Countdown To TCJA Expiration: Tax Strategies for 2024 and Beyond Webinar

Thank you everyone for joining us.

We’ve got a lot to cover today, so, I think we’ll go ahead and get started here. So thank you for joining us for today’s webinar, the countdown to the TCJA expiration.

I will be presenting today on tax strategies for twenty twenty four and beyond.

I’m delighted to be joined by my colleagues at Mercer Advisors, Brian Streich, who is our director of financial planning and research, and Jenna Elliott, who is our director of estate planning.

These folks spend their days day in and day out working through all of the laws, the strategies, the details, and advising our clients. So I can’t think of of better folks to be joining and talking about, these concepts.

Before we start, however, I just want to acknowledge today is September twenty sixth twenty twenty four, And I know that there are many of you in the southeast who may be starting to be affected here by the incoming hurricane, including Brian who’s in Atlanta.

So if you see, Brian freeze up or if we lose him all of a sudden, it may be related to to that. So just have some patience and we’ll keep going, but, I wanted to keep you all aware of that. And if you yourself are affected, certainly prioritize your safety. That’s the most important.

And please know that we’re recording this presentation.

It will be posted on our website on our insights tab following this, so you will certainly have the opportunity to to be able to see it at a later date if if you are affected as well.

So before we get kicked off, wanna start with, recognizing that all of this information that we are presenting is for informational purposes only. It should not be viewed as personal advice to your financial situation, and we would refer you to your wealth adviser for direct advice on your personal situation.

So as we start today, we noted that, we’re talking about the tax cuts and jobs act. I know many of you submitted questions in advance, which we appreciated greatly, and we’ve used that to guide, a lot of our content today. So, hopefully, we’ll cover a lot of that for you. But we’re also gonna leave some time at the end to take live questions.

So if you have questions, please, submit them to the q and a. We will be monitoring that, and answering those here at the end of the podcast end of the webinar as well. So feel free to use that. So let’s go ahead and start then. So I thought I’d set the stage here a little bit, remind everyone what the tax cut and jobs act, commonly known as the TCJA, is. So it was a package of tax changes, went into effect in twenty eighteen, mainly affected personal income tax, and those were mostly temporary.

And they will revert back to what the previous rules were in twenty twenty six.

Many of the corporate business and tax changes are permanent.

And this package of tax changes was passed with the idea that it was to stimulate investment and spending, drive growth, boost wages, create jobs, simplify the tax code. I think as we talk about this, you’ll see it may or may not have, helped with simplifying your your set your personal sec tax situations in any case. And it was also to make US, businesses more competitive locally. But a lot of what we’re talking about today should be viewed in the fact that, this is actually currently slated to sunset, in twenty twenty six barring any changes to the law. So what we are presenting today is as the law is written and assuming that it’s going to sunset in twenty twenty six. We’ll talk about how it could change as we go on here. So, Brian, first, I’m gonna turn it over to you to talk about what were kind of the major changes that went into effect because of this.

Yeah. Sure. Thanks.

So Tax Cuts and Jobs Act was passed in twenty seventeen kinda right towards the end of the year and started, as Kara mentioned, started impacting taxes in twenty eighteen.

The way in which it was passed was utilizing a process known as reconciliation.

And reconciliation, the problem is you kinda have this ten year window, and you can’t cause higher, or, excuse me, more deficit, more debt, outside of that ten year window. So we had something very similar back in the early two thousands with, George w Bush passing a tax law that was set to expire after twenty ten.

Same sort of thing here with the reconciliation.

So we do have some of the provisions that were made permanent. Most of those are gonna be related to corporate, entities or business entities, and a lot of the individual law is going to sunset. And all we mean by sunset is we got a different set of rules for twenty eighteen through twenty twenty five. And then starting in twenty twenty six, again, barring any changes, we would go back to the twenty seventeen law. And most of that law, the numbers are inflation adjusted. So, you know, it’s it’s gonna be twenty seventeen law, but the numbers are gonna be a little bit different.

Some of the main things without getting way too technical, that are gonna impact individuals are the brackets.

So we all have these tax brackets, and as we have more and more income, we’ll move through those brackets. We pay tax at each level as we go.

And so those brackets were reduced from a rate perspective as well as the brackets themselves were shifted a little bit. So the amount that may fall into a certain bracket would be a little bit different.

One of the major things that was an attempt to simplify the tax code was higher standard deduction. So the standard deduction was about doubled. That will go back to free, Tax Cuts and Jobs Act level in twenty twenty six, again, barring no change.

What Jenna will talk about later on is the higher lifetime estate tax exemption.

That exemption, again, currently thirteen point six million, is slated to revert to the twenty seventeen levels.

One of probably the most, kind of thorn in the side pieces of the Tax Cuts and Jobs Act was the SALT deduction cap, and SALT stands for state and local tax. So if you itemize your deductions and you’re a high income taxpayer, the maximum amount of state and local taxes you could deduct has an itemized deduction, was limited to ten thousand dollars. So that should go away again in twenty twenty six. No miscellaneous itemized deductions, are allowed right now under tax cuts and jobs act. That will come back.

Bonus depreciation and qualified business income deduction for pass through entities.

