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Foreign.
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What is up? And welcome back everyone to another episode of the Practical Planner podcast. I'm your host, Thomas Coleman, and here with me is my co host, Dave. Dave, I feel like we've needed to kind of sit down and talk about this. So I'm sure everybody that knows the new tax bill came out and I think it came as a little bit of a surprise to many of us because I think for a while everybody said, or the government said, hey, we want a new tax bill by the 4th of July. And everybody said, absolutely no shot. Right. We, we kept seeing bills come out and it seemed like everybody was pretty far away from reaching an agreement. But the bill ended up passing and I think there's a decent amount of surprises in it. And so today's episode we're really going to talk about basically like probably 10 of the key parts. But Dave, I'd love with for you to kind of just start in the estate planning space. I don't think we could have a whole conversation just on the estate planning side. I guess maybe we could go into like, how does planning change with this? But let's start with the estate planning and then we'll go with kind of income and capital gains tax planning.
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Yeah, I mean, I think the biggest thing that's super interesting about this bill from an estate planning perspective is what's not in it. Because for years and years estate planners were all ramped up for Sunset. We thought Sunset was going to happen. We thought you have to get gifts out of the estate before sunset happens. You know, depending on where the political winds shifted, we were looking at a loss of step up in basis, loss of the use of grantor trusts, potentially not being able to do discounted gifting. There were all kinds of proposals out there that would have really limited the tools available to estate planners. And what ended up happening? The estate tax exemption actually went up. So it's going up to $15 million per person. It's going to be indexed for inflation. So it's, we're still in a atmosphere where there's a really small percentage of households that have an estate tax issue. So that's comforting for a lot of the high net worth, ultra high net worth families because it gives them time. Even though it's called permanent. I think we all know that we're not going to call it permanent in reality because nothing is permanent with the tax code. So we just know that we have a few more years pretty certainly to be able to do this planning. It's not as urgent as Sunset. We still could see the estate tax threshold go down. There are proposals from the other side than, than who controls Congress and the presidency. Now that the estate tax threshold would go down to about 3.5 million. We could still see something like that. So it's important to recognize you're still at unprecedentedly high estate tax levels and it's still a great time to get assets out of the estate and look at some of these strategies. But there's some more Runway there.
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B
Yeah, I think you made some interesting points about like what was not included. I think, you know, we've had conversations earlier in the years. As soon as Trump won, we kind of all were like, okay, state exemption is probably going to be extended. And it doesn't seem like something that they're going to want to pull back on. Some of the other ones like loss of step up in basis, grantor trust, et cetera, those are interesting ones I hadn't really thought about, but it's interesting. I was meeting with a client earlier today. He's like, call it just about a hundred million net worth in his 40s and he was asking about the estate planning side of things. And you know, I still was like, I don't think we have any reason to rush right now. Right. It's permanent until we get a new president in or you know, you know, whatever that could potentially change this. But you know, not that Poly Paul market's always right. But right now JD Vance has like an 80% chance of being the next president. Who knows if that exists. But if that does happen, we're probably seeing this continue to get extended. So, you know, I think on the estate tax planning side of things, it's if you're older, you have way too much money, use your gifting. If you're younger and you want liquidity, maybe don't do as much, you can maybe seed some startup investments or some shares in the companies that you own, et cetera, if you want to. But, but in general you don't really have much of a rush. We know we have at least four years to really think about what planning that you want to do. And if you want to do stuff at the very end of kind of that four year timeframe, go for it. But this doesn't really change estate planning much other than telling people like if this wasn't put in force, it really was going to sunset. So that is actually a big change. Even though the big change is keeping the environment the same as today.
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A
Yeah, absolutely. Yeah, I think it's, it's keeping things flexible. We've said it a long time, you know, before this was, everyone was certain sunset was going to happen. They were absolutely certain because there was so much political gridlock. And look what happened. And some people, you know, took steps to plan for sunset affirmatively. Maybe they want to unwind that if they lost a step up in basis or there was something disadvantageous to that. So I think the key point is we saw what happened. It wasn't necessarily expected. It's just a promotion for why you should keep things flexible.
