Alright. Welcome back to the Great Retirement Debate. Ed, good to back with you once again. Yeah. Have an interesting topic. Alright. What's on topic for today? Well, we don't know what's going to happen with the tax laws after 2025. You could've just stopped that. We don't know what's gonna happen with the tax laws. But alright. So what's what's happening after 2025? Well, tax rates are supposed to go back up to the pre tax cuts and jobs act levels. You may remember we've been having some nice low tax rates for these past few years. But that train ends after 2025. We're in 2024 now. You have two years left to see Should you take action? Should you do some things now? Pay some taxes now or get, move assets, Roth conversions, estate and gift tax planning for the rules from the Tax Cuts and Jobs Act are suspended and they go back, to to the former rates. Alright. So our topic for discussion today or for debate today is should I act now ahead of the schedule changes at the end 2025. And the changes are a tax increases. Alright. So we've got the Tax Cut and Jobs Act passed back in 2018. First, really effective for the most part in two 2018, coming to a close here. And, you know, it made a a lot of changes. In fact, clearly the the most sweeping changes to the tax code in two, three decades, right, since the 1986 tax changes. Right? Would you agree? Oh, yeah. Yeah. With the, across the board. Mhmm. In individual income tax rates, capital gain rates, estate and gift tax, exemptions. Even corporate tax reform. That was one of the biggest. Yeah. And that's the interesting thing was, you know, when they passed this law, they they wanted to do so within a a trillion and a half dollars of additional deficit over ten years. This was back when two thousand seventeen when Republicans had control of the the White House, the Senate, and the the House of Representatives, and they kind of set themselves a a deficit budget, if you will. They said we're not gonna make anything go more than trillion and a half dollars of additional deficit over ten years. Is it amazing how we throw throw around the word trillion now? A trillion here. A trillion there. It's all the same. So they had this. And I mean, it used to be billions and millions were a lot. And couple of years, we'll be at quadrillions. Just stick around that inflation happens. So you know, the Republicans, as they came up with this bill, they with the changes that they wanted to make on the corporate side, so notably taking the top rate from 35 percent down to 21 percent, and the changes they want to make on the individual side, it was gonna put them over budget if you will. It was gonna be more than a trillion and a half dollars of additional deficit, and they weren't willing to do that. So they effectively had a choice. Right? They could have either kind of watered down all the provisions on both sides and made them permanent, made the changes to the personal income tax and personal estate taxes permanent and sunset or reverted the corporate tax rates to their old at some point or they could have done what they ultimately decided to do, which is make the corporate changes permanent so that 21 percent corporate rate is now permanent, but almost all, not everything, but almost all the changes they made on the individual income and estate tax side, go back to their old rules, and here's a scary word, thought at the end of next year, like that soon. Yeah. So two big areas of change, add income tax changes and estate tax and So let's call it transfer taxes. So a state and gift tax. Let's put that off to the side. We'll come back to that afterwards. Let's talk about income taxes first. Give me a quick rundown of maybe some of the the top three to five things that impacted most people as a result of the tax cuts and jobs act, what were some of the biggest changes that.. Some of the biggest ones with the lowering of the rates. Obviously, the fact that ninety percent of the people according to IRS at taking the standard deduction now that they raised up. So very few people are itemizing anymore. Okay. So two things right there. Right? The brackets change. And The big one, I think, that a lot got a lot of attention was the top tax bracket going from 39.6 down to 37, that's scheduled to go back. But even a lot of the middle tax brackets. We had a twenty five percent bracket. Now we have 24 and 22. There was a 15 percent bracket. Now we have 12. So even at different income levels, people on average saw a reduction in taxes. You mentioned another big one. The fact that the, the standard deduction was roughly doubled from where it was. Any other ones that stick out to you as major changes from that that are set to revert? The I'll tell you one that's not set to revert the alimony provision. That's why that was stuck in there. Yeah. If you get divorced now, it is now even more expensive. You get divorced afterwards. It is you know, I guess Congress felt it was too cheap to get divorced before, so they decided to make these more. Well, it depends what side you were on. That's fair enough. Just so explain what what I'm talking Sure. It used to be that alimony was deductible by the payor, and then, the recipient would have to include that in their income taxes. Congress felt that was unfair because it allowed one person to effectively split income out over two different tax returns, and again. For whatever reason, but they made that provision permanent. That right. And I think that was probably smart because then you have people with divorces going back and forth to the different rules. And that's probably why they did it. You know, one of the other changes that sticks out to me, they the Tax Cut and Jobs Act did eliminate miscellaneous itemized deductions. Those come back now, along with exemptions and so forth. Effectively, we go back to the tax rules