These things are also slated to revert to twenty seventeen levels as well. Well, QBI was instituted as part of, TCJA, so it would go away completely in twenty twenty six. A couple other of the corporation ones, I’m not gonna go through all of these, but the main one is the c corp rate.

So c corp is for your standard corporations, and the rate used to be a graduated table similar to the individual brackets, but the Tax Cuts and Jobs Act just instituted a flat twenty one percent.

So that is a permanent adjustment. Well, as permanent as tax law can be these days. So that is kinda where we stand right now for what’s not gonna change in twenty twenty six.

So you mentioned, Brian, the the tax rates and the marginal rates and how they’ve shifted. Can you give us a illustration or kind of talk about those?

Absolutely.

So I thought this table would or these charts would be most helpful. So on the, left side here, we have the single tax brackets. On the right, we have married filing joint. And what we can see in the blue line here, which is generally the lower line, is what the tax rates are based on your taxable income in the current year, in twenty twenty four. So you’ll notice, the post tax cuts and jobs act is going to be our kind of purple raspberry color line.

It’s generally going to be a higher rate. As you can see, the ten percent rate stayed the same, twenty seventeen law to tax cuts and jobs law.

But then tax cuts and jobs went to twelve, whereas the previous law was fifteen.

Then it goes to twenty two, but previous law was twenty five and so on. There are some areas where we’ll see that the rate will actually be lower for income within those ranges for single folks.

For married filing joint folks, there’s only one small little sliver here where the tax rate’s actually lower, in a post tax cuts and jobs act, so a twenty twenty six level. So generally speaking, if we look at what tax rates are today versus what tax rates will look like in twenty twenty six, generally, they’re going to be a little bit higher, starting in twenty twenty six.

So the other thing that you mentioned, Brian, was a change in the personal exemptions and the standard deduction. So can you talk through what the differences are on those as well?

Absolutely. So standard deduction is, one of the items that was really geared towards helping people simplify filing their taxes. I don’t I wouldn’t say I wouldn’t say the tax codes necessarily got any simpler over time, But most people who don’t have to itemize anymore because they receive a larger standard deduction, that that certainly simplifies keeping track of charitable contributions and, you know, mortgage interest, real estate taxes, all those things.

So the standard deduction was approximately doubled by the Tax Cuts and Jobs Act, and statistics show, that about eighty seven percent of taxpayers in the Tax Cuts and Jobs Act world, are filing with the standard deduction. So we only have usually very high income folks and folks who give a lot to charity that are gonna be itemizing their deductions in the Tax Cuts and Jobs Act world.

So prior to Tax Cuts and Jobs Act, so I took the twenty seventeen numbers and inflated them. So right now as of twenty twenty four, we’re looking at a single standard deduction of about seventy eight hundred and married of just shy of sixteen thousand.

Tax Cuts and Jobs Act, so the law that we’re currently under for twenty twenty four and twenty twenty five, you can see those, those standard deduction amounts are almost double, fourteen thousand six hundred for single, twenty nine thousand two hundred for married filing joint. Now if you’re older, generally sixty two or older, you’re allowed an additional standard deduction.

And if you’re blind, legally blind, you get an additional standard deduction on top of that as well. Those standard deductions didn’t change. So in the twenty seventeen law versus the current tax cuts and jobs act law, we’re basically in the same place for those. So twenty twenty six, we expect from the prior slide, we expect tax rates to be a little bit higher, and we expect our standard deduction to be a little bit lower.

You mentioned Before before we move on, Brian, we’ve got a question here on timing from Mark in our q and a.

And so he says when we’re talking about starting in twenty twenty six, does that mean this will affect the twenty twenty five tax year or the twenty twenty six tax year, meaning when you what you would file in April of twenty twenty seven?

It is the twenty twenty six tax year. So you wouldn’t, you wouldn’t actually see it until twenty twenty seven when you file your taxes for twenty twenty six.

Great. Hope that help help clarify that, Mark.

So tax withholdings and things like that should be automatically adjusted if we go through the sunset and rates change.

So that should be automatic.

However, if you are doing tax withholding through ten ninety nine or you’re making estimated tax payments in twenty twenty six, you would need to factor in that the tax rates have gone up a little bit. Your deductions are probably a little bit lower.

And so you you need to factor in that you you might need to pay a little bit more in tax in twenty twenty six for those estimated payments and everything.

Great. Let’s talk about personal exemptions.

Yeah. Personal exemptions are one of the things that we tend to forget about. So when people look at the standard deduction being cut almost in half starting in twenty twenty six, it seems pretty draconian.

However, what we get back in twenty twenty six is personal exemptions.

Right now, personal exemptions are eliminated, so there is no tax deduction for yourself, for your spouse if filing married, filing joint, and for any dependents. You don’t get that, that deduction, which we call the personal exemption.

So starting in twenty twenty six, again, using twenty twenty four because we don’t know what the inflation is gonna be, for twenty, four and five yet. So the estimated number right now is five thousand and fifty dollars per person as an additional deduction, known as a personal exemption. So you would get the standard deduction, plus you would get your personal exemption, or you get your itemized deductions plus a personal exemption starting in twenty twenty six. So I did a chart here just to show you a little bit about how we look at this, utilizing both personal exemptions and standard deduction.