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B
Yep, yep. Okay, well, let's go into some of the other parts of the bill and I think a couple of them actually do intersect with estate planning. And so the first one I want to bring up is the salt cap change. So this is kind of an interesting one. I feel like, you know, there were some people who wanted it to be extended. Some people wanted it, you know, get rid of ptet. We can talk about that as we go. But basically what ended up happening is salt was increased now, so increased to $40,000 that, that can be deducted. But that ca, that's at 500k. From 500 to 600k, it basically phases down all the way back to 10,000. So I think a lot of people heard about this solid increase and they're like, great, this can be beneficial for me. I'm a high earner. None of my high income earning clients get this at all. They all fully phase out. They're well above 600,000 of income. If you're in this like 400,000 of income to 500,000 and you live in Texas with a high property tax bill, or you live in California with decent property tax bill or high state and local tax taxes. Sure this is beneficial for you, but for it's kind of this small window of people, you're either your income is too low where your state taxes aren't really enough for this to benefit you and get above the standard deduction, or your income is too high that you're phased out of it and it doesn't benefit you. I think the one caveat here that I thought was interesting is thinking about trust structures now. So you have two parts here. One is the marriage penalty. So for certain high dual high income earners, it actually makes sense to be potentially married filing separately. So that way you can both end up getting this salt deduction. And then the other one is trust. Right. Each individual or each irrevocable trust can kind of have that salt cap. And so you potentially can get some more tax benefits inside of that trust.
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Yeah, because it's an interesting point because, you know, I'm in Massachusetts. Obviously me and many of my neighbors are happy about the SALT cap being lifted because property taxes and there's an income tax component to things. But those people who are phased out, they need to find ways to be able to capture as much deduction as possible. Having non grantor trust to be able to put assets into could be a way. Now why do I say non grantor trust? Because if it's a grantor trust, meaning that the taxpayer is the same as yourself, which is usually the way that people structure irrevocable trust just because they want to make sure that they're the taxpayer. Because the individual rates are much less than the trust and the states rates is actually a bit different when it comes to certain other strategies like the SALT deduction, QSP stacking. Because you actually want the trust to be a different taxpayer so that it can take advantage of its own deductions and its own phase out limitations and its own credits, whatever the case may be. And this is one of those scenarios where you might want to look into whether an irrevocable trust to be able to capture some of those state and local income taxes could be a, could be a good avenue. Obviously there are tons of nuances to it. You have to go about it very carefully, but it can be a really effective strategy.
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B
Yeah. Well, let's talk about QSPs then because you brought it up. So I think this was the biggest surprise of the bill in my mind. I don't think I saw any proposals on QSBS being improved. Right. So for everybody, QSBS was if you have a business less than 50 million in assets, you know, you own it for more than five years, you can get 10 million basically of capital gains exclusion or 10x your basis. The new tax bill is basically extended to 75 million in assets or less and 15 million of QSPs eligibility after five years. But what makes it better is at three years you get 50%, so 7.5 million. At four years you get 75% eligibility. Before it was five years or nothing. And so now we have better QSPs, we have higher capital gains exclusion and we even have more beneficial to kind of stack that with trusts. So for somebody, you know, a lot of times people will stack this with a spouse, but you know, a slat or just kind of an irrevocable trust, different type. Right now you can end up getting to the point where you can get 30 million just between your name and one trust versus before you'd have to use two trusts and get more outside of your estate for that.
- [09:29]
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Yeah, there's a lot of interesting opportunities, a lot more leeway there for small business owners who, who have this stock that's going to be rapidly increasing. Again, another area where there can be some sophisticated planning, you can get a ton of benefit out of it. You just have to be careful. And the other thing you have to look at is, you know, what state do you reside in? How does the state treat us? How does the state treat non grantor trusts? There are some states who can get pretty aggressive, you know, depending on the type of trust strategy you go into. So it's just another thing to be careful.
