May 17, 2024 • 60 mins
Unlock the secrets to masterful tax management with our latest episode where we navigate through the transformative landscape post the Tax Cuts and Jobs Act of 2017, they shed light on how Alison Wealth Management has redefined the way we approach tax planning. From our early family office days to serving a diverse clientele, this episode promises to equip you with the strategies you need to triumph over the incoming tax shifts that could affect your bottom line.
We're at a pivotal moment as the sunset phase of the Tax Cuts and Jobs Act looms, stirring the waters of the tax world. You'll discover why this year and next year are critical for anyone paying taxes, as we delve into what the reduction in standard deductions and hike in tax brackets could mean for your wealth.
Our experts dissect the nuances of advanced planning methods that could shield your income and prepare you for the financial reverberations of these changes. Business owners, retirees, and high income professionals alike will find invaluable insights to stay ahead of the curve.
Lastly, we pull back the curtain on sophisticated estate planning tactics in response to the evolving tax code. Hear real-world applications of how lifetime giving trusts and irrevocable trusts can fortify your legacy against the impending reduction of gift and estate tax exemptions. We'll also explain how survivorship life insurance policies can be a game changer in your financial arsenal. By the end of this episode, you'll be equipped with the foresight to craft a legacy that not only survives the taxman but thrives for generations to come.
Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.
All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hey everyone, welcome to the Complete Wealth
Management Podcast.
I've got my two compadres withme here, david Roth and Conrad
Levesque.
Welcome, fellas.
It's good to be here.
Hola, hola, hola.
Well, this is kind of ameaningful episode for me.
Here we're going to be talkingabout the Tax Cuts and Jobs Act,
and the reason that I say it'smeaningful is, you know, I
(00:23):
remember back to 2017.
And you know a lot of peoplerefer to this as the Trump tax
cuts.
If you kind of can go back in atime machine to 2017, donald
Trump was the president and hewas proposing a lot of these
major tax cuts in this massivetax reform actually the largest
tax reform that I had seen in myentire lifetime.
(00:46):
And like, if I go back and lookat what Allison Wealth
Management was back then, wewere really kind of what I would
consider to be more of like afamily office, like we only had
a couple clients.
We really built theorganization to serve the
financial needs of my brotherand his family and what he had
going on kind of in his journeyof getting acquired by Facebook,
(01:10):
which is now Meta, and you knowkind of the journey that
happened along the way there andyou know we had started to
expand some of the services to afew other families, of really
tying together holistic wealthmanagement, of the financial
planning, the asset management,the tax management, the
protection planning and,ultimately, the legacy planning
(01:32):
kind of what we call our fivepillars of holistic wealth
management.
But in 2017, the Tax Cuts andJobs Act proposal came out, and
at the time, I had aone-year-old daughter.
Everly was one it's crazy tobelieve that she's turning eight
now, but she was one and, asboth of you guys know, when you
have a one-year-old, you're notsleeping a whole lot through the
(01:54):
night, and so what better wayto kill some time in the middle
of the night than to sit aroundand read tax proposals and tax
law?
And I remember sitting there inNovember of 2017, reading
through the proposal of the TaxCuts and Jobs Act, and I was
really trying to understand howthis massive tax law change
(02:16):
would impact the few clientsthat we were serving at the time
, and I just had this likeepiphany that this tax law was
going to be a game changer foralmost everybody.
You know, so many times taxlaws only impact a certain
segment, maybe they only impactbusiness owners, maybe they only
(02:37):
impact retirees, maybe theyonly impact ultra high income
earners.
But this one had, you know,what I call something for
everybody in it.
It impacted low income people,it impacted high income people,
it impacted retirees, itimpacted business owners.
It really did have somethingfor everybody.
And I remember saying likeconsumers need to be educated
(02:59):
about this stuff.
And you know, at that time thatwas where I strategically
decided that we were going toopen up the resources and the
service and the expertise atAllison Wealth Management to
many, many more people, justbecause I felt like I had a duty
to be able to educate as manypeople as I could about how this
tax law was going to impacttheir family finances.
(03:22):
And I actually, at the time,sat down and I created what
today we call the tax managementjourney, which is our proven
process around how we help ourclients maximize their income
and minimize their taxes and notjust their taxes each and every
year, but their lifetime taxesand really helping them
understand that not all money istaxed to the same and that if
(03:46):
we apply some strategy to howthey accumulate their wealth,
how they proactively managetheir wealth and, ultimately,
how they distribute their wealthto themselves in retirement, to
their family amongst theirpassing to the charities that
they hold near and dear to theirheart, then we could really
help them eliminate a majorchunk of income tax and estate
(04:09):
tax liability.
And really all of that wasspawned by the Tax Cuts and Jobs
Act.
And I could honestly sit hereand say that if it wasn't for
the Tax Cuts and Jobs Act, Idon't think we would know each
other, because at at the time, Ineeded help in bringing all of
these resources and valuableplanning to more and more
clients.
(04:29):
And that's when, you know,david, you joined the team.
What was that now?
About four or five years ago?
Yeah, I think it's about four,four years ago.
Yeah, four years.
Time flies.
And so, you know, I neededanother tax expert who
understood this stuff, who couldanalyze this, who could help
communicate it with clients.
And again, you were a certifiedfinancial planner and an
enrolled agent admitted topractice before the IRS.
(04:52):
And then I started teachingthis stuff nationally to
advisors all around the country.
And, conrad, that's how youfound our national company,
prosperity Capital Advisors,that I was fortunate enough to
help found about 11 or 12 yearsago, because, again, you were a
CFP, a CPA, an investmentadvisor, and you have a passion
(05:15):
for helping people eliminatetaxes and build their wealth as
well, and so you had your ownindependent practice in Atlanta
Laveck Associates, and youjoined Prosperity Capital
Advisors, and, of course, youand I have hit it off over the
years, and in August of lastyear, you decided to join the
(05:35):
team at Allison Wealth and helpkind of partner in this big
picture initiative of bringingthis to more and more clients.
And so, like again, I don'tthink the three of us would be
working together if it wasn'tfor the Tax Cuts and Jobs Act,
and I certainly know thatbecause of the course I built
the tax management journey basedon what we do to help our
(05:58):
clients maximize their income,net worth and minimize their
taxes.
You know we've been able tobring this message in education
to thousands of clients acrossthe United States, and so it's
what's kind of bittersweet aboutthis whole thing is that, you
know, conrad, with the Tax Cutsand Jobs Act that came out in
(06:20):
2017, there was something reallyunique about this law in that.
Here's a little bit of triviafor you guys.
Do you know how they passedthis law, how Donald Trump got
this law to be, even though hecouldn't get the majority of
Congress to agree upon it?
Speaker 3 (06:40):
Yeah, I do.
It's called the Byrd Doctrine,right.
What's the Byrd Doctrine right?
What's the Byrd?
Speaker 1 (06:44):
Doctrine.
Speaker 3 (06:46):
Under this doctrine.
Speaker 1 (06:47):
That's something that flies by over the air tweeting
at you.
Speaker 3 (06:51):
Listen for all the Boston Celtics fans.
It's not about Larry Byrd, okay, and I forget the senator's
name.
The rule came about where.
Senator Byrd created this rulethat Congress could not cause
increase in taxes or a largeamount of burden over a 10-year
(07:12):
period or greater than 10 years.
What that means is, if we can'tdecide or determine the impact
of an action of Congress thatlasts greater than 10 years,
then you cannot do that, and sowhat Donald Trump and team did
was create a law that basicallyexpired right around 10 years.
(07:33):
Right, it was within that 10year window, and so it didn't
violate that bird doctrine, andso it has automatic sunsetting
provisions, which again avoidthat bird duck, if you will.
Speaker 1 (07:46):
Yeah, it's interesting.
You know they passed thisthrough a legislative process
called the budget reconciliation, and what that basically means
is exactly what Conrad said whenit comes to things around the
budget and reconciling thebudget which, of course, taxes
impact the budget, right, that'sthe money that comes in.
So, when it comes to thingsaround the budget, you don't
(08:09):
have to have super majority,which is 60%.
You can actually get by andpass law with just majority, and
so at the time, in 2017,president Trump and team did not
have super majority, whichmeans if they tried to pass this
like a normal law, it wouldhave got filibustered right,
(08:29):
where they kind of grandstandfor days and days at a time and
then they wear each other outand they burn all of our
taxpayer dollars to just waste abunch of time because they
can't agree on anything.
Right Like this eliminates thatbecause they had majority, not
super majority, and so they wereable to pass this tax act.
But under that, one veryimportant caveat that a lot of
(08:52):
these tax cuts have to expirewithin a 10-year time period,
and so 2017, it's hard tobelieve is approaching a 10-year
time period, which means a lotof these things that reduced all
of our income taxes will expireand go away at the end of next
(09:14):
year, 2025, because starting in2026, we revert back to the old
tax system and the only thingthat would change that is if
Congress enacts new tax law.
And listen, that could happen.
But is it a high probabilitythat in an election year, when
(09:38):
there's so much on the table andwe have a divided House and
Senate, that they're all goingto get together and say, yeah,
we agree, we should keep taxesthe way they are?
Probably not, because we knowthe political agendas and this
is not a political conversationhere, but President Biden has
(09:59):
been crystal clear on what hewants to do with tax policy.
We've done webinars on Biden'stax proposal.
I have a video on our YouTubechannel on what he proposed here
in 2024.
And for most income earners,it's a massive tax increase for
those that are earning over$400,000 a year of income, which
(10:23):
are many of our clients, and alarge tax increase for those
that have over a million dollarsof income, which again is many
of our clients, particularly ourCalifornia clients that have
both spouses working to be ableto afford a home in the standard
of living in the San FranciscoBay Area, and so we know
President Biden's proposals.
(10:45):
We also know President Trump'sproposals, and those are the two
people running for presidentright now.
We've seen both of theirplaybooks already, and the
reality of it is there'sprobably not going to be a lot
of bipartisan agreements thathappen in Congress and with the
president this year being in anelection year and then probably
(11:07):
next year as well, with adivided House and Senate
potentially.
So there's an enormous amounton the line with this upcoming
election and how it translatesto taxes.
And so what we wanted to do inthis episode is break down some
of these sun setting provisions,how they will impact your
(11:29):
personal finances come 2026.
And, most importantly, someplanning that you could do today
to potentially make some taxsavvy decisions.
And so that's what we're goingto spend the rest of the time in
this episode on, and I'mexcited to jump into it with you
guys.
All right, guys.
(11:58):
So we're going to tackle someof the big provisions and
changes and, conrad, you werejust sharing with us earlier,
you've developed a document that, if any listeners want a copy
of it, just email info atallisonwealthcom.
That's info at allisonwealthcom.
We'll get you a copy of thistool.
(12:19):
But, conrad, talk about whatthis tool does first, and then
we'll get into some of thedetails.
Speaker 3 (12:23):
Yeah, it identifies some of the major changes that
you guys will face as taxpayers,and it's a kind of a yes or no
questionnaire.
It's only a couple of pages,it's not going to take you two
hours to fill out, but it's justgoing to be a call to action,
meaning if you feel like this isgoing to impact you, you have
the opportunity to startplanning ahead.
(12:45):
Again, you mentioned in theintro we have until the end of
2025, which seems like a longway away, but when we say the
end of next year, I think it's alittle more imperative that you
start to act.
Speaker 1 (12:59):
So it's just going to be saying that.
It says it in our side mirrorson our car.
You know, right at the bottom.
Speaker 3 (13:06):
Yeah, objects are closer than they appear, right.
Speaker 1 (13:09):
Objects are closer than they appear.
I feel like that's that thatshould be written across the Tax
Cuts and Jobs Act right now.
Speaker 3 (13:15):
Yeah, and there are so many changes that we're going
to experience here going back,new experience here going back.
I'm going to have some PTSDthinking about being in the
trenches back in 2016, 17 and 18and having that major change
come about for all of my clients.
