, they may not ask for it. And, you know, I’d hate for someone not to get the deduction, especially if they’re entitled to it.

So moving on to the next one. This is no tax on tips and overtime. This allows twenty five thousand of income to be considered tax free as your is again, we have these income thresholds, but it’s now three hundred thousand for married filing joint, one hundred and fifty thousand for single. And so what’s important for this one is if you receive tips, it has to be for a job that normally receives tips.

So, you know, if you’re a hairdresser or a server or things like that, who normally get tips, you would qualify. Now financial advisors? Yeah. Financial advisors.

No. We unfortunately can’t say yes. This fee that you’re giving us, it’s a tip because I’m doing wonderful job and you love me, and therefore, twenty five thousand’s tax free. That doesn’t work.

So if you don’t normally get tips, it doesn’t count. And, also, if there’s a tip that’s required, so, for example, parties of eight or more that have a mandatory tip, that doesn’t qualify for this. So you have to be very careful. And the government you know, the IRS has a nice list of, basically, people who qualify as well.

So you can look on the IRS’s website to see if you’re eligible.

And then getting to the second half, the overtime, same income limits, but this is what caught a lot of people off guard last year. It’s not your overtime the whole time and a half that gets tax free. It’s only the half in the time and a half that is tax free. You still have to pay tax on that straight time. So, again, be very careful about that. And last year was kind of messy because they didn’t adjust the w twos. I’m hoping this year with the w twos being amended that they’ll have a nice line item for the tax preparer to say, this is in bright bold letters, here’s what you’d made in overtime so it makes tax preparation a lot easier for everybody this year.

Now switching from that, let’s talk about, education savings. So five twenty nines are a fantastic tool that you can use to save money for college education’s expenses.

The money, that goes in grows tax free, And as long as it’s used for eligible expenses, it comes out tax free.

And one thing that is very nice about it is you can change beneficiaries. So if you, like, set one of these up for your grandchildren and the oldest decides that they don’t wanna go to college or they got scholarship money and don’t need it, you can always change the beneficiary to the next oldest grandchild, and then down the road you go. And the other thing that changed was recently is that you can actually move over thirty five thousand dollars of five twenty nine money into a Roth IRA for that beneficiary. Now there’s a lot of rules that apply.

The account has to be open for fifteen years. You can’t use the last five years of contributions, and you can only do whatever the max is, each year, which is seventy five hundred for twenty twenty six, and the child has to have earnings. Again, despite all those hurdles, it’s still a great option because a lot of folks had these accounts that had some residual money left over that they didn’t know what to do with. Now we have a phenomenal option of putting it into an IRA.

Another

thing.

Sorry. I’m gonna interrupt you real quick to put a plug in because we got a lot of questions about this subject just around five twenty nines because there’s been so many changes in a lot of clients.

I think a lot of people feel very worried about getting stuck in these in case their kid doesn’t go to college. Right? And and they wanna weigh, like, the tax preferential treatment against that. We do have other resources on our website authored by Brian Strike and Michael Van Boenning and a lot of our specialists on our team to kinda unpack that because, like Jamie mentioned, there’s a lot of little rules, and we won’t be able to we don’t have the time to, like, dig into all of that. It’s like a whole another webinar in itself. So please, I’m gonna direct your attention there if you have more questions about that.

Yeah. And then one of the other questions I’ve received is, you know, whether I should open up a Trump account for my kiddo for college. And it’s really more towards retirement versus college spending. It’s kind of like an IRA, and there’s a lot of fuzzy guidance that we’re still needing, you know, some clarity on.

Because as of right now, you know, I definitely would tell everyone, yeah, go ahead. Open up accounts for kids that were born in twenty five and later to get your free one thousand dollars. But putting money into it right now without guidance, you’d have to file a gift tax return and without going down the rabbit hole because, again, that’s a whole another webinar that our colleague Brian did that you can find on our website, we’re just gonna have to wait for some guidance before we know anything more on that. So putting that aside, let’s move on to vehicles.

