Year-End Tax Planning After the OBBBA (EP.224)

0:28We all need to make smart decisions with our money. Bill Act reshaped a lot of the playbook. And so as you listen to today's conversation, we dig into what really changed for year-end planning specifically, whether that was how new charitable giving mechanics affect donor-advised funds, what the updated salt landscape means, the nuance around social security taxation, and why multi-year projections are essential for pre-retirees. We also get into some practical advice for executives with equity compensation and business owners navigating QBI, bonus depreciation, and pass-through entity elections.

1:04As you can tell, it is jam-packed full of information. And if you would like to understand what it looks like to work with Plaincorp, who not only provides comprehensive wealth management, but has a full-service tax team that files and prepares tax returns, you can go click on the link in the episode description or go to callwithpeter.com.

1:27Welcome to the Long-Term Investor. When tax laws change, so do the strategies that can make a real difference in your after-tax wealth. And that's why I've invited Susan Jones to unpack how the One Big Beautiful Act has reshaped year-end planning. And I want to start by looking at what has actually changed and what has stayed the same before we dig into some of that, what do you do before December 31st? So I guess last year when we were talking about year-end tax planning, we expected higher marginal rates once the Tax Cuts and Jobs Act expired. So how did the One Big Beautiful Bill Act change the conversation?

2:04And is there any way for me to shorten that long bill name into a cool phrase? Do we call it ABBA? What do we call it? Yeah, it's funny. So the OBBBA is what we call it. I don't know if that really rolls off the tongue any easier, but that is what we can call it today or really anything you want to call it. And that is the actual technical name of the act, just to be clear. It's not any kind of political statement. Really, as you know, Peter, the conversation that we had last year around this time and really up until July of this year has been surrounding the potential expiration or the sunset of many of the individual provisions that were included in the Tax Cuts and Jobs Act.

2:43And so that included the rates that had been lowered under that act back in 2018 were set to expire. So we expected that looking forward into 2026, we would be facing higher marginal rates. And then there were some other provisions, some good, some bad, that we expected to expire. One of the other really significant provisions was the increase in the estate and gift tax exemption. And so what had been pushing closer to$14 million was scheduled to sunset and to revert somewhere around$7 million. And that has now been made permanent, as well as those lower rates. Well, and that's a great call out, something that I think we had done a lot of planning around with our clients.

3:24Many PlanCorp clients are also charitably inclined. I mean, how do the changes for the tax benefit of gifts look now? So, Peter, one of the pretty significant changes that's in the new law that really wasn't talked about before the law became final, but even in some of the summaries and different planning ideas I've seen since really hasn't been highlighted, is the change to charitable deductions, which is both kind of two forms. So the first being that now there is a 2 % floor for charitable deductions, meaning that your charitable deduction is actually decreased by 2 % of your adjusted gross income.

4:00And then the second is the reintroduction of what looks like what's called the P's limitation. The calculation is a little bit different, but that's something that's been kind of in and out of the law since the early 90s, where for high income taxpayers, their total itemized deductions get a haircut. And so in this case, the way the calculation works, the highest benefit for an itemized deductions for high income taxpayers will be in the 35 percent bracket as opposed to the 37 percent bracket. So in other words, if you're being taxed on$1 at 37 % and you're itemizing your deductions, you're not going to get that 37 % benefit on the itemized deductions.

4:39Okay. So that could maybe cause people to rethink some of the bunching strategies that we've done over the years with donor advised funds. I mean, I don't know if you change when you do QCDs or when you accelerate giving, but this is probably the conversations that we're having with clients doing year-end tax plans. Are those the sort of things you look at? Yeah. Yeah, well, you know, it used to be that, you know, you could say pretty much at a high level, although, you know, details would be needed, but you could pretty confidently say if you were going to have a high income tax year. So whether that was because of you're coming up on retirement, you're having some retirement plan benefits pay out, we have a big bonus year, there's a lot of things where we could pretty confidently say, you're going to have really high ordinary income, you're going to be taxed at a really high rate, this would be a great year to go ahead for charitable donors to set up a donor advised fund and kind of pre-fund those gifts going forward.

