Year-End Tax Planning Moves

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1:10Taxes, stop paying taxes, y 'all. It's that time of year. You still have Christmas gifts left to buy, but you have to be aware that April 15th is just around the corner. Consider this your nudge that you have less than three weeks to make whatever year-end tax moves you're planning for the calendar year 2025. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss the moves investors should be thinking about in order to reduce their 2025 taxes. To help us unpack all of this and what it means for your money, let's bring in Bill Artseronian. Full disclosure, Artseronian is the Director of Tax Services at Ritholtz Wealth Management, and we've been working with him for just about five years.

2:06So Bill, let's start with a simple overview. You've said before, tax advice is financial advice. I want to unpack that. How should investors be thinking about the role of tax planning in their overall wealth strategy, especially here in December? Well, thanks, Barry, for having me. Let's just think about a financial plan for a second. What part of a financial plan does not touch on taxes. I mean, think about just basic cash flow planning. Taxes for our investors are often the largest expense in their annual budget. It's mortgage and taxes. Those are the largest costs. Life insurance is thinking about a tax-free inheritance for the next generation or for your heirs.

2:49Estate planning is all about taxes. If there was no estate tax, we wouldn't really have to think about estate planning. And then basic portfolio management is not purely tax-centric, but our investors are thinking about tax all the time. Our clients would rather save $1 ,000 on taxes than make six figures in a trading day. So it's all connected. And the end of the year is like the report card. Tax planning should be happening proactively for 12 months. But we don't even stop there. We're not thinking about taxes as a current year item or even a lifetime item. We're thinking about this generationally.

3:22We're thinking about how can we set up the next generation of client children, client grandchildren for tax success. So we have a few weeks left in the year. What are the big boxes that you think investors should be checking? And what important items do they ignore? What are the big mistakes people make? I think one of the misunderstandings is on tax deferral rather than tax avoidance. Many strategies can avoid taxes or can defer taxes, but that bill will come due at some point. Think about even just a 401k, a pre-tax contribution. You're going to recognize that income at some point. Things like accelerated depreciation will come back to bite you on the recapture when you sell the asset.

4:03Opportunity zones are a tax deferral mechanism. These are all very useful because time value of money says that a tax deduction today is worth more than a tax deduction in the future. But eventually there's going to be a tax hit. So I think that's a common misunderstanding. A few other mistakes is on capital gain timing. We see clients not really understand or consider the timing of when they recognize gains. When we onboard folks, we're often pushing gains from the fourth quarter of, say, 2025 into the first quarter of 2026, because that gives us a full 12 months to tax loss harvest and create losses to offset any capital gains.

4:43The flip side of that, of course, is even a small movement in a stock price can cost more than a tax bill just to sell it. So you have to be pretty comfortable holding the position for a couple of weeks or even a couple of months. And then the last mistake is misunderstanding just basic payment obligations. There are safe harbors to avoid estimated tax penalties. But on the flip side of that is if you pay too much, there's opportunity cost. If you have a big refund in April, that means you paid a little bit too much and that money could have been better put to use. So Bloomberg has a fairly sophisticated audience of high earning professionals.

5:21What are the three top moves you see for folks like that? They have a portfolio, they have a pretty decent income, and they can expect to continue that for the foreseeable future. Let's start with charitable giving. We'll talk about it more throughout the show, but it's often the most accessible lever to pull for tax savings. The caveat being you need to be conscious of where your total deductions fall. We see some clients give a certain amount of charitable gifts and they don't even itemize their deductions. So from a federal tax standpoint, maybe they gave away 10K, but they're still taking a standard deduction.

5:57They're not benefiting from that charitable gift. So that's where bunching strategies and some other strategies with donor advised funds can come into play. Number two is on the equity comp side, equity compensation for folks compensated through their company stock, the timing of the income can often be flexible. Think about stock options, company stock options. We should be asking the question, how much can we recognize in stock option income before the end of the year, before we bump up against the next federal or state tax bracket? How much, if these are incentive stock options, how much can we recognize without paying AMT, alternative minimum tax?

6:33These are questions we should all be asking if we're paid through equity or if we have clients that are paid through equity. And the last one is for small business, owners, there's a whole lot on the small business side of this. I'm focused a lot on qualified business income, which is a 20 % deduction for pass-through income. But there are limitations, and those limitations can be based on how much you pay your employees or yourself in a wage. If you don't meet a certain wage number, that QBI benefit could be significantly reduced or even reduced down to zero if you're really screwing this up.

