More 2025 Tax Changes

As an American taxpayer, financial planner, and part-time radio host, one of my self-appointed responsibilities has been to enlighten our audience as to upcoming financial changes that will impact nearly everyone. This time of year, Congress and certain Departments of the Administration are busily preparing annual changes to taxes and our massive Social Programs, including Social Security and Medicare. My objective, one that I have been pursuing for years, is to disseminate information as soon as it is made available to the public.

Before I summarize changes that were released this week, I will render my long-held opinion, and I expect few will be surprised with my conclusion.

Every year, the government demands a larger portion of our purchasing power.

One of the main tools used by government to fleece the public is the annual Cost-of-Living Adjustment, or COLA. Understating the COLA, as it gets applied to Social Security benefits, reduces purchasing power for the 70+ million recipients of monthly Social Security benefits. This practice has been so pervasive that Americans have lost 30% of Social Security Benefits’ purchasing power since the year 2000. The paltry 2.5% increase in Social Security benefits is a ridiculous understatement of the actual cost of living we all experienced over the past year. We consider misuse of the COLA.

COLAs can also be used to increase our costs, providing a double whammy for taxpayers. This week, we were treated to another data set exemplifying this form of financial manipulation. The subject is Medicare premiums, which are rising by 5.9% (the government stated Medicare COLA), more than double our Social Security monthly benefit increases. Since Social Security recipients have Medicare premiums deducted from their monthly benefits, our net benefits suffer. Adding insult to injury, the Medicare Part B deductible will increase a whopping 7.1% for 2025, further reducing our purchasing power.

Once again, America’s “seasoned citizens” will experience a setback in their lifestyles.

Van Wie Financial takes great pride in our willingness and ability to keep our audience informed of changes as soon as they are released. We take no pleasure, however, in our analyses when they lead to inevitable conclusions.

On a positive note, there is a pinpoint of light coming in 2025. Tax brackets have been broadened by about 2.8%. Lower tax brackets will apply to more of our income next year. Also, President-elect Trump has proposed elimination of taxes on Social Security benefits. Fun to imagine, but don’t hold your breath.

Van Wie Financial is fee-only. For a reason.

Uncertainty is the bane of the stock market, as well as tax planners and investors everywhere. Throughout the 2024 Presidential Election Cycle, prognostication became increasingly difficult as proposals, trial balloons, polls, and candidate swaps supplied a plethora of conflicting concerns. Nothing was certain, planning was difficult, and markets were understandably volatile.

Fortunately, the election is (virtually) over, giving markets and people time to assess results and refine financial planning prior to year-end. In the 2024 election, one of the main uncertainties revolved around the future of the 2017 “Trump Tax Cuts.” Due to arcane Senate rules, our current low rates are set to sunset after 2025, at which time Personal Income Tax Rates would automatically rise.

For purely political reasons, election results would pave the way for either continuing lower rates or the expiration of those rates with the resultant tax increase. With election results now known, tax rates will most likely not rise in 2026. This opens up a new discussion regarding tax planning, and especially the viability of Roth IRA Conversions. Here’s a look at our thought process.

Following introduction of the Roth IRA in the 1997 Taxpayer Relief Act, Roths have been helpful for many American taxpayers, due to forever-untaxed withdrawals offered to account owners who follow simple rules. People in low tax brackets could save for a future in which tax rates would be higher, and their withdrawals would remain tax-free.

Converting Traditional Retirement funds to Roth status creates a 1-time taxable event, but the long-term tax-free status can be very valuable. This is especially true in the face of impending higher tax rates, which would have been the case if our election results were different. Our clients have been very interested in the concept, as they should be. However, the immediacy of the discussion has been reduced because of the steadiness of tax rates. In fact, Trump (47) has expressed a willingness to cut rates even further.

Tax and Investment Planning shrouded by uncertainty can lead to expensive (and irreversible) actions by investors. As we settle into year-end planning, pressure to take some actions is reduced, or even eliminated. Most of us are relieved and feeling less pressured.

Naturally, Tax Planning is a complex and multi-faceted process. As more decisions are made and published, we face reduced uncertainty, making planning considerably less complex. We are watching for any and all details of further changes coming to the Tax Code. After all, the only thing certain about taxes is change.

All in all, early data presents a mixed bag. We’ll keep you updated.

Van Wie Financial is fee-only. For a reason.

During the closing weeks of each calendar year, our Federal Government trickles out tax changes that will affect savers and investors in the coming New Year. The process has started for 2025, and we are bringing you what we know so far, with some analysis and comments included.