So if I’m single with no kids, I’ll get the standard deduction of seven thousand eight hundred and fifty, plus I get a personal exemption of five thousand. So my total deductions is twelve thousand nine hundred.

If we compare that to the standard deduction today under Tax Cuts and Jobs Act, it would be fourteen six hundred. So we can see here that there’s about a twenty seven hundred dollar deduction difference between where we are today and where we would actually be in twenty twenty six provided the sunset happens.

However, if I have one kid, two kids, a hundred kids, the more did the, dependence I have on my tax return, the higher my personal exemption is going to be by that five thousand and fifty bucks. So we can see here that it actually works out to have more deductions in twenty twenty six if you have more dependents. Same with married filing joint. No kids. We’re gonna be under by a little less than four grand. However, if we do have kids, we’re actually gonna be in a slightly higher deduction state, because of those personal exemptions.

So personal exemptions are important, and we shouldn’t forget about those, when we do our calculations.

I think the key thing here, and and I know you’ve got some other cases that we’re gonna talk about itemized deductions as well, is this is a time when it is critically important for you to be working with your adviser and doing those tax planning. We can help you with those tax projections so that you understand how this is going to affect your personal situation.

Every person’s sit situation is gonna be different. Every family situation is gonna be different. Whether you have itemized deductions or not, we’re gonna talk about charitable planning. But this is critical that you’re working with your adviser. Your adviser is well versed in doing that. We do this all the time with our clients, so we strongly encourage you to work through these these calculations on your personal circumstance with your adviser.

So well, let’s move on, Brian, and talk about child tax credits. You talked about how it changes with kids. Let’s talk about that.

Yeah. So the child tax credit’s another area that is rife with contention in Congress.

The Tax Cuts and Jobs Act increased the, child tax credit from one thousand dollar credit to a two thousand dollar credit. So we doubled the credit, but more importantly, we also more than doubled, and in some case, almost quadrupled the phase out threshold.

So more, individuals, whether single or married filing joint with children, are able to take the child tax credit under the Tax Cuts and Jobs Act.

If we go back to twenty seventeen law, the child tax credit will drop by half and our phase outs will drop considerably.

So right now, let’s say you are single and you make a hundred and fifty thousand dollars a year, you wouldn’t get your child tax credit. So that thousand dollars would effectively go away. So that’s a thousand dollars lost.

However, it’s worse than that because Tax Cuts and Jobs Act, you’re actually getting two thousand. So you would actually lose the two thousand credit that you would get under Tax Cuts and Jobs Act if you make too much money and we sunset back to the prior to Tax Cuts and Jobs Act. Now Now in twenty twenty one, I just put this up here as a reminder in case anyone was getting confused thinking that the child tax credit was higher than two thousand dollars for twenty twenty one only, and this was due to the pandemic.

We did have the American Rescue Plan that bumped up the child tax credit to three thousand dollars for most qualified children, thirty six hundred if they were under, age six. Now both of the, political, candidates running right now have made comments related to either maintaining the child tax credit where it is or possibly even increasing it. Some as high as, thirty six hundred, and I’ve heard another, five thousand.

So we don’t know exactly where this is going, but there tends to be a lot of, you know, a lot of work around the child tax credit. So this is one that would probably not see too much in the way of a decrease, but right now, it is slated to decrease potentially very significantly if changes aren’t made.

Well, let’s talk quickly before we get to the other dependents, and I know we’ve got some case examples just to show people how all these pieces work together. Mhmm.

Yeah. So oops. Let me there.

So there is one additional credit that is allowed for Tax Cuts and Jobs Act, and that is a five hundred dollar credit for dependent.

So this credit is in an effort to offset a little bit of that personal exemption. So the personal exemption, again, being a deduction that reduces your taxable income, the credit being a dollar for dollar reduction in taxes owed. So this credit, the idea of it is to help out kinda offset a little bit of that, the removal of the personal exemptions.

When we go to twenty twenty six and sunset, we will have no additional credit here, but we do get the personal exemptions back. And that five thousand dollar deduction, as long as you’re not in the ten percent bracket, that ten thou or the five thousand dollar deduction will be more powerful than the, the credit. So it should be a net positive, for this particular piece.

Let’s let’s go to these case examples, and I know we’re not gonna go through all of the numbers. There are so many numbers on these slides. But the the main point here, Brian, maybe to talk just quickly about how important the tax planning is for your personal situation. We won’t go through the numbers, but just so folks can tell how much it varies and how much your income and personal situation can matter.

Yes. As a tax nerd, I love the numbers. So, I I really wanna go through every single one. No.

What I tried to do here is show how we have, the twenty twenty six law versus what we’re dealing with right now with tax cuts and jobs act based on different income levels. So fifty thousand, hundred, hundred fifty, and two hundred. So what you can see as you kinda look down, obviously, the taxes are going to be higher, the higher your income goes. That’s pretty self explanatory.

But you’ll also notice here that in the pretax cuts and jobs act, so the world that we’re kinda going back to, assuming nothing changes, you’ll see that the tax, the taxes owed under every situation looks to be higher with the twenty twenty six law, under the sunset provision than it does with tax cuts and jobs act.