from two 2017. And I think, even casualty and theft losses That's right. Who are in there too. And and you know what, everybody's situation is different. Right? There's no one provision you can point to to say, this affected you good or bad, then overall it was good or bad for you because there's so many things on a tax return that are counterbalanced one another, but on the whole, depending upon what estimates you believe, somewhere between 70 to 80 percent of people saw lower taxes after the tax cut and jobs act. Now, doesn't mean it's a good thing, doesn't mean it's a bad thing. That depends on your point of view. Right? Wasn't the limitation the ten thousand on real estate taxes? The state and local taxes. That's right. So real estate taxes, income taxes of your state were capped at ten thousand dollars whereas before, it was theoretically unlimited. I say theoretically because the alternative minimum tasks. Really? That's another point. When people complained back at that time, I said you weren't getting deduction anyway, but they said, but you put it on my return. I put it on your return. I had to tell clients. So you wouldn't argue with.. So you wouldn't say I forgot it. That's right. But then if you look at the alternative minimum tax, you don't get it. Yep. Yep. In fact, they gave people ten thousand dollars when they got zero before. Yeah. Yeah. So, I mean, that's the, an AMT is actually another good one that's set to revert. Right? So lots of things scheduled to go back about. Look, if 70 to 80 percent of people have lower taxes now because of these changes, it stands to reason that if nothing changes, then 70 to 80 percent of people will have higher taxes So here's the question, Ed. Right. I was just gonna say, what's the question? Should people do something about it. Is there something they should do today ahead of these schedule changes? Well, it's two questions. Should they do something today? And the other question is, oh, maybe it's the same question. Do you think it will really happen. That's a question I get from advisors and seminar. You think they're really gonna go back in 2026 and raise the rates? Alright. So what do you think? I don't think so. No? First of all, I know we didn't get to the state and gift tax, but those changes are massive because it doubled the exemption. You're talking about huge numbers. I don't believe, and you may correct me on that. The state and gift tax exemption was ever lowered in history other than the one year 2010 we had nothing. Yes. Yeah. Yep. But other than that, I don't think it's ever been reduced. No. It's a straight line pretty much up here. So I think that would be too much of a shock to the system. I think if anything comes back, it's gonna be piecemeal. I don't think they're going to say put the whole thing back as is. So you think they'll basically, you you think they're more likely to extend today's I think they're gonna try and do it or cherry pick certain items. A good point. I, you know, I'm not a hundred percent sure. I, well, I don't think anybody is, but I, I, I don't I always take the under. It comes to congressional action. Right? Like, it's, when it comes to Washington, I vote for gridlock. I know what's gonna happen. At the end of twenty five, it's gonna be a political issue. Oh, they're gonna raise your taxes. They did that, in another tax bill where something was set to come in, not that they were raising your taxes, but they took away tax reductions. That's right. Which is essentially raising taxes. So that's gonna be the whatever side of the aisle is saying, oh, they're gonna raise your taxes. If we're not in, In 2026, they're raising your taxes. No. This was part of the deal that was made in 2017. But the other part of the question, should people do something now? And I say yes to that. Alright. So what should they do? Well, let me tell you why I say yes. Because right now, you may think nobody likes to pay taxes, everybody complains. Everybody says taxes are too high, but historically, we're in the lowest rates you will ever see in your lifetime right now. And one of our other friends has been inflation. Now inflation, how could that be a friend? Well, inflation, I get it. It means things cost more. But when it comes to taxes, Inflation is great. The brackets have been expanded. The rates are the same, but the brackets have been expanded allowing more income to be passed at unbelievably low historic rates, 22 percent, 24 percent. Yep. Hundreds of thousands are able to come out. So you ask me what per in particular, Roth conversion comes to mind. If you can get that IRA money out at rock bottom rates, tax rates are on sale. So whatever happens in twenty six, which we don't know. We do know today's rates. Why not take advantage of the rates we have right now, which are historically low? I think I say this in almost every episode. I know I say it in every seminar, the key to keeping more of your hard earned money is to always pay taxes when the rates are the lowest. And I believe that's right now, and probably next year too, because we know what those rates are, and you will have inflation expansion. So I actually don't disagree with anything you said, but I I'll say that I would add a little bit of nuance to it in that If your income is gonna be relatively stable for now and in the future, I think accelerating a lot more today, where I've seen, some people perhaps go the wrong route recently or, you know, is is thinking along the lines of, hey, these tax rates are going to go up next year. I should vert now because the rates are low. But right now, they're working. Right? And in a few years, maybe they're going to retire. They're not gonna have that two three hundred thousand dollar a year salary. And even though rates might be higher, their income might be a lot lower down the road. Well, that goes