Complete Wealth Management With Dave Alison

The Great Sunset From The Tax Cuts & Jobs Act: Are Your Taxes Going Up?

• Dave Alison, CFP®, EA, BPC • Season 1 • Episode 20

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Unlock the secrets to masterful tax management with our latest episode where we navigate through the transformative landscape post the Tax Cuts and Jobs Act of 2017, they shed light on how Alison Wealth Management has redefined the way we approach tax planning. From our early family office days to serving a diverse clientele, this episode promises to equip you with the strategies you need to triumph over the incoming tax shifts that could affect your bottom line.

We're at a pivotal moment as the sunset phase of the Tax Cuts and Jobs Act looms, stirring the waters of the tax world. You'll discover why this year and next year are critical for anyone paying taxes, as we delve into what the reduction in standard deductions and hike in tax brackets could mean for your wealth. 

Our experts dissect the nuances of advanced planning methods that could shield your income and prepare you for the financial reverberations of these changes. Business owners, retirees, and high income professionals alike will find invaluable insights to stay ahead of the curve.

Lastly, we pull back the curtain on sophisticated estate planning tactics in response to the evolving tax code. Hear real-world applications of how lifetime giving trusts and irrevocable trusts can fortify your legacy against the impending reduction of gift and estate tax exemptions. We'll also explain how survivorship life insurance policies can be a game changer in your financial arsenal. By the end of this episode, you'll be equipped with the foresight to craft a legacy that not only survives the taxman but thrives for generations to come.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Speaker 1:

Hey everyone, welcome to the Complete Wealth Management Podcast. I've got my two compadres with me here, david Roth and Conrad Levesque. Welcome, fellas. It's good to be here. Hola, hola, hola.

Speaker 1:

Well, this is kind of a meaningful episode for me. Here we're going to be talking about the Tax Cuts and Jobs Act, and the reason that I say it's meaningful is, you know, I remember back to 2017. And you know a lot of people refer to this as the Trump tax cuts. If you kind of can go back in a time machine to 2017, donald Trump was the president and he was proposing a lot of these major tax cuts in this massive tax reform actually the largest tax reform that I had seen in my entire lifetime. And like, if I go back and look at what Allison Wealth Management was back then, we were really kind of what I would consider to be more of like a family office, like we only had a couple clients. We really built the organization to serve the financial needs of my brother and his family and what he had going on kind of in his journey of getting acquired by Facebook, which is now Meta, and you know kind of the journey that happened along the way there and you know we had started to expand some of the services to a few other families, of really tying together holistic wealth management, of the financial planning, the asset management, the tax management, the protection planning and, ultimately, the legacy planning kind of what we call our five pillars of holistic wealth management.

Speaker 1:

But in 2017, the Tax Cuts and Jobs Act proposal came out, and at the time, I had a one-year-old daughter. Everly was one it's crazy to believe that she's turning eight now, but she was one and, as both of you guys know, when you have a one-year-old, you're not sleeping a whole lot through the night, and so what better way to kill some time in the middle of the night than to sit around and read tax proposals and tax law? And I remember sitting there in November of 2017, reading through the proposal of the Tax Cuts and Jobs Act, and I was really trying to understand how this massive tax law change would impact the few clients that we were serving at the time, and I just had this like epiphany that this tax law was going to be a game changer for almost everybody. You know, so many times tax laws only impact a certain segment, maybe they only impact business owners, maybe they only impact retirees, maybe they only impact ultra high income earners. But this one had, you know, what I call something for everybody in it. It impacted low income people, it impacted high income people, it impacted retirees, it impacted business owners. It really did have something for everybody. And I remember saying like consumers need to be educated about this stuff.

Speaker 1:

And you know, at that time that was where I strategically decided that we were going to open up the resources and the service and the expertise at Allison Wealth Management to many, many more people, just because I felt like I had a duty to be able to educate as many people as I could about how this tax law was going to impact their family finances. And I actually, at the time, sat down and I created what today we call the tax management journey, which is our proven process around how we help our clients maximize their income and minimize their taxes and not just their taxes each and every year, but their lifetime taxes and really helping them understand that not all money is taxed to the same and that if we apply some strategy to how they accumulate their wealth, how they proactively manage their wealth and, ultimately, how they distribute their wealth to themselves in retirement, to their family amongst their passing to the charities that they hold near and dear to their heart, then we could really help them eliminate a major chunk of income tax and estate tax liability. And really all of that was spawned by the Tax Cuts and Jobs Act. And I could honestly sit here and say that if it wasn't for the Tax Cuts and Jobs Act, I don't think we would know each other, because at at the time, I needed help in bringing all of these resources and valuable planning to more and more clients. And that's when, you know, david, you joined the team. What was that now? About four or five years ago? Yeah, I think it's about four, four years ago. Yeah, four years. Time flies.

Speaker 1:

And so, you know, I needed another tax expert who understood this stuff, who could analyze this, who could help communicate it with clients. And again, you were a certified financial planner and an enrolled agent admitted to practice before the IRS. And then I started teaching this stuff nationally to advisors all around the country. And, conrad, that's how you found our national company, prosperity Capital Advisors, that I was fortunate enough to help found about 11 or 12 years ago, because, again, you were a CFP, a CPA, an investment advisor, and you have a passion for helping people eliminate taxes and build their wealth as well, and so you had your own independent practice in Atlanta Laveck Associates, and you joined Prosperity Capital Advisors, and, of course, you and I have hit it off over the years, and in August of last year, you decided to join the team at Allison Wealth and help kind of partner in this big picture initiative of bringing this to more and more clients.

