1
00:00:08,240 --> 00:00:31,080
Speaker 1: Me tell you, hey, it's early to be thinking about taxes.

2
00:00:31,280 --> 00:00:34,720
Speaker 1: April is only a few months away. But you have

3
00:00:34,880 --> 00:00:38,960
Speaker 1: questions and we have answers. Let's discuss how you can

4
00:00:39,040 --> 00:00:43,040
Speaker 1: reduce or defer your taxes over the long haul. I'm

5
00:00:43,040 --> 00:00:45,680
Speaker 1: Barry Riddolts, and on today's edition of At the Money,

6
00:00:46,000 --> 00:00:50,880
Speaker 1: we're going to discuss important issues for all investors about

7
00:00:51,040 --> 00:00:54,520
Speaker 1: understanding how to lower their tax bill. To help us

8
00:00:54,600 --> 00:00:57,080
Speaker 1: unpack all of this and what it means for your money,

9
00:00:57,440 --> 00:01:01,280
Speaker 1: let's bring in Bill Artsimoronian full discs closure. Bill is

10
00:01:01,320 --> 00:01:05,080
Speaker 1: a director of tax services at Retults Wealth Management, where

11
00:01:05,120 --> 00:01:08,760
Speaker 1: I also happen to coincidentally work and have my name

12
00:01:08,840 --> 00:01:12,640
Speaker 1: on the door. So Bill, let's start with the basics.

13
00:01:12,720 --> 00:01:17,000
Speaker 1: Where does tax management sit in the hierarchy of priorities

14
00:01:17,040 --> 00:01:20,840
Speaker 1: for investors? How does this look relative to things like

15
00:01:21,360 --> 00:01:27,080
Speaker 1: asset allocation or security selection, or even asset location and

16
00:01:27,520 --> 00:01:28,640
Speaker 1: their own behavior?

17
00:01:28,880 --> 00:01:31,720
Speaker 2: Well, thanks for having me back, Barry. I'm biased. I'm

18
00:01:31,720 --> 00:01:34,200
Speaker 2: a CPA. I've run the tax practice here, Like I

19
00:01:34,480 --> 00:01:38,200
Speaker 2: think about taxes all day, but I'm both in life

20
00:01:38,240 --> 00:01:41,959
Speaker 2: and in working with clients. I'm a proponent of control

21
00:01:42,000 --> 00:01:44,479
Speaker 2: what you can control. We can't control the market. Asset

22
00:01:44,520 --> 00:01:46,800
Speaker 2: allocation gives us you know, we can run back test,

23
00:01:46,840 --> 00:01:49,560
Speaker 2: we can look at historical data. That's very useful. Even

24
00:01:49,600 --> 00:01:52,680
Speaker 2: security selection. That's you know, individual stocks are more vulneratile

25
00:01:52,720 --> 00:01:56,520
Speaker 2: than say an index fund. But taxes, we have a

26
00:01:56,560 --> 00:01:59,760
Speaker 2: set of rules and we can we can define our

27
00:01:59,760 --> 00:02:01,480
Speaker 2: behave if you're based on those rules, at least in

28
00:02:01,480 --> 00:02:03,160
Speaker 2: the short term. We don't know what tax level will

29
00:02:03,160 --> 00:02:04,720
Speaker 2: look like twenty years from now, but we have a

30
00:02:04,760 --> 00:02:07,000
Speaker 2: set of rules for the foreseeable future. We have to

31
00:02:07,040 --> 00:02:10,240
Speaker 2: act within those rules, but it gives us guidelines, and

32
00:02:10,520 --> 00:02:12,679
Speaker 2: that's where we can actually make a difference because we

33
00:02:12,720 --> 00:02:14,679
Speaker 2: don't know what the market's going to do tomorrow, next week,

34
00:02:14,720 --> 00:02:16,560
Speaker 2: next month, next year, but we do know what the

35
00:02:16,560 --> 00:02:19,840
Speaker 2: tax code will look like at least until probably twenty

36
00:02:19,880 --> 00:02:20,359
Speaker 2: twenty eight.

37
00:02:20,480 --> 00:02:24,560
Speaker 1: So let's talk about tax aware portfolios. What are the

38
00:02:24,600 --> 00:02:28,240
Speaker 1: core issues that investors can pull the right levers on.

39
00:02:28,280 --> 00:02:30,919
Speaker 1: What moves the needle the most.

40
00:02:31,480 --> 00:02:34,760
Speaker 2: It's very basics. We have different buckets of tax assets.

41
00:02:34,800 --> 00:02:37,440
Speaker 2: We have pre tax money like a traditional form o K.

42
00:02:37,800 --> 00:02:41,160
Speaker 2: We have after tax money, which is say a broker's account,

43
00:02:41,320 --> 00:02:43,400
Speaker 2: and then we have tax free money, which is your

44
00:02:43,400 --> 00:02:47,040
Speaker 2: Wroth account. Asset location can be huge, and we're big

45
00:02:47,040 --> 00:02:50,720
Speaker 2: fans of asset diversification. With clients come to us, they're

46
00:02:50,720 --> 00:02:54,839
Speaker 2: well versed in sorry, asset diversification, but not necessarily tax diversification.

