Crucial Year-End Tax and Estate Planning Strategies with Plancorp’s Susan Jones (EP.120)

0:28We all need to make smart decisions with our money. number of provisions from the Tax Cuts and Jobs Act are going to go away. And that is why I've asked my colleague, Susan Jones, to talk about the planning opportunities that deserve your attention before the end of the year. Susan Jones is a senior wealth manager and shareholder at PlanCorp, and she has over 20 years of experience serving individuals, families, fiduciaries, and private foundations on all sorts of tax and estate planning topics. Listening to our conversation, you will undoubtedly see that Susan understands the many facets involved and why it is so important to get started now, as opposed to wait until the last moment when some of these provisions are sunsetting.

1:09As always, you can find detailed show notes and links to all sorts of important resources at thelongterminvestor.com. And now, here is my conversation with Susan Jones. Susan Jones, thank you so much for joining me here today on the show. Absolutely. Thank you, Peter, for having me. Well, I know you're really busy. We are right in the thick of year-end planning, and I think that's maybe a nice jumping off point. Can you share what that typically means for us at PlanCorp and our clients? Sure. Well, you know, the good news, Peter, is that we really consider tax planning to be a year-long endeavor.

1:47So some of the hecticness or fire drill nature of year-end planning isn't quite as applicable, but we really want to take this time to, you know, work with clients, review client situation, and just make sure that we're not missing an opportunity. And so on the income tax side, that usually means, are there ways that we can either defer income, accelerate some deductions, or really take into account kind of the marginal tax rate planning to reduce income and income tax, both for this year and going forward. On the estate tax side, you know, we're really looking at for clients that make annual exclusion gifts, have they made those gifts?

2:21If they're not making them, should they be making them? Will they be in a potentially estate tax situation? And then for more complicated planning, a lot of times there's, you know, some dotting of the I's and crossing of the T's that just need to be done before the end of the year. And so we're just really making sure that all of that is completed. What's a little bit different about this year is that we're not only thinking through tax impact for 2023 and maybe 2024, but really taking into account the provisions of the Tax Cuts and Jobs Act that are expected to be repealed at the end of 2025.

2:53And just for a little bit of background, the Tax Cuts and Jobs Act, sometimes called the TICJA, which I might refer to it during this presentation, was enacted again at the end of 2017. It was really very sweeping legislation, both in terms of the number of individuals that were impacted, as well as just the kind of dollar impact on those individuals. But many of those provisions were scheduled to end or sunset at the end of 2025. And, you know, I can remember when that became long, thinking that 2025 sounded so far away. And yet here we are, again, going into 2024, and all of a sudden we are kind of right there.

3:31And many of these provisions are just kind of the planning around them, really, in many cases, almost require multi-year planning to really think through those implications. And so this year, you know, just again, knowing how close we're getting, That's something that we're really taking into account as we do that multi-year planning. Well, I'd love that you bring that up because a lot of times, and I'll admit, prior to speaking with someone like you who is so knowledgeable about taxes, naturally, I go and Google year-end planning articles. And you really only see that every year, year-end planning articles are only focused on that tax year.

4:07So I'm really excited today to be digging into some of those multi-year planning opportunities with you that you really do need to start now in order to capitalize before the sunsetting of these tax provisions in 2025. And I'd like to start our conversation focused on this income tax planning side and then move into the estate planning because there's some implications there too. even though I'm sure as you're talking, there might be some overlap points, but does that overall, does that sound good to you? Yeah, that's great. That's perfect. So let's start with tax projections, which was something that amazed me when I first came to PlanCorp, just how detailed the tax projections we are.

4:43And for people who aren't really familiar with tax projections, you are often doing them just to understand what the potential impact from a tax perspective are of different options, just to help you make better decisions. And it's not to say that taxes are the ultimate decider. There can be very good reasons to accept a higher tax bill if the move provides other benefits. But by running those numbers, we can guide you toward a conclusion with the full understanding of the pros and cons of any financial move. So with all that in mind, Susan, maybe you could just kind of explain who is a tax projection useful for and what are the type of information that we're collecting and the sort of items and opportunities we're looking for when doing them?