So, again, another provision, Oba, is that you can deduct up to ten thousand dollars of interest per year for a new vehicle. This also includes motorcycles that are purchased for personal use. Business use, not deductible. You would deduct it on your business schedule.

But the caveat is that the final assembly has to be in the US. And, there’s a lot of resources on the IRS website to see if you are eligible or not.

Now, hopefully, you’re not paying ten thousand dollars a year on the interest deduction, but it is it is available to you.

Now to kind of rein in my what I talked about earlier about dependent care, you can now put up to seventy five hundred dollars in pretax savings into a day care flex spending account.

This was a lot you know, I think it was five thousand dollars before. And with the rising cost of day care, it’s great to see that we’re finally getting some increases to that. Now that may cover a couple months, but it’s still something. You get some tax savings.

Well, I mean, if now with the bump, this could mean two, three thousand dollars in savings for some of our clients.

Yeah. Depending on your tax bracket, it actually could help quite a bunch. And you’re saving federal tax, state tax, if you have one, Social Security, and Medicare. So it’s pretty substantial.

Yeah. It’s a big one. We get a lot of questions about the charitable one, so I’d love for you to unpack that too.

Yeah. This one is a huge one, and there was a couple changes that I will go into. So the first thing is that you can take a additional deduction up to one thousand dollars per person for donations made to a charity directly in cash on top of that standard deduction. So in the past, you could only take donations if you itemize. So this one is kind of a a new fun one where you can take two thousand dollars if you’re married filing joint, plus take your standard deduction, so total of thirty four thousand two hundred dollars, if you, again, donate to charity. Again, it has to be cash. So, you know, taking some clothes down to goodwill that doesn’t count, it has to be cash donations to eligible charity.

And then the other change, this one I don’t like as much, is that there’s now a point five percent adjusted gross income hurdle that you have to get over before you can deduct your charity if you’re itemizing. Okay? So the first one we’re talking about, you’re taking the standard deduction.

This one, you’re itemizing. So your real estate taxes and home mortgage interest were sufficient enough that you’re gonna be over the standard deduction in itemizing.

So, you know, in this case, if you made a hundred thousand dollars during the year, your first five hundred dollars of donations would not be deductible. So if you donated seven hundred dollars during the year, you only get a two hundred dollar charitable deduction on your itemized deduction form, schedule a.

So that I’d like, there’s so many little nuances with charitable giving. I’m going to emphasize that it’s a topic that we should make sure to have on the agenda in another client meet when you’re having a client meeting with your adviser, like, how you’re giving, where you’re giving, how much you’re giving so that we can make sure we’re doing it smartly. Right?

Yeah. And there’s a lot of other opportunities that are still available that didn’t change, like donating from an IRA if you’re seventy and a half. So, again, things that we need to make sure that you’re talking with your adviser throughout the year to make sure you’re giving the most tax efficient way.

Right. Right.

Alright. So this is our other favorite cheat sheet.

I love it so much. So, Jamie, walk us through it.

Yeah. So, again, in the first chart, we showed that, those it was in a chart form, but now we have a picture. This is my favorite because it I don’t know why, but the picture speaks to me better.

But it also kind of integrates capital gains and ordinary income tax. So what does that mean? Your wages, Social Security, IRA, pension, all those are taxed at your ordinary income rate. That’s these numbers here in the chart.

And, this kinda shows you, again, married filing joint, your first twenty four thousand eight hundred dollars are at ten percent, and for single, twelve thousand four zero one. And you can see as you go up the chart, so does the tax rate for ordinary income taxes.

But what’s also really interesting in this chart is that it shows you your capital gains rates. Capital gains rates are more preferred tax rate that you pay on things like selling stock or selling, your house that’s over the five hundred thousand dollar exclusion if you’re married, filing joint. Capital gains in the first couple brackets here, can see. So these nice purple and lilac covers, hopefully, you can see them well.