47
00:02:55,160 --> 00:02:58,720
Speaker 2: Tax diversification to me means you have different levels of

48
00:02:58,720 --> 00:03:00,760
Speaker 2: assets in each of these buckets, and that gives you

49
00:03:00,880 --> 00:03:03,760
Speaker 2: a lot of flexibility when you need it. A lot

50
00:03:03,800 --> 00:03:06,000
Speaker 2: of times this comes up in retirement. We have folks

51
00:03:06,040 --> 00:03:07,560
Speaker 2: come to us and they socked away money in a

52
00:03:07,600 --> 00:03:09,120
Speaker 2: four oh one K their whole career. They have a

53
00:03:09,120 --> 00:03:11,280
Speaker 2: couple million bucks, They feel great about it, and then

54
00:03:11,320 --> 00:03:12,600
Speaker 2: we have to break the news like, hey, you're going

55
00:03:12,639 --> 00:03:15,080
Speaker 2: to pay tax on every single dollar here, and there's

56
00:03:15,080 --> 00:03:17,920
Speaker 2: no flexibility in their plan. Every dollar that they distribute,

57
00:03:17,960 --> 00:03:19,960
Speaker 2: every dollar that they need for the rest of their lives,

58
00:03:20,120 --> 00:03:22,799
Speaker 2: is going to be taxable. Whereas if you plan ahead

59
00:03:22,840 --> 00:03:25,600
Speaker 2: and you can diversify those different buckets of tax money,

60
00:03:25,880 --> 00:03:28,079
Speaker 2: that's where that's where you provide a lot of flexibility

61
00:03:28,080 --> 00:03:29,000
Speaker 2: for yourself in the future.

62
00:03:29,360 --> 00:03:32,639
Speaker 1: So let's talk about planning ahead. And perhaps the thing

63
00:03:33,080 --> 00:03:35,840
Speaker 1: that I find most fascinating and I've been reading the

64
00:03:35,880 --> 00:03:38,600
Speaker 1: most about and I still feel like I don't have

65
00:03:38,640 --> 00:03:42,920
Speaker 1: a solid handle on it. Is the super Wroth backdoor conversion?

66
00:03:43,200 --> 00:03:46,520
Speaker 1: Tell us what that is, What are the advantages of it?

67
00:03:46,880 --> 00:03:49,960
Speaker 1: How do you make sure you're doing that both correctly

68
00:03:50,240 --> 00:03:52,440
Speaker 1: and legally according to the IRS.

69
00:03:52,960 --> 00:03:55,200
Speaker 2: Sure we can call it super Wroth, we can call

70
00:03:55,240 --> 00:03:58,960
Speaker 2: it mega Roth. It's just a juiced up Wroth option

71
00:03:59,320 --> 00:04:02,320
Speaker 2: in your employee retirement plan. Let's just use Let's just

72
00:04:02,400 --> 00:04:04,240
Speaker 2: use four oh one k's as an example. There are

73
00:04:04,280 --> 00:04:06,960
Speaker 2: other employer retirement vehicles, but let's use four oh one k's.

74
00:04:07,240 --> 00:04:09,960
Speaker 2: The limit in twenty twenty five for total four oh

75
00:04:10,000 --> 00:04:12,920
Speaker 2: one K contributions is seventy grand. Now that can be

76
00:04:13,120 --> 00:04:17,040
Speaker 2: employee myself contributing to a to contributing to a four

77
00:04:17,120 --> 00:04:20,120
Speaker 2: oh one K, or that can come from the employer. Normally,

78
00:04:20,440 --> 00:04:22,440
Speaker 2: for a lot of plans, it's a combination of the two.

79
00:04:22,760 --> 00:04:25,240
Speaker 2: So let's say I'm fifty years old, I'm contributing thirty

80
00:04:25,320 --> 00:04:27,960
Speaker 2: K to my pre tax four oh one K in

81
00:04:28,040 --> 00:04:30,600
Speaker 2: twenty twenty five. Next year, that's going to change slightly.

82
00:04:30,640 --> 00:04:33,279
Speaker 2: We talked about that last time. But then my employer

83
00:04:33,360 --> 00:04:35,160
Speaker 2: is going to kick in let's say ten grand. That's

84
00:04:35,160 --> 00:04:38,680
Speaker 2: their match. So total we're at forty K, the remaining

85
00:04:38,760 --> 00:04:40,839
Speaker 2: thirty if the if the four to one K plan

86
00:04:40,920 --> 00:04:44,279
Speaker 2: allows it, that remaining thirty seventy K maximum minus forty

87
00:04:44,360 --> 00:04:47,040
Speaker 2: K already contributed that can be made on an after

88
00:04:47,120 --> 00:04:49,800
Speaker 2: tax basis, and then you have money that's already been

89
00:04:49,839 --> 00:04:52,000
Speaker 2: taxed in the four oh one K, you convert that

90
00:04:52,040 --> 00:04:54,640
Speaker 2: to ROTH. So now we have we have forty K

91
00:04:54,720 --> 00:04:57,479
Speaker 2: that went in pre tax between employer and employee, and

92
00:04:57,520 --> 00:04:59,400
Speaker 2: now we have thirty K that's now in a tax

93
00:04:59,440 --> 00:05:02,880
Speaker 2: free row bucket. So we started our discussion talking about

94
00:05:03,400 --> 00:05:05,720
Speaker 2: tax diversification. This is a great way to do it.