Speaker 1:

And so, like again, I don't think the three of us would be working together if it wasn't for the Tax Cuts and Jobs Act, and I certainly know that because of the course I built the tax management journey based on what we do to help our clients maximize their income, net worth and minimize their taxes. You know we've been able to bring this message in education to thousands of clients across the United States, and so it's what's kind of bittersweet about this whole thing is that, you know, conrad, with the Tax Cuts and Jobs Act that came out in 2017, there was something really unique about this law in that. Here's a little bit of trivia for you guys. Do you know how they passed this law, how Donald Trump got this law to be, even though he couldn't get the majority of Congress to agree upon it?

Speaker 3:

Yeah, I do. It's called the Byrd Doctrine, right. What's the Byrd Doctrine right? What's the Byrd?

Speaker 1:

Doctrine.

Speaker 3:

Under this doctrine.

Speaker 1:

That's something that flies by over the air tweeting at you.

Speaker 3:

Listen for all the Boston Celtics fans. It's not about Larry Byrd, okay, and I forget the senator's name. The rule came about where.

Speaker 3:

Senator Byrd created this rule that Congress could not cause increase in taxes or a large amount of burden over a 10-year period or greater than 10 years. What that means is, if we can't decide or determine the impact of an action of Congress that lasts greater than 10 years, then you cannot do that, and so what Donald Trump and team did was create a law that basically expired right around 10 years. Right, it was within that 10 year window, and so it didn't violate that bird doctrine, and so it has automatic sunsetting provisions, which again avoid that bird duck, if you will.

Speaker 1:

Yeah, it's interesting. You know they passed this through a legislative process called the budget reconciliation, and what that basically means is exactly what Conrad said when it comes to things around the budget and reconciling the budget which, of course, taxes impact the budget, right, that's the money that comes in. So, when it comes to things around the budget, you don't have to have super majority, which is 60%. You can actually get by and pass law with just majority, and so at the time, in 2017, president Trump and team did not have super majority, which means if they tried to pass this like a normal law, it would have got filibustered right, where they kind of grandstand for days and days at a time and then they wear each other out and they burn all of our taxpayer dollars to just waste a bunch of time because they can't agree on anything. Right Like this eliminates that because they had majority, not super majority, and so they were able to pass this tax act. But under that, one very important caveat that a lot of these tax cuts have to expire within a 10-year time period, and so 2017, it's hard to believe is approaching a 10-year time period, which means a lot of these things that reduced all of our income taxes will expire and go away at the end of next year, 2025, because starting in 2026, we revert back to the old tax system and the only thing that would change that is if Congress enacts new tax law. And listen, that could happen. But is it a high probability that in an election year, when there's so much on the table and we have a divided House and Senate, that they're all going to get together and say, yeah, we agree, we should keep taxes the way they are? Probably not, because we know the political agendas and this is not a political conversation here, but President Biden has been crystal clear on what he wants to do with tax policy.

Speaker 1:

We've done webinars on Biden's tax proposal. I have a video on our YouTube channel on what he proposed here in 2024. And for most income earners, it's a massive tax increase for those that are earning over $400,000 a year of income, which are many of our clients, and a large tax increase for those that have over a million dollars of income, which again is many of our clients, particularly our California clients that have both spouses working to be able to afford a home in the standard of living in the San Francisco Bay Area, and so we know President Biden's proposals. We also know President Trump's proposals, and those are the two people running for president right now. We've seen both of their playbooks already, and the reality of it is there's probably not going to be a lot of bipartisan agreements that happen in Congress and with the president this year being in an election year and then probably next year as well, with a divided House and Senate potentially. So there's an enormous amount on the line with this upcoming election and how it translates to taxes.

Speaker 1:

And so what we wanted to do in this episode is break down some of these sun setting provisions, how they will impact your personal finances come 2026. And, most importantly, some planning that you could do today to potentially make some tax savvy decisions. And so that's what we're going to spend the rest of the time in this episode on, and I'm excited to jump into it with you guys. All right, guys. So we're going to tackle some of the big provisions and changes and, conrad, you were just sharing with us earlier, you've developed a document that, if any listeners want a copy of it, just email info at allisonwealthcom. That's info at allisonwealthcom. We'll get you a copy of this tool. But, conrad, talk about what this tool does first, and then we'll get into some of the details.

Speaker 3:

Yeah, it identifies some of the major changes that you guys will face as taxpayers, and it's a kind of a yes or no questionnaire. It's only a couple of pages, it's not going to take you two hours to fill out, but it's just going to be a call to action, meaning if you feel like this is going to impact you, you have the opportunity to start planning ahead. Again, you mentioned in the intro we have until the end of 2025, which seems like a long way away, but when we say the end of next year, I think it's a little more imperative that you start to act.

Speaker 1:

So it's just going to be saying that. It says it in our side mirrors on our car. You know, right at the bottom.

Speaker 3:

Yeah, objects are closer than they appear, right.

Speaker 1:

Objects are closer than they appear. I feel like that's that that should be written across the Tax Cuts and Jobs Act right now.

Speaker 3:

Yeah, and there are so many changes that we're going to experience here going back, new experience here going back. I'm going to have some PTSD thinking about being in the trenches back in 2016, 17 and 18 and having that major change come about for all of my clients. So we're going to flip back to that and I think anybody listening you're going to have some level of change for your tax situation. Others you're going to have a major change. So we'll kind of dive into that here. I'm excited to talk about these changes.