That is generally true, but you’ll notice that I only utilize the standard deduction. I did not utilize itemized deductions here just because it’s itemized deductions could be just about anything. So this is just a very simplified look at how the taxes kinda stack up as well as what our tax picture is gonna look like if we have qualifying children, which applies the child tax credit as well. So you can kinda look through this, and we’ll see with married filing joint, what we’ll notice here is pretty much the exact same thing. So federal taxes are generally gonna be higher under twenty twenty six law, with the sunset than they are currently under Tax Cuts and Jobs Act. But we’re using standard deduction here as I mentioned before, and, you should definitely work with your adviser to run your particular circumstances because I’ve seen just about everything you can possibly, you know, all the permutations, come out when working on a particular situation.

K. So I have one to nine questions about itemized deductions. Lucy, Tom, Laura, Cindy, Sheila, Tony, Grant.

So let’s talk about Let’s do it.

About itemized deductions.

Alright. So itemized deductions is, schedule a for our tax return.

And prior to Tax Cuts and Jobs Act, like I said, we had a lot more people itemizing deductions. And the reason we had more people taking those itemized deductions is there were more deductions to take. We had, we had home equity interest that could be deducted up to a certain threshold. We had miscellaneous itemized deductions subject to two percent.

That would be CPA fees, attorney’s fees, and so on. We had personal and casualty losses above ten percent of AGI. You could even deduct gambling expenses to the extent of your gambling winnings. So we had all these additional deductions, and that doesn’t even in, include probably the biggest deduction that most higher income folks have, and that is that state and local income tax deduction.

The SALT deduction cap is one of the things that really kinda limited how many people are going to be itemizing their deductions.

Under tax cuts and jobs act, where we are right now, we do have that SALT cap of ten thousand.

Home mortgage interest is only deductible up to seven hundred and fifty thousand dollars of a mortgage.

Home equity is generally not deductible.

The one boost, I would say, to itemize deductions is you can give cash and take a deduction on cash donations up to sixty percent of AGI, rather than fifty percent, which is the old rule. Probably doesn’t impact a whole lot of people, but, you know, there are some people out there who do give, a whole lot to charity.

So you kinda see here the itemized deductions, where we are today, we’re pretty limited on what we can deduct, and that’s gonna keep a lot of people out of the itemized deduction realm and push them into standard.

If we go back, if we sunset again, we should go back to the old rules for itemizing deductions, which means an unlimited state and local income tax deduction, home equity interest becomes deductible, personal, excuse me, yeah, personal casualty losses are deductible, miscellaneous itemized deductions, and so forth. So, if we do go back, we will see a lot more people itemizing their deductions.

One of the other things to think about too with the itemized deductions is what is, the power of maybe charitable giving? And we’ll talk about that in a little bit with an example, but, remember, you have to get over that standard deduction threshold.

Great. I’m seeing a bunch of questions here, Brian, also on, Roth conversions.

Couple from Sheila and from John and from Sally. So can we talk about kind of timing of doing these projections, putting in your timing, and how you kind of look at that on Roth contributions?

Yes. So not just Roth conversions, but any sort of timing of income.

For most taxpayers, they don’t really have a whole lot of control over timing income unless they’re a business owner or unless we’re talking about Roth conversions.

So for those who aren’t aware, Roth conversion, you’re basically taking money from a tax deferred account, such as a traditional IRA, traditional four zero one k, something like that, and you’re moving the money from that account into a Roth IRA.

When you do that, you do have to pay tax on the amount that you’re moving over.

You are not subject to a ten percent penalty on that. So since the money is staying within retirement vehicles, you’re in good shape there. But you do have to pay the tax upfront, but the benefit is now you got the money in the Roth, and the Roth, provided you meet all the requirements, is gonna grow and provide you with tax free income in the future. So controlling Roth conversions is totally, up to you. It’s very much a situation where we can pinpoint exactly how much you need to convert in a particular year to top off a bracket or something along those lines.

So this example here just shows, pretax cuts and jobs act. So what we’re going to in twenty twenty six. If we have a hundred thousand of other income, whether that be salary or interest or whatever, Standard deduction, personal exemption, our taxable income, seventy four one fifty, which means we have another nineteen thousand dollars of income we can recognize at the fifteen percent bracket. So our marginal tax bracket’s fifteen percent, and we could top off that bracket by converting nineteen thousand to a Roth IRA.

However, under tax cuts and jobs act where we are right now, the same a hundred thousand dollars, we would have seventy thousand eight hundred of taxable income.

Our marginal bracket is twelve percent. Remember, the ten percent stayed the same, and then it jumped to twelve percent now, fifteen percent starting in twenty twenty six.

So not only do we save an extra three percent there, but we also have a little bit more wiggle room.

We can do a Roth conversion of twenty two thousand before we move out of the twelve percent bracket and into the twenty two percent bracket.

For twenty two percent bracket, we’ve got a hundred and thirty we can recognize versus twenty twenty six, a hundred and fifteen. So long story short, generally speaking, again, it depends on your particular circumstances.

Generally speaking, it makes more sense to do your Roth conversions in twenty twenty four, twenty twenty five, rather than waiting until twenty twenty six. However, there are circumstances where waiting to twenty twenty six could actually be better for you than doing it now. So, again, you need to work with your adviser and run the numbers.