5:28But now really you have to think through, well, is that AGI because their AGI is going to be so high? Does that mean that's that 2 % floor that's based on your adjusted gross income, that they're going to actually get more of a haircut? And again, knowing that the rate is kind of capped at that 35%, it's probably for many taxpayers going to be better to make gifts kind of in the two or three years before retirement, where their income is still high enough that they're in the 35 % bracket, but they haven't moved into the 37 % bracket. And their income is still low enough that that 2 % floor isn't going to be as much as it maybe would be later on.

6:07And so, as you know, I was going to preach the gospel of multi-year tax projections. And this really is a case where that really needs to be done. And there might be people that can calculate this in their head. I don't think there actually are. But it really is just one of those things where those kind of like quick answers that, oh, that's probably a good idea or it's maybe not a good idea. You really need to kind of run the numbers to prove that out. Now, the SALT cap was a really big issue being able to deduct your interest, your real estate. I mean, you explain it. I'm not the tax expert.

6:40You are. What happened with the SALT cap and how does that impact how we're looking at year-end planning? So just as a reminder, you know, back again in 2018, when the Tax Cuts and Jobs Act came out, one of the provisions that wasn't as friendly to taxpayers was a cap or a limitation on the amount of state and local income taxes that could be deducted. So prior to that, you know, if you paid$50 ,000 in state income tax or had real estate taxes or even sales tax of that amount, you could deduct it against income. And as part of that act back in 2018, the most that you could deduct was$10 ,000. And so that's been one that has been widely talked about since then.

7:21And so as part of this new law, it now raises the cap to potentially$40 ,000 starting in 2025. but that amount gets reduced at higher income level. So for a married couple, for example, it starts to phase out at$500 ,000 and then ends up kind of sliding back to$10 ,000 when your income gets over 600 ,000. So what that means for a lot of individuals who have income below that threshold is that if they are paying more, again, either real estate taxes or combination of state income taxes, that they're gonna have a higher itemized deduction. And I think while some of the demographic groups we're going to focus on in a little bit don't necessarily apply to this.

8:04I know we have a lot of retirees who listen to the show. There's something about Social Security that I was reading in preparation for this. The Social Security checks are going to be taxable still, but there are some new deductions around that that require planning. Is that right? So that's really interesting. So there was a lot of press and part of it was President Trump and his team had put out some information that Social Security was no longer going to be taxable. And that's not exactly true. But what did change is that there's now an enhanced senior deduction is part of the personal exemption, essentially.

8:37And so for seniors, they do have a$6 ,500 additional exemption that they can use. So the way that Social Security is still taxed is still the same. So 85 percent of it, up to 85 percent of it can be subject to tax. But there is this new enhanced deduction for seniors and lower income brackets will likely have the effect of reducing the amount of Social Security that's taxed. OK. And I mean, we're talking about some things that have changed. I mean, are there any classic year end tactics that still work or maybe things that often go overlooked without a coordinated advisor helping? So I would say the one thing that always stays the same is the need to do year-end planning and to start early.

9:19And so, again, you've heard me say this before, Peter, but I really think that November is the time to plan, kind of the last time to plan, because you know enough about what's happened during the year, but you still actually have time to do things before the end of the year. And so I think one of the biggest mistakes that people make is waiting until December to start planning, just because you simply run out of time. There are kind of the traditional accelerate deductions, postpone income that might not work this year. And again, part of that is because of the different laws around charitable gifting, which actually don't go into effect until 2026, meaning that actually for a donor who's really charitably inclined, it might actually make sense if you have control over timing of income to actually push some of that income into 2025 and take that big deduction in the year where you get the benefit of that.

10:11And so again, this year, it's just a really strange year in that regard, because a lot of it does have to do with the fact that some of these different provisions, some take effect this year. So that state and local income tax deduction, for example, takes effect this year. But then the rules related to the charitable giving and the itemized deductions don't take effect until 2026. Well, Susan, I would like to transition a little bit. If you go to callwithpeter.com, next week, I'll be taking calls with people who want to become clients and benefit from our tax planning. And I pulled out three segments of people that we often work with, and I was hoping you can kind of tease what the year-end planning looks like.