Foundational to annual changes is the inflation incurred over the past Government fiscal year, which ends on September 30. At that point in time, price levels are compared to the same date last year, and the overall change is deemed the official annual inflation rate. Logic would dictate that tax-related items would be applied consistently, but (as I have railed against in the past) that would be too easy for America’s massive bureaucracy. Therefore, we must break down actual changes by category to judge the effects on tax bills.

First, we stipulate that the inflation numbers provided to us are clearly designed to understate the actual level of price increases. Seldom in my decades on the planet has this been more evident than over the past 4 years.

Acknowledging the true rate of inflation would cause the massive annual budget deficit to (further) explode. We are powerless to change the process, so we simply report and comment. Read it and weep, as they say.

Initially, we are treated to the “official rate of inflation,” which is +2.4% for the year ended 09/30/2024. This is down slightly from the prior year, which was stated as +2.5%. For the record, my experience during those 24 months is considerably higher than the collective 5%. You probably agree.

First to be announced was the Social Security Benefit COLA (Cost-of-Living Adjustment), which for 2025 will be 2.5%. Medicare recipients who also collect Social Security monthly benefits will have to wait longer to discover their monthly Medicare increases. My guess is that the Medicare increase will be higher than the 2.5% Social Security COLA, rendering 70+ Million Americans worse off than they are today. We will report as soon as increases are announced.

Income Tax Brackets were revised for 2025, with the brackets broadened about 2.8%, a little better than the inflation rate. Score one for taxpayers.

Retirement Plan contributors were losers from data released so far. IRA contributions were not increased, and Employer-sponsored Plan participants received a paltry 2.17% contribution increase. Deductible limits for Traditional IRAs, and income limitations for Roth IRA contributions, were raised in a mixture of percentages that makes no sense. Some are a little higher, and some a little lower, than the stated inflation rate.

For Tax Filers, the Standard Deduction increased by 2.74%, but the FICA and Medicare taxation limits were increased sharply, all in excess of 4%, a mixed bag.

All in all, early data is a hodgepodge. We’ll keep you up-to-date.

Van Wie Financial is fee-only. For a reason.

Last week, we began a discussion that emanated from a radio listener’s inquiry. The general topic was preparing Americans for Retirement Planning and the need for an early start with education, saving, and investing. Dreaming of retirement is not enough, and in the 21^st Century, no one else will be looking out for you. That is a stark reality.

Prior generations relied on traditional pensions and Social Security for lifetime income in retirement. Things are different today, as pensions are almost extinct, and Social Security payments have not kept pace with inflation. Recent estimates show a 36% decline in purchasing power of Social Security retirement benefits since the year 2000. Ouch!

For many, difficult changes such as working longer and saving more, will be necessary. Knowing this many years in advance allows a working person time to adjust saving and investing habits, but being confronted with this data late in life can be devastating, without time to adjust to reality.

Successfully achieving a desired retirement income stream requires time and careful planning. This is due to the principle of compounding, whereby earnings are continually reinvested over time. Future earnings are enhanced as the account grows. Over time, compounding becomes a powerful source of wealth accumulation.

Invested money earns more money, whether from interest, dividends, or capital gains. Slow at first, the effects of compounding multiply over time, as growth gets applied to an ever-increasing pool of money. The process may seem slow, but over time it accelerates. We often explain compounding using a simple example. Earning 10% on $1,000 begets an increase of $100. Each successive year applies growth to a larger number. Earning the same rate on $100,000 increases the account by $10,000, and the pattern continues. Imagine at the $1 Million level!

To a young worker who is faced with conflicting demands on income, saving can be burdensome and difficult. Looking out 30 years or so may seem unreasonably long, and a host of other excuses can interfere with investing scarce dollars. With a good financial education, these obstacles can be seen in their proper perspective, providing needed incentives to prepare for “someday.”

Young people may look to their parents and derive incorrect assumptions as to how they got where they are. Some parents have (or had) substantial pensions, and others were successful in their IRAs and 401(k) Plans. These people are enjoying comfortable retirements. Others, however, failed to understand their own roles in preparation for the future, and are not in the best financial condition.

It is not necessary to be judgmental of others while taking hold of your own situation by planning for the future. Your future is up to you.

Van Wie Financial is fee-only. For a reason.