So we're going to flip back tothat and I think anybody
listening you're going to havesome level of change for your
(13:37):
tax situation.
Others you're going to have amajor change.
So we'll kind of dive into thathere.
I'm excited to talk about thesechanges.
Speaker 1 (13:45):
Yeah, and again, like just what I mentioned earlier,
when the Tax Cuts and Jobs Actwas passed, it was something for
everyone.
Well, guess what?
When these things sunset, it'ssomething for everyone.
We're going to talk about highincome individuals, we're going
to talk about retirees, we'regoing to talk about business
owners, and then there's somethings that are going to impact
everybody.
So, david, let's kind of kickit off and let's just brainstorm
(14:06):
.
I mean, we haven't planned anyof this stuff.
We'll just kind of run off thetop of our head of things that
we come up with and talk aboutand brainstorm and share
strategies that we're talkingabout with our clients and I'd
imagine we probably don't evenhave a lot of our clients that
listen to this podcast becausethey know we have already taken
care of all of this stuff forthem.
But for the listeners likeDavid, what would you say is,
you know, the first kind of bigthing that's going to change
(14:29):
when the Tax Cuts and Jobs Actsunsets?
Speaker 4 (14:32):
Yeah, so I think the one big thing that's going to
change, that's going to impactpretty much everyone, is the
standard deduction.
So the Tax Cuts and Jobs Act,they nearly doubled the standard
deduction and when we go backand we get into 2026, it's going
to revert back to what thestandard deduction was, which
was $6,350 in 2017.
(14:53):
So that's the huge impact.
Speaker 1 (14:56):
So, just to put that into perspective, I'm looking at
my handy tax guide right now.
I always keep it.
It's my little roadmap, mycheat sheet.
I don't have all these numbersmemorized A lot of them
memorized but the standarddeduction for somebody who's
married, filing jointly, in 2024is $29,200.
(15:16):
Now if you're over age 65, youget an additional $1,550.
You get an additional $1,550.
If you're single, the standarddeduction is about $14,600.
And again, if you're over 65,you get an additional $1,950.
(15:39):
So the standard deduction is thefreebie that the government
gives us.
That's the amount of income wecan have and we don't have to
pay any income tax on it.
So that's one of the mostpowerful tax planning and tax
management tools that we have inour toolbox is how we use that
standard deduction.
And when the Tax Cuts and JobsAct doubled that standard
(16:01):
deduction, that was double theamount of income we can have
without paying any income tax.
So, david, you said that thatstandard deduction I mean if it
was doubled in 2017, 2018, afterthat law was passed, and let's
say, for round numbers, it's 30grand of income somebody can
have as a married couple andthat reverts back and it gets
(16:24):
cut in half.
Now that's about $15,000, if youwill, that's a pretty big
difference.
I mean, even at that lower rateof 10%, that's $1,500 of
additional income tax liability.
If somebody's in the highermarginal rates, which are about
40%, 40% of that $15,000 is6,000.
(16:48):
So that's a pretty meaningfultax difference right out of the
gate of just that simple changeof the standard deduction.
So what else?
The standard deduction is goingto change for everybody.
That's going to impacteverybody.
What else happens?
Because of the sunsettingprovisions?
Everybody that's going toimpact everybody.
Speaker 4 (17:05):
What else happens because of the sunsetting
provisions?
I think the other big onethat's going to impact everyone
are the tax brackets are goingto change, in particular the top
tax bracket right now 37%.
Once the sun sets it's going tojump back up to 39.6% as a top
tax rate.
Okay, so I'm pretty good atmath 6% as a top tax rate.
Speaker 1 (17:22):
Okay, so I'm pretty good at math.
39.6% minus 37% is a 2.6%change, right.
So that's not a huge deal.
If I have a million dollars ofincome at those top rates, it's
about $26,000 more of income tax.
(17:45):
But what we also know is thatit's not just the top rate
that's changing, right, Conrad.
Speaker 3 (17:50):
Yeah, what we're seeing is kind of a reset across
the board.
Outside of the numbers, rightthe income inside the bracket
the 12% bracket that we havetoday will go to 15%.
So it's a material difference.
On the lower end of the scaleas well.
The 22% bracket goes to 25, 24goes to 28.
(18:12):
So we're seeing not just thosebrackets in the top level of
income be compressed downwards,we're seeing that the actual
amount of tax is also increasing.
So it's going to feel likeyou're getting double taxed if
you're in those gap windows, ifyou will.
Speaker 1 (18:31):
So this is what we talk about as a tax increase on
everyone, because the standarddeduction is going to get cut in
half.
That's going to raiseeveryone's taxes, and then all
the brackets are going to change.
So if you were in the 12%bracket, you're going to now be
in the 15% bracket.
(18:51):
That's a 3% tax increase.
If you were in the 22% bracket,you're now going to be in the
25% bracket.
Speaker 3 (19:01):
Or the 28, right, where the top end of the 22%
bracket crosses into the bottompart of the 28% bracket.
So what you're?
Speaker 1 (19:12):
saying there is for the same amount of income.
The brackets are also kind ofcompressing because, like, think
about this and I'm going to goto my tax chart right now If
you're married, you can haveover $731,000 of taxable income
(19:33):
before you're in that 37%bracket.
Now, if the Tax Cuts and JobsAct sunsets and we revert back
to what we were experiencing in2017, what was an approximation?
I don't have the exact dollarsand I know they're going to be
(19:55):
indexed for inflation, but doyou guys have an approximation
of how much income somebodycould have before they were in
the 39% bracket?
Speaker 3 (20:04):
Yeah, I don't have a number back then, but the
comparison chart that I have andagain we can provide just a
simple comparison chart isprojected to be $583,750.
Speaker 1 (20:17):
Okay, today I could make 700 grand and I'm still not
in the top tax bracket.
Grand and I'm still not in thetop tax bracket.
But come 2026, if I make 700grand, I am going to be well
(20:39):
into that top tax bracket.
Over $200,000 of my incomewould be taxed at that highest
marginal rate.
And so I think the moral of thestory with all of this is that
taxes are going up for everybodyin 2026.
I don't care if you are aretiree who is living on fixed
income of five or $10,000 amonth, or if you are the master
(21:01):
of the universe making $20million a year.
Your taxes are going up come2026.
So let's unpack this a littlebit with some ideas that our
clients and the listeners canthink about implementing this
year and next year, knowing thattheir taxes are probably going
(21:21):
to be higher in the future.
Speaker 3 (21:23):
I would say the biggest one that we talk about
with clients is acceleration ofincome.
Right, we want to pay the taxeswhile they're on sale, so to
speak, and we know that thatexpiration date is likely going
to occur.
So if we can accelerate and pay22% now versus 28% later, right
(21:44):
, we should probably do that Now.
The number of things that thatmay include, you know, a big one
that we talk to a lot ofclients about is Roth
conversions right.
So, again, paying the taxes nowversus later.
Speaker 1 (21:57):
Let's unpack that for a little bit, because some
people don't know the lingo andthe terminology.
So you said accelerate income.
And if I'm a listener who's nota business owner, I'm like well
, how the heck do I accelerateincome?
I can't just go to my boss andsay give me more of my paycheck,
right, I wish we could, butthat doesn't happen.
(22:17):
Don't try it, guys.
But there is a way to accelerateincome based on a planning
strategy called a Rothconversion.
If you have pre-tax retirementsavings, that could be your 401k
at work or an IRA, anindividual retirement account.
(22:38):
And so if you have either ofthose savings vehicles a 401k at
work or an individualretirement account, an IRA,
individual retirement account,an IRA you can actually convert
a portion of that balance fromthe tax deferred status to a tax
free status by moving it from atraditional 401k or IRA into a
(23:05):
Roth 401k or IRA.
And so let's say I've got$500,000 in my 401k or my IRA
and I want to convert $50,000 ofthat.
Because I can convert $50,000and keep my tax bracket at the
22% rate before I get bumped upinto the 24%, I can go to my
(23:30):
custodian Schwab, fidelity,whoever and I can request them
to take 50,000 out of the 401kand IRA and transfer that 50,000
into my Roth and at the end ofthe year you're going to get a
1099R from your custodian,schwab Fidelity whoever that
(23:53):
actually has that as a taxabledistribution to you, and so
you're going to owe the tax onit Again.
If it was a $50,000 Rothconversion and you're in the 22%
bracket, the 22% bracket you'regoing to owe about $11,000 in
income tax, right?
That's 22% times 50,000.
(24:16):
Now you might be saying like,why in the world would I want to
pay tax today if I don't haveto?
And it's the same reason thatif I know I need to make a large
purchase, I might want to makethat large purchase on Black
Friday when it's on sale,because taxes today are on sale.
(24:37):
We know that if we wait to takemoney out of that retirement
account till later on, let's sayin 2026 or beyond, that 22%
bracket probably isn't going toexist anymore.
It's going up to what you said,conrad 25 or 28.
And ask yourself, do you thinkit could be even higher than
(25:00):
those?
Because right now we're sittingat almost $37 trillion of
national debt.
The government needs to paythis debt off or pay it down in
one way or another.
And really, what's the mainlever for the government?
To raise more money to pay offdebt?
Raise taxes, raise taxes,exactly.
And so again, some of this stuff, although it seems
(25:21):
counterintuitive like why wouldI want to pay tax any quicker
than the government makes me.
It's because it's like a gameof chess.
You got to be thinking three orfour moves ahead.
For a simple retirementplanning client, david, that is,
for example, in the 12% bracketright now.
How many times do we do theanalysis?
(25:43):
And it makes so much sense forthem to fill up that 12% bracket
, particularly if they're goingto be electing social security
in a couple of years?
Because if we fill up the 12%bracket now and we move some of
that money to Roth money andthat Roth is invested and it's
(26:05):
growing in value, what does thatgive us the ability to do once
that client goes on socialsecurity from an income
standpoint?
Speaker 4 (26:14):
Yeah.
So that's a great point.
It gives us the opportunity totake money tax-free, and what
that's going to do is it's goingto make it so you could take
income without impacting yourprovisional income for Social
Security, meaning that you couldactually pay less tax later on
the Social Security you get, ifyou plan it correctly, gotcha.
Speaker 1 (26:37):
So basically we're ripping the Band-Aid off, we're
paying at these low rates, we'removing some of that money from
what would be forever taxed inan IRA or 401k to never taxed in
a Roth IRA or Roth 401k andthen when it is time to take
some of that money out, it's notgoing to even show up on our
(26:59):
tax return.
It's not going to cause tax onour social security benefit,
it's not going to potentiallycause a Medicare tax that makes
our Medicare a higher cost oncewe're age 65.
And it overall lowers thewithdrawal rate of what we need
to take out of a portfoliobecause we don't have to gross
(27:20):
up that distribution toaccommodate an income tax
liability at again those 25 or28% rates.
So it really is a win-winstrategy for a retiree.
But it's not just retirementplanning clients that need to
think about Roth conversions.
It's every one of our clientsthat has income because, again,
(27:41):
I'll be 40 this year and whenyou guys do my taxes and you
determine, hey, dave, you've gota little wiggle room in the 22%
bracket or hey, dave, we cancreate another $10,000 or
$20,000 of income, before youskip from the 24% bracket to the
(28:01):
32% bracket, I might want to gointo my company 401k and do an
in-plan conversion of some ofthat money from the pre-tax
allocation of my 401k to theRoth.
And again, young clients, olderclients, pre-retirees and then,
last but not least, people whoare concerned about generational
(28:24):
wealth planning.
We're doing this a lot withclients right now where you know
, conrad, how many clients do wehave that?
You don't have to give a number, but give some examples of this
that have accumulated more thanenough money than what they're
going to need to support theirentire retirement, and they're
thinking about how to maximizethe net after-tax money that
(28:47):
they pass on to their children.
And many of their children aregoing to be in the peak earning
years of their career when momand dad pass away, which means
they're going to be in highertax brackets.
