Tax changes are likely to be at play regardless of who wins the Presidency in November. It’s likely that higher taxes will be needed to reduce the Federal debt. Based on historical events, we have been talking to clients about higher taxes for the past few years. The last four Presidential administrations have increased the Federal net debt, and it is projected to go even higher in the future. In the chart below, you can see that in 2024 the Federal net debt is expected to be 99% of Gross Domestic Product.
Source: Congressional Budget Office, J.P. Morgan Asset Management Guide to the Markets June 2024.
The next chart shows the US history of Federal tax rates, with the time during World War II at the highest individual rate of 90%. Currently, the top Federal individual tax rate is 40.8%.
With these things in mind, tax efficiency is center stage for our clients. This includes your investment portfolio and overall tax strategy. We have built our practice to include a CPA, Jill Carr, as well as other wealth advisors with depth of knowledge on tax planning. And, as you know, we often work with your CPA to help manage your tax burden.
When building our investment portfolios, one of the important factors considered is tax efficiency. For example, we think through asset location when determining WHERE to hold various types of investments. We weigh the use of:
-
- Tax-efficient Exchange-Traded Funds (ETFs) in taxable accounts. This enables us to manage capital gain distributions better than regular managed mutual funds and limits your tax burden.
- Tax-exempt bonds (such as municipal bonds) to avoid federal tax on interest.
- Taxable bonds (such as corporate bonds) in a tax-free or tax-deferred account (like a Roth IRA or IRA) to take advantage of a higher yielding instrument without being subject to taxes on the interest.
- Large dividend-paying investments in a taxable account where you pay taxes each year yet are not drawing income from the accounts.
We also take regular ACTION to help minimize taxes. Some of the work we do includes:
- Realizing taxable losses in your accounts annually to avoid paying taxes on realized gains. This is called tax harvesting.
- Helping determine if a Roth conversion makes sense for you by analyzing your income and deductions. You may be in the “sweet spot” for a Roth conversion. That is a period in which you are retired, earning little or no salary or business income, and not yet collecting Social Security / taking a Required Minimum Distribution (RMD).
- Recommending strategies for charitable giving. For instance, if you are over 70.5, you can donate directly to a charity through your IRA. This is called a Qualified Charitable Distribution.
- If you are someone who gives cash to charities, we might recommend you consider donating low-basis securities directly. This allows the charity to recognize the gain without any taxes and you get the benefit of a tax deduction.
One of our other tax planning strategies involves deciding when to recognize or defer income and deductions. You may not always have a choice in what year you recognize what income, especially when you have wages, Social Security payments, dividends/interest, and/or IRA Required Minimum Distributions (RMDs). Many people have large 401(k)s or IRAs with pre-tax/tax-deferred money. At some point, you will be expected to take an RMD from those accounts. We help you think through WHEN it is best for you to do these things based on your overall financial picture.
We shared information about the Tax Cuts and Jobs Act (TCJA) tax provisions, including the estate planning impacts, earlier this year. As you know, the TCJA provisions are set to expire at the end of 2025. That means it is important to be looking at tax strategies today. As a reminder, if Congress does not extend the TCJA, several things will happen.
- Tax brackets themselves will increase by 2-3% per bracket.
- The standard deduction will decrease. In 2024, the standard deduction for Single filers is $14,600 and for Married Filing Jointly, it is $29,200. This will be cut by almost half if the TJCA expires.
- Itemized deductions will change. The State and Local tax deduction will no longer be capped at $10,000, and miscellaneous deductions will be allowed again (you may be able to deduct your investment advisory fees again!).
- Personal exemptions will be reinstated. So, the lower standard deduction will be offset by the ability to take exemptions for dependents.
- The Qualified Business Income (QBI) deduction for business owners will expire. This is currently up to 20% of the taxpayer’s QBI or taxable income.
Losing the QBI deduction for business owners would be a big adjustment. If you are a business owner, it’s a great time to look at what retirement plans may help you take advantage of extra deductions. We often work with business owners on setting up a Cash Balance Plan in addition to their 401(k), SEP, or Simple IRA. For example, business owners over age 60 may be able to contribute more than $200,000 to a Cash Balance Plan and take a tax deduction for that.
It’s not just business owners who should review their tax strategy. Snowbirds should consider how their income is going to be taxed differently based on what residencies they claim. Your residency status will affect where you need to pay taxes. Some states have reciprocal agreements that allow residents to avoid paying taxes in both states, but every state is different, and states are becoming more aggressive in trying to tax dollars.
No matter who you are and what your situation, SWMG is your partner in tax planning. We proactively address tax efficient strategies for clients and are always available to talk with you or your CPA about tax considerations.
Disclosure
*Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product. (Including the investments and/or investment strategies recommended or undertaken by Stephens Consulting, LLC. Doing business as Stephens Wealth Management Group (SWMG). Or any non-investment related content, made reference to directly or indirectly in this material will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Stephens Consulting. Please remember that if you are a SWMG client, it remains your responsibility to advise us, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to your individual situation. You are encouraged to consult with the professional advisor of your choosing.
SWMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of SWMG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Links are being provided for information purposes only. SWMG is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. SWMG is not responsible for the content of any website. Or the collection or use of information regarding any website’s users and/or members. Important Disclosure.
Please Note: Stephens Wealth Management Group does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SWMG’s website or newsletter or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.