We do this all the time. I do it, it seems like daily.

So it is something that you wanna get a look at your particular circumstances. But the general rule would be, let’s look at it now because for many people, it will make more sense to convert sooner rather than later.

Alright. Well, let’s also talk about charitable giving. And I know we wanna leave time for Jenna to talk about estate planning too. So maybe we can talk kind of high level here.

I see questions from Tim and Henry and Kathy about charitable giving, donor advised funds. How do you figure those out? And I’m guessing, based on all the numbers on this chart, you’re gonna say work with your adviser and your personal circumstances. What determines it?

That’s pretty much true. So if if I had to boil it down to just very simple kinda rules of thumb is prior to twenty twenty six, I wanna recognize more income if I can.

And then starting in twenty twenty six, I would wanna start taking more deductions.

So if I can delay some deductions to twenty twenty six, that may work out better for me because I’ll be in higher tax brackets. The the rates will be higher, and and income we wanna take when rates are lower.

This example here just shows that we have someone with a hundred thousand dollars of income not doing charity versus giving thirteen thousand to charity. They have standard deduction or itemized deductions.

And what you’ll see here with the pretax cuts and jobs act, which is our twenty twenty six law, is that thirteen thousand of charitable giving takes us from sixteen thousand of itemized deductions to twenty nine thousand. So we get a benefit on that thirteen thousand dollars of charitable giving to reduce our taxable income by thirteen thousand, which ultimately saves us almost two thousand dollars in taxes.

However, under the Tax Cuts and Jobs Act, because the standard deduction is so high, that sixteen thousand of itemized deductions, we’re not gonna take. We’re just gonna take the standard deduction because it’s more. If we do thirteen thousand of charitable giving, we’re still at twenty nine thousand of itemized deductions.

This should say twenty nine thousand. My apologies.

So twenty nine would you take twenty nine two or would you take twenty nine? Obviously, you’re gonna take twenty nine two. So what you’ll see here is the thirteen thousand in charitable giving, while it may have a a great impact for the charity of your choice, you’re not getting an individual tax benefit from making those gifts. So it’s important that when we’re doing our giving, we’re making sure that we get a tax benefit, you know, on top of the charitable benefit as well.

Great. Well, I know that I’ve seen some questions here from Doug about it. Can we do a illustration on a different tax bracket? And and CK asking about how would it would affect people who are single?

Again, and some questions about will my adviser help with this from Nadia and Shannon. Your adviser can help you work through this with your personal situation and and what your deductions are. So, real quickly, Brian, and turn it over to Jenna. Alternative minimum taxes is definitely gonna be a big topic for folks. Yeah. Again, I don’t wanna get too complicated, so I’ll keep this kinda high level.

The alternative minimum tax is essentially a second tax system that runs parallel to the regular tax system that we all know and and love.

But, it’s, it was put into place in an effort to make sure that super high income folks could, paid at least some minimum level of tax.

What we saw in the seventies, lot of people taking large, large itemized deductions, personal exemptions, and so forth. So this was put into place in order to capture those people and make them pay some tax. But what you can see from this, this illustration here is starting around the late nineties, we had a lot more people being sucked in to the alternative minimum tax system.

And if you remember the early two thousands, the government was making yearly adjustments to the AMT, so it didn’t continue ensnaring, you know, everybody in, in the tax system.

The tax cuts and jobs act, we’ll look at on the next page. It increased the per the exemption from this and increased the phase out of that exemption, which really helped to limit the number of taxpayers subject to AMT. In twenty twenty six, the TCJA rules go away, and what we expect to see is a super large increase, almost eight million taxpayers getting sucked back into the AMT system.

So right here, you’ll see tax cut prior to Tax Cuts and Jobs Act, it was fifty five four, eighty six two hundred for married filing joint. But the phase out threshold was pretty low. A hundred and twenty three thousand for single, one sixty four married filing joint. The exemption didn’t change a whole lot under tax cuts and jobs act, but the phase out did. The phase out jumped to half a million for single and a million for married filing joint, which is one of the reasons AMT really hasn’t, really hasn’t been a big deal for the last, seven years or so.

Great. I know I know we’ve got an example. This is, again, just to demonstrate the importance of going through the projection with your adviser and seeing how that would affect you in there, and what to expect.

Should be. Yeah. Won’t spend a whole lot of time here, but you’ll see that, you know, it is there’s gonna be a lot more adjustments in the twenty twenty six law than there currently is, which will make filing taxes a little bit more little more tedious.

Yeah.

And then quickly, we I we had a question here from Kirsten, about qualified opportunity zones, and you may hear those coming up. Just to talk about what a qualified opportunity zone is and what it’s useful for is if it’s a strategy that you may have have in order to consider if you’ve got large capital gains, you sold some stock, you sold real estate, things like that. There are things called opportunity zones which are identified specific areas for investment by the US Department of Treasury. They exist in all fifty states and in the US territories and Washington DC, and it’s a specific set of rules on what you have to invest, how the timing of it, what you have to do for improvements. You can either create your own or you may be able to use an existing fund. So we wanted to bring this up as it’s a technique that can be used to defer some capital gains and they’re fairly significant as you can see from the holding periods, but they’re also very complex.