But, essentially, in the close to the first ten and twelve percent brackets here, if you have capital gains of of about a hundred thousand, you’re gonna pay zero percent capital gains. So that means you can sell over a hundred thousand plus your standard deduction. So let’s say a hundred and thirty two thousand rough numbers of appreciated stock in gain and not have a single dollar of federal income tax. Now beware, states are different. They don’t have necessarily this fund structure of zero percent on the first, hundred thousand here for married filing joint. Then the next bracket for capital gains goes up to fifteen percent, And then the highest capital gains bracket up here over the five hundred thousand and change, that’s twenty percent.

Okay. So we’re looking at income taxes, capital gains and we even have another threshold on here, the NIIT. We have a client who said, what is NIIT, and how do I get rid of it?

Yeah. That’s a great question. So it is net investment income tax, and this was during the Obama era, part of the Affordable Care Act that was passed, to raise money. And what it is is an additional tax of three point eight percent on investment income above two hundred and fifty thousand for married filing joint and two hundred thousand for single.

So you can see there’s kind of a little marriage penalty here that if you would double single, you would think this would be four hundred thousand, but it’s not. And the very important point to this is these numbers are not inflation adjusted. So more and more people are getting, you know, hit by this net investment income tax. And so in you know, your, capital gains, your interest, dividends, that income above the two fifty will get taxed at three point eight percent.

So one thing I’m gonna emphasize here that our clients don’t have to do, but they should know that we’re really mindful about, is being really careful with the way our portfolio income is realized. We have technology in place to be able to do tax loss harvesting daily on our portfolios. So the accounts are set up with tax budgets, and we try really hard to use the opportunities every day to look to see if there’s a way we can tax loss harvest. And, and and it creates some efficiency there, number one.

It’s hard harder to do when somebody’s trying to do it on their own through Schwab or Fidelity or when they’re trading on their own. So when somebody’s doing this on their own and managing and they don’t have that technology to do that tax loss harvesting aggressively, then another simple thing we can do is use things like municipal bonds instead of taxable bonds and be really mindful about the income and the characteristic of the income that’s coming off of some of these investments. I’m seeing more and more very creative investment structures that are being sold, and our clients are getting into things that look like they’re getting a lot of income, but they’re taxed at, like, these terrible tax rates.

And so, it’s really what you keep, not what you earn.

Like, so I I think I’m just gonna emphasize that before we move on to the

Yeah.

And then getting back to your second part of your question, how do you avoid it? Well, the you know, reduce your income, whether it’s your ordinary income or capital gains income Right. To get yourself under that threshold. And you can do that, like you said, by using municipal bonds or tax loss harvesting, deferring income from bonuses, maybe, you know, instead of selling all of the stock that you wanted to, you know, get out of at once, splitting it up between two years, you know, sell some in December, some in January to spread out the tax effect. But, unfortunately, once you get over that threshold, you’re you’re stuck.

Alright. So let’s recap sort of what we’re looking at when you’re kind of looking at tax planning for a client.

Yeah. So we’re gonna in the, you know, in the interest of time, I think skip over some be more basic slides and get to the meat that you all will probably enjoy.

So we’re gonna talk about a Roth conversion. It’s a real hot topic that everyone has lots of questions in the, q and a, and we’re sent ahead of time on, you know, what are Roth conversions? Should I do them, and how do I do them? So let’s just dive in at a really great example here. So we have a a, you know, prospect here or a client that’s making two hundred thousand dollars a year. K? They decide that they’re gonna retire at age sixty two, and they have a pension that they’ll receive for fifty thousand dollars a year.

And then they are, born before nineteen sixty, so at age seventy three, they have to take money out of their retirement accounts. Those are required minimum distributions. So at that point, you can see their income jumps up pretty dramatically because of these required minimum distributions.

Right. So we should call attention to that little segment of time here. Look at we’re seeing this nice opportunity, and this is what we do when we map out financial plans for clients. We can see not only tax assumptions that we’re using now, but what they might, what those tax brackets might look like in future years and look at it sort of like over a lifetime of tax paying instead of just year by year.

So I love that there’s those notch years. That’s, tax planning gold. Right?