95
00:05:05,839 --> 00:05:08,080
Speaker 2: Now you have pre tax money growing and you have

96
00:05:08,120 --> 00:05:10,360
Speaker 2: tax free money growing, and again that's going to give

97
00:05:10,360 --> 00:05:12,640
Speaker 2: you a ton of flexibility down the line. And even

98
00:05:12,680 --> 00:05:15,839
Speaker 2: inside of those plans, you might want to structure the

99
00:05:15,880 --> 00:05:18,560
Speaker 2: WROTH money a little bit more aggressively because you know

100
00:05:18,960 --> 00:05:21,480
Speaker 2: WROTH money, in perfect financial theory, is gonna be the

101
00:05:21,560 --> 00:05:23,240
Speaker 2: last money you touched, so you might want to be

102
00:05:23,279 --> 00:05:26,000
Speaker 2: more aggressive in the WROTH. If you have a bond allocation,

103
00:05:26,080 --> 00:05:28,320
Speaker 2: you might want that in the traditional or the pre

104
00:05:28,360 --> 00:05:32,760
Speaker 2: tax sleep, but the megabackdoor WROTH allows for these higher contributions.

105
00:05:33,040 --> 00:05:34,840
Speaker 2: It's a kind of an unlock for a lot of

106
00:05:34,880 --> 00:05:37,640
Speaker 2: folks who are earning a lot of money, they want

107
00:05:37,720 --> 00:05:40,320
Speaker 2: tax efficiency. A lot of plans are starting to pick

108
00:05:40,320 --> 00:05:42,800
Speaker 2: this up. So if you're listening and you're a high

109
00:05:42,839 --> 00:05:45,080
Speaker 2: earner and you have some sway at your company, go

110
00:05:45,160 --> 00:05:47,520
Speaker 2: ask your CFO, go ask HR and see if you

111
00:05:47,520 --> 00:05:50,760
Speaker 2: can implement the megabackdoor Roth strategy.

112
00:05:51,160 --> 00:05:54,880
Speaker 1: And then what about the full on mega roth conversion?

113
00:05:55,000 --> 00:05:57,920
Speaker 1: Do you take the traditional four O one K, what

114
00:05:58,000 --> 00:06:01,480
Speaker 1: does that look like when you convert that to a ROTH.

115
00:06:01,839 --> 00:06:05,039
Speaker 2: The extra thirty K that I alluded to, that goes

116
00:06:05,120 --> 00:06:08,280
Speaker 2: in as in quote unquote after tax contribution. When you

117
00:06:08,320 --> 00:06:10,719
Speaker 2: convert after tax money, you don't pay tax on it.

118
00:06:10,720 --> 00:06:13,120
Speaker 2: You don't pay tax twice. That's kind of a foundation

119
00:06:13,240 --> 00:06:16,000
Speaker 2: of the US tax code. You don't pay tax twice. Now,

120
00:06:16,040 --> 00:06:19,960
Speaker 2: if you're talking about taking money you took a deduction on,

121
00:06:20,160 --> 00:06:23,000
Speaker 2: that's considered pre tax money. So if that forty K

122
00:06:23,240 --> 00:06:25,640
Speaker 2: of pre tax money, if I wanted to convert that

123
00:06:25,760 --> 00:06:28,400
Speaker 2: to ROTH, that's going to be a ROTH conversion, and

124
00:06:28,480 --> 00:06:31,240
Speaker 2: that on that one's going to be taxable. That may

125
00:06:31,279 --> 00:06:34,279
Speaker 2: make sense. If you're as an investor, maybe you're in

126
00:06:34,279 --> 00:06:37,400
Speaker 2: your twenties, and thirties and you have a long runway

127
00:06:37,400 --> 00:06:40,040
Speaker 2: to retirement and you want full WROTH money. That's that's

128
00:06:40,080 --> 00:06:42,360
Speaker 2: a great case to convert pre tax money to ROTH

129
00:06:42,520 --> 00:06:45,640
Speaker 2: now and benefit from long term tax free growth in

130
00:06:45,680 --> 00:06:47,640
Speaker 2: the WROTH for decades to come.

131
00:06:47,839 --> 00:06:49,839
Speaker 1: What are some of the more common tax traps that

132
00:06:49,920 --> 00:06:56,440
Speaker 1: you see around equity comp walk us through rsu's ISOs, NSOs,

133
00:06:56,880 --> 00:06:58,920
Speaker 1: employee stock purchase plans, et cetera.