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Well, the good one is like California doesn't like it, but you don't get usbs in California anyways. So like stacking the trust is more about federal QSPS eligibility, but definitely really good points. Okay, next one is just income tax brackets and standard deduction. So income tax brackets are extended. Right. So they were going to sunset where, you know, the top bracket instead of 37 was going to be 39.6. All of them were essentially moving up. This is really good for everybody. I'm sure this is probably the most, one of the most expensive parts of the tax bill. But in general, this still relates to estate planning. I mean, I guess inside of trust, right. You have a little bit more room before hitting the top bracket from before. But in general, this is just a personal income tax planning side of things where, hey, you have less. If you're a higher earner, you have less taxed at, you know, 37 or 39.6 versus 37. And, and then on top of that, standard deduction is actually going up. So now it's actually, it's at 31 5. Before the first Trump tax bill, it was really low. So this has really extended. It led to a lot of just, I mean, lower taxes for everybody. And then on top of that, you also have this like added $6,000 senior deduction for people that are 65 or older. But that one does have a phase out.
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Yeah. And I think it's kind of similar to the estate tax where we thought things were going to sunset. We thought that the rates were going to go up and they didn't. But, you know, we still could see that happen in the future. So still a conversation regarding Roth conversions. You know, we talk about this where people are doing the Roth conversions. They thought that the rates were going to go up. Well, they didn't, but they still could in the future. And there's still some benefit to it as far as beneficiaries who inherit in their high earning years are going to need to withdraw it all within 10 years. So inheriting a Roth is much better than a traditional ira. So it doesn't mean that Roth conversions, if you did convert it was a bad idea. It's just you have more time now.
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Yeah, yeah. I mean, I think it would be interesting to see. I think there's a lot of advisors who push the Roth conversion side of things, regardless of tax bracket because the assumption is taxes go up, up. But we've been in like what, like 70 years of just reducing taxes. So it's not a very easy, you know, stance to take to win a presidency and say, hey, I'm going to go raise taxes on everybody. So I take the side of like, hey, let's, let's not guess on what's going to happen here. And the other thing to remember is, you know, even though right now you're, you're an income earner, if you do Roth conversions, that's coming out your top marginal bracket versus in retirement, you're withdrawing through brackets. So even if taxes go up, it doesn't mean a Roth conversion conversion today is going to be better than withdrawing later or doing Roth conversions kind of in that pre Social Security, pre RMD age.
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Absolutely.
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Okay, so that's the introduction. Next one to talk about here is, you know, some of the, some of the changes for business owners. So we obviously went through qsbs. The other one for business owners is that, you know, qualified business income deduction. There was talk about maybe it going up. There was talk about maybe getting rid of SSTB designation, but in general it's basically staying the Same still the 20%. The one difference is, is there's a larger phase out range. So instead of it being 100k, it's 150k. Is that phase out range. So not too much changes there. That helps the SSTB's a little bit who are in that phase out, you know, bonus depreciation. This is probably the biggest one and the one that people are the probably the happiest about. Right. It was phasing down from 100 to 80 to 60 to 40 to 20 going to go away to zero. And now permanent is 100% bonus depreciation.
- [13:53]
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Yeah, absolutely. I mean, I think especially for like farmers and things of that nature, I think that there's some really big wins and things to take advantage of here that advisors who are in those Niche markets who have business owners should really be closely taking a look at, you know, the Section 179 deduction, this bonus depreciation. Because there can be really big tax benefits to, to this upfront deduction on purchases of equipment versus the long drawn out stretching out of the deduction depending on where they are in a tax situation. So it's really important just to understand how it works. Obviously you might need to bring in your CPA or attorney, but knowing just how to identify it and just generally how it works, you can save clients a lot of money.
- [14:41]
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Yeah, I mean I obviously work with a pretty high net worth space and real estate is a really big part of most of my clients financial life. So whether that's, hey, they're lawyers or doctors and they own the buildings that they operate out of or whether that short term rentals, long term rentals, you know, it's just a pretty good opportunity to do some cost studies, bonus depreciate these properties. And even if it's passive. Right. Those passive losses can go offset other passive income or if you get rep status or you kind of go through the short term rental loophole side of things, you can use that to offset active income. You just need to make sure you do it right. But this is something that advisors can be really educated on and kind of help nudge their clients and show them the impact of using some of these strategies. Absolutely. Okay, so we're good there. Maybe one of another one we want to hit on is 529 plans. So there's been some good extensions. You kind of want to talk about what, what good changes were made?
