WEBVTT - Year-End Tax Planning Moves

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>They're billing mombs? What about schools are falling?

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<v Speaker 3>Tell me what in the hell of pay taxes for?

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<v Speaker 1>Well? What a little?

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<v Speaker 2>Stop paying text? Stop, what a lit Stop paying taxes?

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<v Speaker 1>Stop paying tax.

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<v Speaker 3>It's that time of year. You still have Christmas gifts

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<v Speaker 3>left to buy, but you have to be aware that

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<v Speaker 3>April fifteenth is just around the corner. Consider this your

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<v Speaker 3>nudge that you have less than three weeks to make

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<v Speaker 3>whatever year end tax moves you're planning for the calendar

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<v Speaker 3>year twenty twenty five. I'm Barry Riddolts, and on today's

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<v Speaker 3>edition of At the Money, we're gonna discuss the moves

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<v Speaker 3>investors should be thinking about in order to reduce their

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<v Speaker 3>twenty twenty five taxes. To help us unpack all of

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<v Speaker 3>this and what it means for your money, let's bring

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<v Speaker 3>in Bill Artsmarnian Full disclosure. Arts Ronian is the director

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<v Speaker 3>of tax services at Richholt's Wealth Management and we've been

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<v Speaker 3>working with him for just about five years. So Bill,

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<v Speaker 3>let's start with a simple overview. You've said before tax

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<v Speaker 3>advice is financial advice. I want to unpack that. How

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<v Speaker 3>should investors be thinking about the role of tax planning

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<v Speaker 3>in their overall wealth strategy, especially here in December.

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<v Speaker 1>Well, thanks Barry for having me. Let's just think about

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<v Speaker 1>a financial plan for a second. What part of a

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<v Speaker 1>financial plan does not touch on taxes? I mean think

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<v Speaker 1>about just space of cash flow planning. Taxes For our

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<v Speaker 1>investors are often the largest expense in their annual budget.

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<v Speaker 1>It's mortgage and taxes. Those are the largest costs. Life

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<v Speaker 1>insurance is thinking about a tax free inheritance for the

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<v Speaker 1>next generation or for your errors. State planning is all

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<v Speaker 1>about taxes. If there was no estate tax, we wouldn't

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<v Speaker 1>really have to think about estate planning. And then basic

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<v Speaker 1>portfolio management is purely you know, not purely tax centric.

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<v Speaker 1>But our investors are thinking about tax all the time.

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<v Speaker 1>Our clients would rather save one thousand dollars on taxes

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<v Speaker 1>than make six figures in a trading day. So it's

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<v Speaker 1>all connected. And the end of the year is like

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<v Speaker 1>the report card. Tax planning should be happening proactively for

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<v Speaker 1>twelve months, but we don't even stop there. We're not

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<v Speaker 1>thinking about taxes as a current year item or even

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<v Speaker 1>a lifetime item. We're thinking about this generationally. We're thinking

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<v Speaker 1>about how can we set up the next generation of

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<v Speaker 1>client children, client grandchildren for tax success.

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<v Speaker 3>So we have a few weeks left in the year.

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<v Speaker 3>What are the big boxes that you think investors should

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<v Speaker 3>be checking and what important items do they ignore? What

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<v Speaker 3>are the big mistakes people make?

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<v Speaker 1>I think one of the misunderstandings is on tax deferral

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<v Speaker 1>rather than tax avoidance. Many strategies can avoid taxes or

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<v Speaker 1>can defer taxes, but that bill will come do at

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<v Speaker 1>some point. You know, think about even just a four

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<v Speaker 1>oh one K a pre tax contribution, You're going to

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<v Speaker 1>recognize that income at some point. Things like accelerated depreciation

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<v Speaker 1>will come back to bite you on the recapture when

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<v Speaker 1>you sell the asset. Opportunity zones are a tax deferral mechanism.

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<v Speaker 1>These are all very useful because time value of money

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<v Speaker 1>says that a tax deduction today is worth more than

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<v Speaker 1>a tax deduction in the future, but eventually that there's

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<v Speaker 1>going to be a tax hit. So I think that's

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<v Speaker 1>a common misunderstanding. A few other mistakes is on capital

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<v Speaker 1>gain timing. We see clients not really understand or consider

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<v Speaker 1>the timing of when they recognize games. When we onboard folks,

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<v Speaker 1>we're often pushing gains from the fourth quarter of say

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<v Speaker 1>twenty twenty five, into the first quarter of twenty twenty six,

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<v Speaker 1>because that gives us a full twelve months to tax

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<v Speaker 1>lost harvest and create losses to offset any capital gains.