So if this is something that you think that you may be interested in because you have a large capital gain or you’re anticipating one, this is a great thing to talk about with your advisor as well who’d be able to help guide you through that, bring in our tax team members, and really give you a detailed, overview.

And quickly, Brian, I know we wanna talk about qualified business interest. I saw questions from Evan and Steven there, and then we’ll turn it over to Jenna to talk about estate.

Yeah. So qualified business income deduction or the QBI deduction as it’s commonly known, When the Tax Cuts and Jobs Act was being implemented to make the corporate tax rate twenty one percent flat, the big concern in Washington and really amongst a lot of professionals was pass through business entities would bear a disadvantage to the c corp brethren because of the individual tax rates being higher than the corporate tax rates would be at that point. So Tax Cuts and Jobs Act instituted a brand new code section, for the QBI deduction, and it applies a twenty percent deduction of certain income for pass through entities.

Right now, that is scheduled to expire at the end of twenty twenty five. So, again, sunsets twenty twenty six, there is no QBI deduction.

I think this is definitely an area that will be addressed over the next, year or so as we get closer and closer to the sunset.

Because if this goes away, then we fall right back into the same problem we had, with the twenty one percent rate and c corps getting, you know, better better tax treatment.

So, yeah, this is an area we’re definitely gonna watch very closely, and it does impact a lot of our closely held business clients, that operate businesses through s corporations, partnerships, even sole proprietors.

So Great.

It’s very helpful, Brian. And this is, I think, is a great lead in when you were talking about kind of what to plan for. I see a lot of questions, John and Gail and Henry. Now that’s probably a huge list.

One of the most popular questions in our q and a here, what are the what are the chances of this being extended? And so I’ll say it’s really important to remember when election season, there’s lots of campaign rhetoric going up who’s gonna change what and everything else, that this is the law as it is written now. And just because one candidate or the other candidate has ideas on things that they’re gonna change, we do planning based on the fact that legislation actually has to be passed and changed and all of that that that is a process. So sometimes we see changes, campaigning to governing to getting laws passed, and what the final bill looks like can often be very different.

So our advice, and this especially applies here, I think, to what Jenna’s gonna talk about is we make planning recommendations based on what the law is, and you need to understand what those changes are not to make planning decision based on what we may think may happen, and have those discussions.

So hopefully, that’s helpful for those of you who don’t know what the chances are, and I would say we never make planning decisions based on what we think or hope might happen, but what reality really looks like as it stands right now.

So thanks, Brian. That was helpful.

The next year is gonna be a wild year in congress for taxes. So it’s gonna be something that I will be writing a whole lot about.

Absolutely. Something that we watch very carefully, and, certainly, your advisers will be giving advice as we know that things actually have changed and there are executable planning strategies, some of which Jen is gonna talk about here on the estate planning implications. So as we start here, Jen, I know we talk a lot about estate and gift laws, and sometimes we lump them together, estate and gift, laws. And maybe can you talk about what the difference is between estate tax and gift tax and those laws?

Correct. Yes. I’d love to. A little bit about the estate and gift tax. Estate tax is a tax on your ability to transfer your assets upon your passing.

Gift tax is really a tax imposed on gifts made during life. Now in twenty twenty four, each individual can transfer up to eighteen thousand dollars.

Right? So each individual to as many individuals as they want, up to eighteen thousand dollars, no gift tax return is due.

But any lifetime gifts you make above and beyond that eighteen thousand dollar mark, those are going to be taken against your lifetime exclusion amount. So federal gift and estate tax are paired together. Lifetime gifts get taken against the estate tax exemption amount. In twenty twenty four, each individual can transfer up to thirteen point six one million dollars during life and at death.

So if you make a gift of one million eighteen thousand dollars to one individual, the first eighteen thousand dollars is going to be ignored. You don’t have to worry about that for gift tax purposes, but you would file a gift tax return for that million dollars above and beyond that eighteen thousand. That would reduce the amount that you have at your passing from thirteen point six one down to twelve point six one. So we have to keep in mind that they are very closely paired because lifetime gifts affect the amount you have at your passing.

So let’s talk about specifically the TCJA highlights on how it changed.

Great. And to get there, we have to start with, originally, the the law that was put into place said you get five million dollars, adjusted for inflation, to pass during life and at your death. And then when TCJA was passed, they doubled it. They said, pretend we’ve said ten million back when we said five. But the way that they did it, as with almost everything in TCJA, said, but it’s gonna sunset.

So this year, we’re at thirteen point six one million dollars per person. Again, these numbers are indexed for inflation. That’s how we’ve gotten here.

But at the time of sunset, we are anticipating that dollar amount will be about seven million, probably north of seven million dollars per individual.

So that is assuming no subsequent legislation is passed.

So we’ve got a quick question, Jenna, maybe before we move to the next slide from Judith. I think related to the last slide and this slide here, it’s what’s the difference between the lifetime gifts and the annual gifts?

The lifetime gifts and annual gifts. So annual gifting each year, you can transfer up to eighteen. Well, this year, it’s eighteen thousand dollars, but it’s the gift tax exclusion amount. So that’s an annual that’s how much you can do. Lifetime gifts, we generally are thinking anything above and beyond that gift tax exclusion amount.