right to what I said. Always pay taxes when your rates, your marginal rates, your bracket rates will be the lowest. And that may be the case. Although I will, just to divert from that a little, I will say when people always think they're gonna be in a lower rate in retirement, I have rarely seen that unless somebody had a mega job, they make a million dollars a year, and then they're not. Because if you do nothing on talking about a Roth conversion, let's say you do nothing. You say, well, my rates will be lower, and that's the reason you convert. You wanna convert when rates are lower. Or if you're, If you think your rates in retirement will be lower, you won't convert. But if you think that and you're wrong, that means your IRA continues to grow. I'll give you this example. I was telling this client years ago about Roth conversions, and he kept saying, no, no, I don't wanna spend the money that once I'm retired, I'll be in a lower bracket. Well, that never happens. At least what I've seen, sure enough, he came in for his tax return for his first full year of retirement with no w2, because in his mind, which makes sense. Mhmm. I don't have this big w2. My rates will be lowest. I get in the tax. Ed, how can this be? My income is higher than my best earnings years. I said, how can this be? It's because you never listened to me. I told you for years to do Roth conversions to start knocking down that IRA. Well, guess what? Look at your RMDs. They're higher than your best year w2. So Look at that. What you're saying makes sense, but for a lot of people, especially, that have large IRS, they may not be in a lower rate. And you don't know what that rate will be. That's true. In the future, given, tax rates, at some point, I believe whether it's this law or a future law will have to go up, especially on higher earners. So if you can get that money out now, I would just take advantage of today's low rates, taxes are on sale. I would cash in on that now. I think those are all good points. And and and probably the Roth conversion is is the single biggest way that someone could take advantage of today's income tax rates versus the future. Another, you know, just thinking kind of more on the margins, you know, 90 percent of tax planning is push pull, right, is either push out deductions and pull in income or pull in deductions and push out income. Right? One of those two. Right? If you believe your rates will be higher down the road, you wanna pull in income to today, like the Roth conversion and push out deductions, If the opposite is true, you wanna take the opposite action. So if we believe that rates might be a little bit higher down the road, then some of the other things that someone might be thinking about today. For instance, maybe someone knows they're gonna be making a large charitable contribution at some point in the near future. Oh, right. Right. They wanna give a hundred thousand, two hundred thousand more to charity. While they may wanna satisfy their charitable content sooner rather than later, there might be a much bigger tax benefit to doing that once rates go up, or maybe they're a business owner and they're looking at taking depreciation today. Right? The idea, you know, today's tax laws allow a lot of business owners to take depreciation now, you might wanna push that out and take more time. Exactly as you say. You want deductions. When rates are higher, you want income when rates are lower. But now let's switch gears. We're still talking about what's going to happen in twenty twenty six. I think the big move, is in the estate and gift tax area. Certainly a big certainly a big change. I mean, we're not talking about taking the 27 excuse me. You're not talking about taking the thirty seven percent tax rate and making it seventy four percent. Right. Right. That would be doubling it. Well, that's basically what's gonna happen with the state and gift tax. We're gonna take today's exemption of roughly, you know, thirteen and a half million called fourteen for just round numbers. Fourteen million dollars per person. So Well, it could be next year. Let's say next year, it could be fourteen million. That's twenty-eight million per married couple. And going back to half of that. Right. So seven million, roughly a person, if everything goes according to plan. When I say going according to plan, I don't mean my plan. I mean, the existing plan that's set to happen as the tax cuts and jobs act expires. So, Ed, obviously, that is a huge reduction in a state and gift tax exemption, one that we've never seen to your point earlier. Right. So would you take action today instead of that? Yes I would it everybody's situation is different. But at a minimum, I would have the conversation because one of the things you can do we talk about the estate exemption. So everybody thinks about, oh, when I die. So why can I how can I plan that? Yep. No. The exemption. That's not the type of planning we talk about. Yeah. This is a that's a different program. Different podcast. No. We're talking about using the exemption can be used during a lifetime to lock it in. So, we're talking maybe fourteen million. It'll before 2026, depending on inflation adjustments. It's just a ballpark number. Let's say fourteen million. You could lock that in now depending on your estate and your other plans, but you could get that out now by gifting it absolutely tax free. You can use the exemption during life and Here's the interesting part. A few years ago, even the IRS said they came out with a ruling and said, basically, either use it or lose it. Yep. And what did they actually say? They said if you because this was the big question that came up, if I use my fourteen million during life, and then it and I'm still alive. And then by the time I die, it goes down to seven million, will there be a clawback? Nope. And IRS