It sure is. It sure is. And so that’s why it’s great to have, you know, folks engage with us before they retire because then we can kind of get some great planning in progress for these notch years because there’s, like you said, they’re, you know, tax planning gold for for us advisors.

So continuing on with that same example here, you can see here we had, you know, with the base of fifty thousand of income.

We’re gonna round for my simple math here. Even though we know the standard deduction is thirty two two, we’re gonna use basic math for poor Jamie because I don’t wanna have to dig out my calculator. So here we have fifty thousand of income. We’re subtracting our rounded standard deduction of thirty thousand. So if we do nothing, our taxable income is gonna be around twenty thousand dollars in those notch years, which is in the ten percent bracket.

And so one thing I will tell folks is not using the ten and twelve percent bracket is really, in my opinion, a waste. You You can’t go back and fill it up later, so you have to do it now. And so if you’re paying zero you know, the worst thing I hate when you’re at a cocktail party or in dinner and someone says, I pay zero tax. And I say, that’s foolish. You want to pay at the ten and twelve percent, especially as you saw in our example, the future years as those required distributions get bigger and bigger, their income is just gonna go up substantially more.

So what we’re gonna do is utilize the ten and twelve percent bracket by taking money out of the IRA and directly rolling it into a Roth IRA, and that’s called a Roth conversion.

And so in my example, rolled their four zero one k over to us, and so we’re gonna take it from that pretax four zero one k. So everything we move over from the IRA to the Roth is gonna be taxed.

So what we’re gonna do is we’re gonna move seventy three thousand five hundred dollars over. And so now our ending taxable income is ninety three thousand five hundred, and so we’ve successfully filled up ten and twelve percent ordinary brackets.

Now I’m gonna enter I I I have one thing that I’m gonna add in here is that it doesn’t have we don’t have to fill up the brackets with just a Roth conversion. I do see another question here where somebody says, what do I do if I have some investments that have made a lot of money over time, and how do I recognize those with the least amount of tax? And, like, this is another one of those golden opportunities where one can, pay those taxes at low brackets and low rates. Right?

And there was that point where you were showing us that there is there’s even a little bit of space sometimes to realize capital gains for free. And so I think this is that really good exercise where an adviser can use two different pieces of software to kinda help model this and help understand and look at the different opportunities. Should it be a conversion? Should it be realization of capital gains, or can we be pulling some of this, like, future income forward so that we’re playing in low brackets versus the big ones later?

Yeah. And, Jennifer, I’m gonna answer Robert’s question here and that he’s had in the chat. You know, short term versus long term capital gains, and that’s something I didn’t point out, and that’s very important point. If you buy a stock or security and sell it before one year has passed, that’s considered a short term gain. Short term gains are ordinary income tax in that middle of that triangle chart, and that’s unfavorable. So we don’t want that. Okay?

Long term capital gains get the favorable capital gains treatment, which were the purple colors within the chart. So great question, Robert. So, ideally, we want long term capital gains because we can get long term capital gains at zero percent in these first two brackets, the ten and twelve.

Yep. Great. Alright. Let’s go to the next chart that kinda pulls it together.

Yeah. So this really is helpful because it shows us pictorially the impact of doing these Roth conversions during the notch years. So you can see here, this is the IRA balance, you know, that we’ve got through the years if we do these Roth conversions.

So here we have, you know, the ten years of Roth conversions that we’re doing, and you can see that the, Roth IRA continues to grow.

And then we’ve got the required distributions.

Okay. I have to just interject with this fun little comment that one of our tax colleagues or the tax pro said. And he said the IRA is an IOU to the IRS, and I love that alliteration.

And that light that lavender color of IRA, that’s all money that hasn’t been taxed yet. So when we start taking the money out, it’s getting taxed. But if we move it to the tax free bucket, which is the black, then we’re starting to see account balances in an account that doesn’t have to be an I r a I I IOU to the IRS. Right?

That’s right. Yes. And, you know, a lot of people you know, the the other question I have is, you know, why should I pay tax now? You know, we’ve always been told to put money in pretax in my four one k, and you get that tax deferral for longer. You know, there are the reason for that is because you have to look at what your income is gonna be in future years. And with these required distributions, your income could obviously be up substantially, plus your Social Security benefit and things of that nature could just compound this whole problem.