Following a recent episode of The Van Wie Financial Hour, a listener hit the nail squarely on the head with his observation that learning about retirement only when it is staring you in the face is not only dysfunctional but can also be discouraging. We wholeheartedly agree. Imagine being within a short number of months or years to retirement, only to find out that you will not be financially capable of actually leaving the workplace on your preferred basis.

Absolute rules about money are simple, they are few, and once stated, they are pretty much obvious. Number One is, “More money is better than less money.” Number Two is, “Money sooner is better than money later.” Together, these two simple rules help provide a framework for Retirement Planning.

In our day jobs as Certified Financial Planners®, we guide new clients through the process of Goal Setting. Retiring Early, or Retiring Comfortably, or Getting Rich are not goals. At least not yet. Initially, they are dreams, desires, or motivators, but they are insufficient to be labeled goals.

Workable goals require actual numbers. Unfortunately, most Americans are weak in understanding pertinent numbers regarding their own future. It is not their fault. Personal finance has long been neglected in our worsening educational system, which is hopefully now reversing course. This is the crux of our listener’s recent inquiry.

Starting with the most basic, and as referenced by our listener, we need to instill in the skeptical public a simple concept: accumulating $1 Million is not insurmountable. That magical number is decades old and used to be beyond the grasp of most Americans. Going to the movies and buying a soft drink with a Quarter (as I did in the 50s) made a $1 Million goal seem impossible. Today, that $1 Million is becoming more of a necessity. Try a movie night out with a $20 bill these days. To the average ticket price of $11.75, add transportation costs, and try to buy popcorn with the remainder. Good luck.

Perceptions have not changed as much as reality. Amassing $1 Million may still seem difficult, but the sheer number of “401(k) Millionaires” indicates that this goal is no longer the hurdle it used to be. According to Fidelity Investments, 401(k) Millionaires recently reached a new high of 497,000 (just at Fidelity) and those are in addition to their $1 Million IRA owners. While that $1 Million number is not magic, and won’t apply to everyone, it is a mental milestone ingrained in most Americans.

Next week, we pick up the basics of amassing your own million(s).

Van Wie Financial is fee-only. For a reason.

What a difference a degree or two can make, as we all learned this past week from Hurricane Milton. This strange disturbance deep in the Southwestern Gulf of Mexico did the unthinkable, moving eastward and multiplying its force. I can’t remember a pattern like that, and if I never see it again, I’ll be better than fine.

Looking back on the week, having watched the various options for landfall and destruction, the Cone of Uncertainty appeared to spell out a cataclysmic result for Tampa, supposedly the nation’s 49^th-largest city. In reality, the Greater Tampa Bay area is comprised of a multitude of smaller cities and towns, with a total population in the millions. Situated on a huge bay, and with a shallow Gulf floor near the harbor entrance, a storm surge could devastate countless people and properties.

And that was exactly what the forecast was showing, with a tidal surge estimated at up to 15 feet, with waves likely doubled in height by the geography of the region. Losses would be some form of catastrophic, defying words.

Slowly, the path seemed to be shifting a degree or two southward. That trend continued, and landfall eventually occurred south of the City on the Bay. This bit of serendipity resulted in a negative storm surge in the high-density population area, saving countless devastation of lives and property.

Of course, wherever a huge storm goes, there are winners and losers, and horrible losses further South will be examined over the next few days. Applying the term “good news” to any part of this seems heartless and even reckless, but of all the possible outcomes, this was probably the least awful.

Life in the area (and generally throughout the State) will not return to normal for many months and even years. Following on the heels of Helene, we should take heed of my last week’s Blog regarding insurable risks. Don’t wait any longer to begin your disaster planning. Start with buying Flood Insurance.

I have no doubt that many Floridians will decide to abandon Florida in the aftermath of our back-to-back storms. However, more will come to replace them, and the population will continue to grow. We should expect no less in our Tropical Paradise.

Overall, various reports show that residents in the Cone of Milton were acting responsibly in abandoning the Coastline area for higher ground. Countless lives were saved because of their actions. The rest of us need to view their misfortune and self-reliance as providing role models for life in Florida.

Many years may pass with very little “excitement” regarding Hurricanes and Tropical Storms, but that is not cause for complacency. Protect yourselves and your possessions, while enjoying your stay in the Sunshine State.

Van Wie Financial is fee-only. For a reason.

Florida’s First Coast dodged a bullet last week, when Hurricane Helene roared through several states for hundreds of miles, wreaking untold devastation on areas largely unprepared to handle this form of dangerous weather. As the death toll passes 200, and the missing toll remains in the hundreds, we look around our immediate area and breathe a sigh of relief. Minor power outages and messy yards were ubiquitous, but loss of life was nonexistent, to the best of my knowledge. The season is not over, and another storm is brewing. What now?

