Joey Loss 00:00
All right, welcome back. This is Wealth Unplugged podcast with Joey Loss today. I have no guest, or you could call my guest the new tax bill. It can't speak for itself, and thank God for that. It's over 900 pages long, so I'm going to dig through maybe 15 items that are most applicable to you and me, and just kind of talk through what changes you can expect, maybe hit a couple housekeeping items, of things that you can look into to avoid any surprises over the next year or two, as this tax bill takes effect. But just to be clear, it is tax law at this point, so a lot of these things we're going to talk about are already in effect. So before we dig in, I want to talk for a second about the deficit. This is something I'm sure you've heard about. The current US deficit sits at $36 trillion that is a massive number to put it in perspective, Nvidia, the largest company ever, is just hit $4 trillion yesterday. That is a company that supplies chips to people all over the world. I mean, it is a massive powerhouse of a company, and it is a ninth of the size of the deficit that the US carries currently. So it is a big number. And the problem with that number is it continues to grow every year, regardless of tax law. We have a spending issue in this country, and you know, if it were a household or a business or anything else, I mean, it would just be an untenable practice to outspend what you bring in on such a regular basis. And that's kind of been the case in our country for for decades now at this point. And so that starts with the criticism of this tax bill in the eyes of the CBO, the Congressional Budget Office who analyzes these bills to estimate impact over time, this bill will increase the rate of deficit accrual over the next 10 years by $5 trillion so whereas we might end up in the high 40s just through interest alone and ongoing spending that was in place before this tax bill, now we're probably Looking at the low 50s as a target deficit balance in 10 years. So big talking heads like Ray Dalio, famous hedge fund, founder of Bridgewater, they're concerned about this, and there's a good reason to be. In my mind us, treasuries remain one of the safest places in the world to store your money. We've seen credit agencies take action this year to reduce the rating of the US government. Just to be clear, that's not the first time that's happened. I think during the Obama administration, we saw a cut, and then sometime in the late 2010s we saw another cut. So this is not the first time this has happened, but it is worth noting, there's questions about how solvent the government will be. I don't think those questions are in any way immediately concerning, but it's just something I wanted to point out before we dig into this, you know, kind of the atmosphere around this tax bill, as far as, how do you get out of a deficit like this? There's only, only three paths I've heard people talk about. The first one is to print money to pay the debt, right? So you just have the government print money as needed to pay down the debt. Problem with this, it's not really creating any other goods and services. It's just paying off debt. So what does that mean? It just massively inflates the dollar and makes the value of any dollars in your pocket, less people would be tremendously upset about this, if inflation got out of control, and it would also contribute to an unhealthy economy. So I don't think that's a reasonable path. I don't think I've really seen any political party go after it. There's a small camp of people following something called Modern monetary theory that believes that this is fine. I don't agree with that, and I don't think most financial advisors or economists or politicians agree with it either. The second path is you can increase tax rates dramatically to pay the debt off faster in the short term. This is a good option in the sense that, yeah, it obviously increases revenue today. The problem with this is it would definitely slow consumer and corporate spending and investment, and it could dramatically slow the economy, potentially backfiring on the expectation of increased tax revenue in future years. So maybe in year one or two, you get more revenue, because economy has not yet felt the hit fully of a tax increase, but what you may end up fostering is an economy that just doesn't really support much income growth, and you income growth, and you end up with less tax revenue than you might have otherwise. The third path is you can cut taxes, encourage business and income growth and hope that that spurs general economic growth, therefore increasing tax revenue even in the face of a tax cut. Technocrats and other people that support this call this the Grow your way out strategy. And their argument is, you know, we're kind of at a crisis point where $36 trillion is such a big number that there's not really another way that we can get out of it, other than to just buckle down, create the best environment we can and try and grow our way out. You. Candidly, I'm not a super at that level. I'm not an economic expert, and can say that's the perfect strategy. But I wanted to point those things out, because I think that does capture the spirit of this tax bill. It's trying to create an environment where businesses want to spend money. They want to create growth. Consumers want to spend money. And as we talk through some of these points, I think you'll see how they're trying to achieve that. So as with all tax policy, economic policy, we will see what happens. None of this stuff is ever static. That's one of the issues with the CBO report. They say 5 trillion, but they're not anticipating the kind of growth that may happen. And there's no telling what a positive economic atmosphere might do to the 10 year treasury rate, right? So when