10:49We don't have enough time to go deep into a playbook or a checklist for all things to consider, but I really want to dig into what the tax bill and what year-end planning means for three groups, pre-retirees, higher earners with equity compensation, and business owners. And so if we start with pre-retirees, with rates staying the same, I guess, how do you talk to clients about whether they accelerate or defer income and deductions into 2025? Yeah, and that really does involve that multi-year approach. And so kind of what you're looking at is, you know, as you're leading up to retirement, what does that mean for the next couple of years in terms of income that you expect?

11:27What does that income look like? So again, for some individuals retiring, they're going from W-2 to investment income, but there aren't huge leaps in the W-2 income. On the other hand, for other people, especially those that have taken part in non-qualified deferred compensation plans over the years and other types of bonus structures that might pay out on retirement or some other periods, it could really mean a big spike in income. And so it's looking at what does that income look like and really kind of a granular level. Let us look at the plans. Let us actually kind of figure out what that looks like and then preparing those multi-year tax projections because we're looking at does it make sense if you're charitably inclined to set up a donor advised fund and do some other kind of gift bunching?

12:14Does it make sense to, especially in those kind of early years of retirement, to do a Roth conversion? That's something that oftentimes gets missed, but especially with some of the later dates that now we have for R &Ds, many people do find themselves with five, six, seven years where their income is lower and it's taxed differently because it's things like dividends and capital gain income. So those can be really powerful times to do Roth conversions. So it's really taking that look at what we do now and then what are those things that we can do in those early retirement years to make sure that there's a cohesive plan in place.

12:51Yeah, that Roth conversion piece. And for listeners, there's no doubt they can tell that Susan is by far the expert here. I mean, she's leading the tax department. I sometimes feel like I'm in a play and I know the right things to say because I've been reviewing the script or watching the play. I'll sit in client meetings when we're going over this. And I feel like when people hire us and they've never used an advisor before, the timing of Roth conversions and how they're sizing those conversions seem to be some of the areas where there are bigger mistakes. The other thing I sometimes see is like conversations around capital gains.

13:22I mean, any thoughts on how we should consider capital gains for this group or others in 2025? So, you know, the rates didn't change. But one of the things that I think we're always thinking about is capital gains. Once it gets over that net investment income tax threshold, gets an extra 3.8%. And so that's one thing where just doing some careful planning around, hey, are we going to there's gains and there's not an immediate need for cash. Is there a way that you can kind of push that into the next year in order if you're getting close to that threshold? So that's something that we're kind of always considering.

13:55For our listeners in Missouri, this is kind of a big year. Missouri is the first state that has an income tax that has excluded capital gains from state taxable income. That was passed over the summer, but it was made retroactive until January 1st of this year. So now for anyone listening who maybe, you know, is thinking about moving to Florida because they were going to sell a business that had a large capital gain tax. They don't have to. They can stay in Missouri. And also, that's one of those things. And maybe I'm just not reading the right journals, but I haven't seen that as widely publicized for kind of what a big deal it is.

14:28So that's something that's kind of exciting going on. But, you know, one thing, too, Peter, I wanted to mention back to the Roth conversions. A mistake that I see, not by our team, of course, but sometimes in talking to others, is really too much of a focus only on the marginal rates when you're doing the Roth conversion planning. And what that can really miss is, A, you know, as we've been talking, maybe you've picked up on the fact that for a lot of these tax provisions that, A, we already had, but that also are new as part of this new tax act, there's different income buckets where certain benefits phase out.

15:03And it can be a pretty quick drop in terms of the tax benefit you receive. And so a lot of times if people are doing Roth conversion planning only focused on the ordinary income marginal rate, what they can miss is that if you push up over one of those income thresholds, you can actually miss a benefit that then ends up really reducing the overall benefit. So that's something, again, where doing a tax projection is really, really necessary because that's how you calculate. You know, it's one thing to say like, oh, you're going to be in the 22 % bracket, but then actually doing the math and saying, is the income that's added because of this Roth conversion, is that really at the 22 % rate?