5:24Sure. You know, Peter, I think just kind of to your point, doing tax projections or what I often say tax modeling is so important just because I think a lot of times we're talking about taxes and the tax impact of a certain action. It's very not easy, but I think kind of that knee jerk reaction is to say, oh, if you do this, then the tax consequences this. But really, because of kind of all the interrelated calculations and just the nature of taxes is that until you really put kind of that pen to paper. Now, of course, we're not using pen and paper. We're using very sophisticated tax modeling software.

5:55But until you really take a look at how kind of the numbers work out and understand why, I think it can be very difficult to make decisions. And so, you know, really, I would say anyone that has either certain aspects of their income or certain deductions that can be controlled really is someone who should be doing that tax modeling or those tax projections. And so what I mean by that, you know, someone who has maybe their employee, they have a W-2, they take the standard deduction, they might not be the best candidate or really need to do a tax projection simply because their income, in many cases, it kind of is what it is and there's not much they can do about it.

6:32On the other hand, you know, anyone who has either a business that they have some discretion over when income or expenses can be realized or recognized for income tax purposes, if there's, you know, bonus situations where there's a little bit of ability to shift income, clients who have retirement accounts that can take R &Ds and kind of shift or even do conversions, things like that. And one of the things we see most often are clients who are very charitable and that, again, have some discretion with the timing of those contributions that we can really plan around. Also, tax projections, I think sometimes people hear that word and they're like, oh, that sounds so difficult or so painful.

7:10But really, it doesn't have to be. And so when we're doing a tax projection for a client, we always start with the prior year tax return. That's always kind of the best jumping off point. So we're going to request a copy of that. Usually we already have it on file because again, we're doing this year round. And then we just roll everything forward and really take a look and say, what has changed and what do we expect to be the same? And that gives us really our base case that we say, this is without any changes. This really is how this year is going to end up. And then we start kind of playing around and we say, but what if we did something different?

7:43Maybe we have a client who's in a particularly low bracket this year? What if we added some income? What would that do? And then again, you know, keeping in mind things that could change either because of the client situation or because of tax legislation, we can roll that forward and say, you know, here's what maybe 2023 can look like, but how does that impact 2024, 2025? And we can even go on from there. So it really is, again, one of those things where we kind of take back and say, what's the default? And then how can we improve upon that? Well, that's such a great explanation. And I think the process is always so informative.

8:16And even if you don't take any specific action, at a minimum, you eliminate surprises. And I think one thing that's true for myself, I can say for sure, but anybody else I talk to in April, client or otherwise, is that they're never happy with a surprise. So I do like that element of it as well. Yeah. Yeah. Unless it's a good surprise. Right. Good surprises will always take, of course. Those aren't the ones you remember, though. That's probably true. You mentioned some of these in passing, but I'm wondering if you could dive a little deeper into some of the common tax planning strategies that result from these tax projections.

8:50And knowing that the Tax Cuts and Jobs Act is going to sunset in two years, how that might impact the planning this year for those strategies? Sure. So, Peter, one of the things that we're always looking for is, again, what margin, what tax margin is the client in? And so a lot of times, you know, just kind of a background. I think most of us know that we're not in a flat tax situation. And so to the extent that you make more income, the higher kind of echelons of that income are subject to higher rates. And so a lot of times clients are in positions where their income varies from year to year.

9:25And that can either be because of, again, a business that has variable income. It can be because of the way their compensation is structured, either by being on commissions, things like equity compensation. But there's just a lot of variation. Sometimes it's clients that are retired and aren't in a position yet where they need to take required minimum distributions from their retirement accounts. And so they just have some income tax years where they're in a much lower bracket than maybe we expect them to be in the future. And so one of the first things we do in a situation like that is say, well, how can we, again, minimize income tax in future years by taking advantage of these lower bracket years right now?