So that annual gift doesn’t count that eighteen thousand doesn’t count towards that lifetime amount.

Correct.

Great. Okay. That was helpful. Thank you. So let’s talk about, we’ve got all of these changes. What are our planning opportunities now that we’re looking at this possible sunset?

Right. So for those of you who are married, there are a couple of techniques that are available straight out the gate.

And the first is something that we call the unlimited marital deduction. So for married couples, if you give gift to your spouse during lifetime or upon your passing, you leave everything to your spouse, your spouse can receive all of the assets, gift and estate tax free. So let’s say that you have twenty million dollars in your estate. You, as the individual, have twenty million dollars in your estate, and you gift that all to your spouse. No taxes due. No gift tax return needs to be filed.

Right? That is an unlimited amount can go to your spouse even though you only have thirteen point six one million dollars of exemption.

Right?

But Congress has actually done one additional thing. So with that unlimited marital deduction, we also have something that came to pass, over a decade ago, and that is something called portability.

Portability is going to allow the surviving spouse, once they’ve inherited everything from their inherited everything from their decedent spouse, the surviving spouse can now claim file a an estate tax return and claim portability. And what that means is they say my spouse didn’t use up their exemption.

I’m gonna keep their thirteen point six one million dollars they didn’t use, and I’m gonna add it to my own thirteen point six one.

So now that I received twenty million dollars for my spouse, we’re not making a crazy huge tax bill upon my subsequent passing. Right? We’re gonna be able to preserve that original thirteen point six one from my spouse to pass on to our children with a smaller tax bill down the line.

So those are two things coupled together that we see families use quite often.

That’s great. And I know that maybe kind of just to demonstrate the annual and the lifetime, you’ve got a slide in what the different categories and techniques are. Can you go over those?

Absolutely. So this goes back to the question we just had. Annual annual gifting that we think about is we commonly talk about that eighteen thousand dollars per individual.

Another really helpful technique is if you have a child or grandchild passing going through college, you can pay their educational expenses directly to the institution.

And that’s not going to count against your eighteen thousand that you’re gifting to your child or grandchild.

Alright? Similarly, if you have someone who you’re paying their health care expenses, you pay it directly to the institution, that is a gift you can give above and beyond that eighteen thousand dollars per individual. Now I’m stressing directly to the institution. Please don’t write a check to your child to go pay their tuition bill. That doesn’t count. That, in fact, would go against the eighteen thousand. It does need to go directly to the institution.

Lifetime transfers. When we think about making lifetime gifts and transferring assets, few things to think about. Lifetime transfers are gonna go generally against that gift tax, estate and gift tax exemption, that thirteen point six one million dollars. But there are ways to kind of maximize your gifting, and some of that would be things like discounting strategies. You have a business and you create a family LLC or a family limited partnership.

You can start to gift the partnership interests to your loved ones at discounted rates. So let’s say the whole business is worth ten million dollars, you gift, ninety eight percent to your family members. That gift isn’t gonna be considered nine point eight million. It’s gonna be much less.

K? So so you get to to gift a large asset with a discount.

Freezing check techniques are also very common, and this is something like putting an asset into a trust, allowing the future appreciation to happen outside of your estate. So you gift five million dollars into a trust. Any future appreciation, if it’s worth seven million at your passing, that additional two million isn’t counted. We’re not looking at a state tax again for that portion.

And finally, if you do have a certain type of trust where you retain the obligation as the grant or the creator of the trust to pay the tax bill, You can actually pay that tax bill.

Paying the tax on any income within that trust is not considered a taxable gift.

Right? It’s not something you have to worry about filing a new gift tax return, but it does reduce your overall taxable estate. So there are some definite benefits to doing some lifetime transfers.

Jenna, I’m getting some questions here about timing, and I I know you’re gonna kinda talk about this in gifting trust as well. So maybe let’s talk about those gifting trust as first and then maybe talk about when you should do these things and the details.

Great. So gifting trust. Importantly, when you do go to make gifts to individuals, gifting trusts are a really great technique because it allows you to make a gift, but in many instances, retain some amount of control over those assets. The two types of trust we’re gonna talk about here today are, intentionally defective grantor trust. You might hear us refer to those as IDGits.

And then also spousal lifetime access trust. Those are referred to as slots.

And when we think about gifting, gifting sooner rather than later is a great benefit when we go back and think about that freezing strategy.

Get the asset out of your estate today so that the appreciation is happening outside of your estate. Your gift has a larger impact over time.

Right? So smaller impact against your estate tax, exemption, but bigger impact and that your beneficiaries get that amount with less tax.

Great. I’ve seen some questions here from Jerry and Sue and George about this. So let oh, great. Let’s go through the example, and I I know some of this the timing of this is critical, and you’ve got some advice on when to do it.

So Absolutely.

So this first one is an agent example, the intentionally defective grantor trust. And in this instance, Bob comes to us, and Bob says, okay. I have this asset. Maybe it’s Apple stock. Maybe it shoot. It was probably NVIDIA on this one. And, rapidly growing and appreciating asset.

And my goal is to get it out of my estate now. I want the growth to happen outside of my estate.