they run those reports, they have to pick a fixed interest rate that they use when calculating where the deficit is going to end up. If the economy just goes gangbusters and everything feels very healthy, there's a good chance that that rate can go down, and when the 10 year treasury rate goes down, what that means is people feel better about the solvency of the US government, and therefore the US government does not have to pay as much interest for people to want to own those bonds. The less safe those bonds feel to investors, the greater the interest rate the government has to pay to make people want to own them. So when we see fluctuations in the rates, that's what's going on behind them. But the same is true, like I said, for corporate bonds, short term bonds, everything like that. It's really a matter of risk. You know, the more risk people are willing to take on or the longer people are willing to lock in a certain rate. So on a 30 year treasury, theoretically, the more that entity, whether it's a government or company or otherwise, should have to pay to make that person want that bond and be willing to lock up the money for that period of time. Okay, let's dig into the actual details of the tax law. So part one, I'm going to talk about income and tax rates. So new tax brackets that really are not new, they're the tax brackets you've been used to for the last, let's say, seven years. By the end of this year, they started in 2018 with the tax cuts and Jobs Act put into force. Late 2017 the tax brackets are going to be set at 10% 12% 2224 3235 and 37 at the top. This is historically quite low compared to where tax rates have been in the past. Prior to this tax law, the top tax rate was 39.6% and based on the income at that point, you're talking about 10s of 1000s of dollars at the bottom of that bracket. You know, the more money people make, obviously, the much greater that 2.6% cut can mean. But these cuts also apply at the lower tax brackets, 1012, 2224 that's a lot lower than where we were. The 22% bracket was a 25 the 24 was a 28

Joey Loss 07:59
so people in the middle class and and all the way up will definitely feel this. So one thing to point out is, you know, for listeners who may not know, we have a progressive tax system, this means you're not taxed the same amount of money on every dollar that you earn. So if you earn, let's say, $30,000 your standard deduction is actually going to put that tax rate at 0% if you're a married person, when you start to earn more than that, you start to get taxed at 10. And then if you keep earning beyond that, it goes to 12 to 22 to 24 and so when it comes to tax planning conversations, a lot of what we're trying to figure out is, how do we keep you in the 24% and keep you from going to 32 if that's something that we can do. Now, to be clear, that's not the worst cliff there is. There are some cliffs in tax law, but the reality is, if you slip up into that 32% tax bracket, for example, from 24 that's one of the bigger jumps. You're only going to pay 32 on the dollars that cross that threshold. It doesn't change your tax rate for all of your money. So when it comes to income tax planning on wages, there are some strategies you can look at, but in general, it's not the worst thing in the world if you bump up in a tax bracket. Now, the higher you go in tax brackets, there are some other kind of hidden taxes, if you want to talk about it that way, that do start to come into effect. So income tax planning is a good thing. But to keep it simple for now, your tax brackets are going to be where they've been for the last few years, and a few other ways we'll get into I think you'll notice that your actual tax bill should decrease. For almost everyone who's probably listening to this podcast, tax on investment income. So investors may know that if you own stocks or bond funds or anything else that you can trade on the market, capital gains taxes are lower than income taxes. So for many people with income below a certain amount, you'll pay 0% taxes. For a larger amount of people. To listen to this podcast, you're probably in the 15% capital gains bracket for long term capital gains. Now, where does this change? You have to hold an investment for a year and a day to get access to long term capital gains. If you're day trading, you're going to pay ordinary income taxes those 1012, 22, 24% brackets I just talked about, on any income that you make. So this is one of the notches in the in the camp of owning stocks for longer. Being a longer term investor, you do get more favorable tax treatment if you hold stocks for a year and a day or longer. Another point, this was a big one. I'm sure everybody heard it. Talked about no tax on tips. This is actually a thing that was in the tax bill. It's pretty impressive to see that actually get over the line. So how does this work? It's not the case that you don't count the income at all. It will show up on your tax return, but you will not owe taxes on up to $25,000 of tip income below certain income thresholds. I think it's 150 or 175,000 you'd have to earn a lot of money in tips to end up having to pay taxes on tips and generally for service industry type stuff. That's not the kind of income people are ending up with. So they're going to get an above the line deduction, which means, no matter what, as long as they're below that income level, they're going to get up to get up to $25,000 of tax free tip income. The same is true for overtime. So you get up to $12,500 in tax free overtime income. This is also subject to some income limits. If you make a ton of money and you're getting overtime pay, you know, by a ton of money, I mean a couple $100,000 a year as an individual, or over 300,000 as a married couple, you're going to pay taxes on that overtime pay. But for