10:04And so one of the best ways that we kind of plan around that is looking at those retirement accounts that were funded on a pre-tax basis, meaning that when those distributions are made later, they're going to be subject to tax. And not just subject to any tax, but subject to tax at ordinary income rates, which are the highest rates that you can pay at. And we say, you know, is there a way that we can accelerate that income now? Generally by doing Roth conversions. And so, you know, taking a distribution from an account, recognizing that taxable income right now, but then putting it into a Roth account that then is going to grow and be tax free when it comes out later.

10:45So, you know, that's something that, again, we look at every year, regardless of kind of what year it is. But this year, we're especially paying attention to that because as part of the sun setting of the TICCHA at the end of 2025, rates, not only will the top rate potentially increase from 37 % to 39.6%, but some of those rates more in the middle. One of the things that happened is that although the rates themselves didn't change, the brackets at which they hit expanded. And so for many individuals, they actually were subject to or are subject to a lower bracket than they otherwise would be. And so, you know, traditionally, we're making sure that we're taking and really maximizing the use of the 12 percent bracket and the 24 percent bracket.

11:28But part of the things we're thinking through now is, you know, even at the 32 percent bracket, if it's a client that's going to be in a 35, 39.6 percent bracket later on, do we consider looking at that bracket as well in order to accelerate some income this year? One of the things that's really helping with that as well is the fact that because of changes in the age at which required minimum distributions are required, that we have more clients than ever that have some of those income tax years where they, again, they have that discretionary ability to take income from different sources. And so as part of the most recent Secure 2.0, for many individuals now, they're not required to take those required minimum distributions until age 75.

12:12And so for clients that retire earlier, that just leaves even more runway in which we can, again, really make sure that we're using those lower income tax years in order to accelerate that income and some income tax, knowing that overall over a multi-year period, they'll end up paying less in tax. Another item that we're always looking at is, again, those charitable contributions. Again, we have many clients who are very generous. And so, you know, our goal, and I think, you know, part of really our job is making sure that we're helping clients fulfill that charitable legacy while also maximizing the income tax benefits from doing so.

12:50And so, you know, again, some of those planning ideas that we see every year are considering, you know, taking into account our clients in a high ordinary income tax year that may be accelerating some of those deductions by using a donor advised fund. and really being able to make a larger charitable contribution, take advantage of that high income tax rate in a way, though, that still gives them flexibility in order to make those actual charitable distributions later on. Another thing that we're always looking at is that ability to make contributions of long-term appreciated stock to charities and take advantage of the charitable deduction being based on the full fair market value without needing to recognize that gain and that appreciation.

13:36And so that's kind of a double whammy in both increasing your charitable deduction and then also without needing to recognize that income. Another opportunity that we're always looking at is the ability to make up to$100 ,000 of charitable donations directly from a retirement account to a charity. And that distribution, as long as it's made directly from the retirement account to the charity, does not count as income for the year. Now, there is no also additional charitable deduction, but really the benefit of that is that it can keep taxable income lower and reduce taxes, including the net investment income tax on that income.

14:13One of the things I think that's important to point out is that even though there's been that increase in the age at which an individual needs to start taking those required minimum distributions, they can actually start doing those charitable rollovers still at age 70 and a half. And so even if, you know, it used to be that that number was really tied to the age at which those RMDs started, but there has, even though that age has gone up to 72 and then 75, individuals still can do that qualified charitable distribution at age 70 and a half. One of the other things, you know, that's really important, again, for those clients that are particularly generous is that as part of the TICCHA, the limitation on gifts to charity of cash was increased from 50 % of the overall adjusted gross income to 60 % of adjusted gross income.

15:05And, you know, again, for clients that are very generous that would find themselves kind of running up against that limit, that really has given that additional ability to make gifts. But that is one of the provisions that's scheduled to end at the end of 2025. And so we're looking, you know, again, for those clients, really making sure that we're taking full advantage of that full 60 % limitation in these years remaining up until the end of 2025. Well, so much really, really good stuff in there. And for everyone listening, as always, you can go to the longterminvestor.com for show notes with a lot of details on all these different items.