Speaker 1:

Yeah, and again, like just what I mentioned earlier, when the Tax Cuts and Jobs Act was passed, it was something for everyone. Well, guess what? When these things sunset, it's something for everyone. We're going to talk about high income individuals, we're going to talk about retirees, we're going to talk about business owners, and then there's some things that are going to impact everybody. So, david, let's kind of kick it off and let's just brainstorm. I mean, we haven't planned any of this stuff. We'll just kind of run off the top of our head of things that we come up with and talk about and brainstorm and share strategies that we're talking about with our clients and I'd imagine we probably don't even have a lot of our clients that listen to this podcast because they know we have already taken care of all of this stuff for them. But for the listeners like David, what would you say is, you know, the first kind of big thing that's going to change when the Tax Cuts and Jobs Act sunsets?

Speaker 4:

Yeah, so I think the one big thing that's going to change, that's going to impact pretty much everyone, is the standard deduction. So the Tax Cuts and Jobs Act, they nearly doubled the standard deduction and when we go back and we get into 2026, it's going to revert back to what the standard deduction was, which was $6,350 in 2017. So that's the huge impact.

Speaker 1:

So, just to put that into perspective, I'm looking at my handy tax guide right now. I always keep it. It's my little roadmap, my cheat sheet. I don't have all these numbers memorized A lot of them memorized but the standard deduction for somebody who's married, filing jointly, in 2024 is $29,200. Now if you're over age 65, you get an additional $1,550. You get an additional $1,550. If you're single, the standard deduction is about $14,600. And again, if you're over 65, you get an additional $1,950.

Speaker 1:

So the standard deduction is the freebie that the government gives us. That's the amount of income we can have and we don't have to pay any income tax on it. So that's one of the most powerful tax planning and tax management tools that we have in our toolbox is how we use that standard deduction. And when the Tax Cuts and Jobs Act doubled that standard deduction, that was double the amount of income we can have without paying any income tax. So, david, you said that that standard deduction I mean if it was doubled in 2017, 2018, after that law was passed, and let's say, for round numbers, it's 30 grand of income somebody can have as a married couple and that reverts back and it gets cut in half.

Speaker 1:

Now that's about $15,000, if you will, that's a pretty big difference. I mean, even at that lower rate of 10%, that's $1,500 of additional income tax liability. If somebody's in the higher marginal rates, which are about 40%, 40% of that $15,000 is 6,000. So that's a pretty meaningful tax difference right out of the gate of just that simple change of the standard deduction. So what else? The standard deduction is going to change for everybody. That's going to impact everybody. What else happens? Because of the sunsetting provisions? Everybody that's going to impact everybody.

Speaker 4:

What else happens because of the sunsetting provisions? I think the other big one that's going to impact everyone are the tax brackets are going to change, in particular the top tax bracket right now 37%. Once the sun sets it's going to jump back up to 39.6% as a top tax rate. Okay, so I'm pretty good at math 6% as a top tax rate.

Speaker 1:

Okay, so I'm pretty good at math. 39.6% minus 37% is a 2.6% change, right. So that's not a huge deal. If I have a million dollars of income at those top rates, it's about $26,000 more of income tax. But what we also know is that it's not just the top rate that's changing, right, Conrad.

Speaker 3:

Yeah, what we're seeing is kind of a reset across the board. Outside of the numbers, right the income inside the bracket the 12% bracket that we have today will go to 15%. So it's a material difference. On the lower end of the scale as well. The 22% bracket goes to 25, 24 goes to 28. So we're seeing not just those brackets in the top level of income be compressed downwards, we're seeing that the actual amount of tax is also increasing. So it's going to feel like you're getting double taxed if you're in those gap windows, if you will.

Speaker 1:

So this is what we talk about as a tax increase on everyone, because the standard deduction is going to get cut in half. That's going to raise everyone's taxes, and then all the brackets are going to change. So if you were in the 12% bracket, you're going to now be in the 15% bracket. That's a 3% tax increase. If you were in the 22% bracket, you're now going to be in the 25% bracket.

Speaker 3:

Or the 28, right, where the top end of the 22% bracket crosses into the bottom part of the 28% bracket. So what you're?

Speaker 1:

saying there is for the same amount of income. The brackets are also kind of compressing because, like, think about this and I'm going to go to my tax chart right now If you're married, you can have over $731,000 of taxable income before you're in that 37% bracket. Now, if the Tax Cuts and Jobs Act sunsets and we revert back to what we were experiencing in 2017, what was an approximation? I don't have the exact dollars and I know they're going to be indexed for inflation, but do you guys have an approximation of how much income somebody could have before they were in the 39% bracket?

Speaker 3:

Yeah, I don't have a number back then, but the comparison chart that I have and again we can provide just a simple comparison chart is projected to be $583,750.

Speaker 1:

Okay, today I could make 700 grand and I'm still not in the top tax bracket. Grand and I'm still not in the top tax bracket. But come 2026, if I make 700 grand, I am going to be well into that top tax bracket. Over $200,000 of my income would be taxed at that highest marginal rate. And so I think the moral of the story with all of this is that taxes are going up for everybody in 2026. I don't care if you are a retiree who is living on fixed income of five or $10,000 a month, or if you are the master of the universe making $20 million a year. Your taxes are going up come 2026. So let's unpack this a little bit with some ideas that our clients and the listeners can think about implementing this year and next year, knowing that their taxes are probably going to be higher in the future.