And if they're in a higher taxbracket because of the earned
income, the last thing you wantto do is dump an inherited IRA
(29:09):
into that beneficiary's lap,because what does that
beneficiary have to do with thatretirement account that they
got from mom and dad?
Speaker 3 (29:17):
They now are subject to what's called the 10-year
rule, and we'll have to talkabout Secure Act 2.0 and how.
It certainly feels like thegovernment intentionally passed
that along with the expirationof Tax Cuts and Jobs Act, but in
essence, in the Secure Act 2.0,most kids will have 10 years to
(29:39):
withdraw 100% of the funds fromqualified accounts, meaning
your IRAs, 401ks, et cetera.
Now the Roth IRA is stillincluded in that rule, but the
Roth IRA still passes down as atax-free asset to the
beneficiary.
So your kids, instead ofinheriting an IRA that let's
(30:03):
call it, once you net out thegovernmental portion or the
partnership portion, as thegovernment would like to treat
it at 40% right, that's alikelihood of number They've
gotten 40% of that IRA, whereasa conversion today could mean
that you're passing a tax-freeasset to your kids.
Speaker 1 (30:23):
And particularly if you can pay tax at a lower
bracket like 22% or 24%, andmaybe your kids are going to be
in that 39.6% bracket and maybethey even have a high state
income tax also.
Again, it's tax arbitrage wewant to pay when the tax rate is
(30:43):
the lowest.
If you continue to defer, defer, defer, you're building up a
bigger and bigger and biggerliability.
Because if I have a milliondollar retirement account today,
hopefully it's invested andyou're working with a great team
like Allison Wealth Managementand maybe that million turns to
2 million or 3 million over thenext 10, 20, 30 years, that
(31:08):
basically means you've built upa bigger and bigger tax
liability as well.
But if we strategically funnelsome of that money from the
retirement account to the Rothaccount, and now you've got that
Roth account building biggerand bigger and bigger based on
the investments in the market,there's no liability attached
(31:28):
with that.
You own that money free andclear.
So that's such a huge planningidea.
And, david, it all comes backto what you shared.
It's the standard deductionchanging.
Now we are going to go back toadding personal exemptions for
some people and there's phaseouts and there's just more
confusion and complexity.
Like, go back and look at yourtax return from 2016.
(31:49):
You're going to see it looksquite different from your tax
return last year.
We also have these differentbrackets that we need to think
about.
So those bring up greatplanning techniques to maybe
accelerate income via Rothconversions For our business
owner clients.
Maybe another way to accelerateincome is try to get your
(32:10):
clients to accelerate yourreceivables.
And, conrad, I know you do aton of fractional CFO work and
business advisory.
I'm sure that's what you'regoing to be talking with clients
about as 2025 rolls around,before we cross that deadline of
2026.
Speaker 3 (32:27):
Absolutely yeah, and I mean ultimately the business
changes.
While it's a lot lower innumber, I think are much more
wide ranging in its impact.
Because this concept ofqualified business income right,
the nebulous concept which eventhe IRS has failed to fully
clarify to this date, right, allof the rules and regulations is
(32:53):
a massive impact to businessowners and, ultimately, if we
can accelerate income and,number one pay a lower tax
bracket but also leverage ahigher QBI deduction as a result
of that right, you remember howI said that the double taxation
effect would be in place forindividuals.
(33:14):
This is a double reductioneffect in essence, right,
because the QBI could, forsimple numbers, reduce business
income by up to 20%.
So, for simple math, you make100,000, the QBI would, in
essence, reduce your taxablebusiness income to $80,000.
Speaker 1 (33:35):
So, conrad, we do a lot of business entity work with
our clients that havebusinesses or that are thinking
of starting a business, even ifit's just a side hustle setting
the right entity and what I meanentity you could have a sole
proprietorship, you can have anLLC, you could have a
partnership, you could have an Scorporation or you could have a
(33:59):
C corporation, and the decisionon which way you go is kind of
table stakes.
There's asset protection,there's liability protection and
there's also taxation that isimpacted by how you elect your
business entity.
And we don't have the time,we'll do another podcast episode
(34:21):
on this, but essentially let'stalk about Tax Cuts and Jobs Act
, because a lot of our clientsare not C corporations.
C corporations are usually thebig companies, with the
exception of David, some of ourSilicon Valley clients who are
in tech, that have tech startupsthat are maybe going to raise
(34:41):
capital they might want to electas a C corp.
And what's another reallyunique tax strategy?
If somebody elects as a C Corpand they're in tech, they're
creating technology innovations.
Speaker 4 (34:54):
There's a lot to go along with it.
One is there's tax credits forthe research and development tax
credit.
The other, which is anopportunity, is qualified small
business stock, which if youever sell your company, you
could exclude up to $10 millionon the sale of your business
stock.
Speaker 1 (35:13):
So there's owners, so like if you are part of the
stock and your wife owns part ofthe stock, that could be up to
$20 million of tax-free money.
So that's huge.
Yeah, qualified small businessstock, section 1202.
And again, we're not going toget into that in this episode.
We'll do another podcast onthat for the people that that's
relevant to, but for Ccorporations, with the Tax Cuts
(35:35):
and Jobs Act, their tax ratelowered, right, conrad?
Speaker 3 (35:39):
Yeah, it dropped significantly, right.
So prior to the Tax Cuts andJobs Act, c corporations paid
35% on their profits.
Jobs Act C corporations paid35% on their profits.
The Tax Cuts and Jobs Actdropped that to 21%.
That's a 14% reduction of theirtax rate across the board.
So it was a big, big reduction.
Speaker 1 (36:01):
And what happened is like the people who were not C
corps kind of, you know, startedpicketing right.
They started rallying aroundlike this isn't fair.
Why are you going to give thesebig corporations this enormous
tax break but not the smallbusiness owners?
Because the small businessowners, who are mainly our
clients, are sole proprietors,they're LLCs, they're
(36:26):
S-corporations, which the commondenominator of those businesses
they are pass-through entities.
The income passes through tothe owner's tax return, and so,
in response, congress createdthis qualified business income
deduction what Conrad wastalking about earlier.
And the gist of this thinginstead of paying tax on 100% of
(36:50):
your business income, you onlyhave to pay tax on 80% of your
business income.
So if you are in a 22% taxbracket and you only have to pay
80% of that tax, you can see80% times 22 is 16 and a half,
(37:12):
about 16 and a half, and sothat's a much lower tax rate.
And so what it did was?
It helped bring parity to oursmall business owners, but again
, so many planning techniquesthat need to be considered.
So, for example, you know a lotof our business owners used to
use qualified plans like solo401ks or SEP IRAs to defer their
(37:35):
income and save on taxes thisyear.
But again, maybe they might notwant to do that because they
might be sacrificing some oftheir qualified business income
deduction.
Like which would you rather do?
Pay tax at 80% today or deferthat income into the future
(37:57):
where you're going to have topay tax at 100% when you take it
out of that retirement accountand potentially be in a higher
tax rate?
So, with business owners, thebig considerations and what
we're doing around tax cuts andjobs act planning is how do we
think about accelerating income?
How do we think about deferringincome?
(38:17):
What type of business entityand structure do you have today?
What type of business entityand structure makes sense if all
of these sunsetting provisionshappen and they change the laws
in 2026.
And then, last but not least,what types of retirement
accounts do you have set up inthe business 401ks?
(38:39):
What types of benefits do youhave for your employees?
And then, what types of assetsare you purchasing in the
business?
Because talk about bonusdepreciation for a minute and
how that impacts our businessowners.
Yeah it, bonus depreciation fora minute and how that impacts
our business owners.
Speaker 3 (38:51):
Yeah it.
Bonus depreciation is is, inessence, in its simplest form,
an acceleration of the deductionthat you get for buying a piece
of equipment or property.
And under normal rules, right,let's say you buy a piece of
equipment for fifty thousandbucks and it's subject to a five
year life and what that meansis it's estimated to to last
(39:16):
five years.
Normal depreciation says youcan take a ten thousand dollar
expense each year for that pieceof property for five years.
Five years.
What bonus depreciation did andtwo years ago it was up to 100%
of qualified property was, saywe'll let you expense, in
(39:41):
essence, that equipment in thefirst year.
So instead of a $10,000deduction you'd be getting a
$50,000 deduction for that pieceof equipment in the year of
purchase.
Now, two years ago, thesunsetting provisions on bonus
depreciation actually startedtwo years ago where, instead of
it being 100%, you could get 80%of a deduction.
In this year it was 60%.
Moving down it's 40%, 20%.
(40:04):
Until bonus depreciation it'szero.
And we go back to old rules,which is pre-tax cuts and jobs
act.
Now we also still have section179.
So there's still anothermechanism to utilize, but kind
of the-.
Speaker 1 (40:21):
So you can still buy your Range Rover.
Speaker 3 (40:24):
Yeah For the TikTok advisors, right, you can still
buy a Range Rover every year andwrite it off and nevermind know
, never mind, don't listen toConrad.
Speaker 1 (40:31):
That is not tax advice.
You can kind of, but there'ssome rules, right, right I say
that very much.
Now, conrad, there is actuallylegislation that's going through
the House and the Senate rightnow of reenacting 100 percent
bonus depreciation because thatis good for the economy.
You know the Republicans wantit.
The Democrats aren't pushingback on it because we want to
(40:54):
spur businesses to makeinvestment in manufacturing and
equipment and we want to givethem tax incentives to be able
to do that.
So that's actually tied toanother bill that I think will
probably have some legs andactually go through.
But the reality of it is, youknow, and kind of the moral of
the story here, before we moveon to the next topic, is, if
you're thinking about makingmajor investments in your
(41:17):
business, call Conrad before youdo it.
Like, let us analyze, like, doesit make sense to buy them now?
Does it make sense to wait?
Should we hold off until theHouse and the Senate decide on
what they're going to do?
What might impact thosedecisions of buying and putting
that equipment into place nowversus later?
So so many things to considerwhen it comes to how we're
(41:39):
advising our business advisoryclients.
But you know, outside ofbusiness owners, let's get back
to kind of the normal everydayconsumer and maybe these aren't
the everyday consumers, but,david, you're kind of knee deep
in working with clients thathave incentive stock, and with
incentive stock, what's the onething that people hate more than
anything else?
Speaker 4 (42:00):
Well, I love it, people hate it, but it's
alternative minimum tax and it'sthis parallel tax system that
we have, and what's going tohappen is they're making huge
changes to the AMT exemptiononce this expires, so it's going
to impact basically everyonewho has incentive stock options
(42:22):
or who might pay AMT.
Speaker 1 (42:23):
And basically, these changes are going to increase
people's taxes in their abilityto exercise these incentive
stock options, and so it mightmake sense to accelerate what
you otherwise would haveexercised in latter years,
because your tax liability willbe higher in later years.
(42:45):
And so, again, like David, Iknow you're doing a lot of
analysis for our clients thathave ISOs incentive stock
options and maybe it makes senseto bundle a bunch more
exercising in 2024 and 2025before these AMT rules change,
and what we're going to see froma tax preparation side is
there's going to be a lot morepeople who are subject to this
(43:06):
parallel universe of the AMT,which is a horribly challenging
tax system to navigate.
But again, I know it's stuff wedo every day, all day for
mostly our Silicon Valleyclients that are working in
private companies that aregetting these stock option
grants and they have millions ofdollars on the table in tax
(43:29):
savings if they work with a teamlike ours to help them navigate
the potential of how theyshould exercise these so huge,
huge area there.
The other one that I want totalk about, and something that
is hot on my mind right now, isthe gift in a state tax
exemption.
So, conrad, like what is thisin the first place and how does
(43:52):
this impact our clients?
Speaker 3 (43:54):
Yeah, this is the gift in a state.
Exemption is is, in essence,how much you can give to family
or friends and not have to paythe government a dime Under the
Tax Cuts and Jobs Act.
It increased prettysubstantially.