15:42And as we talk through some of the tax strategies that are going into consideration that help us either accelerate income, defer income with Roth conversions and charitable gifts. One thing I think it's worth pointing out is that the sweet spot for a lot of this happens, these strategies that you've been talking about, Susan, when you're retired and your income's down and you haven't been required to take money out of your IRAs yet, I'm kind of curious, can you share any examples for people who are in their working years that might also be looking at some of these strategies? So it's really easy for me to picture the retiree.

16:18What about the person who's high earning, maybe even has some stock options? Right. Well, and so, Peter, there's a couple of things with that. So I've been talking a lot about making sure that we take advantage of those lower income tax brackets to accelerate income. But just as importantly is understanding that deductions are worth more when they're offset against income being taxed at a high rate. And so a lot of times, you know, again, that charitable planning as we're leading up to retirement, that a lot of times is a time to really maximize your charitable contributions. And a lot of times we see that within, you know, kind of the last two, three, four years leading up to retirement is when a lot of individuals have some of their highest ordinary income tax years.

16:59So that can be a great opportunity to, again, set up a donor advised fund, really pre-fund a lot of those charitable contributions for retirement and take advantage of the deduction value at the highest rate. One of the other things that we're always looking at is both the income, regular income and the alternative minimum tax for clients who have equity compensation. And so, you know, first of all, I hope I didn't scare off any viewers by just even mentioning alternative minimum tax. A lot of times AMT could be kind of a trigger for many of us. But, you know, that really is something, and again, for those individuals that have equity compensation packages is always kind of a key consideration when we're putting together equity compensation strategies.

17:42Of course, it's not the only consideration. And so you had mentioned, you know, early on, Peter, just the importance of not letting tax completely drive a decision. And that's certainly a good example. But one of the things, you know, just kind of delving into that a little bit more. So just at a very high level, the AMT is an alternative tax system. And so you have kind of your regular tax. If you think of it as a ledger where we calculate your income and then your deductions, and then you arrive at your taxable income. The AMT is kind of a similar, you know, kind of that same process, except that there are some both income and deduction items that are either disallowed or added back for AMT purposes.

18:20And then kind of take a look and see what your regular taxable income is, your regular AMT, calculate the tax, and then you pay the higher amount. And one of the most common items that's adjusted is actually the exercise of incentive stock options. And so for regular income tax, that's not an event. And so if you exercise your ISOs, there is no regular tax consequence. On the other hand, for AMT, the difference between your exercise price and the fair market value actually is taxable income. And so when we think, again, kind of our alternate systems, in those years, oftentimes you're going to have a higher AMT tax liability and then end up paying that AMT.

19:02Now, is that quite as draconian as it sounds? You do then have a higher AMT tax basis in those shares. And so later on, it often kind of reverses itself. But still, that can be kind of a terrible surprise for individuals who weren't expecting that and often is something that we can plan around. Again, one of the items in the TICCHA that changed was the AMT exemption both increased, but then also that income threshold for when the AMT exemption goes away was really significantly increased. And so the result of that is that for many individuals who previously would have been subject to the AMT, they're not subject to the AMT right now.

19:43And so, again, that's something that as we're looking through and thinking through some of these equity compensation strategies, we're really taking into account that the AMT burden right now might actually be less than it would be in 2026 and moving forward. Yeah, that's a really good example of something that at least I've sat in on some conversations where if you're in your high earning years and you have those equity options and you've been earning them for a long time and think that you have your tax picture set correctly in your head, there's a really strong chance that you don't. So this is one of those great times.

20:18The time is to act now for that multi-year planning. So I love that you bring that up. And then I know there was a tax deduction for business owners as part of the Tax Cuts and Jobs Act. Can you talk a little bit about what needs to be considered with that right now? Sure. So Peter, this is a completely new provision and for many business owners really provided a great tax benefit. It's called the qualified business income deduction, and it can provide up to 20 % of a deduction off of business income for certain owners of pass through entities. And so that can either be a sole proprietorship, it can be an LLC with only one member that's a disregarded entity, can be an owner of a partnership or an S corporation.