Bob is not married. So Bob creates an IGIT, an intentionally defective grantor trust, and he gets ten thousand dollars into this trust.

By doing so, he’s both reducing his taxable estate and his estate tax exemption amount by ten million dollars. Right? So makes sense. They both go down at the same proportion.

Now the beneficiary can receive distributions from this according to HIMSS, which means for their health education, maintenance, and support. But, again, these assets are growing estate tax free while in this type of trust.

And the really beautiful part is that Bob, in leaving these assets to his children, was able to be responsible. He’s on the hook to pay the income tax bill on this. And you might be thinking, why is that a good thing? Well, when he goes to pay the income tax on the income within this trust, it is reducing his taxable estate, but it is not considered a lifetime gift that he has to file that gift tax return.

Right? So he gets to continue to gift and not be penalized or or have that taken against his exemption. Now upon his passing, very importantly, the trust will have to start paying its own income tax bill. I think that makes a lot of sense there.

But if Bob doesn’t pass now until, excuse me, until twenty thirty four and we see four percent growth here, His children get fourteen point nine million dollars, but he only burned through ten million of his exemption. So this is a really great way to transfer the assets, get the assets out of his estate today. This is a great technique whether or not the sunset even occurs. And that’s where I think it’s really important.

Doing planning today, we are planning in a way that makes a lot of sense whether or not the sunset does happen.

Great. And I know you’ve got one more example that we’re, seeing. First example, you talked about Bob wasn’t married, but what if Bob was married?

So, here, Bill and Kathy, they are married. And Okay. Bill goes ahead, and he he has ten million dollars in separate property assets. So very important.

He owns this even though he is married. These are Bill’s own separate property assets. Now what’s even more important is with a slot with a married couple here, it is important that the marriage be a strong, lasting, stable marriage. And the reason for that is once Bill gifts these into a slot, these are Kathy’s assets.

She gets to benefit from these. Whether she, whether they subsequently get divorced, they’re automatically hers. Right? This is not something he can say, oh, wait.

Let’s let’s unwind. So really important. We wanna make sure it’s a lasting stable marriage, And that is the case for these individuals. They’ve been married thirty five years, children of the marriage, everything is going strong.

So Bill says, I wanna gift ten million dollars of these assets into a slot for Kathy’s benefit.

And Kathy, during her lifetime, gets to receive distributions of principal and income based on the terms of this trust.

And, again, Bill here is responsible for the tax bill. Right? So same rules apply as the IDGT. This is just very much for spouses.

Importantly, upon Kathy’s passing, not bills, because these assets are for her benefit, upon Kathy’s passing looks like we’re on the injured example again.

Oh, sorry.

That’s okay. Upon Kathy’s passing, when those those assets will now pass to the remainder beneficiaries, their children. The children, again, if she doesn’t pass until twenty thirty four, the children get to inherit fourteen point nine million dollars when originally Bill only transferred and used up ten million dollars in his exemption.

Right?

So, importantly, while Kathy was alive, any distributions she takes from this trust, Bill got to indirectly benefit from. So upon her passing, it is important he no longer indirectly benefits because those assets are now their children’s.

K? But, the the last thing I wanna mention before we move on from slots is if Kathy wanted to do something similar in return for Bill and create a slot for Bill, it is very important that these be done in two separate calendar years. So if Bill creates one this year, Kathy needs to make sure she creates and funds hers next year in a separate calendar year. And that’s because there are rules that say if you do reciprocal planning, that it can be invalidated at the IRS level and not honored. So we really wanna not run afoul of that. And that’ll kinda take us to our takeaways and with the kind of main takeaways on the estate tax side of things.

So on, I think, our last slide, there we go. Perfect.

To have the greatest impact, we wanna be gifting more than what we think the exemption will be. And that’s, you know, if if you we think it’s gonna be seven million, gifting over seven million dollars to really avail ourselves of a high exemption amount that we have today.

If we are gonna utilize slats, one for each, so two slats in this family, then we wanna make sure we create them in separate years. That means that today, and I mean today, we should be thinking about contacting an estate attorney to help you get a slot in place, fund it before the end of this year because you only have this year and next to create two separate slots in two separate years.

And then finally, as you kind of heard me talk about multiple times, we wanna make sure that any planning we do is smart planning whether or not the sunset occurs. Both of these techniques are sound planning techniques for whatever the tax laws may change in the future.

Right. So as we wrap up, I know we’re right here at time. Certainly, I hope that, each of you got some information that may be relatable to your personal financial situation. And, again, we encourage you to speak with your adviser about your personal circumstance.

Certainly, your wealth adviser at Mercer Advisors has access to our tax team, to our Jenna’s team of estate planning strategist who would be able to help you come up with those things. But certainly planning sooner rather than later gives you the most options to be able to understand how your circumstances can be optimized. So thank you for joining us. If we didn’t get to your question live, we will be we’ve recorded them all.

We’ll be sending them to your advisor to get back to you to follow-up, and again just to repeat this has been recorded, and we will be posting it on our website, emerseradvisors dot com. Typically it takes us a couple of business days to get that posted to our insights tab. That’s where you will find this recording.

Thank you all for joining us, and we really appreciate your attendance. Bye bye.