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<v Speaker 1>The flip side of that, of course, is even a

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<v Speaker 1>small movement in a stock price can cost more than

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<v Speaker 1>a tax bill just to sell it, so you have

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<v Speaker 1>to be pretty comfortable holding the position for a couple

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<v Speaker 1>weeks or even a couple months. And then the last

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<v Speaker 1>mistake is misunderstanding just basic payment obligations. There are safe

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<v Speaker 1>harbors to avoid estimated tax penalties. But on the flip

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<v Speaker 1>side of that is, if you pay too much, there's

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<v Speaker 1>opportunity cost. If you have a big refund in April,

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<v Speaker 1>that means you paid a little bit too much and

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<v Speaker 1>that money could have been better put to use.

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<v Speaker 3>So Bloomberg has a fairly sophisticated audience of high earning professionals.

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<v Speaker 3>What are the three top moves you see for folks

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<v Speaker 3>like that, they have a portfolio, they have a pretty

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<v Speaker 3>decent income, and they can expect to continue that for

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<v Speaker 3>the foreseeable future.

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<v Speaker 2>Let's start with charitable giving.

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<v Speaker 1>We'll talk about it more throughout the show, but it's

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<v Speaker 1>often the most accessible lever to pull for tax savings.

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<v Speaker 1>The caveat being you need to be conscious of where

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<v Speaker 1>your total deductions fall. We see some clients give a

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<v Speaker 1>certain amount of charitable gifts and they don't even itemize

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<v Speaker 1>their deductions. So from a federal tax standpoint, maybe they

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<v Speaker 1>gave away ten k, but they're still taking that standard deduction.

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<v Speaker 1>They're not benefiting from that charitable gift. So that's where

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<v Speaker 1>bunching strategies and some other strategies with don'tant advice funds

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<v Speaker 1>can come into play. Number two is on the equity

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<v Speaker 1>comp side. Equity compensation for folks compensated through their company stock,

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<v Speaker 1>the timing of the income can often be flexible. Think

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<v Speaker 1>about stock options company stock options. We should be asking

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<v Speaker 1>the question, how much can we recognize in stock option

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<v Speaker 1>income before the end of the year before we bump

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<v Speaker 1>up against the next federal or.

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<v Speaker 2>State tax bracket.

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<v Speaker 1>How much if these are incentive stock options, how much

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<v Speaker 1>can we recognize without paying a MT alternative minimum tax.

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<v Speaker 1>These are questions we should all be asking if we're

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<v Speaker 1>paid through equity, or if we have clients that are

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<v Speaker 1>paid through equity and the last one is for small

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<v Speaker 1>business owners.

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<v Speaker 2>There's a whole lot on the small business side of this.

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<v Speaker 1>I'm focused a lot on qualified business income, which is

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<v Speaker 1>a twenty percent deduction for past through income, but there

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<v Speaker 1>are limitations, and those limitations can be on based on

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<v Speaker 1>how much you pay your employees or yourself in a wage.

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<v Speaker 1>If you don't meet a certain wage number, that QBI

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<v Speaker 1>benefit could be significantly reduced or even reduced down to

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<v Speaker 1>zero if you're really screwing this up. And then on

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<v Speaker 1>the small business side, we should be looking at are

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<v Speaker 1>we prepared to maximize retirement contributions? The max four one

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<v Speaker 1>K is seventy thousand dollars this year between employer and

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<v Speaker 1>employee contributions, and so you have to be ready to

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<v Speaker 1>have that cash available to fund those contributions. Say you're

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<v Speaker 1>a mom and pop shop to owners zero employees, maybe

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<v Speaker 1>you're structured as an es corp. You're gonna have to

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<v Speaker 1>come up with some cash to meet the four to

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<v Speaker 1>one K obligations either before the end of the year

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<v Speaker 1>before the tax filing.