- [15:39]
A
Yeah, I mean I think we've seen 529s get expanded as far as what are qualified educational expenses. Over and over like the past decade, you know, we've seen student loans, K through 12 tuition, we've seen this new ability to do limited Roth conversions for overfunded 529s. So it just keeps expanding and expanding. What are available qualified educational expenses? And then it continued with a big beautiful bill. And basically what it is now is that K through 12, it was the case that it could only be used for tuition. And it was a very defined. It could only be used for tuition, unlike for college, can be used for a lot of things. Right. It can be used for books and off campus housing, things of that nature. Well, they opened it up as far as from the K through 12 perspective. So that's, that's, that's good that, that's more qualified expenses that parents can use for their children's 529 to fund early and use prior to them reaching college. And it just keeps on expanding. And then the other area which expanded in this bill was also for post secondary courses and potentially designations, potentially things like cfp, bar prep, you know, CPA courses, things of that nature towards professional designations. You want to check. I mean, you know, a lot of times these laws are written pretty vague and we don't know all the rules until later on, until the regulations come out. But it seems like a lot of these really reputable types of credentials that people can get. If there's an overfunded 529 child gets through college, there's still money left over there. There's still some areas where you might be able to use that money even beyond the Roth conversions to be able to get some post secondary credit credentials.
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B
Yeah, I'm a fan of 529, especially for my high net worth clients. Right. They live in California or Texas or wherever. Right. They're paying 23.8% long term capital gains potentially plus state. So at the end of the day, if you have an overfunded 529post, the Roth conversions post basically getting money back for scholarships, you pay a 10% penalty and income tax on the growth for the kid. Right. The kid that's basically going to be. You can go through 0, 10, 12 with a 10% penalty is lower than capital gains bracket for their parents. So the opportunity cost is lower. But now with the expansion here, so we have Roth conversions, you have tutoring, you have 20k now of k through 12 versus 10k. I mean there's a lot of good, good changes here. And I think that kind of almost moves me into the Trump accounts because I think a lot of people think oh, why would I not use the Trump account when I can? When it's better. Right. And better is definitely arguable because I don't think they're better. You can put in 5000, your employer can put in 2500. That money grows basically tax deferred. Think of it like an ira. You can't use it before retirement age except for business, home buying or education. But if you use it for those three, you still pay income tax to get it out. Right. There's a capital gains.
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I believe, income tax.
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Yes. Again, I guess it's so income tax rate. So it's worse than a 529 because you don't get that tax free use. So but you can roll it to an IRA at 18 and then you can do Roth conversions from it. So my thought is you fund this, goes to an ira, they're in college for four years with no income, you do Roth conversions, they graduate college, they have earned income, use the529 for Roth conversions. And now you've just set up your child for like nine years of Roth contributions with basically paying no tax. And now they have this head start of like easily 100k in Roth money before 30 without having to use a dollar of their own money.
- [19:32]
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Yeah, absolutely. And you know, I've seen, I've seen, you know, early analysis on this that really 529 are still better. Definitely set up the Trump account, get the thousand dollars from the government potentially. And remember, these are only until 2028, these Trump accounts. So they're going to sunset, you know, theoretically, depending on if we see an extension. So this is one of those areas where it's only a short time period they're available. One of my concerns is whether only.
- [19:59]
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For the thousand dollars, I'm pretty sure that they will exist. It's just you only for those four years the child gets a thousand, right?
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Yeah, they will, they will continue to exist. And the question that I have though is will custodians be motivated to set these up quick enough to be able to take advantage of these? Because they're going to have to create Trump accounts, they're going to have to have an administrative process for them, tax reporting obligations, all those sorts of things. Those things take a lot of time.
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Yeah.
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Short time frame. I'm not sure how much you're going to be able to take advantage of that.
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B
Yeah, I wondered that too. It's an interesting one. I think it's kind of like a. Yeah, solid. If you're very, very wealthy and you're going to put money for your kids, I like it better than an at my account because of the ability to get to Roth. But for most wealthy people, 5,000 a year isn't a big, a big use for them. Right, okay, cool. What other parts of the bill do you think are worth talking about today?