Yeah. Our clients are I mean, our gosh. Our clients are the straight a clients. They’ve made a lifetime of good decisions, and sometimes the best decisions turn into new problems, which is, oh, no. I saved so much that now I have this giant IRA, this IOU. Yeah.

Right. Exactly.

You know? And and the other thing too, just to point out, and and sorry to kinda go off track, but we don’t know what the tax rates are gonna be in the future. You know? We’ve got the next couple years that we know we’re in a nice low tax, you know, rates structure, and we’ve got a huge deficit.

So we they tried cutting spending, and this is not political, you know, but it did work. And so how do we pay off a deficit that’s really large? We gotta raise taxes. So this is my personal opinion, not the, you know, Mercer’s or anybody else’s.

You know, my thinking is that, you know, rates are tax rates are eventually gonna have to go up to help pay off the deficit at some point. When?

No clue. But, you know, this is my Roth conversions. Think are in you know, hugely valuable now because we have a lower rate structure than we’ve really ever had.

Yeah.

So let’s take advantage of it here by doing these conversions. So we did, you know, ten years of conversions during that notch period from retirement to when they have to start taking distributions from their IRA. So you can see here, if we didn’t do conversions, the income that, you know, we’re gonna have to take out from our account and pay tax on, if we do these conversions for ten years, our balance of our IRA goes down. So the basis for which we have to take money out goes down, and our RMD or required distribution also goes down.

And then not only does the RMD for us go down or but for the next generation. Right? Can you touch on that?

Yeah. And that was one of the rules that passed with Secure Act, and we used to be able to stretch out inheritances of IRAs for our lifetime, and that went away with the Secure Act. Now the new rule is for non spouse inheritors, and, of course, there’s a lot of exceptions to this rule. But in general, non spouse inheritors have ten years to take all the money out of that IRA.

So, you know, I have a I was talking with a client today. They’re married. Their RMDs are gonna be six hundred thousand dollars. So we are proactively doing lots of Roth conversions because, you know, between the two kids having to take out, you know, three hundred thousand a year, you know, for ten years, you know, that’s a pretty substantial burden.

And, again, they’re in their notch years, so now’s the time to do these Roth conversions.

So I love that it’s impacting our clients’ lifetime and potentially their children’s lifetime. So now we’re looking at multigenerational tax impact. That’s great. Exactly.

Alright. Now I was told we need to save some time for questions.

So this is where I’m gonna go to our chat box. And I know Brian is a rock star and is getting answering a lot of these questions here.

But let me just see if there’s any else that I can help answer for you.

So you’ve exceeded the net investment income tax level for married filing joint, which is two hundred fifty thousand.

Will married filing separate provide any tax advantage? Oh, that’s a great question. Now the single limit is, two hundred thousand, but I’ve let me just see real quick what the married filing separate limit is. I believe it is the the two hundred thousand.

No. Married filing separate. I take that back. Google told me it’s a hundred and twenty five thousand.

So, yeah, that’s not gonna help you at all if you’ve married filing separate. So, I lost the question, but there we go. We answered that one live. So married filing joint versus married filing separate, that won’t help you.

And be very careful because if you marry filing separate, it affects a lot of other things like tax credits. You can’t contribute essentially to a Roth IRA, and there’s a lot of things that you have to be careful of. So always be careful and do the analysis with your adviser or your tax professional on married filing joint versus separate because sometimes it does make sense. Like, where I’ve seen a client that had income related loan payments for education loans, it made sense to file separate.

But most of the time, filing separate does not help.

The next question here that I’m looking at is, you know, for Roth conversion, do you have to wait some time before you withdraw the funds after conversion? Yes. You do. There is that, you know, five year limit that you’ve gotta look at. So you gotta be very careful about, you know, Roth. So if you just move money into a new Roth IRA, there is a five year window you have to wait. So be careful.