Feeling grateful is a good start, and donating whatever time and money is available to the rescue effort is also commendable, but Helene also presents a learning experience for all of us who live in Hurricane Country. An old saying reminds us that an ounce of prevention is worth a pound of cure. Though we can’t prevent hurricanes from doing what they do, what we can do is to prepare ourselves for the possibility that we will be hit hard one day.

Life exposes us to two essential forms of risk, insurable and uninsurable. Possessions can be insured against loss using conventional insurance policies. Unfortunately, most Americans are not adequately insured against catastrophic losses, whether from fire, windstorm damage, or flooding. One fundamental precept in financial planning is that the very day you need insurance is the first day that you can no longer obtain it. At the extreme of this rule of thumb is Flood Insurance, which is 30 times worse, in that a 30-day waiting period is imposed before the Flood Insurance Policy becomes effective.

Originally, Flood Insurance was offered by a handful of private companies, but that system failed. Floods violate a fundamental principle of insurance, in that floods affect everything and everyone in their path. There is no random selection, causing damage to be so widespread as to only be insurable by an entity as large as the Federal Government. As of this writing, Flood Insurance is only required by mortgage companies for mortgaged properties in government-designated flood zones.

We have argued for many years that this requirement is pathetically insufficient. This week illustrated that wisdom beyond anything we ever imagined when mountainous properties hundreds of miles inland flooded beyond salvation. They will not receive payments from their homeowners’ insurance policies when the damage is ruled flood (defined as damage from rising water). Many people will be wiped out, and my heart breaks for them.

Flood Insurance is expensive and rising much faster than the rate of inflation, rendering flood protection both a luxury and a necessity. At a minimum, all Floridians should be using this time to evaluate their coverages and costs. Waiting for a potential threat to present is not a plan.

Van Wie Financial is fee-only. For a reason.

“Silly Season” is in full swing in Washington, D.C. This is the period immediately preceding a Presidential Election, a period during which excessive promises are made to voters on both sides. Mostly, promises are for tax cuts for the Middle Class (and sometimes for others). Sprinkle in some tax increases for people who aren’t you and those you aren’t supposed to like, and you have the Mulligan Stew of promises, most of which will remain unfulfilled.

Cutting taxes is difficult and complicated. For that matter, so is raising taxes. With the U.S. GDP (Gross Domestic Product) in excess of $27 Trillion, our economy contains too many intertwined moving parts for any politician to accurately assess the outcome of new tax proposals.

In a perfect world, tax policy would benefit the national economy and the vast majority of our citizens. Let’s get into the weeds with a few of today’s popular themes to see if any or all proposals qualify for my lofty standard.

• “Further tax cuts for everyone” is a current Trump proposal. This follow-up to the 2017 tax cuts would likely benefit nearly everyone, as well as the economy, and tax cuts generally raise government revenues.
• “No tax on tips” is a Trump original, which was immediately aped by team Harris. Expect a very small economic impact, but lots of goodwill.
• “No tax on overtime” is another Trump original. Once again, it has very little overall economic impact and is dripping in voter goodwill.
• “No tax on Social Security Benefits” is a recent addition to Trump’s campaign. This would strain the already overstressed Social Security System, hastening its insolvency, but again generates goodwill.
• “Cut taxes for the Middle Class” is a Harris Campaign slogan. This repetitive promise never gets enacted but sounds good to voters.
• “Raise the Corporate Tax Rate to 28%” is another Harris proposal. This job-killing, budget-busting proposal is pure economic tripe.
• “Tax Deduction of $50,000 for starting a business” is another Harris proposal. Waiting until a new business is profitable to get a tax deduction does absolutely nothing (short-term, anyway) for our economy or the entrepreneur. Tantamount to vote buying, and not much else.

During “Silly Season,” it is critical to note that Presidents do not control the U.S. Tax Code. That is the purview of the Legislature, and quite literally requires an Act of Congress. No wonder so little actually gets done. The only economic proposals encompassing sound financial principles must entail massive spending cuts. I have yet to see or hear one such proposal this cycle. Unfortunately, the only place where Economics comes before Politics is in the dictionary.

Van Wie Financial is fee-only. For a reason.