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<v Speaker 3>So I'm glad you brought up tax advantage accounts. Like

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<v Speaker 3>for a one k's there always seems to be a

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<v Speaker 3>last minute frenzy to maximize not only for A one

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<v Speaker 3>k's but IRA's health saving accounts five twenty nine. So

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<v Speaker 3>how have the rules changed around credits and ceilings for

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<v Speaker 3>this year and for twenty twenty six?

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<v Speaker 1>Right at least once a year with our clients, we're

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<v Speaker 1>running through the quote unquote basics of all of these contributions.

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<v Speaker 1>Are you on track to hit each of these with

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<v Speaker 1>a four oh one K? We just talked about it

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<v Speaker 1>a little bit, but there's a seventy K limit. Now,

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<v Speaker 1>if you're a W two employee and you don't own

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<v Speaker 1>the company, you're going to make employee contributions, Maybe there's

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<v Speaker 1>a megabackdoor, a WROTH option in there for you. We

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<v Speaker 1>talk to folks all the time who have this eligible

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<v Speaker 1>or eligible in their plan, but they don't even know

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<v Speaker 1>about it. Nobody's talking to them about this when they

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<v Speaker 1>join the company, and that megabackdoor WROTH allows you to

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<v Speaker 1>put after tax dollars into the four to one K,

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<v Speaker 1>convert it to WROTH, and have a nice Roth tax

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<v Speaker 1>free bucket growing alongside the pre tax contributions that you

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<v Speaker 1>already made. I raise don't come up a lot in

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<v Speaker 1>our world for a few reasons. Number one is most

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<v Speaker 1>of our clients are employed with a retirement plan and

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<v Speaker 1>through their employer, and if that's the case, deductible IRA

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<v Speaker 1>contributions may be limited. However, there is a backdoor option

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<v Speaker 1>in the IRA. If you don't have any pre tax

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<v Speaker 1>money in any iras, you can make after tax contributions

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<v Speaker 1>and again convert to ROTH in the IRA just as

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<v Speaker 1>well as you can in the four to one K.

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<v Speaker 1>And then the HSA. I love tax owners love hsas.

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<v Speaker 1>You need to be on a high deductible plan, which

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<v Speaker 1>isn't for everybody. My colleague Bill Sweet and I we

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<v Speaker 1>ran an analysis on high deductible plans and we found

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<v Speaker 1>that there's a pretty there's a pretty attractive break even

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<v Speaker 1>on high deductible plans because the premiums are lower and

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<v Speaker 1>the long term benefit of investing deducting HSA contributions and

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<v Speaker 1>treating those as another retirement vehicle. Again, those are like

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<v Speaker 1>roths where they're tax free. Those those can compound very

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<v Speaker 1>very nicely. Where maybe you retire early and let's say

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<v Speaker 1>you retire sixty instead of sixty five, you have a

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<v Speaker 1>five year gap where you need to cover probably significant

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<v Speaker 1>healthcare premiums that HSA can be used in that case,

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<v Speaker 1>and it's nice tax free bucket to have.

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<v Speaker 3>And what do the ceilings look like on all these

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<v Speaker 3>tacks of entergs accounts for twenty twenty six? How has

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<v Speaker 3>the recent legislation changed the max people can kick into those?

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<v Speaker 1>The big change in twenty twenty six is that catchup

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<v Speaker 1>contributions for folks over age fifty are now forced to

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<v Speaker 1>be ROTH contributions again starting twenty twenty six. Historically, catchup contributions,

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<v Speaker 1>which are going to be seventy five hundred this year

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<v Speaker 1>seventy five hundred next year, Folks in their fifties are

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<v Speaker 1>often in their highest earning years. Therefore the pre tax

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<v Speaker 1>option is usually preferred. However, starting next year, the catchup

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<v Speaker 1>contributions that seventy five hundred are going to be required

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<v Speaker 1>to be WROTH contributions. My theory is, I don't mind

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<v Speaker 1>this at all. Nobody ever regrets a ROTH contribution. Nobody

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<v Speaker 1>ever really regrets a ROTH conversion because once you pay tax,

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<v Speaker 1>you don't really think about it. And so you know,

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<v Speaker 1>if we have investors in their fifties and sixties that

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<v Speaker 1>are forced to make a small ROTH contribution instead of

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<v Speaker 1>a pre tax contribution. That just gives them exceedingly more

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<v Speaker 1>flexibility down the line, because now they're going to have

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<v Speaker 1>different buckets of money to pull from in retirement.