134
00:06:59,240 --> 00:07:02,680
Speaker 2: We call that aquity comp alphabet soup berry is. It's

135
00:07:02,880 --> 00:07:05,320
Speaker 2: really confusing a lot of folks out in the Bay

136
00:07:05,360 --> 00:07:09,560
Speaker 2: Area or in other tech companies. They get employed by

137
00:07:09,560 --> 00:07:11,600
Speaker 2: these companies, They're like, here's your package, and they have

138
00:07:11,600 --> 00:07:13,160
Speaker 2: no idea what it means. So I think the first

139
00:07:13,160 --> 00:07:15,880
Speaker 2: thing is just an understanding of what you own and

140
00:07:15,880 --> 00:07:19,160
Speaker 2: then an understanding of how it's taxed. Ursus are a

141
00:07:19,160 --> 00:07:22,360
Speaker 2: little simple. These are restricted stock restricted stock. It's going

142
00:07:22,400 --> 00:07:25,800
Speaker 2: to be paid on a state investing schedule, and it's

143
00:07:25,840 --> 00:07:28,400
Speaker 2: almost like a cash bonus. You're just receiving stock instead

144
00:07:28,400 --> 00:07:30,240
Speaker 2: of cash. Once you receive it, it's yours to do

145
00:07:30,240 --> 00:07:32,680
Speaker 2: what you want with. Options are a little bit more tricky.

146
00:07:32,680 --> 00:07:36,600
Speaker 2: There's two types of options, non qualified and incentive stock. Options.

147
00:07:36,760 --> 00:07:39,040
Speaker 2: The tax treatment is different. But the way to think

148
00:07:39,040 --> 00:07:41,280
Speaker 2: about it is you don't get anything for free. The

149
00:07:41,320 --> 00:07:43,800
Speaker 2: IRS says, no, you don't get anything for free. So

150
00:07:43,880 --> 00:07:46,480
Speaker 2: if there's a difference in your option between what you

151
00:07:46,520 --> 00:07:48,640
Speaker 2: pay for the share or your strike price and what

152
00:07:48,680 --> 00:07:50,520
Speaker 2: the share is worth, there's going to be a tax

153
00:07:50,560 --> 00:07:52,520
Speaker 2: component on that difference. We call it a spread or

154
00:07:52,560 --> 00:07:55,640
Speaker 2: a bargain element, but that's the big difference. I think

155
00:07:55,640 --> 00:07:59,280
Speaker 2: what at the very basics, what folks that are paid

156
00:07:59,280 --> 00:08:02,480
Speaker 2: in equity need to do is be proactive with a

157
00:08:02,520 --> 00:08:06,360
Speaker 2: tax planner. I've seen far too often folks with RSUs

158
00:08:06,800 --> 00:08:09,960
Speaker 2: or they exercise options, and they have a big tax

159
00:08:09,960 --> 00:08:11,480
Speaker 2: bill in April and they have no idea where it

160
00:08:11,480 --> 00:08:15,560
Speaker 2: came from, because, in my experience, folks don't feel stock.

161
00:08:15,720 --> 00:08:17,840
Speaker 2: They feel cash. They know when they're paid in cash,

162
00:08:17,880 --> 00:08:19,520
Speaker 2: they don't know when they're paid in stock. So if

163
00:08:19,520 --> 00:08:21,640
Speaker 2: you're paid in stock and you recognize that as income,

164
00:08:21,880 --> 00:08:23,720
Speaker 2: you're not thinking about it, and then you're left with

165
00:08:23,760 --> 00:08:25,160
Speaker 2: a big tax bill down the road and you're like,

166
00:08:25,880 --> 00:08:27,840
Speaker 2: I didn't make a million dollars, I made five hundred k.

167
00:08:28,120 --> 00:08:30,240
Speaker 2: But then you realize, oh, that extra five hundred k

168
00:08:30,360 --> 00:08:32,400
Speaker 2: was stock. Not cash. Therefore I didn't feel it.

169
00:08:32,559 --> 00:08:34,600
Speaker 1: What about some of the clients we have at some

170
00:08:34,720 --> 00:08:40,600
Speaker 1: really high growth companies, Apple, Google, Palentier, and Video, they're

171
00:08:40,679 --> 00:08:44,320
Speaker 1: seeing their stockholdings go through the roof. What are best

172
00:08:44,320 --> 00:08:48,280
Speaker 1: practices for those folks. How soon do they need to

173
00:08:48,320 --> 00:08:51,959
Speaker 1: start thinking about managing capital gains?

174
00:08:52,280 --> 00:08:54,480
Speaker 2: Well, that depends. It depends how comfortable they are with

175
00:08:54,520 --> 00:08:57,600
Speaker 2: the stock, both in the short term and long term.

176
00:08:57,679 --> 00:09:00,360
Speaker 2: And there's a bias here, right If you work for

177
00:09:00,360 --> 00:09:03,320
Speaker 2: a company, in theory, you're bought into what that company

178
00:09:03,360 --> 00:09:05,880
Speaker 2: is doing. Therefore you don't really want to sell the shares.