21:00So anytime there's that flow through income, we could easily spend a couple of podcasts talking about all the intricacies of that provision. But again, at a very high level, some of that benefit goes away, can go away at different income levels. And so a couple of things that we're really planning around when it comes to that deduction is first keeping in mind that it is scheduled to also sunset at the end of 2025. And that's something, again, for those who are eligible, could really have a pretty significant tax impact. And so in those cases, we're looking at, again, does it make sense to try to accelerate income into these last few years, knowing that we have that deduction, to try to get that 20 % essentially off of the income tax.

21:45Now, what's a little bit tricky about that is that, again, one of the limitations on that is an income limitation for certain types of businesses and for certain businesses that don't have additional employees. And again, there's a lot of intricacies in there. But one of the things that we're really keeping in mind is that there is an income limitation on that for certain types of businesses and for certain businesses that don't have additional employees. And so it can be very punitive if you actually accelerate too much income and get over those thresholds and really essentially result in not having any of the deduction.

22:22And so that's another great example of where, again, putting that pen to paper, doing that tax modeling is really important as opposed to just thinking, oh, I'm going to try to accelerate as much as possible. And then end up not being able to have additional amounts, but potentially even lose that 20 % discount as it is. So shameless plug here. You've heard all the ways if you're a retiree, if you have ISOs, if you're a business owner and you aren't doing proactive tax planning, the time is now. You know, again, go to the longterminvestor.com. You can schedule a call. You can meet people like Susan, who I don't mind saying knows way more about this stuff than I do.

22:58That's why she's here to help us. And that's why I'm going to ask you, Susan, before we transition into estate planning, is there anything about income tax planning that you feel we've missed that you feel like deserves some mention? Yeah, you know, Peter, I'm just going to expand a little bit on something that you said at the very beginning, which is about surprises and just, you know, if nothing else, knowing what you're going to owe that following April. And one of the things I think that can be easily missed and that we're, again, always looking for when we're doing tax projections is, is there a possibility, A, that someone's going to have a significant tax bill due?

23:31And what can we do about that in terms of cash flow planning? But also, is there a potential that there could be penalties owed? And so individuals, really the rule is at the federal level that you have to pay in at least either 100 % or 110 % based on your prior year return or 90 % of your current year tax. And it's actually the lesser of those two. And so really making sure that, A, you're not overpaying too much, you know, taking into account those rules, but also that you're paying in enough to avoid those penalties because that can be, again, not necessarily always a big dollar amount, but year after year can certainly add up.

24:11And so just wanted to mention that because, again, And that can be sometimes not as complex as some of the other tax planning that we're doing, but also very important. I have a friend who always says that it's important to pay your tax bill to the IRS, but you don't need to leave them a tip. And a lot of what we're talking about is, you know, we pay our fair share, but there are ways to make sure that your fair share is, you know, take advantage of all the rules that are there for a reason. So appreciate you saying all those things and sharing all that, Susan. Let's go ahead and dive into estate planning now.

24:42What do you think it is that people need to know about the current estate tax laws? And what are some ideas that you think people ought to be considering right now? Sure. So, Peter, I think one of the things that's always kind of top of mind and important to know is what are those kind of important numbers on the estate tax side? And so in 2023, you know, each individual can make up to$17 ,000 of annual exclusion gifts. So they can make gifts directly to, you know, any individual for that amount. Their spouse can as well. And so, you know, combined, a married couple can gift up to$34 ,000 without using any of their estate tax exemption or even, in most cases, needing to file a gift tax return.

25:21Also, the exclusion, so the amount that you can pass to loved ones, family members, et cetera, without the imposition of estate tax is$12.92 million per individual. And so, you know, certainly at that level, there are many individuals subject to estate tax. So one of the things, though, that we're really keeping in mind as we approach the end of 2023 is that that$12.92 million will decrease if the sunset provisions of the tick job go forward. And so that was something that was expanded as part of that legislation in 2018. And so right now, under that law, without any changes, it's scheduled to actually decrease back to the original$5 million plus inflation.