And along that, there was another question that says, is there an income limit required, or does it keep you from doing Roth conversions?

Yeah. The nice thing about Roth conversions, you can go hog wild. And, you know, let’s say tomorrow you wanna just take all of your IRA money and move it over to your Roth. You can do the whole thing no matter how much income you have or no income.

So it’s really independent of your income levels, which is great. And we can do, you know, a hundred dollars or a hundred million for all that matter. It’s just, again, being very careful about making sure you know what thresholds you’re at. And then the other important point is making sure you pay in the appropriate amount of tax.

And this is something I I think that bears talking about is, what we call safe harbor estimates. So if we do a Roth conversion today, okay, what the IRS says is you need to pay tax as you earn it. So when I have my you know, when I get paid for Mercer, they take taxes out every time I get paid, which is convenient.

If you do a Roth conversion, there necessarily isn’t withholding and hope the ideal situation is to not have withholding because then you can get more money into the Roth IRA.

But what you have to do is you’ll have to make an estimated tax payment for the money that you incur or income you incur during that quarter. So estimated tax payments are due in April for the income from January to March, and then June and July is paid. Oh, wait. I think I screwed that up.

Let me go back. January, February, March is paid in April, and then April, May is paid in June fifteenth. So here’s another reminder for everybody on this call. If you have quarterly estimates, your next payment is next week on the fifteenth.

And then June and July and August are paid in September fifteenth. And then September, October, November, and December, you have until January fifteenth of twenty twenty seven to pay that in. Now let’s say last year, I retired and I didn’t talk to my adviser and I had no tax whatsoever.

And I paid nothing in and I owed nothing. My tax was zero.

This year, I hired Mercer, and we did all this planning, and we did a lot of conversions and things of that sort. Now my tax bill is a hundred thousand for extreme examples.

The IRS has a safe harbor that you can pay in a hundred or a hundred percent of the prior year tax without a penalty as long as you pay that much in. Now the hundred and hundred and ten percent depends on your adjusted gross income for the prior year. If you made a hundred and fifty thousand or more, you have to pay a hundred and ten percent of the prior year tax. If I made less than a hundred and fifty, it’s the hundred percent.

So look. In my case, let’s just say for simple math, I made zero, and so I had zero tax. I can pay a hundred percent of zero in twenty twenty six and not have a penalty even though I owe the government a hundred thousand dollars. So the other safe harbor is ninety percent of the current year tax.

So why would I wanna pay ninety thousand when I can pay zero? So there’s, you know, these two methods that we can utilize, and this is very important when we have folks that are retiring or have, you know, like, a windfall of some sort, whether it be like, I had a client with some, deferred comp get paid out a huge chunk this year.

So last year

a house your portfolio did better than you expected.

Like, all sorts of things that create anything lumpy, it’s it’s easy for us to run, like, run the numbers, take a look at the return, and then try to project ahead, or at least find that safe harbor number. Right? Like, it’s just even if we do don’t do anything else in this exercise, like, let’s just make sure we knock out that preventable tax like this penalty. Like, we shouldn’t have to pay that. There’s enough tools out there that we can avoid that.

Yeah. And there’s a couple questions here on, kind of oopsies that happened. You have to be very careful, and this is why it’s important to talk with your adviser and kinda analyze your tax return and do projections because there’s a couple things that can run afoul. Like, my income was too high, and now I can’t get the ACA subsidies anymore. Or I my income is too high, and now I’m paying more for Medicare.

And so you do wanna make sure that you have these discussions. And, you know, before you, you know, do this rough conversion in our example, you know, make sure you’re aware of what the impact is to your Medicare premiums and any other kind of income related issues that may arise by doing that.

Good stuff. I know we have a lot more questions, but I do think, we’ve covered most of them. And our advisors are going to get a list of these so that, they know for those of you who’ve identified yourselves, your advisors will be reaching out to to answer some of the more specific questions. Because sometimes it’s a little it’s it’s better to use the software and act use actual numbers versus just throwing out this theoretical advice. We’re trying to make decisions in a more precise way. So I think it’ll be more impactful if the advisors reach out directly.