179
00:09:06,160 --> 00:09:09,079
Speaker 2: But then you create some concentration risk when when you're

180
00:09:09,080 --> 00:09:12,400
Speaker 2: paid in equity, it accumulates. And if that accumulates to

181
00:09:12,400 --> 00:09:14,760
Speaker 2: a point where a small move in the stock is

182
00:09:14,840 --> 00:09:17,440
Speaker 2: keeping you up at night because on paper you're worth x,

183
00:09:17,440 --> 00:09:19,760
Speaker 2: and then the next day you're worth X minus whatever,

184
00:09:20,920 --> 00:09:23,480
Speaker 2: you might want to diversify a little bit. And that's

185
00:09:23,520 --> 00:09:26,680
Speaker 2: where effective tax planning is going to be crucial, because

186
00:09:26,840 --> 00:09:28,480
Speaker 2: you don't just want to rip a band aid off.

187
00:09:28,720 --> 00:09:31,240
Speaker 2: You want to strategically plan for capital gains based on

188
00:09:31,280 --> 00:09:34,120
Speaker 2: certain limits. It could be it could be capital gain brackets,

189
00:09:34,160 --> 00:09:37,120
Speaker 2: it could be We talked about salt limits last time

190
00:09:37,160 --> 00:09:40,520
Speaker 2: on deductions Bury, So there's a there's a very structured

191
00:09:40,559 --> 00:09:42,720
Speaker 2: way to do this, but ultimately it's going to depend

192
00:09:42,760 --> 00:09:46,280
Speaker 2: on how comfortable you are with concentrated positions in your

193
00:09:46,280 --> 00:09:48,800
Speaker 2: portfolio and how much are you willing to pay tax

194
00:09:48,800 --> 00:09:49,960
Speaker 2: to get rid of their concentration.

195
00:09:50,600 --> 00:09:53,600
Speaker 1: What happens with someone who not only is getting their

196
00:09:54,040 --> 00:09:57,920
Speaker 1: income from a company, but they just have so much

197
00:09:57,960 --> 00:10:01,240
Speaker 1: concentrated risk in that equity. What sort of advice do

198
00:10:01,280 --> 00:10:02,320
Speaker 1: we give folks like that?

199
00:10:02,679 --> 00:10:05,839
Speaker 2: There's a couple options. Number One, you could just pay

200
00:10:05,880 --> 00:10:08,360
Speaker 2: tax on it. That's a win, you know, especially at

201
00:10:08,400 --> 00:10:10,679
Speaker 2: long term gain rates. You know, our clients are a

202
00:10:10,720 --> 00:10:12,880
Speaker 2: lot of our clients are pushing thirty five, thirty seven

203
00:10:12,920 --> 00:10:15,280
Speaker 2: percent on their ordinary income, but their long term capital

204
00:10:15,280 --> 00:10:17,320
Speaker 2: gain rate is going to be twenty percent. They'll probably

205
00:10:17,320 --> 00:10:20,000
Speaker 2: pay three point eight percent, which is net investment income tax.

206
00:10:20,200 --> 00:10:22,080
Speaker 2: But that's a reasonable rate to pay for all this

207
00:10:22,200 --> 00:10:26,680
Speaker 2: growth you've won. Now create some tax, sell the capital gain,

208
00:10:26,920 --> 00:10:29,240
Speaker 2: and help yourself sleep at night, because again, if that

209
00:10:29,320 --> 00:10:32,040
Speaker 2: stock moves ten percent, it's going to be material to

210
00:10:32,080 --> 00:10:34,880
Speaker 2: your overall net worth. There are some other mechanisms we

211
00:10:34,920 --> 00:10:38,520
Speaker 2: are we're heavy with direct indexing here at Adults. We've

212
00:10:38,559 --> 00:10:40,560
Speaker 2: had a lot of success with the O'Shaughnessy team on

213
00:10:40,840 --> 00:10:46,360
Speaker 2: direct indexing and creating tax losses to use against concentrated positions,

214
00:10:46,440 --> 00:10:49,199
Speaker 2: or maybe use tax losses against real estate holdings or

215
00:10:49,240 --> 00:10:51,960
Speaker 2: other stuff. There are some newer things. Bill Sweet calls

216
00:10:52,000 --> 00:10:55,120
Speaker 2: this late stage capitalism, where there's this there's this slew

217
00:10:55,160 --> 00:10:59,320
Speaker 2: of new products to either avoid or defer taxes. Three

218
00:10:59,320 --> 00:11:03,079
Speaker 2: point fifty one exchanges come into mind. Where you take

219
00:11:03,120 --> 00:11:06,160
Speaker 2: a concentrated position, you find a group of investors, you

220
00:11:06,200 --> 00:11:09,200
Speaker 2: bundle it into an ETF, and you have a diversified

221
00:11:09,240 --> 00:11:12,880
Speaker 2: basket now rather than a concentrated position. It doesn't necessarily

222
00:11:12,920 --> 00:11:16,760
Speaker 2: solve the tax problem because your basis is your basis.