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<v Speaker 3>Sounds really interesting. You mentioned earlier tax loss harvesting. We've

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<v Speaker 3>been using Canvas as our direct indexing product, but it

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<v Speaker 3>seems like this has become ubiquitous. What are your thoughts

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<v Speaker 3>on tax loss harvesting. What does thoughtful harvesting look like?

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<v Speaker 1>I think the term thoughtful there implies to me that

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<v Speaker 1>there should be an ongoing activity, not just a year

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<v Speaker 1>end item. Historically, taxpayers, sell DIY, investors and even advisors,

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<v Speaker 1>they'd look at the portfolio in December, they'd say, okay,

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<v Speaker 1>what's underwater. Let's book those losses through direct indexing. This

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<v Speaker 1>is now an ongoing activity, but you don't need a

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<v Speaker 1>direct indexing portfolio to look at your portfolio. Even if

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<v Speaker 1>you're not in a direct indexing setup, you can still

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<v Speaker 1>tax lost harvest throughout the year. Why just December? This

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<v Speaker 1>should happen with regularity. There's nothing saying we can only

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<v Speaker 1>book losses in December. Now a lot of this is

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<v Speaker 1>dictated by individual stock market volatility, but with an ultra

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<v Speaker 1>diversified bucket of stocks. Some will ultimately be losers, so

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<v Speaker 1>you sell those, you pick up tax losses, you invest

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<v Speaker 1>in a similar company, so you keep the fidelity of

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<v Speaker 1>the portfolio, and then you don't trigger wash sale rules.

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<v Speaker 1>The only caveat here is state by state stuff. New Jersey,

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<v Speaker 1>for example, does not allow tax loss carry forwards. So

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<v Speaker 1>we're doing in December, we're doing a bit of the

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<v Speaker 1>opposite with our New Jersey clients. We're actually we're looking

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<v Speaker 1>historically over the first eleven months, what did we realize

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<v Speaker 1>in losses. Let's go make a game's harvest. Instead of

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<v Speaker 1>realizing more losses, We're going to realize capital gains so

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<v Speaker 1>we can use them at the state level this year.

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<v Speaker 3>That's really interesting. So I know the deductions have changed,

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<v Speaker 3>the standard deductions have become permanent. There are new floors,

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<v Speaker 3>There are new ceilings for that for itemized and chatterable gifts.

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<v Speaker 3>How should those people who are charitably inclined think about

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<v Speaker 3>you mentioned and bunching donations or donor advice funds. Give

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<v Speaker 3>us a little more detail about how people should be

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<v Speaker 3>using these vehicles.

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<v Speaker 1>Yeah, we're doing a lot of this with our clients

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<v Speaker 1>throughout the year. But specifically at the end of the year.

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<v Speaker 1>We kind of tee up charitable planning. I'm like, hero,

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<v Speaker 1>let's think about what we want to accomplish, and then

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<v Speaker 1>let's take a look at the end of the year

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<v Speaker 1>and figure out how we're going to get this done

0:12:18.880 --> 0:12:21.040
<v Speaker 1>and if it's the right year to do it. What

0:12:21.080 --> 0:12:23.800
<v Speaker 1>we need to be conscious of is all the other deductions. Right,

0:12:23.880 --> 0:12:27.079
<v Speaker 1>Like I mentioned previously, you might have a hurdle rate

0:12:27.120 --> 0:12:29.720
<v Speaker 1>before you even start to deduct your charitable gifts. And

0:12:29.760 --> 0:12:34.160
<v Speaker 1>that's where you might want to consider bunching maybe three years,

0:12:34.160 --> 0:12:36.760
<v Speaker 1>maybe five years, maybe ten years worth of charitable gifts

0:12:37.040 --> 0:12:40.240
<v Speaker 1>into twenty twenty five. For example, twenty twenty five. Maybe

0:12:40.240 --> 0:12:43.520
<v Speaker 1>it's a high income year. Maybe you're paying down your mortgage,

0:12:43.559 --> 0:12:46.000
<v Speaker 1>so you're not getting that mortgage deduction anymore, and you

0:12:46.040 --> 0:12:49.160
<v Speaker 1>want to take advantage of an appreciated security that you

0:12:49.960 --> 0:12:51.960
<v Speaker 1>gift for charitable purposes.