15:43Or because of some other misbenefit, does that push it up? So that's just something, again, I just wanted to point out there. Yeah, that's a great call out. That's why I mentioned the Roth conversions in the first place is because when I am sitting in on meetings, I do hear a lot of feedback and guidance there, particularly with new clients. Maybe I can pivot to another sort of profile of listener that we see in our survey data who are people with equity compensation, starting with like RSUs or options, what year end steps matter the most? So the first is just understanding what's coming down the pike and having a good understanding of not only the income that's going to be reported to you, but also the withholding and all that.

16:24And that sounds really basic and rudimentary, but that's one of those things that can really catch people by surprise. And so oftentimes RSUs, when they invest, it's a income tax event. Generally, you know, employers withhold, but it's usually at a 22 % rate. And so for our executives that are closer to the 35 or 37 % rate, what that means is that you could just be kind of going about your business, living your life, thinking you're doing your income tax withholding, and then end up with a very surprise tax bill. So again, basic, but also can be really important. And then just understanding what the tax impact looks like, but also other things, non-tax related, you know, your concentration.

17:04And that's something where a lot of times we have clients and prospects that we're talking to that end up in a situation where they're highly concentrated and their employer stock. And then Peter, as you often point out, you know, you end up being concentrated not only because your holding is at a level that it makes up more of your overall net worth, but also that's where your income is coming from. And so your concentration really goes beyond just what your balance sheet looks like. It's also, you know, really impacts your profit and loss statement as well. So even though I love tax, there is a piece where you have to kind of step back and say, what is my overall goal?

17:37What is the risk of where I'm at? And then kind of think through what tax costs you're willing to and able to take. And that also does really depend on what your other income looks like. And so if you're already in the 20 % bracket, you know, maybe you're in the net investment income tax bracket, 23.8%, then you think, okay, is that the way it's going to be for the next 15 years? And I just need to take that now and plan around it. Or am I going to be in a lower bracket next year? And that's something that I can work around. Or even if it's stock that you hold outright and you can do what you want with it, is that stock that you use for gifting?

18:12I mean, there's different ways to kind of mitigate that risk, but it's really understanding what those both tax and non-tax goals are related to that. And then, you know, one thing I want to point out, and again, something that comes up is that oftentimes with clients that have had incentive stock options that they've exercised and maybe they've even had to pay the alternative minimum tax and now they have an alternative minimum tax credit that's carrying forward, that can be really complicated. And a lot of times we see that advisors, even including some accountants, I mean, quite honestly, and I understand, I mean, as you know, I used to be in that world and the tax code is big and you can't be an expert in everything, but that's something that can really get missed because what happens is back when you exercise that ISO, although it wasn't a regular tax event, it was an alternative minimum tax event.

19:02So if you actually did pay the AMT back when you exercised, you actually have a higher basis. And what that could mean is that if you have a credit carrying forward in the year that you sell that stock, you could actually have a tax benefit from using that AMT credit that's carrying forward. But that's something that often gets missed. And even for individuals who have changed preparers during the years or things like that, it's something they can even get kind of missed on the tax return. So that's part of it too, is it's oftentimes worth going back and looking at that tax return for the year that you acquired that ISO just to make sure.

19:36So much great stuff in there. And I'm thrilled you mentioned the AMT because I was going to maybe ask about that, Just kind of recapping some of those things in the conversation that we're typically having with people with equity compensation. It's you look at those tax withholdings, trying to decide you need to pay different estimated taxes because we want you to pay your tax bill, but we do not want you to leave the IRS a tip. We talk about donating appreciated shares. We talk about reducing that single stock risk. We look at the AMT and the net investment tax exposure. There's a lot of charitable tie in with all these things.