said, no. Yeah. That was a big deal. You know, for somebody in the right bracket with the the net worth, we're talking about somebody with high net worth, but you could save a bundle with gifting using some of that exemption right now or now, and and in 2025, before it's set to go back to half. Yeah. I think, you know, you have to separate individuals based on their net worth today and their projected net worth down the road. Certainly, if if you have I think the the risk here, right, is that we go back to seven million dollars a person. So if you have seven million dollars yourself, if you're married and you have, a spouse that's fourteen million dollars. If you think your estate might be north of that at the point you you pass away, then you're probably a candidate for thinking about these gifting strategies today. If you think your estate will be lower than that, which look. Let's face it. It's still the majority of Americans. Overwhelming majority, then it may actually pay not to gift out because by gifting out, you actually eliminate certain things such as a step up and basis. In other words, if you well, I'm not talking about those assets. I should make that clear. I generally, especially for older people that are closer to their great beyond. I wouldn't give away. I wouldn't give away, highly appreciated assets because you get the step up in basis. I'm talking pure cash Well, if you have twenty eight million dollars in cash, I'd like to yeah. That's a that's a pretty good thing. I I don't want people to think we're saying they give up the step basis. That's too good. So so an important important consideration there, right, the trade off between income taxes and gift taxes. But, you know, there's also, you know, with today, I'd say if I was thinking about the the simplest, you know, the slam dunk of situations today would be for a married couple with significant wealth using something called a spousal lifetime access trust. Right. You know, a a a slat to, you know, the big problem with gifting assets during life is that you really have to gift them. Right? You have to give them away. But people want to use their assets. They don't necessarily want to give them away. The spouse a lifetime access trust, or slat, as it's known, is sort of a the best example we have in the estate and gift tax planning world of having your cake and eating it too. Right? Giving money away, but still being able to use it yourself. Now you have to have a spouse and you have to trust your spouse. But that that's a potential option here. One that people can think of today ahead of the 2026 schedule changes. Yeah. You make a good point there because even when I've talked to clients that had you know, sufficient, beyond sufficient net worth. There's just something about gifting. What if I'll need it later? Yes. Those with thirty and forty million saying, what if I need that? Yeah. But but to your point, it doesn't matter how much you have for a lot of people. They just have that level of discomfort gifting, and Look, at the end of the day, the gift in a state tax only applies if you have a, an, an estate in excess of the exemption, which even if everything happens as it's scheduled to right now would mean seven million dollars a person fourteen million dollars for a couple, which is still a lot of money. If you have more than that and you're comfortable hanging on to the money and having your estate subject to a state tax, then that's your choice. Right. I would point out another thing though. There are certain people in certain states like mine, New York that have a state estate tax. Not all states have it. There are a few of them, though. Those can be very high, and they come with a cliff so the estate the state estate tax can be devastating even if you're maybe a hundred thousand over the limit. Yeah. Definitely add complexity upon complexity, upon complexity. So as we think about this ultimately, Ed, we we get to to wrap up our discussion here today. We think about the question, should I take action ahead of the tax cut and jobs act? I think what we come to is everybody's situation, obviously, is different. But for the majority of people, there's no need to necessarily rush to judgment today. On the income tax side, it is either possible to your point that a lot of it gets extended going forward, or that, or or that you're just in a situation where even if it changes the situation that you have, doesn't warrant adding significant income today because maybe you'll be at a lower tax rate in the situation in the future. And on the estate tax side, looking at gifting makes a lot of sense for those who are in the fortunate situation where maybe they will die within a state north of fourteen million. But for those with estates less than that, this really doesn't necessarily affect. But we only mention it because it's the most drastic change. That's going to happen. That's right. So that is a huge change. And the the this thing is it takes The estate and gift tax is impacting a really, really, really, really, really small amount of people to just a really, really, really small amount of people. But If you're in that difference, boy, does this matter to you? Nothing else may have a bigger impact on your family's future. So wrap up. I would still take advantage where the law changes are not. Today's low rates, wherever you can, especially with Roth conversions. Yeah when you know something is, then you could always It is now, and it will be next year. Alright, Ed. Let's leave it there. Thanks so much for joining us, everyone. And let us know what you think. Should you take action ahead of the changes at the end of 2025 going back in 2026, you can reach out to us on Twitter @TheSlottReport and myself @CPAPlanner, and we look forward to seeing you real soon for the next episode the Great Retirement Debate.