7:07And then on the small business side, we should be looking at, are we prepared to maximize retirement contributions? The max 401k is$70 ,000 this year between employer and employee contributions. And so you have to be ready to have that cash available to fund those contributions. Say you're a mom and pop shop, two owners, zero employees, maybe you're structured as an S-corp. You're going to have to come up with some cash to meet the 401k obligations either before the end of the year or before the tax filing. So I'm glad you brought up tax advantage accounts like 401ks. There always seems to be a last minute frenzy to maximize not only 401ks, but IRAs, health saving accounts, 529s.

7:48How have the rules changed around credits and ceilings for this year and for 2026? Right. At least once a year with our clients, we're running through the quote unquote basics of all of these contributions. Are you on track to hit each of these? With a 401k, we just talked about it a little bit, but there's a 70k limit. Now, if you're a W2 employee and you don't own the company, you're going to make employee contributions. Maybe there's a mega backdoor Roth option in there for you. We talk to folks all the time who have this eligible or eligible in their plan, but they don't even know about it.

8:22Nobody's talking to them about this when they join the company. And that mega backdoor Roth allows you to put after-tax dollars into the 401k, convert it to Roth and have a nice Roth tax-free bucket growing alongside the pre-tax contributions that you already made. IRAs don't come up a lot in our world for a few reasons. Number one is most of our clients are employed with a retirement plan through their employer. And if that's the case, deductible IRA contributions may be limited. However, there is a backdoor option in the IRA. If you don't have any pre-tax money in any IRAs, you can make after-tax contributions and, again, convert to Roth in the IRA just as well as you can in the 401k.

9:04And then the HSA, I love, tax owners love HSAs. You need to be on a high-deductible plan, which isn't for everybody. My colleague Bill Sweet and I, we ran an analysis on high-deductible plans, And we found that there's a pretty attractive break even on high deductible plans because the premiums are lower and the long-term benefit of investing, deducting HSA contributions and treating those as another retirement vehicle. Again, those are like Roths where they're tax-free. Those can compound very, very nicely where maybe you retire early. And let's say you retire 60 instead of 65. You have a five-year gap where you need to cover probably significant health care premiums.

9:42that HSA can be used in that case. And it's a nice tax-free bucket to have. And what do the ceilings look like on all these tax advantage accounts for 2026? How has the recent legislation changed the max people can kick into those? The big change in 2026 is that catch-up contributions for folks over age 50 are now forced to be Roth contributions, again, starting 2026. Historically, catch-up contributions, which are going to be 7 ,500 this year, 7 ,500 next year, folks in their 50s are often in their highest earning years. Therefore, the pre-tax option is usually preferred. However, starting next year, the catch-up contributions, that's 7 ,500, are going to be required to be Roth contributions.

10:28My theory is, I don't mind this at all. Nobody ever regrets a Roth contribution. Nobody ever really regrets a Roth conversion because once you pay tax, you don't really think about it. And so if we have investors in their 50s and 60s that are forced to make a small Roth contribution instead of a pre-tax contribution, that just gives them exceedingly more flexibility down the line because now they're going to have different buckets of money to pull from in retirement. Sounds really interesting. You mentioned earlier tax loss harvesting. We've been using Canvas as our direct indexing product, but it seems like this has become ubiquitous.

11:04What are your thoughts on tax loss harvesting? What does thoughtful harvesting look like? I think the term thoughtful there implies to me that there should be an ongoing activity, not just a year-end item. Historically, taxpayers, DIY investors, and even advisors, they'd look at the portfolio in December. They'd say, okay, what's underwater? Let's book those losses. Through direct indexing, this is now an ongoing activity, but you don't need a direct indexing portfolio to look at your portfolio. Even if you're not in a direct indexing setup, you can still tax loss harvest throughout the year. Why just December?

11:41This should happen with regularity. There's nothing saying we can only book losses in December. Now, a lot of this is dictated by individual stock, market volatility, but with an ultra diversified bucket of stocks, some will ultimately be losers. So you sell those, you pick up tax losses, you invest in a similar company. So you keep the fidelity of the portfolio and then you don't trigger wash sale rules. The only caveat here is state by state stuff. New Jersey, for example, does not allow tax loss carry forwards. So we're doing in December, we're doing a bit of the opposite with our New Jersey clients.