223
00:11:16,800 --> 00:11:19,640
Speaker 2: You can't change that. So if I have a million

224
00:11:19,640 --> 00:11:22,800
Speaker 2: dollars of stock with a five thousand dollars basis, even

225
00:11:22,840 --> 00:11:26,360
Speaker 2: if I exchange that for a diversified ETF, my basis

226
00:11:26,360 --> 00:11:28,720
Speaker 2: is still five grand. So whenever I want to sell

227
00:11:28,760 --> 00:11:30,679
Speaker 2: some shares of that new ETF, I'm still going to

228
00:11:30,720 --> 00:11:32,920
Speaker 2: have a pretty big capital gainspill. But it does solve

229
00:11:32,920 --> 00:11:34,240
Speaker 2: the diversification issue.

230
00:11:34,400 --> 00:11:37,520
Speaker 1: I know there was an exchange act recently. This traces

231
00:11:37,559 --> 00:11:41,040
Speaker 1: back to real estate. If you sold an investment property

232
00:11:41,080 --> 00:11:43,800
Speaker 1: and rolled into another one, you got to roll over

233
00:11:43,840 --> 00:11:48,120
Speaker 1: the tax obligation. So it sounds like the SEC is

234
00:11:48,240 --> 00:11:52,400
Speaker 1: finally caught up with real estate investors. Tell us more

235
00:11:52,480 --> 00:11:55,120
Speaker 1: about how that operates. If you're sitting in a highly

236
00:11:55,120 --> 00:11:59,800
Speaker 1: appreciated stock and let's be blunt, this is late stage

237
00:11:59,840 --> 00:12:03,240
Speaker 1: of a bull market. People are sitting on giant, low

238
00:12:03,280 --> 00:12:07,560
Speaker 1: cost basis positions. How do these exchange works? Does it work?

239
00:12:07,679 --> 00:12:10,480
Speaker 1: Is it just ETFs? What else can you do this with?

240
00:12:10,800 --> 00:12:13,280
Speaker 2: Yeah, there's again there's a slew of products on the

241
00:12:13,280 --> 00:12:16,360
Speaker 2: market to solve these quote unquote problems. They're not problems

242
00:12:16,360 --> 00:12:19,560
Speaker 2: at all. They're they're these are these are Champagne problems.

243
00:12:19,760 --> 00:12:22,000
Speaker 2: But just like in real estate, where a ten thirty

244
00:12:22,000 --> 00:12:24,640
Speaker 2: one exchange looks like you have a piece of property

245
00:12:24,720 --> 00:12:27,640
Speaker 2: real estate, for example, you find a bigger piece of

246
00:12:27,640 --> 00:12:30,920
Speaker 2: real estate, you have a capital gain in the existing

247
00:12:31,320 --> 00:12:34,360
Speaker 2: property and you roll it into the new property. Again,

248
00:12:34,440 --> 00:12:37,360
Speaker 2: this is tax deferral, It is not tax avoidance. Your

249
00:12:37,400 --> 00:12:40,400
Speaker 2: basis stays low, and so what you end up with

250
00:12:40,600 --> 00:12:43,720
Speaker 2: is you push the capital gain down the line. Now,

251
00:12:43,840 --> 00:12:46,400
Speaker 2: in real estate, and what you could do with liquid

252
00:12:46,400 --> 00:12:50,160
Speaker 2: assets and securities is if you exchange and exchange and

253
00:12:50,200 --> 00:12:53,520
Speaker 2: exchange your whole life, then you pass it. Let's say,

254
00:12:53,679 --> 00:12:55,440
Speaker 2: let's say you die. My favorite thing to say is

255
00:12:56,160 --> 00:12:59,240
Speaker 2: nothing solves tax problems like death. But if you die.

256
00:12:59,800 --> 00:13:01,960
Speaker 2: If if you die, you pass on the assets to

257
00:13:02,000 --> 00:13:04,800
Speaker 2: your kids. And what you've effectively done is you've deferred

258
00:13:04,800 --> 00:13:07,319
Speaker 2: capital gains until you die, and then your error is

259
00:13:07,360 --> 00:13:09,280
Speaker 2: going to step up in basis. So there are more

260
00:13:09,320 --> 00:13:12,840
Speaker 2: mechanisms now to replicate what's happened in real estate with

261
00:13:12,960 --> 00:13:16,280
Speaker 2: liquid securities and other assets, and that's that's allowed folks

262
00:13:16,320 --> 00:13:20,760
Speaker 2: to defer, defer, and then you know, eventually we'll inevitably

263
00:13:20,800 --> 00:13:22,880
Speaker 2: we'll see a bear market and this will solve itself.

264
00:13:23,200 --> 00:13:25,120
Speaker 2: But right now we're seeing a lot of folks explore

265
00:13:25,160 --> 00:13:27,120
Speaker 2: these options because we've had a hell of a run

266
00:13:27,160 --> 00:13:28,960
Speaker 2: for fifteen years now and a lot of folks are

267
00:13:29,000 --> 00:13:30,600
Speaker 2: sitting on big capital gains.

268
00:13:30,840 --> 00:13:32,719
Speaker 1: Yeah, to say the very least. So there's been a

269
00:13:32,760 --> 00:13:35,560
Speaker 1: whole new set of rules passed last year in twenty

270
00:13:35,600 --> 00:13:39,640
Speaker 1: twenty five. Tell us what the most significant tax law

271
00:13:39,760 --> 00:13:42,440
Speaker 1: changes were. What should investors be aware of?