Only five months have passed since our past April 15th tax day, and most people are not thinking about year-end tax and financial planning just yet. In a “normal” year, that is an oversight, but in a Presidential election year, it could represent a financial error. In this particular election year, it could constitute an epic fail. Taxpayers who are also investors should be assessing the possibilities and what effect certain outcomes may produce.

Markets and political polls are rife with volatility this year and with good reason. Financially, the candidates are polar opposites, and the winner is likely to have a dramatic impact on individual and corporate taxation. With that in mind, this is none too soon to begin contingency planning. Once plans are made, there will be time post-election to execute whatever steps have been outlined.

From our standpoint, tax planning could be significantly dependent on election results. Trump’s Plan includes making the 2017 TCJA (Tax Cuts and Jobs Act) tax rates (and expanded brackets) permanent. The Harris proposal would let the “Sunset” provision kick in, raising tax rates for nearly all Americans on January 1, 2026. That leaves two tax years to take advantage of the lower rates.

Should the likelihood arise that taxes will be higher, this may be a perfect time to begin Roth Conversions, reducing future RMDs (Required Minimum Distribution) in the future, when tax rates will likely be higher. Naturally, if election results favor making rates permanent, the wisdom of performing Roth Conversions may be lessened.

Taxpayers with a degree of control regarding their personal income and expenses can often minimize the tax impact. Taxpayers in high-tax states, who have been limited to a $10,000 maximum annual deduction for SALT (State and Local Taxes) may be able to defer some of their expenses to 2026 when the limitation would expire.

In every year, investors should examine their holdings (those in taxable accounts) to see if they could benefit from some tax-loss harvesting. In order to realize a capital loss, the asset cannot be repurchased until at least 31 days after the sale. “Banking” some losses allows future gains to be offset, which may be much more valuable in 2026 if rates rise.

With markets high right now, many of our clients are finding it impossible to find and execute taxable losses. However, investors holding many individual stocks may have several winners and several losers, as recent market gains have favored super-huge companies. Lesser-known companies have only recently begun a rebound, and losses may be available, in time for a replacement purchase prior to a broad market rally.

Van Wie Financial is fee-only. For a reason.

A few years ago, we (personally) found ourselves approaching Medicare age, with a combination of trepidation and relief. To be fair, in terms of medical insurance, we have had an overall positive experience with Medicare. Originally, Medicare excluded coverage for prescription medicines. This changed under President George W. Bush, when Medicare Part “D” (Prescription Drug Coverage) was implemented in 2006. From the start, Part D was optional, and remains that way. As an alternative to Part D, enrollees may purchase drug coverage through a private Prescription Drug Policy, or they can go it alone.

I should also mention that for Medicare enrollees electing to use Part C (Medicare Advantage), which places all coverages outside traditional Medicare, many Advantage Plans include drug coverage. That is a topic for another time.

One of the Original Sins of Part D is “affectionately” called the “Donut Hole.” This is stage 3 of annual coverage, with Stage 1 being the deductible, which must be met before Stage 2 benefits are paid using traditional cost sharing between Medicare and the enrollee. Stage 3 is the Donut Hole, wherein the consumer pays a larger portion of each prescription until reaching Stage 4, the Catastrophic Coverage period, where the policyholder no longer pays any portion of prescription costs. Every January 1, the policy resets back to Stage 1.

For years, politicians have been promising to close the Donut Hole, staying with co-payments until the Catastrophic Coverage period. At last, come 2025, the Donut Hole is going the way of the Dodo Bird. Since its elimination is costly, there will be compromises. First is a higher deductible, which must be met before the Plan really kicks in. The maximum Deductible in 2025 will be $590.

Once the Deductible is satisfied, enrollees will pay shared costs for covered prescriptions until they have spent $2,000 out of pocket. Covered prescriptions after that point are secured at no out-of-pocket cost for the balance of the year.

People approaching age 65, when Medicare eligibility begins, but still working for an employer that offers health insurance benefits, need to know the new rules. Normally, Americans sign up for Medicare for their 65th birthday month, and failure to do so can result in penalties. An exception is made for employees with Qualified Coverage.

Qualified Coverage is determined by Medicare, based on the terms of the employer-sponsored Plan. For most private insurance that is not a problem. However, with upcoming changes to Medicare Part D, employees should take a new look at their employer’s drug coverage. A thorough review is required of each employer offering Drug Coverage to determine if Qualification will still be granted. Failure to re-qualify may subject employees turning 65 to Medicare penalties. If you are in doubt, contact your Benefits Manager.

Van Wie Financial is fee-only. For a reason.