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I mean there's just, there's so much contained in the bill that I think what's important to understand is it's going to cover your entire book of business from all the way at the bottom. People who are taking advantage of these, you know, the senior deduction and the Trump accounts and a lot of these things that have really, really low phase out zones. They're important to understand. You know, the auto loan, you know, for the next few years, you can deduct up to $10,000 worth of interest on a car loan. I don't know how many people have $10,000 worth of interest in a year.
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B
Well, especially because of the phase out, right. Like it's like, I'm pretty sure it's like 150,000 of income or something is the phase out. Like if you have 150,000 or under income and you have $10,000 of car interest, that means 100k car at 10% interest. Like hopefully you're not in that spot. Because the interesting part with this bill is there is this new section in your tax return that you can still take the standard but then you still get to basically get this above the line deduction. And that's one of them, right?
- [21:57]
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Yeah. The other thing that I think is important that we haven't mentioned yet is the above the line charitable deduction. So there is going to be that ability to take a $1,000 or $2,000 if you're married filing jointly deduction even if you're not itemizing for charitable contributions. That was something that I believe started during COVID and they've just increased it and I think that's great. I think it's going to hopefully promote charitable giving. What people need to realize though is if you do itemize, they snuck another thing into the bill where there is actually now a charitable deduction floor a point five percent of your income to be able to start being able to itemize charitable deductions. Doesn't sound like a lot, but you're higher is it could be quite a bit.
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B
I mean I have clients who make 2, 3, 4 million. So if you make $2 million, that's your first 10k of charitable giving. You actually get no benefit which then moves you into this side of like donor advised fund lumping charitable giving and every one, you know, because think about that. If you make 2 million and that's going to be the first 10K. Right. So if you get, if you're going to donate 25k a year, you're better off doing a donor advised fund donating 75 in one year. So only that first 10 is in used and then take the standard or do whatever in, in the other years or not even take the standard. But you just then don't have to worry about that 0.5% phase out, right?
- [23:18]
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Yeah, I mean it's, it's similar to Task Cuts and Jobs act. When we talked about bunching to be able to get yourself, to be able to itemize to get the Benefit of the charitable deduction. If you're really high income and you're itemizing, it's the same concept, you're gonna want a bunch.
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Yeah, yeah, that's a good one. I'll just kind of wrap up with a few. So going back to the car loan interest one, it's actually at 200,000 of income and fully phases out at 250. The other ones are like this no tax on tips and overtime pay. Not really true. It's not a no tax thing. It's funny because like even the government was saying it was, but it's really just an above the line deduction similar to one that you're talking about for tips. Up to 25,000 if married and basically the same for overtime. And then those phase out about 300k. You know, the child tax credit is becoming permanent and increases to 2,200 per child next year. Dependent Care FSA. That's a good one. Moving from 5,000 to 7,500.
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A
I like that one.
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B
Me too. Yeah, HSAs are actually, there's going to be more HSA eligible plans than there were before. Qualified opportunity zones are actually becoming a little bit better. So there's still this new 10 year rolling Oz designation basically similar to before, but now there's like this rural community carve out that actually have better OZ designations. I know that was one that a lot of people wanted, interest, expense, permanent. But I think that's probably everything that we need to go through as it relates to the new tax bill. I think there's a lot of changes, but some of them are just keeping things exactly the same. And then there's some other random ones that are like, hey, talk about them. But how many people does it actually impact? But overall, I mean if your number one goal with tax bill is lowering taxes, you're going to be pretty happy at this. If your number one goal was making the US as financially stable as possible, maybe you don't really love this tax bill. I try to stay out of the hey, is this right politically, is this wrong politically? And say here's the environment now how do I help my clients plan around it? But I just don't think as an advisor you have any choice but to stay up, stay on top of this. And it's also a huge reason why we're extremely valuable is because the tax bill is extremely long or just the tax code is extremely long and it changes every two to four years. Nobody, none of your clients understand what's going on, let alone the changes. So the more you can stay ahead of it. The more you can help them continue to plan, the more you win in the eyes of your client.
- [25:47]
A
Absolutely.
- [25:49]
B
All right. Well, I think that was everything that we wanted to go through today. So everybody, hopefully you found this helpful. Please rate, subscribe, share with another advisor and tune back in in a couple.
- [26:07]
A
Jam.