Right now that gift and estateexemption is $13,610,000 per
(44:21):
person.
Wanted to give away all of ourcall it $27 million of assets.
Right, not that we have it, butif we had it, we could give it
away today and pay zero tax onthat.
Now, once we give it away, it'sgone.
(44:42):
We've used up that exemption.
The expiration of the Tax Cutsand Jobs Act, though, in essence
cuts that number in half.
So, instead of having $13.6million, we now have $6.8
million is the projection that Isaw?
$6.8 million of estate and giftexemption.
(45:03):
Now, that's your lifetimeexemption.
So if you gift a milliondollars one year and a million
dollars the next year, well,your exemption is your exemption
is now 4.8 million, and imagineif Biden's proposal goes
through, where it drops it backdown to what was the last number
I saw A million dollars.
Speaker 1 (45:21):
It's been low in the past.
I mean, here's the reality ofwhy this exists.
The government doesn'tnecessarily like dynastical
wealth right, Because people whohave dynastical wealth become
quite powerful, and so one ofthe ways to try to eliminate
that is enact an estate taxright.
And the estate tax says whenmom and dad die, if they leave
(45:48):
over a certain amount of moneyto their family, we're going to
come in and take in today's taxrate, 40% of it.
So let me use some simple math.
Let's say the estate exemptionwas $5 million each, like it was
about 10, 15 years ago.
It was around $5 million each,and let's say I've been
(46:08):
fortunate enough to amass $20million of estate value.
Now what does estate valueinclude?
It includes all the money weown, so it includes my
retirement accounts, it includesmy investment accounts, it
includes my business ownership,it includes my real estate and
it includes any death benefit oflife insurance.
(46:29):
So even if I have a $5 millionterm life insurance policy, that
$5 million is included in mytaxable estate.
So let's use the example thatthe exemption is $5 million each
.
I have Alana and I, so thatmeans as a married couple, we
can exempt $10 million from thetransfer tax to pass this money
(46:52):
on to our kids.
But because we've amassed a $20million estate, $10 million the
amount above our exemption issubject to this transfer tax of
40%.
So that's a $4 million tax billthat my estate is going to have
to pay, which means my kids getthe $10 million that I had.
(47:15):
That was part of the exemptionand then of the other $10
million above the exemption, thekids get $6 million.
The government gets $4 millionand you might say, eh, who cares
?
The kids still got $16 million.
A lot of our clients say Idon't want the kid's still got
16 million.
A lot of our clients say Idon't want the government to get
that 4 million.
And we all have three places wecan leave our money when we
(47:39):
pass away Our family thegovernment or charities, and you
generally have to pick two ofthe three.
So under that plan you're onthe government plan.
I leave $16 million to myfamily, I leave $4 million to
the government.
Now the thing about the estatetax is that it is an optional
(47:59):
tax.
It's an optional tax because ifyou work with our team and we
bring in the right estatelawyers that we utilize to
construct advanced estateplanning, you could eliminate
this altogether, and I'll giveyou an example.
Last night I was with one ofour clients I'm not going to say
names and I was with our estateplanning attorney, Benjamin
Kelly, that we utilize for ourultra high net worth and high
(48:21):
net worth clients who are goingto have an estate tax issue.
Well, this client has about a$60 million estate and they're
going to continue to grow itbecause they're just earning a
enormous amount of money eachand every year.
And so what we had set up was atrust, because if you have an
irrevocable trust and you giftyour money into the trust, it's
(48:45):
no longer included in yourtaxable estate.
And so what the husband did washe set up an irrevocable trust
for the benefit of the wife.
Then what the wife did is sheset up an irrevocable trust for
the benefit of the husband, andthe husband was able to gift his
(49:05):
$13 million exemption into thetrust for the wife, and the wife
was able to gift her $13million exemption into the trust
for the wife, and the wife wasable to gift her $13 million
exemption into the trust for thehusband.
Now, if the husband needs money, he goes to his trust, which he
is the trustee of.
He asks himself for money.
He gives himself money, but itis completely protected from the
(49:28):
estate tax.
Same thing with the wife.
The wife needs money.
The wife can go to her trust,she can ask herself for money,
she gets the money.
And so what that did is it took$26 million and it moved it out
of their taxable estate.
The other thing but they stillhave full control of that $26
million Plus, we left money intheir taxable estate, just in
(49:51):
their normal revocable trust intheir house, in their retirement
accounts, because that's themoney that they're going to
consume and live once theydecide to retire.
Then what we did is they havetwo children.
We set up lifetime giving trust.
These are irrevocable trust forthe benefit of their children
and under today's tax law, howmuch can we give each and every
(50:14):
year from an annual giftingstandpoint without having to
worry about any of this estateor gift tax returns or tax
issues?
Speaker 4 (50:25):
Yeah, so for this year, for 2024, it's up to
18,000.
Speaker 1 (50:29):
18,000.
And David, is that like aone-time thing, like, or can I
give 18,000 to a bunch of people?
Speaker 4 (50:35):
It's 18,000 per person.
So if you and Alana want togive 18,000 to any one person,
you could actually double it andthen it makes it 36,000.
Speaker 1 (50:46):
So in this case, what we did was we set up two
irrevocable trusts for thebenefit of the children, and mom
and dad can put $18,000 eachinto each trust for each child.
That's 36,000 times two is72,000.
Now these children are youngerand we're going to do that for
(51:07):
the next 10 or 20 years.
Right, 36,000 times 20 years is$720,000, right Into this
irrevocable trust for thebenefit of the child.
That can be used to pay fortheir college tuition.
They can use it to finance adown payment on the home.
They can use it to start abusiness.
(51:28):
We helped work with the familyto identify what the purpose of
the money should be.
We don't want to raise just abunch of trust funds who think
like, oh, I never have to work aday in my life.
This trust is not to providefor them so that they don't have
to work, it's to supplementsome of the necessities in life,
to give them maybe a quickerjumpstart into being able to buy
(51:50):
their first house.
But it's not to raise a trustfund kid.
And so we write a lot of thatincentivization in the trust and
we work with families all thetime.
But I get back to with the TaxCuts and Jobs Act, we've been
doing this type of planning forour ultra high net worth clients
that have been fortunate enoughto amass over 25 or $30 million
(52:11):
, because they've been the onesthat have been historically
subject to this transfer tax.
And, quite frankly, if you haveover $30 million, you probably
have enough money to supportyour lifestyle.
And now you're starting tothink about multi-generational
planning, right, you're startingto think about how does this
money impact my children, mygrandkids, my great grandkids
(52:34):
and the charities, both whilewe're alive, that we want to
participate in and then thecharities that we want this
money to go to upon our passing.
But what's going to happen in2026 is a lot more people are
going to be exposed to thisestate and transfer tax.
So, for example, we have a lotof clients that have been
(52:55):
fortunate enough to amass $10million, $20 million, and the
estate and transfer tax wasnever on their radar because the
exemptions were so high.
When those exemptions get cutin half, they now are going to
have a lot of this exposure.
They should be proactivelyengaging in conversations and
(53:16):
strategy around how they canmitigate or eliminate this but
not lose control of their money.
Because I always say thoseclients they have a lot of money
but they don't have a lot ofmoney.
It's not like they can justgive away $15 million and be
okay.
They need that money to liveoff of, and that's why some of
this spousal, lifetime access,trust type of planning or, quite
(53:37):
simply, in many clientscenarios, the right approach is
don't use trust at all.
Just buy a second to die orsurvivorship life insurance
policy that can pay the estatetax for your estate, because in
some cases you can buy a lifeinsurance policy for quarters on
the dollar.
And so in my scenario earlier,if I knew I was going to have a
(54:02):
$4 million tax bill, maybe justbuying a life insurance policy
that pays $4 million is the bestapproach, like in Alana and I's
example right now, if I passedaway or we passed away after
2026, we would have an estatetax liability with business
interests and everything elsethat I've been able to
accumulate at this point.
(54:23):
Now for me, I'm not ready tohave the complexity of
irrevocable trust.
I don't have that much money atthis point, right.
But what Alana and I did was wepurchased a $3 million
survivorship policy that at thesecond death it pays $3 million
to our estate.
That takes care of paying allthe tax, so the kids don't have
(54:44):
to.
And for us, because we'reyounger, I pay $8,000 a year,
not $9,000 a year for thatpolicy.
So for nine grand a year Ibasically took care of all my
estate and transfer tax at deathfor my kids.
That's a no brainer in myopinion, right?
And now, if you were, I'm 40,right, and Alana's a little bit
younger, the numbers still workout.
(55:06):
We just did this for a clientwho's 71 and their numbers were
a little bit different.
They paid $70,000 for a $3million policy, but the IRR on
that still works out, because at71, they might have another 20
years of life expectancy.
So again, let's say, $70,000 ayear times 20 years is they
(55:29):
would have paid $1.4 million tothe insurance company to get $3
million income tax-free andestate tax-free.
And so, again, there's so manyunique opportunities to think
about.
But this is all because ofthese sunsetting provisions of
the Tax Cuts and Jobs Act.
So, fellows, I think we did agood job summarizing.
(55:50):
Is there anything else that youcan think about as we land the
plane here that our clients canconsider?
And, conrad, again, just remindeverybody of that document that
you have available.
Speaker 3 (56:01):
Yeah, yeah, we'll send it out.
Just send us an email to infoat allisonwealthcom.
Be glad to share anyinformation that we have with
you guys, and then, obviously,as planning needs come up, we'd
love to help you with those aswell.
I think you know there are somany different small nuances of
(56:23):
the Tax Cuts and Jobs Act wecould probably spend another
full hour on those alone.
So you know the bigger ones,and the other one that I want to
point out is the child taxcredit.
This will impact a lot ofpeople with children as well,
and so that's going to drop frompotentially $2,000 to $1,000
credit.
(56:43):
So you know, on top ofsignificantly reducing the
standard deduction now, you'realso losing, potentially, some
of the credit.
There's so much to it.
I think clients, the big thingthey need to remember this isn't
just one thing or another.
There's likely going to bethree to five to 10 different
ways that your taxes are goingto be impacted.
Speaker 4 (57:05):
Yeah, and I mean.
One final thought I have is Iremember when the Tax Cuts and
Jobs Act came out, it was billedas a simplification to the tax
code.
If anything you could say itgot more complex and it's going
to get more complex as we goforward.
So it's good I get to keep myjob, because it makes things
more complex, but it'sdefinitely something to think
(57:29):
about is that there's just goingto be increasing complexity.
Speaker 1 (57:32):
And millions and millions of dollars on the line
in excessive and unnecessarytaxes.
I mean, we didn't even get intothe SALT deductions, the
$10,000 a year of federal incometax, because of how you
restructured his business entityand took advantage of the
(57:58):
pass-through entity tax.
There is so much here to Conradyour point.
We can't get to it in onepodcast, but here's what I will
say don't procrastinate on thisstuff, because if you call our
office or any of the otherreally really good holistic
wealth management and taxoffices across the country in
(58:19):
September, october, november ofnext year, I don't even know if
we'll be able to bring on newclients.
We'll be so busy during thattime frame.
This is why, again, think aboutthe client that we just met
with yesterday frame.
This is why, again, think aboutthe client that we just met
with yesterday.
We want so much runway to beable to strategize with you and
your family about what the righttechniques are for you.
(58:40):
We don't want to be under thegun to make a bunch of decisions
as these deadlines startlooming over our head.
This is stuff that you need tometiculously think through and
understand the trade-offs,because if you flip your
business to a new entitystructure, or if you gift a
bunch of assets to anirrevocable trust, or if you buy
(59:00):
a large life insurance policy.
These are decisions you have tolive with for a while and we
don't want to be under the gun.
So reach out to our team.
We're here to help.
We do an initial complimentaryphone call just to get to know
your situation, talk a littlebit more about how we might be
able to help, and maybe we can't, or maybe we can refer you to a
(59:23):
firm who specializes inwhatever your need is.