Speaker 3:

I would say the biggest one that we talk about with clients is acceleration of income. Right, we want to pay the taxes while they're on sale, so to speak, and we know that that expiration date is likely going to occur. So if we can accelerate and pay 22% now versus 28% later, right, we should probably do that Now. The number of things that that may include, you know, a big one that we talk to a lot of clients about is Roth conversions right. So, again, paying the taxes now versus later.

Speaker 1:

Let's unpack that for a little bit, because some people don't know the lingo and the terminology. So you said accelerate income. And if I'm a listener who's not a business owner, I'm like well, how the heck do I accelerate income? I can't just go to my boss and say give me more of my paycheck, right, I wish we could, but that doesn't happen. Don't try it, guys.

Speaker 1:

But there is a way to accelerate income based on a planning strategy called a Roth conversion. If you have pre-tax retirement savings, that could be your 401k at work or an IRA, an individual retirement account. And so if you have either of those savings vehicles a 401k at work or an individual retirement account, an IRA, individual retirement account, an IRA you can actually convert a portion of that balance from the tax deferred status to a tax free status by moving it from a traditional 401k or IRA into a Roth 401k or IRA. And so let's say I've got $500,000 in my 401k or my IRA and I want to convert $50,000 of that. Because I can convert $50,000 and keep my tax bracket at the 22% rate before I get bumped up into the 24%, I can go to my custodian Schwab, fidelity, whoever and I can request them to take 50,000 out of the 401k and IRA and transfer that 50,000 into my Roth and at the end of the year you're going to get a 1099R from your custodian, schwab Fidelity whoever that actually has that as a taxable distribution to you, and so you're going to owe the tax on it Again. If it was a $50,000 Roth conversion and you're in the 22% bracket, the 22% bracket you're going to owe about $11,000 in income tax, right? That's 22% times 50,000.

Speaker 1:

Now you might be saying like, why in the world would I want to pay tax today if I don't have to? And it's the same reason that if I know I need to make a large purchase, I might want to make that large purchase on Black Friday when it's on sale, because taxes today are on sale. We know that if we wait to take money out of that retirement account till later on, let's say in 2026 or beyond, that 22% bracket probably isn't going to exist anymore. It's going up to what you said, conrad 25 or 28. And ask yourself, do you think it could be even higher than those? Because right now we're sitting at almost $37 trillion of national debt. The government needs to pay this debt off or pay it down in one way or another. And really, what's the main lever for the government? To raise more money to pay off debt? Raise taxes, raise taxes, exactly.

Speaker 1:

And so again, some of this stuff, although it seems counterintuitive like why would I want to pay tax any quicker than the government makes me. It's because it's like a game of chess. You got to be thinking three or four moves ahead. For a simple retirement planning client, david, that is, for example, in the 12% bracket right now. How many times do we do the analysis? And it makes so much sense for them to fill up that 12% bracket, particularly if they're going to be electing social security in a couple of years? Because if we fill up the 12% bracket now and we move some of that money to Roth money and that Roth is invested and it's growing in value, what does that give us the ability to do once that client goes on social security from an income standpoint?

Speaker 4:

Yeah. So that's a great point. It gives us the opportunity to take money tax-free, and what that's going to do is it's going to make it so you could take income without impacting your provisional income for Social Security, meaning that you could actually pay less tax later on the Social Security you get, if you plan it correctly, gotcha.

Speaker 1:

So basically we're ripping the Band-Aid off, we're paying at these low rates, we're moving some of that money from what would be forever taxed in an IRA or 401k to never taxed in a Roth IRA or Roth 401k and then when it is time to take some of that money out, it's not going to even show up on our tax return. It's not going to cause tax on our social security benefit, it's not going to potentially cause a Medicare tax that makes our Medicare a higher cost once we're age 65. And it overall lowers the withdrawal rate of what we need to take out of a portfolio because we don't have to gross up that distribution to accommodate an income tax liability at again those 25 or 28% rates. So it really is a win-win strategy for a retiree. But it's not just retirement planning clients that need to think about Roth conversions. It's every one of our clients that has income because, again, I'll be 40 this year and when you guys do my taxes and you determine, hey, dave, you've got a little wiggle room in the 22% bracket or hey, dave, we can create another $10,000 or $20,000 of income, before you skip from the 24% bracket to the 32% bracket, I might want to go into my company 401k and do an in-plan conversion of some of that money from the pre-tax allocation of my 401k to the Roth.

Speaker 1:

And again, young clients, older clients, pre-retirees and then, last but not least, people who are concerned about generational wealth planning. We're doing this a lot with clients right now where you know, conrad, how many clients do we have that? You don't have to give a number, but give some examples of this that have accumulated more than enough money than what they're going to need to support their entire retirement, and they're thinking about how to maximize the net after-tax money that they pass on to their children. And many of their children are going to be in the peak earning years of their career when mom and dad pass away, which means they're going to be in higher tax brackets. And if they're in a higher tax bracket because of the earned income, the last thing you want to do is dump an inherited IRA into that beneficiary's lap, because what does that beneficiary have to do with that retirement account that they got from mom and dad?