Yeah. And I think we have some more time for some more questions. So let’s just continue on. So one question here is, you know, talk about capital losses and how they deducted and carry forwards and so forth.

So what happens is on your tax return, you have a form schedule d that gives you short term and long term capital gains. Now remember we talked about this. If you sell something before the year, it’s short term, goes on the top of the form. If you hold it for a year or longer and then sell it, then it’s reported on the bottom under long term capital gains.

Now what happens is, let’s say, you know, you had, some stock and it went belly up and now you’ve got a you know, you sold it for a loss of a hundred thousand dollars. Let’s just throw some big numbers out there.

If you have any other capital gains during the year so let’s say I sold my NVIDIA for a hundred thousand gain, that hundred thousand dollar loss will offset any other capital gains that you have in that year.

So now I wouldn’t have a zero capital gain on my tax return because my loss and my gain offset. Now let’s say I wasn’t that lucky. I don’t have any gains to offset and now I still have a hundred thousand dollars of loss and no other gain to offset this year. So then what happens is you get to take three thousand dollars and that’s a it’s, whether you’re married or single, it’s three thousand dollars that you can deduct against your ordinary income or everything else on your tax return.

And then what happens is you get to carry over to the future that capital loss that’s left. So a hundred thousand minus the three thousand, ninety seven thousand dollars of capital loss that I get to carry over to twenty twenty seven, assuming that this happened this year. Twenty twenty seven happens, same thing. I’ve got if I have capital gains, that loss will offset it dollar for dollar.

If, let’s say, I have no capital gains income this year again, then I get to deduct three thousand dollars against my income. And then now that I’ve got done that, I’ve got ninety seven thousand minus three thousand, ninety four thousand that’s going to twenty twenty eight. And this will keep going for the rest of your life. The good thing is there’s there’s no limits.

So, another question I get a lot is what if my spouse dies? Now the technical answer is you should be tracking your husband and wife’s carryover separately. And then when the one spouse dies, it’s gone.

But technically or let’s say practically, nobody does that. And I have not seen an audit, thankfully, knock on wood, for that yet.

I do see that’s a little gotcha that I see from time to time where people aren’t careful about carrying that number forward.

It doesn’t get lost. But there will be years where it might not have any impact on the return, but it needs to stay on the return, and that schedule still needs to be filed so that you don’t lose track of that loss. That’s money that we don’t wanna lose track of. Yeah.

Yeah. And, here’s another one. Another great tax planning mechanism that we have is called NUA, net unrealized appreciation. So, I have a client I’m dealing with.

They work for a publicly traded company. They have a a retirement plan that they have their stock in. So let’s just call it ABC company. So they have ABC shares in their retirement or four zero one k type plan.

So what NUA does is you can take that ABC company stock out of the IRA and into a brokerage account.

At the time that you move it over, and there are certain time frames that you can do this, certain times you can. So, again, lots of rules. Be careful. You would pay tax on the cost basis of that ABC stock that you are moving out. So if, let’s say, you’re moving a hundred shares and you paid a dollar a share and your cost base is a hundred dollars, then you’d pay a hundred dollars of or a hundred dollars of income would be reported, on your tax return as ordinary income. Now, again, and the attendee said here that you have to be careful because that income could also put you up into a higher Medicare bracket.

So now what’s really phenomenal about this doing you know, doing this, if I left that stock in the four zero one k, if I sold it and took the cash out, I would pay ordinary income tax rates. Remember the middle of that chart? Now if I do this NUA transaction, I’ve got my ABC stock in my brokerage account, and any appreciation that now occurs in it is going to be capital gains. So, again, much cheaper tax rate as capital gains than ordinary for a lot of our clients. So it’s a fantastic plan you know, planning technique that we can utilize.

Alright. Looking for some more good questions.

When do you have to pay taxes on capital gains, Renee asked, and when the investment is sold or at year end? Okay. So this one is good. Oh, Brian answered this, but it’s good for everyone to hear.