We've got a lot of connectionsacross the industry and so,
again, so much opportunity withthe Tax Cuts and Jobs Act, and I
appreciate both you guysjumping on the pod today to
share with us.
And let's get back to meetingwith our clients now and driving
some of these strategiesforward.
Speaker 2 (59:42):
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Hey everyone, welcome to the Complete Wealth
Management Podcast.
I've got my two compadres withme here, david Roth and Conrad
Levesque.
Welcome, fellas.
It's good to be here.
Hola, hola, hola.
Well, this is kind of ameaningful episode for me.
Here we're going to be talkingabout the Tax Cuts and Jobs Act,
and the reason that I say it'smeaningful is, you know, I
(00:23):
remember back to 2017.
And you know a lot of peoplerefer to this as the Trump tax
cuts.
If you kind of can go back in atime machine to 2017, donald
Trump was the president and hewas proposing a lot of these
major tax cuts in this massivetax reform actually the largest
tax reform that I had seen in myentire lifetime.
(00:46):
And like, if I go back and lookat what Allison Wealth
Management was back then, wewere really kind of what I would
consider to be more of like afamily office, like we only had
a couple clients.
We really built theorganization to serve the
financial needs of my brotherand his family and what he had
going on kind of in his journeyof getting acquired by Facebook,
(01:10):
which is now Meta, and you knowkind of the journey that
happened along the way there andyou know we had started to
expand some of the services to afew other families, of really
tying together holistic wealthmanagement, of the financial
planning, the asset management,the tax management, the
protection planning and,ultimately, the legacy planning
(01:32):
kind of what we call our fivepillars of holistic wealth
management.
But in 2017, the Tax Cuts andJobs Act proposal came out, and
at the time, I had aone-year-old daughter.
Everly was one it's crazy tobelieve that she's turning eight
now, but she was one and, asboth of you guys know, when you
have a one-year-old, you're notsleeping a whole lot through the
(01:54):
night, and so what better wayto kill some time in the middle
of the night than to sit aroundand read tax proposals and tax
law?
And I remember sitting there inNovember of 2017, reading
through the proposal of the TaxCuts and Jobs Act, and I was
really trying to understand howthis massive tax law change
(02:16):
would impact the few clientsthat we were serving at the time
, and I just had this likeepiphany that this tax law was
going to be a game changer foralmost everybody.
You know, so many times taxlaws only impact a certain
segment, maybe they only impactbusiness owners, maybe they only
(02:37):
impact retirees, maybe theyonly impact ultra high income
earners.
But this one had, you know,what I call something for
everybody in it.
It impacted low income people,it impacted high income people,
it impacted retirees, itimpacted business owners.
It really did have somethingfor everybody.
And I remember saying likeconsumers need to be educated
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about this stuff.
And you know, at that time thatwas where I strategically
decided that we were going toopen up the resources and the
service and the expertise atAllison Wealth Management to
many, many more people, justbecause I felt like I had a duty
to be able to educate as manypeople as I could about how this
tax law was going to impacttheir family finances.
(03:22):
And I actually, at the time,sat down and I created what
today we call the tax managementjourney, which is our proven
process around how we help ourclients maximize their income
and minimize their taxes and notjust their taxes each and every
year, but their lifetime taxesand really helping them
understand that not all money istaxed to the same and that if
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we apply some strategy to howthey accumulate their wealth,
how they proactively managetheir wealth and, ultimately,
how they distribute their wealthto themselves in retirement, to
their family amongst theirpassing to the charities that
they hold near and dear to theirheart, then we could really
help them eliminate a majorchunk of income tax and estate
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tax liability.
And really all of that wasspawned by the Tax Cuts and Jobs
Act.
And I could honestly sit hereand say that if it wasn't for
the Tax Cuts and Jobs Act, Idon't think we would know each
other, because at at the time, Ineeded help in bringing all of
these resources and valuableplanning to more and more
clients.
(04:29):
And that's when, you know,david, you joined the team.
What was that now?
About four or five years ago?
Yeah, I think it's about four,four years ago.
Yeah, four years.
Time flies.
And so, you know, I neededanother tax expert who
understood this stuff, who couldanalyze this, who could help
communicate it with clients.
And again, you were a certifiedfinancial planner and an
enrolled agent admitted topractice before the IRS.
(04:52):
And then I started teachingthis stuff nationally to
advisors all around the country.
And, conrad, that's how youfound our national company,
prosperity Capital Advisors,that I was fortunate enough to
help found about 11 or 12 yearsago, because, again, you were a
CFP, a CPA, an investmentadvisor, and you have a passion
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for helping people eliminatetaxes and build their wealth as
well, and so you had your ownindependent practice in Atlanta
Laveck Associates, and youjoined Prosperity Capital
Advisors, and, of course, youand I have hit it off over the
years, and in August of lastyear, you decided to join the
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team at Allison Wealth and helpkind of partner in this big
picture initiative of bringingthis to more and more clients.
And so, like again, I don'tthink the three of us would be
working together if it wasn'tfor the Tax Cuts and Jobs Act,
and I certainly know thatbecause of the course I built
the tax management journey basedon what we do to help our
(05:58):
clients maximize their income,net worth and minimize their
taxes.
You know we've been able tobring this message in education
to thousands of clients acrossthe United States, and so it's
what's kind of bittersweet aboutthis whole thing is that, you
know, conrad, with the Tax Cutsand Jobs Act that came out in
(06:20):
2017, there was something reallyunique about this law in that.
Here's a little bit of triviafor you guys.
Do you know how they passedthis law, how Donald Trump got
this law to be, even though hecouldn't get the majority of
Congress to agree upon it?
Speaker 3 (06:40):
Yeah, I do.
It's called the Byrd Doctrine,right.
What's the Byrd Doctrine right?
What's the Byrd?
Speaker 1 (06:44):
Doctrine.
Speaker 3 (06:46):
Under this doctrine.
Speaker 1 (06:47):
That's something that flies by over the air tweeting
at you.
Speaker 3 (06:51):
Listen for all the Boston Celtics fans.
It's not about Larry Byrd, okay, and I forget the senator's
name.
The rule came about where.
Senator Byrd created this rulethat Congress could not cause
increase in taxes or a largeamount of burden over a 10-year
(07:12):
period or greater than 10 years.
What that means is, if we can'tdecide or determine the impact
of an action of Congress thatlasts greater than 10 years,
then you cannot do that, and sowhat Donald Trump and team did
was create a law that basicallyexpired right around 10 years.
(07:33):
Right, it was within that 10year window, and so it didn't
violate that bird doctrine, andso it has automatic sunsetting
provisions, which again avoidthat bird duck, if you will.
Speaker 1 (07:46):
Yeah, it's interesting.
You know they passed thisthrough a legislative process
called the budget reconciliation, and what that basically means
is exactly what Conrad said whenit comes to things around the
budget and reconciling thebudget which, of course, taxes
impact the budget, right, that'sthe money that comes in.
So, when it comes to thingsaround the budget, you don't
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have to have super majority,which is 60%.
You can actually get by andpass law with just majority, and
so at the time, in 2017,president Trump and team did not
have super majority, whichmeans if they tried to pass this
like a normal law, it wouldhave got filibustered right,
(08:29):
where they kind of grandstandfor days and days at a time and
then they wear each other outand they burn all of our
taxpayer dollars to just waste abunch of time because they
can't agree on anything.
Right Like this eliminates thatbecause they had majority, not
super majority, and so they wereable to pass this tax act.
But under that, one veryimportant caveat that a lot of
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these tax cuts have to expirewithin a 10-year time period,
and so 2017, it's hard tobelieve is approaching a 10-year
time period, which means a lotof these things that reduced all
of our income taxes will expireand go away at the end of next
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year, 2025, because starting in2026, we revert back to the old
tax system and the only thingthat would change that is if
Congress enacts new tax law.
And listen, that could happen.
But is it a high probabilitythat in an election year, when
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there's so much on the table andwe have a divided House and
Senate, that they're all goingto get together and say, yeah,
we agree, we should keep taxesthe way they are?
Probably not, because we knowthe political agendas and this
is not a political conversationhere, but President Biden has
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been crystal clear on what hewants to do with tax policy.
We've done webinars on Biden'stax proposal.
I have a video on our YouTubechannel on what he proposed here
in 2024.
And for most income earners,it's a massive tax increase for
those that are earning over$400,000 a year of income, which
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are many of our clients, and alarge tax increase for those
that have over a million dollarsof income, which again is many
of our clients, particularly ourCalifornia clients that have
both spouses working to be ableto afford a home in the standard
of living in the San FranciscoBay Area, and so we know
President Biden's proposals.
(10:45):
We also know President Trump'sproposals, and those are the two
people running for presidentright now.
We've seen both of theirplaybooks already, and the
reality of it is there'sprobably not going to be a lot
of bipartisan agreements thathappen in Congress and with the
president this year being in anelection year and then probably
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next year as well, with adivided House and Senate
potentially.
So there's an enormous amounton the line with this upcoming
election and how it translatesto taxes.
And so what we wanted to do inthis episode is break down some
of these sun setting provisions,how they will impact your
(11:29):
personal finances come 2026.
And, most importantly, someplanning that you could do today
to potentially make some taxsavvy decisions.
And so that's what we're goingto spend the rest of the time in
this episode on, and I'mexcited to jump into it with you
guys.
All right, guys.
(11:58):
So we're going to tackle someof the big provisions and
changes and, conrad, you werejust sharing with us earlier,
you've developed a document that, if any listeners want a copy
of it, just email info atallisonwealthcom.
That's info at allisonwealthcom.
We'll get you a copy of thistool.
(12:19):
But, conrad, talk about whatthis tool does first, and then
we'll get into some of thedetails.
Speaker 3 (12:23):
Yeah, it identifies some of the major changes that
you guys will face as taxpayers,and it's a kind of a yes or no
questionnaire.
It's only a couple of pages,it's not going to take you two
hours to fill out, but it's justgoing to be a call to action,
meaning if you feel like this isgoing to impact you, you have
the opportunity to startplanning ahead.
(12:45):
Again, you mentioned in theintro we have until the end of
2025, which seems like a longway away, but when we say the
end of next year, I think it's alittle more imperative that you
start to act.
Speaker 1 (12:59):
So it's just going to be saying that.
It says it in our side mirrorson our car.
You know, right at the bottom.
Speaker 3 (13:06):
Yeah, objects are closer than they appear, right.
Speaker 1 (13:09):
Objects are closer than they appear.
I feel like that's that thatshould be written across the Tax
Cuts and Jobs Act right now.
Speaker 3 (13:15):
Yeah, and there are so many changes that we're going
to experience here going back,new experience here going back.
I'm going to have some PTSDthinking about being in the
trenches back in 2016, 17 and 18and having that major change
come about for all of my clients.
So we're going to flip back tothat and I think anybody
listening you're going to havesome level of change for your
(13:37):
tax situation.
Others you're going to have amajor change.
So we'll kind of dive into thathere.
I'm excited to talk about thesechanges.
Speaker 1 (13:45):
Yeah, and again, like just what I mentioned earlier,
when the Tax Cuts and Jobs Actwas passed, it was something for
everyone.
Well, guess what?
When these things sunset, it'ssomething for everyone.
We're going to talk about highincome individuals, we're going
to talk about retirees, we'regoing to talk about business
owners, and then there's somethings that are going to impact
everybody.
So, david, let's kind of kickit off and let's just brainstorm
(14:06):
.
I mean, we haven't planned anyof this stuff.
We'll just kind of run off thetop of our head of things that
we come up with and talk aboutand brainstorm and share
strategies that we're talkingabout with our clients and I'd
imagine we probably don't evenhave a lot of our clients that
listen to this podcast becausethey know we have already taken
care of all of this stuff forthem.
But for the listeners likeDavid, what would you say is,
you know, the first kind of bigthing that's going to change
(14:29):
when the Tax Cuts and Jobs Actsunsets?