0:12:52.400 --> 0:12:53.280
<v Speaker 2>We do a lot of this.

0:12:53.320 --> 0:12:56.080
<v Speaker 1>We take maybe a client comes to us, they've worked

0:12:56.120 --> 0:12:58.840
<v Speaker 1>at a tech company. The tech company, they've been compensated

0:12:58.880 --> 0:13:02.520
<v Speaker 1>well in that stock. They have charitable intent. We say, okay,

0:13:02.600 --> 0:13:04.839
<v Speaker 1>let's use that stock. Let's send it to a donor

0:13:04.880 --> 0:13:08.000
<v Speaker 1>advised fund. Let's bunch five years worth of gifting, and

0:13:08.040 --> 0:13:10.160
<v Speaker 1>now you have your own little charitable fund that you

0:13:10.200 --> 0:13:12.559
<v Speaker 1>can make grants out of over the next five years.

0:13:12.920 --> 0:13:15.439
<v Speaker 1>So we're gonna time the deduction, but we're not actually

0:13:15.480 --> 0:13:16.760
<v Speaker 1>going to change the way you're giving.

0:13:17.600 --> 0:13:21.400
<v Speaker 3>Really really interesting. So I'm in New York, you're in Philly.

0:13:22.080 --> 0:13:26.840
<v Speaker 3>These are big salt regions. I know. The most recent

0:13:27.200 --> 0:13:31.560
<v Speaker 3>big beautiful bill changed all sorts of things. Where are

0:13:31.600 --> 0:13:33.960
<v Speaker 3>this is a question I hear all the time. Where

0:13:34.000 --> 0:13:37.200
<v Speaker 3>are we with salt deductions today? How has this changed?

0:13:37.520 --> 0:13:39.680
<v Speaker 3>I know we're not quite back the way we were,

0:13:39.840 --> 0:13:42.480
<v Speaker 3>but it seems to have improved for a lot of people.

0:13:43.200 --> 0:13:45.360
<v Speaker 3>Tell us what's going on with the state and local

0:13:45.400 --> 0:13:46.319
<v Speaker 3>tax deductions.

0:13:47.120 --> 0:13:50.200
<v Speaker 1>Well, it's good news for most folks. For some folks,

0:13:50.200 --> 0:13:52.560
<v Speaker 1>it's not going to change the damn thing. It's gonna

0:13:53.040 --> 0:13:56.680
<v Speaker 1>what we have here is for since twenty seventeen, the

0:13:56.720 --> 0:13:59.360
<v Speaker 1>state and local tax deduction as part of your total

0:13:59.360 --> 0:14:03.079
<v Speaker 1>itemize ABOUTS was limited to ten thousand dollars for folks

0:14:03.200 --> 0:14:07.600
<v Speaker 1>bury in New York, California, New Jersey, Connecticut, Pennsylvania.

0:14:07.800 --> 0:14:09.760
<v Speaker 2>Ten thousand dollars just wasn't cutting it. A lot of

0:14:09.920 --> 0:14:10.760
<v Speaker 2>you know, We see.

0:14:10.600 --> 0:14:14.120
<v Speaker 1>Tax returns here every day where there are sometimes six

0:14:14.160 --> 0:14:16.520
<v Speaker 1>figures of state and local taxes between real estate and

0:14:16.559 --> 0:14:19.720
<v Speaker 1>income taxes. The new limit is forty thousand dollars. That

0:14:19.840 --> 0:14:24.760
<v Speaker 1>was maybe the most talked about provision of Trump two

0:14:24.760 --> 0:14:27.680
<v Speaker 1>point zero tax bill. It's an increase from ten k

0:14:27.760 --> 0:14:30.920
<v Speaker 1>to forty k, with caveats. If you're earning more than

0:14:30.920 --> 0:14:34.120
<v Speaker 1>five hundred thousand dollars of total income, you start to

0:14:34.120 --> 0:14:37.280
<v Speaker 1>get phased out. These are for both single filers and

0:14:37.360 --> 0:14:40.240
<v Speaker 1>married filers. Once you had six hundred thousand, you're all

0:14:40.240 --> 0:14:42.480
<v Speaker 1>the way back to ten k. So we have some

0:14:42.560 --> 0:14:44.680
<v Speaker 1>clients that are not going to see a change at all.