Speaker 3:

They now are subject to what's called the 10-year rule, and we'll have to talk about Secure Act 2.0 and how. It certainly feels like the government intentionally passed that along with the expiration of Tax Cuts and Jobs Act, but in essence, in the Secure Act 2.0, most kids will have 10 years to withdraw 100% of the funds from qualified accounts, meaning your IRAs, 401ks, et cetera. Now the Roth IRA is still included in that rule, but the Roth IRA still passes down as a tax-free asset to the beneficiary. So your kids, instead of inheriting an IRA that let's call it, once you net out the governmental portion or the partnership portion, as the government would like to treat it at 40% right, that's a likelihood of number They've gotten 40% of that IRA, whereas a conversion today could mean that you're passing a tax-free asset to your kids.

Speaker 1:

And particularly if you can pay tax at a lower bracket like 22% or 24%, and maybe your kids are going to be in that 39.6% bracket and maybe they even have a high state income tax also. Again, it's tax arbitrage we want to pay when the tax rate is the lowest. If you continue to defer, defer, defer, you're building up a bigger and bigger and bigger liability.

Speaker 1:

Because if I have a million dollar retirement account today, hopefully it's invested and you're working with a great team like Allison Wealth Management and maybe that million turns to 2 million or 3 million over the next 10, 20, 30 years, that basically means you've built up a bigger and bigger tax liability as well. But if we strategically funnel some of that money from the retirement account to the Roth account, and now you've got that Roth account building bigger and bigger and bigger based on the investments in the market, there's no liability attached with that. You own that money free and clear. So that's such a huge planning idea. And, david, it all comes back to what you shared. It's the standard deduction changing.

Speaker 1:

Now we are going to go back to adding personal exemptions for some people and there's phase outs and there's just more confusion and complexity. Like, go back and look at your tax return from 2016. You're going to see it looks quite different from your tax return last year. We also have these different brackets that we need to think about. So those bring up great planning techniques to maybe accelerate income via Roth conversions For our business owner clients. Maybe another way to accelerate income is try to get your clients to accelerate your receivables. And, conrad, I know you do a ton of fractional CFO work and business advisory. I'm sure that's what you're going to be talking with clients about as 2025 rolls around, before we cross that deadline of 2026.

Speaker 3:

Absolutely yeah, and I mean ultimately the business changes. While it's a lot lower in number, I think are much more wide ranging in its impact. Because this concept of qualified business income right, the nebulous concept which even the IRS has failed to fully clarify to this date, right, all of the rules and regulations is a massive impact to business owners and, ultimately, if we can accelerate income and, number one pay a lower tax bracket but also leverage a higher QBI deduction as a result of that right, you remember how I said that the double taxation effect would be in place for individuals. This is a double reduction effect in essence, right, because the QBI could, for simple numbers, reduce business income by up to 20%. So, for simple math, you make 100,000, the QBI would, in essence, reduce your taxable business income to $80,000.

Speaker 1:

So, conrad, we do a lot of business entity work with our clients that have businesses or that are thinking of starting a business, even if it's just a side hustle setting the right entity and what I mean entity you could have a sole proprietorship, you can have an LLC, you could have a partnership, you could have an S corporation or you could have a C corporation, and the decision on which way you go is kind of table stakes. There's asset protection, there's liability protection and there's also taxation that is impacted by how you elect your business entity. And we don't have the time, we'll do another podcast episode on this, but essentially let's talk about Tax Cuts and Jobs Act, because a lot of our clients are not C corporations. C corporations are usually the big companies, with the exception of David, some of our Silicon Valley clients who are in tech, that have tech startups that are maybe going to raise capital they might want to elect as a C corp. And what's another really unique tax strategy? If somebody elects as a C Corp and they're in tech, they're creating technology innovations.

Speaker 4:

There's a lot to go along with it. One is there's tax credits for the research and development tax credit. The other, which is an opportunity, is qualified small business stock, which if you ever sell your company, you could exclude up to $10 million on the sale of your business stock.

Speaker 1:

So there's owners, so like if you are part of the stock and your wife owns part of the stock, that could be up to $20 million of tax-free money. So that's huge. Yeah, qualified small business stock, section 1202. And again, we're not going to get into that in this episode. We'll do another podcast on that for the people that that's relevant to, but for C corporations, with the Tax Cuts and Jobs Act, their tax rate lowered, right, conrad?

Speaker 3:

Yeah, it dropped significantly, right. So prior to the Tax Cuts and Jobs Act, c corporations paid 35% on their profits. Jobs Act C corporations paid 35% on their profits. The Tax Cuts and Jobs Act dropped that to 21%. That's a 14% reduction of their tax rate across the board. So it was a big, big reduction.

Speaker 1:

And what happened is like the people who were not C corps kind of, you know, started picketing right. They started rallying around like this isn't fair. Why are you going to give these big corporations this enormous tax break but not the small business owners? Because the small business owners, who are mainly our clients, are sole proprietors, they're LLCs, they're S-corporations, which the common denominator of those businesses they are pass-through entities. The income passes through to the owner's tax return, and so, in response, congress created this qualified business income deduction what Conrad was talking about earlier. And the gist of this thing instead of paying tax on 100% of your business income, you only have to pay tax on 80% of your business income. So if you are in a 22% tax bracket and you only have to pay 80% of that tax, you can see 80% times 22 is 16 and a half, about 16 and a half, and so that's a much lower tax rate. And so what it did was? It helped bring parity to our small business owners, but again, so many planning techniques that need to be considered. So, for example, you know a lot of our business owners used to use qualified plans like solo 401ks or SEP IRAs to defer their income and save on taxes this year. But again, maybe they might not want to do that because they might be sacrificing some of their qualified business income deduction. Like which would you rather do? Pay tax at 80% today or defer that income into the future where you're going to have to pay tax at 100% when you take it out of that retirement account and potentially be in a higher tax rate?