Speaker 4 (14:32):
Yeah, so I think the one big thing that's going to
change, that's going to impactpretty much everyone, is the
standard deduction.
So the Tax Cuts and Jobs Act,they nearly doubled the standard
deduction and when we go backand we get into 2026, it's going
to revert back to what thestandard deduction was, which
was $6,350 in 2017.
(14:53):
So that's the huge impact.
Speaker 1 (14:56):
So, just to put that into perspective, I'm looking at
my handy tax guide right now.
I always keep it.
It's my little roadmap, mycheat sheet.
I don't have all these numbersmemorized A lot of them
memorized but the standarddeduction for somebody who's
married, filing jointly, in 2024is $29,200.
(15:16):
Now if you're over age 65, youget an additional $1,550.
You get an additional $1,550.
If you're single, the standarddeduction is about $14,600.
And again, if you're over 65,you get an additional $1,950.
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So the standard deduction is thefreebie that the government
gives us.
That's the amount of income wecan have and we don't have to
pay any income tax on it.
So that's one of the mostpowerful tax planning and tax
management tools that we have inour toolbox is how we use that
standard deduction.
And when the Tax Cuts and JobsAct doubled that standard
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deduction, that was double theamount of income we can have
without paying any income tax.
So, david, you said that thatstandard deduction I mean if it
was doubled in 2017, 2018, afterthat law was passed, and let's
say, for round numbers, it's 30grand of income somebody can
have as a married couple andthat reverts back and it gets
(16:24):
cut in half.
Now that's about $15,000, if youwill, that's a pretty big
difference.
I mean, even at that lower rateof 10%, that's $1,500 of
additional income tax liability.
If somebody's in the highermarginal rates, which are about
40%, 40% of that $15,000 is6,000.
(16:48):
So that's a pretty meaningfultax difference right out of the
gate of just that simple changeof the standard deduction.
So what else?
The standard deduction is goingto change for everybody.
That's going to impacteverybody.
What else happens?
Because of the sunsettingprovisions?
Everybody that's going toimpact everybody.
Speaker 4 (17:05):
What else happens because of the sunsetting
provisions?
I think the other big onethat's going to impact everyone
are the tax brackets are goingto change, in particular the top
tax bracket right now 37%.
Once the sun sets it's going tojump back up to 39.6% as a top
tax rate.
Okay, so I'm pretty good atmath 6% as a top tax rate.
Speaker 1 (17:22):
Okay, so I'm pretty good at math.
39.6% minus 37% is a 2.6%change, right.
So that's not a huge deal.
If I have a million dollars ofincome at those top rates, it's
about $26,000 more of income tax.
(17:45):
But what we also know is thatit's not just the top rate
that's changing, right, Conrad.
Speaker 3 (17:50):
Yeah, what we're seeing is kind of a reset across
the board.
Outside of the numbers, rightthe income inside the bracket
the 12% bracket that we havetoday will go to 15%.
So it's a material difference.
On the lower end of the scaleas well.
The 22% bracket goes to 25, 24goes to 28.
(18:12):
So we're seeing not just thosebrackets in the top level of
income be compressed downwards,we're seeing that the actual
amount of tax is also increasing.
So it's going to feel likeyou're getting double taxed if
you're in those gap windows, ifyou will.
Speaker 1 (18:31):
So this is what we talk about as a tax increase on
everyone, because the standarddeduction is going to get cut in
half.
That's going to raiseeveryone's taxes, and then all
the brackets are going to change.
So if you were in the 12%bracket, you're going to now be
in the 15% bracket.
(18:51):
That's a 3% tax increase.
If you were in the 22% bracket,you're now going to be in the
25% bracket.
Speaker 3 (19:01):
Or the 28, right, where the top end of the 22%
bracket crosses into the bottompart of the 28% bracket.
So what you're?
Speaker 1 (19:12):
saying there is for the same amount of income.
The brackets are also kind ofcompressing because, like, think
about this and I'm going to goto my tax chart right now If
you're married, you can haveover $731,000 of taxable income
(19:33):
before you're in that 37%bracket.
Now, if the Tax Cuts and JobsAct sunsets and we revert back
to what we were experiencing in2017, what was an approximation?
I don't have the exact dollarsand I know they're going to be
(19:55):
indexed for inflation, but doyou guys have an approximation
of how much income somebodycould have before they were in
the 39% bracket?
Speaker 3 (20:04):
Yeah, I don't have a number back then, but the
comparison chart that I have andagain we can provide just a
simple comparison chart isprojected to be $583,750.
Speaker 1 (20:17):
Okay, today I could make 700 grand and I'm still not
in the top tax bracket.
Grand and I'm still not in thetop tax bracket.
But come 2026, if I make 700grand, I am going to be well
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into that top tax bracket.
Over $200,000 of my incomewould be taxed at that highest
marginal rate.
And so I think the moral of thestory with all of this is that
taxes are going up for everybodyin 2026.
I don't care if you are aretiree who is living on fixed
income of five or $10,000 amonth, or if you are the master
(21:01):
of the universe making $20million a year.
Your taxes are going up come2026.
So let's unpack this a littlebit with some ideas that our
clients and the listeners canthink about implementing this
year and next year, knowing thattheir taxes are probably going
(21:21):
to be higher in the future.
Speaker 3 (21:23):
I would say the biggest one that we talk about
with clients is acceleration ofincome.
Right, we want to pay the taxeswhile they're on sale, so to
speak, and we know that thatexpiration date is likely going
to occur.
So if we can accelerate and pay22% now versus 28% later, right
(21:44):
, we should probably do that Now.
The number of things that thatmay include, you know, a big one
that we talk to a lot ofclients about is Roth
conversions right.
So, again, paying the taxes nowversus later.
Speaker 1 (21:57):
Let's unpack that for a little bit, because some
people don't know the lingo andthe terminology.
So you said accelerate income.
And if I'm a listener who's nota business owner, I'm like well
, how the heck do I accelerateincome?
I can't just go to my boss andsay give me more of my paycheck,
right, I wish we could, butthat doesn't happen.
(22:17):
Don't try it, guys.
But there is a way to accelerateincome based on a planning
strategy called a Rothconversion.
If you have pre-tax retirementsavings, that could be your 401k
at work or an IRA, anindividual retirement account.
(22:38):
And so if you have either ofthose savings vehicles a 401k at
work or an individualretirement account, an IRA,
individual retirement account,an IRA you can actually convert
a portion of that balance fromthe tax deferred status to a tax
free status by moving it from atraditional 401k or IRA into a
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Roth 401k or IRA.
And so let's say I've got$500,000 in my 401k or my IRA
and I want to convert $50,000 ofthat.
Because I can convert $50,000and keep my tax bracket at the
22% rate before I get bumped upinto the 24%, I can go to my
(23:30):
custodian Schwab, fidelity,whoever and I can request them
to take 50,000 out of the 401kand IRA and transfer that 50,000
into my Roth and at the end ofthe year you're going to get a
1099R from your custodian,schwab Fidelity whoever that
(23:53):
actually has that as a taxabledistribution to you, and so
you're going to owe the tax onit Again.
If it was a $50,000 Rothconversion and you're in the 22%
bracket, the 22% bracket you'regoing to owe about $11,000 in
income tax, right?
That's 22% times 50,000.
(24:16):
Now you might be saying like,why in the world would I want to
pay tax today if I don't haveto?
And it's the same reason thatif I know I need to make a large
purchase, I might want to makethat large purchase on Black
Friday when it's on sale,because taxes today are on sale.
(24:37):
We know that if we wait to takemoney out of that retirement
account till later on, let's sayin 2026 or beyond, that 22%
bracket probably isn't going toexist anymore.
It's going up to what you said,conrad 25 or 28.
And ask yourself, do you thinkit could be even higher than
(25:00):
those?
Because right now we're sittingat almost $37 trillion of
national debt.
The government needs to paythis debt off or pay it down in
one way or another.
And really, what's the mainlever for the government?
To raise more money to pay offdebt?
Raise taxes, raise taxes,exactly.
And so again, some of this stuff, although it seems
(25:21):
counterintuitive like why wouldI want to pay tax any quicker
than the government makes me.
It's because it's like a gameof chess.
You got to be thinking three orfour moves ahead.
For a simple retirementplanning client, david, that is,
for example, in the 12% bracketright now.
How many times do we do theanalysis?
(25:43):
And it makes so much sense forthem to fill up that 12% bracket
, particularly if they're goingto be electing social security
in a couple of years?
Because if we fill up the 12%bracket now and we move some of
that money to Roth money andthat Roth is invested and it's
(26:05):
growing in value, what does thatgive us the ability to do once
that client goes on socialsecurity from an income
standpoint?
Speaker 4 (26:14):
Yeah.
So that's a great point.
It gives us the opportunity totake money tax-free, and what
that's going to do is it's goingto make it so you could take
income without impacting yourprovisional income for Social
Security, meaning that you couldactually pay less tax later on
the Social Security you get, ifyou plan it correctly, gotcha.
Speaker 1 (26:37):
So basically we're ripping the Band-Aid off, we're
paying at these low rates, we'removing some of that money from
what would be forever taxed inan IRA or 401k to never taxed in
a Roth IRA or Roth 401k andthen when it is time to take
some of that money out, it's notgoing to even show up on our
(26:59):
tax return.
It's not going to cause tax onour social security benefit,
it's not going to potentiallycause a Medicare tax that makes
our Medicare a higher cost oncewe're age 65.
And it overall lowers thewithdrawal rate of what we need
to take out of a portfoliobecause we don't have to gross
(27:20):
up that distribution toaccommodate an income tax
liability at again those 25 or28% rates.
So it really is a win-winstrategy for a retiree.
But it's not just retirementplanning clients that need to
think about Roth conversions.
It's every one of our clientsthat has income because, again,
(27:41):
I'll be 40 this year and whenyou guys do my taxes and you
determine, hey, dave, you've gota little wiggle room in the 22%
bracket or hey, dave, we cancreate another $10,000 or
$20,000 of income, before youskip from the 24% bracket to the
(28:01):
32% bracket, I might want to gointo my company 401k and do an
in-plan conversion of some ofthat money from the pre-tax
allocation of my 401k to theRoth.
And again, young clients, olderclients, pre-retirees and then,
last but not least, people whoare concerned about generational
(28:24):
wealth planning.
We're doing this a lot withclients right now where you know
, conrad, how many clients do wehave that?
You don't have to give a number, but give some examples of this
that have accumulated more thanenough money than what they're
going to need to support theirentire retirement, and they're
thinking about how to maximizethe net after-tax money that
(28:47):
they pass on to their children.
And many of their children aregoing to be in the peak earning
years of their career when momand dad pass away, which means
they're going to be in highertax brackets.
And if they're in a higher taxbracket because of the earned
income, the last thing you wantto do is dump an inherited IRA
(29:09):
into that beneficiary's lap,because what does that
beneficiary have to do with thatretirement account that they
got from mom and dad?
Speaker 3 (29:17):
They now are subject to what's called the 10-year
rule, and we'll have to talkabout Secure Act 2.0 and how.
It certainly feels like thegovernment intentionally passed
that along with the expirationof Tax Cuts and Jobs Act, but in
essence, in the Secure Act 2.0,most kids will have 10 years to
(29:39):
withdraw 100% of the funds fromqualified accounts, meaning
your IRAs, 401ks, et cetera.
Now the Roth IRA is stillincluded in that rule, but the
Roth IRA still passes down as atax-free asset to the
beneficiary.
So your kids, instead ofinheriting an IRA that let's
(30:03):
call it, once you net out thegovernmental portion or the
partnership portion, as thegovernment would like to treat
it at 40% right, that's alikelihood of number They've
gotten 40% of that IRA, whereasa conversion today could mean
that you're passing a tax-freeasset to your kids.
Speaker 1 (30:23):
And particularly if you can pay tax at a lower
bracket like 22% or 24%, andmaybe your kids are going to be
in that 39.6% bracket and maybethey even have a high state
income tax also.