272
00:13:42,800 --> 00:13:44,880
Speaker 2: The biggest change is what didn't change at all, and

273
00:13:44,920 --> 00:13:48,880
Speaker 2: that was actually tax rates. If if the tax bill

274
00:13:48,960 --> 00:13:50,559
Speaker 2: that was signed into law, we call it OBI III,

275
00:13:50,840 --> 00:13:53,240
Speaker 2: one Big beautiful, one big Beautiful Act, if that was

276
00:13:53,280 --> 00:13:56,160
Speaker 2: not signed into law by December thirty first, or if

277
00:13:56,200 --> 00:13:58,880
Speaker 2: there were no tax changes, tax rates were set to

278
00:13:58,960 --> 00:14:01,520
Speaker 2: increase by about eight to five percent across the board,

279
00:14:01,880 --> 00:14:05,800
Speaker 2: and for folks earning the highest incomes that would have

280
00:14:05,800 --> 00:14:08,240
Speaker 2: gone from thirty seven to thirty nine point six percent,

281
00:14:08,600 --> 00:14:12,000
Speaker 2: and that two point six percent difference that is unlimited

282
00:14:12,080 --> 00:14:15,199
Speaker 2: in theory, that could be up to six six figures,

283
00:14:15,200 --> 00:14:17,480
Speaker 2: seven figures, eight figures, nine figures, and that two point

284
00:14:17,559 --> 00:14:20,520
Speaker 2: six percent is now kicked into every dollar that exceeds

285
00:14:21,000 --> 00:14:23,680
Speaker 2: that amount. And so the biggest thing that change is

286
00:14:23,680 --> 00:14:26,800
Speaker 2: what didn't change, and that's tax rates. The other changes

287
00:14:26,840 --> 00:14:29,320
Speaker 2: that we're seeing come into a factor a lot. On

288
00:14:29,360 --> 00:14:33,600
Speaker 2: the deduction side, there's more strategy around tax deductions. Charitable giving,

289
00:14:34,000 --> 00:14:36,120
Speaker 2: State and local taxes had a bump from ten k

290
00:14:36,320 --> 00:14:39,680
Speaker 2: up to forty k for certain taxpayers. For most taxpayers,

291
00:14:40,280 --> 00:14:43,760
Speaker 2: we talk about charitable giving quite a bit, and those

292
00:14:43,800 --> 00:14:46,080
Speaker 2: are what we're focused on, is controlling the timing of

293
00:14:46,120 --> 00:14:49,320
Speaker 2: deductions to time with income. Right your deductions are worth

294
00:14:49,400 --> 00:14:51,600
Speaker 2: more when your tax rate is at its highest than

295
00:14:51,640 --> 00:14:53,720
Speaker 2: when your tax rate is lower. So we're trying to

296
00:14:53,840 --> 00:14:57,320
Speaker 2: time charitable gifts, We're trying to time salt deductions to

297
00:14:57,400 --> 00:15:00,000
Speaker 2: coincide with our client's highest income year.

298
00:15:00,800 --> 00:15:04,240
Speaker 1: You mentioned earlier death solves a lot of tax problems.

299
00:15:04,360 --> 00:15:06,920
Speaker 1: Turns out it solves a lot of problems. But how

300
00:15:06,920 --> 00:15:11,160
Speaker 1: do you integrate tax planning into a state planning? Are

301
00:15:11,160 --> 00:15:13,200
Speaker 1: they really one and the same? Tell us what the

302
00:15:13,200 --> 00:15:15,080
Speaker 1: thought process is there?

303
00:15:14,640 --> 00:15:17,840
Speaker 2: They are one and the same with totally different rules.

304
00:15:18,120 --> 00:15:21,640
Speaker 2: A state tax as a whole doesn't come up outside

305
00:15:21,680 --> 00:15:24,720
Speaker 2: of the most wealthy individuals, right because right now the

306
00:15:24,840 --> 00:15:27,400
Speaker 2: estate exemption is going to be like thirty million bucks

307
00:15:27,440 --> 00:15:30,680
Speaker 2: for a joint family. But income tax plays a role

308
00:15:30,760 --> 00:15:33,240
Speaker 2: throughout life, right and so if we can, if we

309
00:15:33,320 --> 00:15:36,360
Speaker 2: can integrate income tax planning with estate planning, it's a

310
00:15:36,640 --> 00:15:39,680
Speaker 2: win for these families because at those levels of wealth,

311
00:15:39,720 --> 00:15:41,040
Speaker 2: those are going to be the folks that are most

312
00:15:41,120 --> 00:15:44,840
Speaker 2: sensitive to big, you know, big tax bills. Now, one

313
00:15:44,840 --> 00:15:48,360
Speaker 2: thing we like to do that combines the two is

314
00:15:48,400 --> 00:15:51,160
Speaker 2: strategic roth conversions. A lot of folks that we meet

315
00:15:51,240 --> 00:15:54,080
Speaker 2: with they have enough assets to live on they're thinking

316
00:15:54,120 --> 00:15:57,040
Speaker 2: about generationally, how do we take care of our kids

317
00:15:57,080 --> 00:16:00,000
Speaker 2: within the bounds of the tax code, And so can

318
00:16:00,080 --> 00:16:04,360
Speaker 2: versions will allow let's say, parents to pay tax now

319
00:16:04,680 --> 00:16:08,000
Speaker 2: rather than leave tax pre tax money to their kids.