Speaker 1:

So, with business owners, the big considerations and what we're doing around tax cuts and jobs act planning is how do we think about accelerating income? How do we think about deferring income? What type of business entity and structure do you have today? What type of business entity and structure makes sense if all of these sunsetting provisions happen and they change the laws in 2026. And then, last but not least, what types of retirement accounts do you have set up in the business 401ks? What types of benefits do you have for your employees? And then, what types of assets are you purchasing in the business? Because talk about bonus depreciation for a minute and how that impacts our business owners. Yeah it, bonus depreciation for a minute and how that impacts our business owners.

Speaker 3:

Yeah it. Bonus depreciation is is, in essence, in its simplest form, an acceleration of the deduction that you get for buying a piece of equipment or property. And under normal rules, right, let's say you buy a piece of equipment for fifty thousand bucks and it's subject to a five year life and what that means is it's estimated to to last five years. Normal depreciation says you can take a ten thousand dollar expense each year for that piece of property for five years. Five years. What bonus depreciation did and two years ago it was up to 100% of qualified property was, say we'll let you expense, in essence, that equipment in the first year. So instead of a $10,000 deduction you'd be getting a $50,000 deduction for that piece of equipment in the year of purchase.

Speaker 3:

Now, two years ago, the sunsetting provisions on bonus depreciation actually started two years ago where, instead of it being 100%, you could get 80% of a deduction. In this year it was 60%. Moving down it's 40%, 20%. Until bonus depreciation it's zero. And we go back to old rules, which is pre-tax cuts and jobs act. Now we also still have section 179. So there's still another mechanism to utilize, but kind of the-.

Speaker 1:

So you can still buy your Range Rover.

Speaker 3:

Yeah For the TikTok advisors, right, you can still buy a Range Rover every year and write it off and nevermind know, never mind, don't listen to Conrad.

Speaker 1:

That is not tax advice. You can kind of, but there's some rules, right, right I say that very much.

Speaker 1:

Now, conrad, there is actually legislation that's going through the House and the Senate right now of reenacting 100 percent bonus depreciation because that is good for the economy. You know the Republicans want it. The Democrats aren't pushing back on it because we want to spur businesses to make investment in manufacturing and equipment and we want to give them tax incentives to be able to do that. So that's actually tied to another bill that I think will probably have some legs and actually go through. But the reality of it is, you know, and kind of the moral of the story here, before we move on to the next topic, is, if you're thinking about making major investments in your business, call Conrad before you do it.

Speaker 1:

Like, let us analyze, like, does it make sense to buy them now? Does it make sense to wait? Should we hold off until the House and the Senate decide on what they're going to do? What might impact those decisions of buying and putting that equipment into place now versus later? So so many things to consider when it comes to how we're advising our business advisory clients. But you know, outside of business owners, let's get back to kind of the normal everyday consumer and maybe these aren't the everyday consumers, but, david, you're kind of knee deep in working with clients that have incentive stock, and with incentive stock, what's the one thing that people hate more than anything else?

Speaker 4:

Well, I love it, people hate it, but it's alternative minimum tax and it's this parallel tax system that we have, and what's going to happen is they're making huge changes to the AMT exemption once this expires, so it's going to impact basically everyone who has incentive stock options or who might pay AMT.

Speaker 1:

And basically, these changes are going to increase people's taxes in their ability to exercise these incentive stock options, and so it might make sense to accelerate what you otherwise would have exercised in latter years, because your tax liability will be higher in later years.

Speaker 1:

And so, again, like David, I know you're doing a lot of analysis for our clients that have ISOs incentive stock options and maybe it makes sense to bundle a bunch more exercising in 2024 and 2025 before these AMT rules change, and what we're going to see from a tax preparation side is there's going to be a lot more people who are subject to this parallel universe of the AMT, which is a horribly challenging tax system to navigate. But again, I know it's stuff we do every day, all day for mostly our Silicon Valley clients that are working in private companies that are getting these stock option grants and they have millions of dollars on the table in tax savings if they work with a team like ours to help them navigate the potential of how they should exercise these so huge, huge area there. The other one that I want to talk about, and something that is hot on my mind right now, is the gift in a state tax exemption. So, conrad, like what is this in the first place and how does this impact our clients?

Speaker 3:

Yeah, this is the gift in a state. Exemption is is, in essence, how much you can give to family or friends and not have to pay the government a dime Under the Tax Cuts and Jobs Act. It increased pretty substantially. Right now that gift and estate exemption is $13,610,000 per person. Wanted to give away all of our call it $27 million of assets. Right, not that we have it, but if we had it, we could give it away today and pay zero tax on that. Now, once we give it away, it's gone. We've used up that exemption. The expiration of the Tax Cuts and Jobs Act, though, in essence cuts that number in half. So, instead of having $13.6 million, we now have $6.8 million is the projection that I saw? $6.8 million of estate and gift exemption. Now, that's your lifetime exemption. So if you gift a million dollars one year and a million dollars the next year, well, your exemption is your exemption is now 4.8 million, and imagine if Biden's proposal goes through, where it drops it back down to what was the last number I saw A million dollars.