Again, it's tax arbitrage wewant to pay when the tax rate is
(30:43):
the lowest.
If you continue to defer, defer, defer, you're building up a
bigger and bigger and biggerliability.
Because if I have a milliondollar retirement account today,
hopefully it's invested andyou're working with a great team
like Allison Wealth Managementand maybe that million turns to
2 million or 3 million over thenext 10, 20, 30 years, that
(31:08):
basically means you've built upa bigger and bigger tax
liability as well.
But if we strategically funnelsome of that money from the
retirement account to the Rothaccount, and now you've got that
Roth account building biggerand bigger and bigger based on
the investments in the market,there's no liability attached
(31:28):
with that.
You own that money free andclear.
So that's such a huge planningidea.
And, david, it all comes backto what you shared.
It's the standard deductionchanging.
Now we are going to go back toadding personal exemptions for
some people and there's phaseouts and there's just more
confusion and complexity.
Like, go back and look at yourtax return from 2016.
(31:49):
You're going to see it looksquite different from your tax
return last year.
We also have these differentbrackets that we need to think
about.
So those bring up greatplanning techniques to maybe
accelerate income via Rothconversions For our business
owner clients.
Maybe another way to accelerateincome is try to get your
(32:10):
clients to accelerate yourreceivables.
And, conrad, I know you do aton of fractional CFO work and
business advisory.
I'm sure that's what you'regoing to be talking with clients
about as 2025 rolls around,before we cross that deadline of
2026.
Speaker 3 (32:27):
Absolutely yeah, and I mean ultimately the business
changes.
While it's a lot lower innumber, I think are much more
wide ranging in its impact.
Because this concept ofqualified business income right,
the nebulous concept which eventhe IRS has failed to fully
clarify to this date, right, allof the rules and regulations is
(32:53):
a massive impact to businessowners and, ultimately, if we
can accelerate income and,number one pay a lower tax
bracket but also leverage ahigher QBI deduction as a result
of that right, you remember howI said that the double taxation
effect would be in place forindividuals.
(33:14):
This is a double reductioneffect in essence, right,
because the QBI could, forsimple numbers, reduce business
income by up to 20%.
So, for simple math, you make100,000, the QBI would, in
essence, reduce your taxablebusiness income to $80,000.
Speaker 1 (33:35):
So, conrad, we do a lot of business entity work with
our clients that havebusinesses or that are thinking
of starting a business, even ifit's just a side hustle setting
the right entity and what I meanentity you could have a sole
proprietorship, you can have anLLC, you could have a
partnership, you could have an Scorporation or you could have a
(33:59):
C corporation, and the decisionon which way you go is kind of
table stakes.
There's asset protection,there's liability protection and
there's also taxation that isimpacted by how you elect your
business entity.
And we don't have the time,we'll do another podcast episode
(34:21):
on this, but essentially let'stalk about Tax Cuts and Jobs Act
, because a lot of our clientsare not C corporations.
C corporations are usually thebig companies, with the
exception of David, some of ourSilicon Valley clients who are
in tech, that have tech startupsthat are maybe going to raise
(34:41):
capital they might want to electas a C corp.
And what's another reallyunique tax strategy?
If somebody elects as a C Corpand they're in tech, they're
creating technology innovations.
Speaker 4 (34:54):
There's a lot to go along with it.
One is there's tax credits forthe research and development tax
credit.
The other, which is anopportunity, is qualified small
business stock, which if youever sell your company, you
could exclude up to $10 millionon the sale of your business
stock.
Speaker 1 (35:13):
So there's owners, so like if you are part of the
stock and your wife owns part ofthe stock, that could be up to
$20 million of tax-free money.
So that's huge.
Yeah, qualified small businessstock, section 1202.
And again, we're not going toget into that in this episode.
We'll do another podcast onthat for the people that that's
relevant to, but for Ccorporations, with the Tax Cuts
(35:35):
and Jobs Act, their tax ratelowered, right, conrad?
Speaker 3 (35:39):
Yeah, it dropped significantly, right.
So prior to the Tax Cuts andJobs Act, c corporations paid
35% on their profits.
Jobs Act C corporations paid35% on their profits.
The Tax Cuts and Jobs Actdropped that to 21%.
That's a 14% reduction of theirtax rate across the board.
So it was a big, big reduction.
Speaker 1 (36:01):
And what happened is like the people who were not C
corps kind of, you know, startedpicketing right.
They started rallying aroundlike this isn't fair.
Why are you going to give thesebig corporations this enormous
tax break but not the smallbusiness owners?
Because the small businessowners, who are mainly our
clients, are sole proprietors,they're LLCs, they're
(36:26):
S-corporations, which the commondenominator of those businesses
they are pass-through entities.
The income passes through tothe owner's tax return, and so,
in response, congress createdthis qualified business income
deduction what Conrad wastalking about earlier.
And the gist of this thinginstead of paying tax on 100% of
(36:50):
your business income, you onlyhave to pay tax on 80% of your
business income.
So if you are in a 22% taxbracket and you only have to pay
80% of that tax, you can see80% times 22 is 16 and a half,
(37:12):
about 16 and a half, and sothat's a much lower tax rate.
And so what it did was?
It helped bring parity to oursmall business owners, but again
, so many planning techniquesthat need to be considered.
So, for example, you know a lotof our business owners used to
use qualified plans like solo401ks or SEP IRAs to defer their
(37:35):
income and save on taxes thisyear.
But again, maybe they might notwant to do that because they
might be sacrificing some oftheir qualified business income
deduction.
Like which would you rather do?
Pay tax at 80% today or deferthat income into the future
(37:57):
where you're going to have topay tax at 100% when you take it
out of that retirement accountand potentially be in a higher
tax rate?
So, with business owners, thebig considerations and what
we're doing around tax cuts andjobs act planning is how do we
think about accelerating income?
How do we think about deferringincome?
(38:17):
What type of business entityand structure do you have today?
What type of business entityand structure makes sense if all
of these sunsetting provisionshappen and they change the laws
in 2026.
And then, last but not least,what types of retirement
accounts do you have set up inthe business 401ks?
(38:39):
What types of benefits do youhave for your employees?
And then, what types of assetsare you purchasing in the
business?
Because talk about bonusdepreciation for a minute and
how that impacts our businessowners.
Yeah it, bonus depreciation fora minute and how that impacts
our business owners.
Speaker 3 (38:51):
Yeah it.
Bonus depreciation is is, inessence, in its simplest form,
an acceleration of the deductionthat you get for buying a piece
of equipment or property.
And under normal rules, right,let's say you buy a piece of
equipment for fifty thousandbucks and it's subject to a five
year life and what that meansis it's estimated to to last
(39:16):
five years.
Normal depreciation says youcan take a ten thousand dollar
expense each year for that pieceof property for five years.
Five years.
What bonus depreciation did andtwo years ago it was up to 100%
of qualified property was, saywe'll let you expense, in
(39:41):
essence, that equipment in thefirst year.
So instead of a $10,000deduction you'd be getting a
$50,000 deduction for that pieceof equipment in the year of
purchase.
Now, two years ago, thesunsetting provisions on bonus
depreciation actually startedtwo years ago where, instead of
it being 100%, you could get 80%of a deduction.
In this year it was 60%.
Moving down it's 40%, 20%.
(40:04):
Until bonus depreciation it'szero.
And we go back to old rules,which is pre-tax cuts and jobs
act.
Now we also still have section179.
So there's still anothermechanism to utilize, but kind
of the-.
Speaker 1 (40:21):
So you can still buy your Range Rover.
Speaker 3 (40:24):
Yeah For the TikTok advisors, right, you can still
buy a Range Rover every year andwrite it off and nevermind know
, never mind, don't listen toConrad.
Speaker 1 (40:31):
That is not tax advice.
You can kind of, but there'ssome rules, right, right I say
that very much.
Now, conrad, there is actuallylegislation that's going through
the House and the Senate rightnow of reenacting 100 percent
bonus depreciation because thatis good for the economy.
You know the Republicans wantit.
The Democrats aren't pushingback on it because we want to
(40:54):
spur businesses to makeinvestment in manufacturing and
equipment and we want to givethem tax incentives to be able
to do that.
So that's actually tied toanother bill that I think will
probably have some legs andactually go through.
But the reality of it is, youknow, and kind of the moral of
the story here, before we moveon to the next topic, is, if
you're thinking about makingmajor investments in your
(41:17):
business, call Conrad before youdo it.
Like, let us analyze, like, doesit make sense to buy them now?
Does it make sense to wait?
Should we hold off until theHouse and the Senate decide on
what they're going to do?
What might impact thosedecisions of buying and putting
that equipment into place nowversus later?
So so many things to considerwhen it comes to how we're
(41:39):
advising our business advisoryclients.
But you know, outside ofbusiness owners, let's get back
to kind of the normal everydayconsumer and maybe these aren't
the everyday consumers, but,david, you're kind of knee deep
in working with clients thathave incentive stock, and with
incentive stock, what's the onething that people hate more than
anything else?
Speaker 4 (42:00):
Well, I love it, people hate it, but it's
alternative minimum tax and it'sthis parallel tax system that
we have, and what's going tohappen is they're making huge
changes to the AMT exemptiononce this expires, so it's going
to impact basically everyonewho has incentive stock options
(42:22):
or who might pay AMT.
Speaker 1 (42:23):
And basically, these changes are going to increase
people's taxes in their abilityto exercise these incentive
stock options, and so it mightmake sense to accelerate what
you otherwise would haveexercised in latter years,
because your tax liability willbe higher in later years.
(42:45):
And so, again, like David, Iknow you're doing a lot of
analysis for our clients thathave ISOs incentive stock
options and maybe it makes senseto bundle a bunch more
exercising in 2024 and 2025before these AMT rules change,
and what we're going to see froma tax preparation side is
there's going to be a lot morepeople who are subject to this
(43:06):
parallel universe of the AMT,which is a horribly challenging
tax system to navigate.
But again, I know it's stuff wedo every day, all day for
mostly our Silicon Valleyclients that are working in
private companies that aregetting these stock option
grants and they have millions ofdollars on the table in tax
(43:29):
savings if they work with a teamlike ours to help them navigate
the potential of how theyshould exercise these so huge,
huge area there.
The other one that I want totalk about, and something that
is hot on my mind right now, isthe gift in a state tax
exemption.
So, conrad, like what is thisin the first place and how does
(43:52):
this impact our clients?
Speaker 3 (43:54):
Yeah, this is the gift in a state.
Exemption is is, in essence,how much you can give to family
or friends and not have to paythe government a dime Under the
Tax Cuts and Jobs Act.
It increased prettysubstantially.
Right now that gift and estateexemption is $13,610,000 per
(44:21):
person.
Wanted to give away all of ourcall it $27 million of assets.
Right, not that we have it, butif we had it, we could give it
away today and pay zero tax onthat.
Now, once we give it away, it'sgone.
(44:42):
We've used up that exemption.
The expiration of the Tax Cutsand Jobs Act, though, in essence
cuts that number in half.
So, instead of having $13.6million, we now have $6.8
million is the projection that Isaw?
$6.8 million of estate and giftexemption.
(45:03):
Now, that's your lifetimeexemption.
So if you gift a milliondollars one year and a million
dollars the next year, well,your exemption is your exemption
is now 4.8 million, and imagineif Biden's proposal goes
through, where it drops it backdown to what was the last number
I saw A million dollars.
Speaker 1 (45:21):
It's been low in the past.
I mean, here's the reality ofwhy this exists.
The government doesn'tnecessarily like dynastical
wealth right, Because people whohave dynastical wealth become
quite powerful, and so one ofthe ways to try to eliminate
that is enact an estate taxright.
And the estate tax says whenmom and dad die, if they leave
(45:48):
over a certain amount of moneyto their family, we're going to
come in and take in today's taxrate, 40% of it.