20:10If I'm going to transition over to business owners, though, what are some of those conversations looking like this time of year? So there were a couple of provisions that were very taxpayer friendly in this act as well. One of those was it did permanently extend the qualified business income tax deduction. And so for a lot of business owners, so that's a 20 % deduction on business income that comes from a pass-through entity. We could spend a couple of these sessions on that alone. So I'm not going to go too deep. But one of the kind of big distinctions is that I always think of it as there's two pieces, though there's one piece that could apply to our clients that are what's called a specified service trader business.

20:49So like accountants, financial advisors, consultants, there's but there were subject to stricter rules and only receive a benefit if income is below a certain threshold. And so the phase out range was actually increased a little bit, both for married taxpayers and for single taxpayers. So there might be additional individuals who receive a benefit from that this year. But that's another one of those areas that you have to be really careful that if you're getting close to that threshold, again, 20 % of ordinary income can be quite significant. So you want to make sure that you understand if you're going to be generating capital gains or accelerating any other income, that you understand the consequence to that.

21:30And then there's those who own larger pass-through entities, operating entities that have employees and things like that. and they're not subject to that same SSTB limit, but it's still something that there's a lot of rules around to make sure that you qualify. But that is, again, a benefit for those. Also, part of the act is that it brought back 100 % bonus depreciation. And so for a lot of business owners, that's something that they can take advantage of. And again, that is retroactive. So it will apply for all of 2025. One of the other things that it did that I think is really interesting is that it used to be kind of an all or nothing.

22:05So either you took all that bonus depreciation or you waived it and then just depreciated over kind of the normal life of the property. And so oftentimes, depending on kind of what your other tax attributes, if you're in not your highest year of income, it brought in this kind of thought of, well, am I going to be taking a benefit in the year where I'm not the maximum rate, which doesn't feel good? So now taxpayers can actually make elections to take a 40 or 60 percent bonus depreciation deduction instead. So there's options. So that's something that I think is going to give people a lot more flexibility.

22:41There's just so much going on for business owners. And I think even as you talk about like the pass through entity stuff, just trying to determine when it makes sense and what has to be done before the year end. I mean, is there anything you feel like comes up more often than not in those conversations? So the one thing that is still, I'm surprised at how often it gets kind of missed until it's too late is the pass-through entity deduction. And that was something for state taxes. And so just kind of backing up again, back in 2018, when the Tax Cuts and Jobs Act put that$10 ,000 cap on the deductibility of state and local taxes, states are smart, people are smart.

23:21And so they said, well, we're going to create this kind of workaround system where a pass-through entity can make an election where it's the pass-through entity itself that pays tax on that state income, which is unusual because normally without that election, it flows through and then the owners pay tax directly on their own return. And so I think we're close to 40 states that have enacted one of those laws and every state is different. So even if we wanted to talk to you about like the specifics, it would depend on what state you're in and some other things. But one of the things that kind of rings true is that usually the entity actually has to pay the state income taxes before the end of the year in order to make them deductible in that year.

24:01And so that's something oftentimes the election in many states isn't required to be made until the return is filed, which is either in March or April of the following year. And so by that time, though, unless you've actually paid the tax, it might be too late. And so that's something that especially if you've created a new business, if you're operating in a different state, even if you've switched accountants for the year, that's something that you want to make sure that you're talking about early so that that calculation can be made and the tax can actually be made. And I've taken a number of notes here.

24:32I mean, we've talked about income and expense timing across the board, but business owners sometimes have even more ability to do that. You've made reference to retirement plans and some of the things you can do there, the QBI, the pass-through entity stuff. Anything else with business owners that you feel like we missed? The other thing I think is just for those who have business income, either from director fees or from their own business, thinking about doing a step-by-right. And that's something that's still very much can be very tax efficient for people. And you do have an extended time on that.

25:03And so you actually have until your tax return is due, including extensions. So it could be as late as October of the following year. But that's something that can also easily be missed. Well, Susan, to close us out, I would love for you as someone who served as a senior wealth manager for a long time, a member of our family office, but now even leading our tax department, the group who actually prepares and files tax returns, if a high net worth family or business owner or somebody with equity compensation is going to engage with Plain Corp and they are really doing so because they want our tax expertise, what does that engagement look like in the first 90 days?