320
00:16:08,160 --> 00:16:12,760
Speaker 2: So under Biden's secure AC two point zero, there's now

321
00:16:12,760 --> 00:16:16,360
Speaker 2: a ten year rule for inherited diarrays. These are both

322
00:16:16,400 --> 00:16:19,200
Speaker 2: pre tax diarrays and WROTH diarrays. And so if I

323
00:16:19,200 --> 00:16:22,200
Speaker 2: have a kid, let's pretend I'm eighty years old. I

324
00:16:22,240 --> 00:16:26,080
Speaker 2: have a fifty year old daughter who's a doctor in

325
00:16:26,120 --> 00:16:27,800
Speaker 2: New York. Right, her tax rate is going to be

326
00:16:27,880 --> 00:16:29,840
Speaker 2: very very high. When I pass away, She's going to

327
00:16:29,880 --> 00:16:33,120
Speaker 2: have ten years to deplete my retirement accounts. If that's

328
00:16:33,160 --> 00:16:35,560
Speaker 2: in pre tax money, she's going to pay tax at

329
00:16:35,560 --> 00:16:38,240
Speaker 2: the highest possible rate on that money. Whereas if I

330
00:16:38,320 --> 00:16:41,600
Speaker 2: convert my assets, my pre tax assets to ROTH, maybe

331
00:16:41,640 --> 00:16:44,760
Speaker 2: I pay tax at twenty four percent instead of her

332
00:16:44,800 --> 00:16:47,640
Speaker 2: thirty seven percent rate. I do that on her behalf,

333
00:16:47,800 --> 00:16:50,200
Speaker 2: and now she has a lot more tax efficiency when

334
00:16:50,240 --> 00:16:51,200
Speaker 2: she inherits my money.

335
00:16:51,400 --> 00:16:55,960
Speaker 1: So last question, what should people be thinking about as

336
00:16:56,000 --> 00:17:01,080
Speaker 1: they start to organize their taxes, not just twenty twenty six,

337
00:17:01,520 --> 00:17:03,520
Speaker 1: but looking ahead to twenty twenty seven.

338
00:17:03,720 --> 00:17:06,800
Speaker 2: It's about timing income, right. It's again think about this

339
00:17:07,240 --> 00:17:09,600
Speaker 2: over the course of your lifetime, or if you have kids,

340
00:17:09,640 --> 00:17:12,000
Speaker 2: over over the course of their lifetime, when can we

341
00:17:12,000 --> 00:17:14,040
Speaker 2: pay tax at a lower rate than we might pay

342
00:17:14,040 --> 00:17:16,680
Speaker 2: in the future. Rights, that's a lot of our work

343
00:17:16,760 --> 00:17:20,280
Speaker 2: is just timing income, timing deductions to take advantage of

344
00:17:20,320 --> 00:17:26,080
Speaker 2: fluctuations and in tax rates and in lifetime income. And

345
00:17:26,119 --> 00:17:28,320
Speaker 2: that's where that's where you have to look forward again,

346
00:17:28,359 --> 00:17:30,960
Speaker 2: look forward rather than backwards. Is if you can time

347
00:17:31,040 --> 00:17:33,640
Speaker 2: these things. These are going to be marginal differences over

348
00:17:33,640 --> 00:17:36,680
Speaker 2: the course of your lifetime, but marginal differences that can

349
00:17:36,720 --> 00:17:39,200
Speaker 2: then compound. They're really going to add up over decades.

350
00:17:39,440 --> 00:17:42,640
Speaker 1: So to wrap up, there are a lot of steps

351
00:17:42,840 --> 00:17:46,840
Speaker 1: investors can take to minimize what they pay in taxes,

352
00:17:47,080 --> 00:17:51,359
Speaker 1: not only on capital gains, but what they're doing with

353
00:17:51,440 --> 00:17:56,240
Speaker 1: their qualified accounts where they locate their assets, and changes

354
00:17:56,280 --> 00:17:59,440
Speaker 1: they can make to make sure their kids aren't saddled

355
00:17:59,520 --> 00:18:03,040
Speaker 1: with the tax burden. Speak to your financial planner, speak

356
00:18:03,080 --> 00:18:06,560
Speaker 1: to your tax professional. Make sure they're working together so

357
00:18:06,600 --> 00:18:10,359
Speaker 1: that you check every box that's available to you to

358
00:18:10,560 --> 00:18:15,000
Speaker 1: legitimately reduce and defer your taxes by as much as possible.

359
00:18:15,560 --> 00:18:28,680
Speaker 1: I'm Barry Ritolts. You're listening to Bloombergs at the Money