So let me use some simple math.
Let's say the estate exemptionwas $5 million each, like it was
about 10, 15 years ago.
It was around $5 million each,and let's say I've been
(46:08):
fortunate enough to amass $20million of estate value.
Now what does estate valueinclude?
It includes all the money weown, so it includes my
retirement accounts, it includesmy investment accounts, it
includes my business ownership,it includes my real estate and
it includes any death benefit oflife insurance.
(46:29):
So even if I have a $5 millionterm life insurance policy, that
$5 million is included in mytaxable estate.
So let's use the example thatthe exemption is $5 million each
.
I have Alana and I, so thatmeans as a married couple, we
can exempt $10 million from thetransfer tax to pass this money
(46:52):
on to our kids.
But because we've amassed a $20million estate, $10 million the
amount above our exemption issubject to this transfer tax of
40%.
So that's a $4 million tax billthat my estate is going to have
to pay, which means my kids getthe $10 million that I had.
(47:15):
That was part of the exemptionand then of the other $10
million above the exemption, thekids get $6 million.
The government gets $4 millionand you might say, eh, who cares
?
The kids still got $16 million.
A lot of our clients say Idon't want the kid's still got
16 million.
A lot of our clients say Idon't want the government to get
that 4 million.
And we all have three places wecan leave our money when we
(47:39):
pass away Our family thegovernment or charities, and you
generally have to pick two ofthe three.
So under that plan you're onthe government plan.
I leave $16 million to myfamily, I leave $4 million to
the government.
Now the thing about the estatetax is that it is an optional
(47:59):
tax.
It's an optional tax because ifyou work with our team and we
bring in the right estatelawyers that we utilize to
construct advanced estateplanning, you could eliminate
this altogether, and I'll giveyou an example.
Last night I was with one ofour clients I'm not going to say
names and I was with our estateplanning attorney, Benjamin
Kelly, that we utilize for ourultra high net worth and high
(48:21):
net worth clients who are goingto have an estate tax issue.
Well, this client has about a$60 million estate and they're
going to continue to grow itbecause they're just earning a
enormous amount of money eachand every year.
And so what we had set up was atrust, because if you have an
irrevocable trust and you giftyour money into the trust, it's
(48:45):
no longer included in yourtaxable estate.
And so what the husband did washe set up an irrevocable trust
for the benefit of the wife.
Then what the wife did is sheset up an irrevocable trust for
the benefit of the husband, andthe husband was able to gift his
(49:05):
$13 million exemption into thetrust for the wife, and the wife
was able to gift her $13million exemption into the trust
for the wife, and the wife wasable to gift her $13 million
exemption into the trust for thehusband.
Now, if the husband needs money, he goes to his trust, which he
is the trustee of.
He asks himself for money.
He gives himself money, but itis completely protected from the
(49:28):
estate tax.
Same thing with the wife.
The wife needs money.
The wife can go to her trust,she can ask herself for money,
she gets the money.
And so what that did is it took$26 million and it moved it out
of their taxable estate.
The other thing but they stillhave full control of that $26
million Plus, we left money intheir taxable estate, just in
(49:51):
their normal revocable trust intheir house, in their retirement
accounts, because that's themoney that they're going to
consume and live once theydecide to retire.
Then what we did is they havetwo children.
We set up lifetime giving trust.
These are irrevocable trust forthe benefit of their children
and under today's tax law, howmuch can we give each and every
(50:14):
year from an annual giftingstandpoint without having to
worry about any of this estateor gift tax returns or tax
issues?
Speaker 4 (50:25):
Yeah, so for this year, for 2024, it's up to
18,000.
Speaker 1 (50:29):
18,000.
And David, is that like aone-time thing, like, or can I
give 18,000 to a bunch of people?
Speaker 4 (50:35):
It's 18,000 per person.
So if you and Alana want togive 18,000 to any one person,
you could actually double it andthen it makes it 36,000.
Speaker 1 (50:46):
So in this case, what we did was we set up two
irrevocable trusts for thebenefit of the children, and mom
and dad can put $18,000 eachinto each trust for each child.
That's 36,000 times two is72,000.
Now these children are youngerand we're going to do that for
(51:07):
the next 10 or 20 years.
Right, 36,000 times 20 years is$720,000, right Into this
irrevocable trust for thebenefit of the child.
That can be used to pay fortheir college tuition.
They can use it to finance adown payment on the home.
They can use it to start abusiness.
(51:28):
We helped work with the familyto identify what the purpose of
the money should be.
We don't want to raise just abunch of trust funds who think
like, oh, I never have to work aday in my life.
This trust is not to providefor them so that they don't have
to work, it's to supplementsome of the necessities in life,
to give them maybe a quickerjumpstart into being able to buy
(51:50):
their first house.
But it's not to raise a trustfund kid.
And so we write a lot of thatincentivization in the trust and
we work with families all thetime.
But I get back to with the TaxCuts and Jobs Act, we've been
doing this type of planning forour ultra high net worth clients
that have been fortunate enoughto amass over 25 or $30 million
(52:11):
, because they've been the onesthat have been historically
subject to this transfer tax.
And, quite frankly, if you haveover $30 million, you probably
have enough money to supportyour lifestyle.
And now you're starting tothink about multi-generational
planning, right, you're startingto think about how does this
money impact my children, mygrandkids, my great grandkids
(52:34):
and the charities, both whilewe're alive, that we want to
participate in and then thecharities that we want this
money to go to upon our passing.
But what's going to happen in2026 is a lot more people are
going to be exposed to thisestate and transfer tax.
So, for example, we have a lotof clients that have been
(52:55):
fortunate enough to amass $10million, $20 million, and the
estate and transfer tax wasnever on their radar because the
exemptions were so high.
When those exemptions get cutin half, they now are going to
have a lot of this exposure.
They should be proactivelyengaging in conversations and
(53:16):
strategy around how they canmitigate or eliminate this but
not lose control of their money.
Because I always say thoseclients they have a lot of money
but they don't have a lot ofmoney.
It's not like they can justgive away $15 million and be
okay.
They need that money to liveoff of, and that's why some of
this spousal, lifetime access,trust type of planning or, quite
(53:37):
simply, in many clientscenarios, the right approach is
don't use trust at all.
Just buy a second to die orsurvivorship life insurance
policy that can pay the estatetax for your estate, because in
some cases you can buy a lifeinsurance policy for quarters on
the dollar.
And so in my scenario earlier,if I knew I was going to have a
(54:02):
$4 million tax bill, maybe justbuying a life insurance policy
that pays $4 million is the bestapproach, like in Alana and I's
example right now, if I passedaway or we passed away after
2026, we would have an estatetax liability with business
interests and everything elsethat I've been able to
accumulate at this point.
(54:23):
Now for me, I'm not ready tohave the complexity of
irrevocable trust.
I don't have that much money atthis point, right.
But what Alana and I did was wepurchased a $3 million
survivorship policy that at thesecond death it pays $3 million
to our estate.
That takes care of paying allthe tax, so the kids don't have
(54:44):
to.
And for us, because we'reyounger, I pay $8,000 a year,
not $9,000 a year for thatpolicy.
So for nine grand a year Ibasically took care of all my
estate and transfer tax at deathfor my kids.
That's a no brainer in myopinion, right?
And now, if you were, I'm 40,right, and Alana's a little bit
younger, the numbers still workout.
(55:06):
We just did this for a clientwho's 71 and their numbers were
a little bit different.
They paid $70,000 for a $3million policy, but the IRR on
that still works out, because at71, they might have another 20
years of life expectancy.
So again, let's say, $70,000 ayear times 20 years is they
(55:29):
would have paid $1.4 million tothe insurance company to get $3
million income tax-free andestate tax-free.
And so, again, there's so manyunique opportunities to think
about.
But this is all because ofthese sunsetting provisions of
the Tax Cuts and Jobs Act.
So, fellows, I think we did agood job summarizing.
(55:50):
Is there anything else that youcan think about as we land the
plane here that our clients canconsider?
And, conrad, again, just remindeverybody of that document that
you have available.
Speaker 3 (56:01):
Yeah, yeah, we'll send it out.
Just send us an email to infoat allisonwealthcom.
Be glad to share anyinformation that we have with
you guys, and then, obviously,as planning needs come up, we'd
love to help you with those aswell.
I think you know there are somany different small nuances of
(56:23):
the Tax Cuts and Jobs Act wecould probably spend another
full hour on those alone.
So you know the bigger ones,and the other one that I want to
point out is the child taxcredit.
This will impact a lot ofpeople with children as well,
and so that's going to drop frompotentially $2,000 to $1,000
credit.
(56:43):
So you know, on top ofsignificantly reducing the
standard deduction now, you'realso losing, potentially, some
of the credit.
There's so much to it.
I think clients, the big thingthey need to remember this isn't
just one thing or another.
There's likely going to bethree to five to 10 different
ways that your taxes are goingto be impacted.
Speaker 4 (57:05):
Yeah, and I mean.
One final thought I have is Iremember when the Tax Cuts and
Jobs Act came out, it was billedas a simplification to the tax
code.
If anything you could say itgot more complex and it's going
to get more complex as we goforward.
So it's good I get to keep myjob, because it makes things
more complex, but it'sdefinitely something to think
(57:29):
about is that there's just goingto be increasing complexity.
Speaker 1 (57:32):
And millions and millions of dollars on the line
in excessive and unnecessarytaxes.
I mean, we didn't even get intothe SALT deductions, the
$10,000 a year of federal incometax, because of how you
restructured his business entityand took advantage of the
(57:58):
pass-through entity tax.
There is so much here to Conradyour point.
We can't get to it in onepodcast, but here's what I will
say don't procrastinate on thisstuff, because if you call our
office or any of the otherreally really good holistic
wealth management and taxoffices across the country in
(58:19):
September, october, november ofnext year, I don't even know if
we'll be able to bring on newclients.
We'll be so busy during thattime frame.
This is why, again, think aboutthe client that we just met
with yesterday frame.
This is why, again, think aboutthe client that we just met
with yesterday.
We want so much runway to beable to strategize with you and
your family about what the righttechniques are for you.
(58:40):
We don't want to be under thegun to make a bunch of decisions
as these deadlines startlooming over our head.
This is stuff that you need tometiculously think through and
understand the trade-offs,because if you flip your
business to a new entitystructure, or if you gift a
bunch of assets to anirrevocable trust, or if you buy
(59:00):
a large life insurance policy.
These are decisions you have tolive with for a while and we
don't want to be under the gun.
So reach out to our team.
We're here to help.
We do an initial complimentaryphone call just to get to know
your situation, talk a littlebit more about how we might be
able to help, and maybe we can't, or maybe we can refer you to a
(59:23):
firm who specializes inwhatever your need is.
We've got a lot of connectionsacross the industry and so,
again, so much opportunity withthe Tax Cuts and Jobs Act, and I
appreciate both you guysjumping on the pod today to
share with us.
And let's get back to meetingwith our clients now and driving
some of these strategiesforward.
Speaker 2 (59:42):
And advisory services are offered through Prosperity
Capital Advisory PCA, an SECregistered investment advisor
with its principal place ofbusiness in the state of Ohio.
Allison Wealth Management andPCA are separate, non-affiliated
entities.
Pca does not provide tax orlegal advice.
Insurance and tax servicesoffered to Allison Wealth
Management are not affiliatedwith PCA.
(01:00:03):
Information received from thisvideo should not be viewed as
individual investment advice.
Content may have been createdby a third party and was not
written or created by a PCAaffiliated advisor and does not
represent the views and opinionsof PCA or its subsidiary.
For information pertaining tothe registration status of PCA,
please contact the firm or referto the Investment Advisor
(01:00:24):
Public Disclosure website.
For additional informationabout PCA, including fees and
services, send for ourdisclosure statement as set
forth on Form ADV from PCA usingthe contact information here.
Please read the disclosurestatement carefully before you
invest or send money.
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