those people working in manufacturing or other type jobs, or maybe their income is in that 70 to 130 type income rate, the overtime pay will be tax free up to $12,500 for that particular income item, again, that's going to be an above the line deduction. So part two, let's talk about adjusted gross income. So when you file a tax return, you'll notice there's a bunch of different lines, and it's hard to figure out which one actually represents the amount of income I'm getting taxed on. You've got wages that you put in, you've got business income that you put in, all of these things contribute to something called adjusted gross income, and it's really the top line number that they use before we start to introduce deductions and other things that reduce the amount of taxable income, which is that figure that really points to what you're getting taxed on. So when talking about adjusted gross income, how do we knock that down before we get to that taxable income figure? So some changes in the tax law include something I'm excited about. It's a universal charitable deduction. Historically, if you give to charity, it only meant something to you if you had so much expenses in medical expense, state and local taxes like property taxes or sales tax and mortgage interest, that you did not take the standard deduction. Instead, you took something called itemized deductions. This is less than 10% of people since 2018 that have taken the itemized deduction path. It's just not that common. Most of America does not have a huge expense in those categories, and therefore they take the standard deduction, which was made a lot bigger in 2018 why is this a big deal? I think there's a huge amount of people in this country that donate things to Goodwill or give a little bit to their church or other causes that they care about. Historically, for those people, these have not been deductible. What this does is, for individuals, now, you can deduct up to $1,000 or if you're a married couple filing jointly, you can deduct up to $2,000 I think that's a big deal. What does that mean for taxes? Well, I mean $2,000 off an income tax return if you're in the, let's say, 32% bracket, 640 bucks so you get a little something for doing something nice. And I think it's not a ridiculous number. It's not like all charitable giving is out of control at this point. Everybody's just gonna try to find ways to give things just for the tax sake. I think it's a reasonable number, and it allows really normal, routine giving to get some sort of recognition in a tax sense. So the takeaway there is, if you give to Goodwill and you get the receipts that they provide for the goods that you gave, or you give a little bit to church, that's something worth keeping track of now, because it's going to be worth something to you come tax time, the next point is expanded 529 plan uses so this is a big deal historically. You know, 520 nines have been a great vehicle for saving for college in 2018 it changed so that you could use it for pre K through or, sorry, kindergarten through 12th grade expenses and private schools and things like that. That was a big change. Things You could use up to $10,000 a year. Now this has changed again. The limit is still $10,000 a year, but you can now use it on costs like apprenticeship programs or HVAC licensing or a CFP designation. If there's a listener who wants to be a financial planner. I think the expanded use of these accounts is in good spirit. It is a investment in your future earning potential, which really just contributes to paying more taxes in the future. So I think it makes sense to make this as accessible as possible, making good education decisions. So in a sense, 529 used to be called a college savings fund. It's really now a lifelong learning account, and it's agnostic to whether you're going a traditional college education route or a trade school or something else like that, in a way that's a little bit greater than has been historically the case. Something new. There are now my American growth accounts, uncoincidentally acronymed Maga accounts. It's a new savings vehicle for children born on or after January 1, 2025 this program officially launches this summer. And how it's going to work is the federal government, for us born citizens, will make a one time $500 to $1,000 seed deposit into an account for every eligible newborn parents and family can then contribute up to an additional 2500 or 5000 per year. It will be invested in a target date type retirement fund, so it'll own a combination of a few major indexes and adjust with time based on where that person is relative to when they're going to spend the money. But the idea is to create this account let people kind of get used to what it's like to be an investor, what it's like to have funds in an account like this, and ultimately the use will be that it can be pulled out completely tax free for qualified expenses like higher education, a down payment on a first home or business startup costs. It's really kind of a life starter account, and I don't think it's a terrible idea. I think one of the biggest faults and challenges in this country is, I think less than 50% of people are investors. So if you kind of create a government thing where people are, it's not a huge amount of money, but it gives them an opportunity to watch some of this, what it's like to be an investor and what it's like to see the market move. I think that's a good thing. That's a good thing, so we'll see how that pans out. There's a lot of lack of clarity around this. It's not clear. Is this going to be some sort of government custodian that's set up to monitor and manage this, or will private companies like Schwab, fidelity, Robinhood, other platforms like that end up hosting these accounts in

Joey Loss 17:44