Speaker 1:

It's been low in the past. I mean, here's the reality of why this exists. The government doesn't necessarily like dynastical wealth right, Because people who have dynastical wealth become quite powerful, and so one of the ways to try to eliminate that is enact an estate tax right. And the estate tax says when mom and dad die, if they leave over a certain amount of money to their family, we're going to come in and take in today's tax rate, 40% of it. So let me use some simple math. Let's say the estate exemption was $5 million each, like it was about 10, 15 years ago. It was around $5 million each, and let's say I've been fortunate enough to amass $20 million of estate value. Now what does estate value include? It includes all the money we own, so it includes my retirement accounts, it includes my investment accounts, it includes my business ownership, it includes my real estate and it includes any death benefit of life insurance. So even if I have a $5 million term life insurance policy, that $5 million is included in my taxable estate. So let's use the example that the exemption is $5 million each. I have Alana and I, so that means as a married couple, we can exempt $10 million from the transfer tax to pass this money on to our kids. But because we've amassed a $20 million estate, $10 million the amount above our exemption is subject to this transfer tax of 40%. So that's a $4 million tax bill that my estate is going to have to pay, which means my kids get the $10 million that I had. That was part of the exemption and then of the other $10 million above the exemption, the kids get $6 million. The government gets $4 million and you might say, eh, who cares? The kids still got $16 million. A lot of our clients say I don't want the kid's still got 16 million. A lot of our clients say I don't want the government to get that 4 million. And we all have three places we can leave our money when we pass away Our family the government or charities, and you generally have to pick two of the three. So under that plan you're on the government plan. I leave $16 million to my family, I leave $4 million to the government.

Speaker 1:

Now the thing about the estate tax is that it is an optional tax. It's an optional tax because if you work with our team and we bring in the right estate lawyers that we utilize to construct advanced estate planning, you could eliminate this altogether, and I'll give you an example. Last night I was with one of our clients I'm not going to say names and I was with our estate planning attorney, Benjamin Kelly, that we utilize for our ultra high net worth and high net worth clients who are going to have an estate tax issue. Well, this client has about a $60 million estate and they're going to continue to grow it because they're just earning a enormous amount of money each and every year. And so what we had set up was a trust, because if you have an irrevocable trust and you gift your money into the trust, it's no longer included in your taxable estate.

Speaker 1:

And so what the husband did was he set up an irrevocable trust for the benefit of the wife. Then what the wife did is she set up an irrevocable trust for the benefit of the husband, and the husband was able to gift his $13 million exemption into the trust for the wife, and the wife was able to gift her $13 million exemption into the trust for the wife, and the wife was able to gift her $13 million exemption into the trust for the husband. Now, if the husband needs money, he goes to his trust, which he is the trustee of. He asks himself for money. He gives himself money, but it is completely protected from the estate tax. Same thing with the wife. The wife needs money. The wife can go to her trust, she can ask herself for money, she gets the money.

Speaker 1:

And so what that did is it took $26 million and it moved it out of their taxable estate. The other thing but they still have full control of that $26 million Plus, we left money in their taxable estate, just in their normal revocable trust in their house, in their retirement accounts, because that's the money that they're going to consume and live once they decide to retire. Then what we did is they have two children. We set up lifetime giving trust. These are irrevocable trust for the benefit of their children and under today's tax law, how much can we give each and every year from an annual gifting standpoint without having to worry about any of this estate or gift tax returns or tax issues?

Speaker 4:

Yeah, so for this year, for 2024, it's up to 18,000.

Speaker 1:

18,000. And David, is that like a one-time thing, like, or can I give 18,000 to a bunch of people?

Speaker 4:

It's 18,000 per person. So if you and Alana want to give 18,000 to any one person, you could actually double it and then it makes it 36,000.

Speaker 1:

So in this case, what we did was we set up two irrevocable trusts for the benefit of the children, and mom and dad can put $18,000 each into each trust for each child. That's 36,000 times two is 72,000. Now these children are younger and we're going to do that for the next 10 or 20 years. Right, 36,000 times 20 years is $720,000, right Into this irrevocable trust for the benefit of the child. That can be used to pay for their college tuition. They can use it to finance a down payment on the home. They can use it to start a business. We helped work with the family to identify what the purpose of the money should be. We don't want to raise just a bunch of trust funds who think like, oh, I never have to work a day in my life. This trust is not to provide for them so that they don't have to work, it's to supplement some of the necessities in life, to give them maybe a quicker jumpstart into being able to buy their first house. But it's not to raise a trust fund kid. And so we write a lot of that incentivization in the trust and we work with families all the time.

Speaker 1:

But I get back to with the Tax Cuts and Jobs Act, we've been doing this type of planning for our ultra high net worth clients that have been fortunate enough to amass over 25 or $30 million, because they've been the ones that have been historically subject to this transfer tax. And, quite frankly, if you have over $30 million, you probably have enough money to support your lifestyle. And now you're starting to think about multi-generational planning, right, you're starting to think about how does this money impact my children, my grandkids, my great grandkids and the charities, both while we're alive, that we want to participate in and then the charities that we want this money to go to upon our passing. But what's going to happen in 2026 is a lot more people are going to be exposed to this estate and transfer tax. So, for example, we have a lot of clients that have been fortunate enough to amass $10 million, $20 million, and the estate and transfer tax was never on their radar because the exemptions were so high. When those exemptions get cut in half, they now are going to have a lot of this exposure. They should be proactively engaging in conversations and strategy around how they can mitigate or eliminate this but not lose control of their money.