0:14:44.720 --> 0:14:46.240
<v Speaker 1>They make a million dollars a year. They're not going

0:14:46.280 --> 0:14:48.680
<v Speaker 1>to benefit from this whatsoever. We see other clients where

0:14:48.720 --> 0:14:53.240
<v Speaker 1>we're having tactical discussions on all kinds of income. Maybe

0:14:53.280 --> 0:14:55.880
<v Speaker 1>we'd defer a capital gain into next year because we

0:14:55.920 --> 0:14:58.440
<v Speaker 1>want to take full advantage of that salt deduction this year,

0:14:58.640 --> 0:15:01.320
<v Speaker 1>or maybe vice versa. There's a lot more planning to

0:15:01.400 --> 0:15:04.200
<v Speaker 1>do on all of these deductions. We talked about charitable

0:15:04.240 --> 0:15:05.760
<v Speaker 1>This is along the same lines.

0:15:06.080 --> 0:15:08.840
<v Speaker 3>What else from the Big Beautiful Bill has changed the

0:15:08.840 --> 0:15:12.120
<v Speaker 3>way you think about year end planning. Do any of

0:15:12.120 --> 0:15:15.960
<v Speaker 3>these provisions show up as actual savings for clients.

0:15:16.520 --> 0:15:18.760
<v Speaker 2>I think it's back to the charitable piece.

0:15:18.960 --> 0:15:20.920
<v Speaker 1>There are some changes next year that are going to

0:15:20.920 --> 0:15:24.200
<v Speaker 1>impact charitable giving, which make twenty twenty five perhaps more

0:15:24.200 --> 0:15:28.120
<v Speaker 1>attractive from a charitable landscape. Next year, there's going to

0:15:28.120 --> 0:15:31.200
<v Speaker 1>be a quote unquote a floor on charitable gifts where

0:15:31.360 --> 0:15:34.280
<v Speaker 1>the first zero point five percent of your agi will

0:15:34.280 --> 0:15:36.400
<v Speaker 1>not be deductible for charitable purposes. So if you make

0:15:36.440 --> 0:15:38.680
<v Speaker 1>a million bucks, the first five k you give away

0:15:38.720 --> 0:15:42.480
<v Speaker 1>to charity provides zero federal tax benefit. The other change

0:15:42.520 --> 0:15:45.160
<v Speaker 1>for the highest earning folks, folks in the thirty seven

0:15:45.240 --> 0:15:48.200
<v Speaker 1>percent bracket, they are going to be limited on their

0:15:48.440 --> 0:15:51.479
<v Speaker 1>overall deductions. They'll be treated as thirty five percent taxpayers.

0:15:51.600 --> 0:15:54.120
<v Speaker 1>So that two percent delta can can really add up

0:15:54.120 --> 0:15:56.400
<v Speaker 1>when we're talking about when we're talking about big deductions.

0:15:56.480 --> 0:16:00.680
<v Speaker 1>So we're doing a lot of shifting of charitable deductions,

0:16:00.760 --> 0:16:04.360
<v Speaker 1>even mortgage even mortgage reductions. We're trying to get most

0:16:04.360 --> 0:16:06.760
<v Speaker 1>of that into twenty twenty five, especially for our highest

0:16:06.800 --> 0:16:08.320
<v Speaker 1>income tax paying clients.

0:16:08.520 --> 0:16:11.080
<v Speaker 3>So to wrap up, there's still plenty of time before

0:16:11.120 --> 0:16:15.080
<v Speaker 3>the year ends. There are lots of moves individual investors

0:16:15.080 --> 0:16:18.920
<v Speaker 3>can make to not only reduce the taxes they're going

0:16:18.960 --> 0:16:22.280
<v Speaker 3>to owe for the twenty twenty five year, but also

0:16:22.360 --> 0:16:27.840
<v Speaker 3>to think about long term planning their estate, maximizing every opportunity.

0:16:27.920 --> 0:16:32.080
<v Speaker 3>The government gives us lots of ways to either reduce

0:16:32.640 --> 0:16:37.120
<v Speaker 3>or defer our current tacts. Bill, everybody should take full

0:16:37.160 --> 0:16:41.880
<v Speaker 3>advantage of what's on offer. I'm Barry Ridults. You're listening

0:16:41.920 --> 0:16:48.160
<v Speaker 3>to Bloomberg's at the Money, all right,