the 529 space. For example, there's kind of a combination. There are some major custodians that just have sort of a state agnostic account, but most states have actually set up their own 529 savings platforms, and they each have different deduction rules about what kind of credit you get for when it comes to tax time, for having contributed to an account in Florida, there's no state income taxes, so no benefit other than the deferral of federal taxes, and that would be the same case with this Maga account. So deductions from your AGI. So we've gone through kind of above the line deductions. Let's go to below the AGI line, a massively increased standard deduction. I don't know that I named that right. It's been 30,000 for joint filers, or about 15,000 for single people filing tax returns since 2018 but it was set to revert to a much lower number in 2026 so I think we can call it an increased standard deduction, because that would that's what it'll be starting in 2026 so again, 90% over 90% of Americans use the standard deduction, so they don't need to track these itemized expenses as much, with the caveat of keep those receipts for charitable donations, because that now matters again, regardless of whether you itemize or take the standard deduction. What does that standard deduction mean? It means if you earn $30,000 and you're a joint filer, you have zero tax. Your AGI adjusted gross income is going to say 30,000 on that line. That $30,000 standard deduction will take place on a line below that. And then when you get to that taxable income line, that number is going to be a whopping zero. So if you're in 150,000 and you're a joint filer, your your taxable income will already automatically decrease to 120 before any of these other things happen that we've talked about. There's a bonus standard deduction for seniors over age 65 assuming income is not over, I believe 175,000 an additional $6,000 deduction per person will happen. So this is a really interesting one. On the surface, it just looks like kind of a bonus for people in that age group, but there was a lot of talk about Social Security becoming untaxed, and there's a range of. Reasons why even the most conservative people who are looking for the biggest tax cuts in Congress did not want to do that, the biggest one being tax revenue generated by Social Security income given to beneficiaries of that program, does not go into the general tax fund. It doesn't go against the deficit that $36 trillion number, it goes into a separate account earmarked for Social Security so in a very weird way, this is just how the system was set up. Taxes that people pay against their social security income goes back into the Social Security program to provide future social security income. It's effectively the payroll tax of Social Security benefits. And many of you have probably heard there's a lot of questions about the solvency and the long term viability of the Social Security program itself. I can imagine nothing more unpopular for everybody in their district in Congress than doing something that further harms Social Security directly. And so the solution for that was to create a deduction that effectively eliminates tax on the lowest income folks who depend almost entirely on Social Security income. Instead of eliminating it on Social Security directly, what they did is, if you're a married couple over 65 you now have the $30,000 standard deduction that everybody gets plus 6000 per person in a bonus deduction for your age. So $42,000 is completely untaxable. So what does that do? It preserves the Social Security tax income revenue model, and it's still effectively for the taxpayer perspective, gives them that deduction and eliminates tax on their social security, assuming that their income is low enough at that $42,000 mark to basically wipe out all their tax bill. Another thing qualified business income deduction is now made permanent. If you don't own a business, this means nothing to you. But if you own a small business, as I do, and my partner does, this is a 20% deduction for pass through business income. So what does it mean? Basically, before income leaves the business part of your tax return and goes to you personally, it sees a 20% deduction. There's some income phase outs and the special rules about special types of businesses, like engineers, architects, financial advisors. Actually, they have lesser thresholds for getting this deduction, and it's full but basically what it does is, previous to this rule, there was a huge advantage to having a C Corporation, which is a completely separate entity, and what that would do is basically their tax rates were a lot lower than what we would pay. So I got taxed more as a business, a small business with a pass through entity, than a C Corp like Microsoft might. And that was just kind of a fluke in the tax law. What they did to offset that was create this 20% deduction, and at the end of the day, you know, it makes our income a lot more like any other business entity. So small business owners, of which there are 10s of millions in this country, like this deduction, it kind of evens the playing field. And so that's here to stay. For those who still itemize, that final 10% of people. Something big happened, especially if you live in New York or Pennsylvania or any of these states that have huge state income tax bills or huge property tax bills, the cap has raised from 10,000 to 40,000 with those for those with income under 500,000 so if you live in a high income tax state this is a game changer, and it may make itemizing your deductions the better option. So in Florida, we have pretty normal we don't have state income tax. We have pretty normal property taxes relative to the rest of the nation. So unless you had, I mean, there's really those are the two