Speaker 1:

Because I always say those clients they have a lot of money but they don't have a lot of money. It's not like they can just give away $15 million and be okay. They need that money to live off of, and that's why some of this spousal, lifetime access, trust type of planning or, quite simply, in many client scenarios, the right approach is don't use trust at all. Just buy a second to die or survivorship life insurance policy that can pay the estate tax for your estate, because in some cases you can buy a life insurance policy for quarters on the dollar. And so in my scenario earlier, if I knew I was going to have a $4 million tax bill, maybe just buying a life insurance policy that pays $4 million is the best approach, like in Alana and I's example right now, if I passed away or we passed away after 2026, we would have an estate tax liability with business interests and everything else that I've been able to accumulate at this point.

Speaker 1:

Now for me, I'm not ready to have the complexity of irrevocable trust. I don't have that much money at this point, right. But what Alana and I did was we purchased a $3 million survivorship policy that at the second death it pays $3 million to our estate. That takes care of paying all the tax, so the kids don't have to. And for us, because we're younger, I pay $8,000 a year, not $9,000 a year for that policy. So for nine grand a year I basically took care of all my estate and transfer tax at death for my kids. That's a no brainer in my opinion, right?

Speaker 1:

And now, if you were, I'm 40, right, and Alana's a little bit younger, the numbers still work out. We just did this for a client who's 71 and their numbers were a little bit different. They paid $70,000 for a $3 million policy, but the IRR on that still works out, because at 71, they might have another 20 years of life expectancy. So again, let's say, $70,000 a year times 20 years is they would have paid $1.4 million to the insurance company to get $3 million income tax-free and estate tax-free. And so, again, there's so many unique opportunities to think about. But this is all because of these sunsetting provisions of the Tax Cuts and Jobs Act. So, fellows, I think we did a good job summarizing. Is there anything else that you can think about as we land the plane here that our clients can consider? And, conrad, again, just remind everybody of that document that you have available.

Speaker 3:

Yeah, yeah, we'll send it out. Just send us an email to info at allisonwealthcom. Be glad to share any information that we have with you guys, and then, obviously, as planning needs come up, we'd love to help you with those as well. I think you know there are so many different small nuances of the Tax Cuts and Jobs Act we could probably spend another full hour on those alone. So you know the bigger ones, and the other one that I want to point out is the child tax credit. This will impact a lot of people with children as well, and so that's going to drop from potentially $2,000 to $1,000 credit. So you know, on top of significantly reducing the standard deduction now, you're also losing, potentially, some of the credit.

Speaker 3:

There's so much to it. I think clients, the big thing they need to remember this isn't just one thing or another. There's likely going to be three to five to 10 different ways that your taxes are going to be impacted.

Speaker 4:

Yeah, and I mean. One final thought I have is I remember when the Tax Cuts and Jobs Act came out, it was billed as a simplification to the tax code. If anything you could say it got more complex and it's going to get more complex as we go forward. So it's good I get to keep my job, because it makes things more complex, but it's definitely something to think about is that there's just going to be increasing complexity.

Speaker 1:

And millions and millions of dollars on the line in excessive and unnecessary taxes. I mean, we didn't even get into the SALT deductions, the $10,000 a year of federal income tax, because of how you restructured his business entity and took advantage of the pass-through entity tax. There is so much here to Conrad your point. We can't get to it in one podcast, but here's what I will say don't procrastinate on this stuff, because if you call our office or any of the other really really good holistic wealth management and tax offices across the country in September, october, november of next year, I don't even know if we'll be able to bring on new clients. We'll be so busy during that time frame. This is why, again, think about the client that we just met with yesterday frame. This is why, again, think about the client that we just met with yesterday.

Speaker 1:

We want so much runway to be able to strategize with you and your family about what the right techniques are for you.

Speaker 1:

We don't want to be under the gun to make a bunch of decisions as these deadlines start looming over our head. This is stuff that you need to meticulously think through and understand the trade-offs, because if you flip your business to a new entity structure, or if you gift a bunch of assets to an irrevocable trust, or if you buy a large life insurance policy. These are decisions you have to live with for a while and we don't want to be under the gun. So reach out to our team. We're here to help. We do an initial complimentary phone call just to get to know your situation, talk a little bit more about how we might be able to help, and maybe we can't, or maybe we can refer you to a firm who specializes in whatever your need is. We've got a lot of connections across the industry and so, again, so much opportunity with the Tax Cuts and Jobs Act, and I appreciate both you guys jumping on the pod today to share with us. And let's get back to meeting with our clients now and driving some of these strategies forward.

Speaker 2:

And advisory services are offered through Prosperity Capital Advisory PCA, an SEC registered investment advisor with its principal place of business in the state of Ohio. Allison Wealth Management and PCA are separate, non-affiliated entities. Pca does not provide tax or legal advice. Insurance and tax services offered to Allison Wealth Management are not affiliated with PCA. Information received from this video should not be viewed as individual investment advice. Content may have been created by a third party and was not written or created by a PCA affiliated advisor and does not represent the views and opinions of PCA or its subsidiary. For information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Advisor Public Disclosure website. For additional information about PCA, including fees and services, send for our disclosure statement as set forth on Form ADV from PCA using the contact information here. Please read the disclosure statement carefully before you invest or send money.

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Dave Alison, CFP®, EA, BPC

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