You pay tax when you sell a stock. So let’s say I bought a share of Amazon today, and it goes up in value. And let’s say, for simple math, I paid a dollar for it today.

If it goes up to a hundred dollars tomorrow and I sell it, I pay tax on the ninety nine dollars of appreciation. Okay? And, again, you should be paying estimated taxes when you sell it. So, again, if I sell it today and I sold a lot of it that my taxes are gonna go up considerably, you should make an estimated tax in in September fifteenth for the income earned this month. Okay? But, again, safe harbor and all that. So there’s a lot of other complex rules that intertwine.

But, again, it’s when you sell it, not if you just hold it. Now if I hold that, share of stock till next year, nothing happens. There’s no gain on any of the gain appreciation in the that share at all. It’s when you sell it is when that really, occurs.

Alright.

When’s the right time to engage with Mercer? Anytime.

No. For real in all serious, not to be flippant about it, it really is a good time. You know, the sooner, the better because we can get a lot of these strategies in place, make sure we’re doing the right thing, make sure you’re retiring at the right time, saving enough, and then get all these strategies in place ahead of time.

You know, the worst thing I hate is, you know, someone’s already collecting Social Security. You know, they they are too late to do the NUA. You know, they’ve, you know, they’ve missed the opportunity to do Roth conversions because they’re, you know, eighty years old, and then they hire us. You know?

It is a lot of misstep Even then,

we can still be really mindful about portfolio construction and income realization from their portfolio management, and we can really do make some impact with legacy planning, which is a whole another webinar also.

The other thing that I’m gonna point out is that it’s June. This is a great time to go to your portal, throw in that tax return, and send your adviser an alert that you’ve uploaded a document, and that will allow us allow an adviser to kind of take a look at the numbers, and then make some plans between now understand the return and then make some plans between now and year end. Once twelve thirty one happens, it becomes really hard to change what happened in the year. So, this gives us a good amount of runway to have a meeting or two, before the end of the year and put some action items in place.

Yeah. And one other great planning maneuver that we’ve kinda, know, kinda let slip under the radar is donations to charity from your IRA, QCDs. So when you hit the magical age of seventy and a half, and I said that to my client, you’re reaching the magical age of seventy and a half.

You have the ability to take money from your IRA and donate it directly to charity, every year. And you can do up to a hundred and eleven thousand dollars per person per year. So this client I was talking to, they’re married. And so, you know, it it made it was fantastic because if you then hit your required minimum distribution age so let’s say my client has six hundred thousand in required distributions.

They could donate the hundred eleven thousand each to then have their taxable income or not taxable income, but what they pay tax on for the IRA, you know, down more than two hundred thousand dollars because they were gonna donate this money anyway. So the one thing is you can’t take the money from the IRA and put it into a donor advised fund. We get that question all the time, and sadly, that is not something you can do. So donor advised funds are great tactics, savings tools that you can do to put money from or put stock in that have appreciated considerably into an account that is going to charities.

You get a tax deduction for the fair market value of the stocks that you put in, and then you can spend the money the rest of your life. So when you send the money out to various charities throughout your life, you don’t get a deduction then. It’s when you put the money in.

And it’s a fantastic tool for folks that are younger than seventy and a half to save money by doing donations. And with the AGI limit, donor advised funds become a lot more beneficial because then in one year, you can do a whole bunch at once in donations and get that tax deduction.

That’s another webinar. Yes. Time, Jamie.

I’m gonna give you

I know.

I can sit here and talk taxes all day, but, unfortunately, you probably all have lives and wanna move on and not listen to taxes all day. So, thank you all so much for listening to us and and joining our webinar today. It’s much appreciated, and, hopefully, you got a little bit of, tidbits and knowledge from it.

If you, didn’t get your question asked, you know, don’t worry. We’re gonna send all these questions to your adviser so you they can follow-up with you. This is getting recorded, and so it’s gonna be found on our website under Mercer Advisors dot com under the sharing knowledge tab. And so thank you again so much. Have a wonderful day, and until our next seminar. Bye bye.