things. So if, if you didn't have high taxes in those two categories, it was much less likely that you were itemizing your deductions. There are some things that could contribute to that. Maybe you had huge medical expenses in a given year, or you had a lot of mortgage interest, which has its own cap. But if those things contributed to greater than $30,000 of deductions, then you were able to take that. Honestly, this salt deduction was probably the biggest component of that for almost most people. And so if you live in one of these high income tax states, you're probably much more likely to itemize at this point, which is beneficial to them. I think they'll appreciate that that expires in 2029 and then new car loan interest deduction. So if you buy a car assembled in the United States, you can deduct up to $10,000 in interest paid on the loan going forward per year. Now that's $10,000 of interest is a lot. Uh, within a year. And I think the objective here is just to focus people on cars, companies where at least the assembly is taking place in the United States, right? We're not importing the whole thing from some other place. So that's the spirit of that. Another item, tax credit, bigger child tax credit. So it was, I believe, at 2000 it was at like 1000 prior to the tcja in 2018 jumped to 2000 now it's 2200 for each qualifying child, and it's going to be indexed for inflation every year. So it's going to keep rising before it was static, and it would only change if a new tax law passed this codifies increases every year. I think that makes sense the cost of having a family and having a child raises every year. So if you're going to have something like this at all, it only makes sense to index it with the cost of living. Electric Vehicle credit is eliminated as of the end of September. So if you have income under 150,000 as an individual, or income under 300,000 as a married couple, and you've been thinking about getting an electric car, you might want to think about pulling the trigger on that before September 30, because after that, there will be no credit whatsoever. That credits about $7,500 for new electric vehicles that qualify, and $4,000 for you used electric vehicles that qualify. So end of September, that's your cutoff for that. But those income thresholds, I think we've got a handful of clients that are interested in them. Those income thresholds kind of phase people out anyway, and it's a hard that's one of those cliffs I was talking about. It's like, once you hit the 300,000 income as a married filing joint that credit is gone period. So there's some planning you can do to try and control that. But if the gap is too big, you know, let's say you're at 350 there's really not a lot that you can do to get under that threshold.

Joey Loss 26:52
Estate exemption. This is a huge one. I think it's a, it's a, kind of a prickly topic for a lot of people. The estate exemption will now remain at 15 million per person. This is the amount of money that you can pass to the next generation without being subject to an estate tax. So for a married couple, this is over $30 billion it indexes with inflation. And Had this not passed, it would have dropped to 7 million per person starting next year. So we've been doing a lot of tax planning with people in the years leading up to this, because we didn't know who was going to be in power, what kind of tax law that we were going to see for people that in their projections, it looked like, wow, they were going to have a lot of money. We were talking with them about some strategies for getting things into trust and and whatnot that might help them mitigate some of that tax strategy, but or that tax bill, but at the end of the day, it's not going to matter. This is codified as permanent law at this point, so we would have to wait and see if a future Congress or administration pushes for some lower threshold again. All right, so I think this got a little bit more cumbersome to read off than I thought, but I'm a nerd. I love tax. The reason why is, I mean, I don't like paying taxes, but I like tax because that, when you understand them, there's so much that you can do. There's little things like the charitable giving that when you add them together within a year or across a lifetime, they really do make a difference. And at the end of the end of the day, you know, people are trying to build a nest egg or spend their money and have more fun, and good tax planning allows you to do one or the other or both. So thanks for chiming in to my tax bill review, and if you have any questions, please feel free to reach out info at strives wealth.com We'd be happy to talk to you. Otherwise, I will see you next time. Thanks for joining us. If you enjoyed the podcast, please consider sharing it with your friends or family. This is the best way to spread the word, and we want to keep turning out great content for you guys. Show Notes and episode transcripts are available on our website at strives wealth.com/podcast, wealth.com/podcast Special thanks to bode leesons for the intro outro music and to the podcast man for producing this show. Until next time,

Disclaimer 29:12
The Wealth Unplugged Podcast is sponsored by Strivus Wealth Partners, Joey and Adam’s SEC registered investment advisory offering Financial Planning and Investment Management services to clients across the United States. The opinions voiced in this episode are for general informational purposes only. Nothing any host or guest says on the podcast is meant to serve as advice or recommendations for any individual security to determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to substitute for individualized tax insurance or estate planning advice. Please consult your tax advisor, insurance agent or estate advisor regarding your specific situation.