12:15We're actually we're looking historically over the first 11 months. What did we realize in losses? Let's go make a gains harvest. Instead of realizing more losses, we're going to realize capital gains so we can use them at the state level this year. That's really interesting. So I know the deductions have changed. The standard deductions have become permanent. There are new floors. There are new ceilings for that, for itemized and charitable gifts. How should those people who are chariably inclined think about, you mentioned, bunching donations or donor advised funds? Give us a little more detail about how people should be using these vehicles?

12:52Yeah, we're doing a lot of this with our clients throughout the year, but specifically at the end of the year, we kind of tee up charitable planning. We're like, here, let's think about what we want to accomplish. And then let's take a look at the end of the year and figure out how we're going to get this done. And if it's the right year to do it, what we need to be conscious of is all the other deductions, right? Like I mentioned previously, you might have a hurdle rate before you even start to deduct your charitable gifts. And that's where you might want to consider bunching maybe three years, maybe five years, maybe 10 years worth of charitable gifts into 2025, for example.

13:242025, maybe it's a high income year. Maybe you're paying down your mortgage, so you're not getting that mortgage deduction anymore. And you want to take advantage of an appreciated security that you gift for charitable purposes. We do a lot of this. We take, maybe a client comes to us, they've worked at a tech company, that tech company, They've been compensated well in that stock. They have charitable intent. We say, okay, let's use that stock. Let's send it to a donor advised fund. Let's bunch five years worth of gifting. And now you have your own little charitable fund that you can make grants out of over the next five years.

13:57So we're going to time the deduction, but we're not actually going to change the way you're giving. Really, really interesting. So I'm in New York. You're in Philly. These are big salt regions. I know the most recent big, beautiful bill changed all sorts of things. This is a question I hear all the time. Where are we with SALT deductions today? How has this changed? I know we're not quite back the way we were, but it seems to have improved for a lot of people. Tell us what's going on with state and local tax deductions. Well, it's good news for most folks. For some folks, it's not going to change a damn thing.

14:37What we have here is since 2017, the state and local tax deduction as part of your total itemized deductions was limited to$10 ,000. For folks buried in New York, California, New Jersey, Connecticut, Pennsylvania,$10 ,000 just wasn't cutting it. We see tax returns here every day where there are sometimes six figures of state and local taxes between real estate and income taxes. The new limit is$40 ,000. That was maybe the most talked about provision of Trump 2.0's tax bill. It's an increase from 10K to 40K. With caveats, if you're earning more than$500 ,000 of total income, you start to get phased out.

15:20These are for both single filers and married filers. Once you hit$600 ,000, you're all the way back to 10K. So we have some clients that are not going to see a change at all. They make$1 million a year. They're not going to benefit from this whatsoever. We see other clients where we're having tactical discussions on all kinds of income. Maybe we defer a capital gain into next year because we want to take full advantage of that SALT deduction this year or maybe vice versa. But there's a lot more planning to do on all of these deductions. We talked about charitable. This is along the same lines.

15:51What else from the big, beautiful bill has changed the way you think about year-end planning? Do any of these provisions show up as actual savings for clients? I think it's back to the charitable piece. There are some changes next year that are going to impact charitable giving, which make 2025 perhaps more attractive from a charitable landscape. Next year, there's going to be a, quote unquote, a floor on charitable gifts where the first 0.5 % of your AGI will not be deductible for charitable purposes. So if you make a million bucks, the first 5K you give away to charity provides zero federal tax benefit.

16:26The other change for the highest earning folks, folks in the 37 percent bracket, they are going to be limited on their overall deductions. They'll be treated as 35 percent taxpayers. So that two percent delta can can really add up when we're talking about when we're talking about big deductions. So we're doing a lot of shifting of charitable salt deductions, even mortgage, even mortgage deductions. We're trying to get most of that into 2025, especially for our highest income taxpaying clients. So to wrap up, there's still plenty of time before the year ends. There are lots of moves individual investors can make to not only reduce the taxes they're going to owe for the 2025 year, but also to think about long-term planning, their estate, maximizing every opportunity.

17:13The government gives us lots of ways to either reduce or defer our current tax bill. Everybody should take full advantage of what's on offer. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

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