LOF - 2025 Tax Savings Moves
We're approaching the last year of the current tax provisions,
especially around Roth conversions. Join us this week as we discuss the future of
the current tax code and what moves people should be considering as we head into
2025.
Welcome to Label On Fire with Leibel Sternbach, the financial independence and
retirement show dedicated to helping you build the life of your dreams as fast as
possible with as little stress as possible. Ladies and gentlemen, it's time for Label
On Fire.
I'm Freddie Bell with Leibel Sternbach and he is the man. He's Amazon's best -selling
author of Living with Financial Anxiety and also the author of the book called
Authenticity. And he's got a wonderful website, yields4u .com,
just really quickly label, I wanna say welcome first of all, and what can we find
at yields4u .com? - And yields4u .com, you will find everything that you need as an
investor to figure out how to retire, whether you have enough money to retire,
create a sound financial plan. We have tools on there to figure out about Roth
conversions, RMDs, Social Security, when to take Social Security and match it up with
your spouse. We even have tools to help you create an income and investment plan.
All right. That's a good backdrop, because I've got a question. We mentioned that
we're going to be talking about taxes. Let's start with the obvious question, if you
don't mind, sir. Is this even an issue now with Trump in office, will the tax code
get extended? What's gonna happen with it?
- So, that honestly is one of those questions that keep me up at night.
- Wow. - You know, there aren't a lot of things that keep me up at night. What's
happening in the market, that doesn't keep me up because our investment strategy is
rock solid and it does exactly what it's supposed to do and I monitor that every
day, and I'm happy with that. What does keep me up at night is the taxes.
Why is that, label? Why does it keep you up at night? Because we've got some real
fundamental pressures on the federal government, and the primary tool that they have
to solve these problems is going to have to come down to taxes at some point,
because the tool that they've been using is we borrow and we borrow and we keep
borrowing more money. When you hear that the federal government is borrowing, what
you should really be telling yourself is they are taking money out of my future
pocket. They are taking money from future me to pay current me.
That works fine as long as the economy keeps growing and the tax base keeps
growing, except that's not what's happening. Our economy is growing, but our tax base
is not growing because, let's face it, most Americans are retiring. The people who
are my age and younger are getting less and less, and they're having kids less and
less. That means that there are less people to pay back this future loan,
and that bill is starting to come due, and that bill comes due in the form of
interest payments, because basically the government, like any deadbeat, is they
borrowed more than they can afford, and they borrowed it against an asset that
didn't exist, and now it's perfectly fine as long as they can make the interest
payments. As long as you can make that minimum monthly payment, nobody cares. The
problem is
had, the interest rates have been a wild ride, right? And we've had interest rates
went up to 5 .25%, 5 .5%. Consumers loved it,
right? Us as investors, it's free money, right? We're getting 5 .5%, very low risk,
right? It's great. Wall Street hates it because they stop being able to borrow money
for free and basically go buy companies or buy assets that pay money, right? So any
kind of real investor was upset about it, but retirees loved it because it's free
money and low risk, right? Now, the problem is, is that the federal government,
they have all these debts, right? They have trillions of dollars in debt. And that
trillions of dollars of debt, it has to pay the interest that we were enjoying. And
that interest payment, right, when it was 0%, it was a small number. When it went
to 5%, it became a very big number. And the problem is, is that we don't know
where interest rates are gonna go. And as we borrow more and more money, and the
Federal Reserve is not reducing interest rates quickly enough, eventually that amount
of money that we have to pay in interest payments is gonna become a very
significant amount of money. And when, where is the government gonna get the money
to pay those to pay those interest payments. They're going to have to pay it. If
the federal government defaults on the interest payments, then it will skyrocket the
interest rates, and it'll cause all kinds of problems. You've got to ask yourself
the question of where are they going to get the tax dollars to pay the interest,
and how sustainable is the spending going to be if the tax base keeps shrinking?
Well, let's several that right here then label. Remind our listeners about what the
tax provisions are that are set to expire. - Yeah, so Trump, in his first term,
he passed a law called the Tax Cut and Jobs Act. And the Tax Cut and Jobs Act,
which was primarily a Republican measure bill, however, the Democrats did get,
in order, they did get some concessions in order to get it passed. What it does,
and what it did, was it solved a problem in the tax code. The tax code, prior to
the Tax Good and Jobs Act, had a fundamental problem that the tax brackets were not
adjusted for inflation. Every few years, Congress had to get together, and they had
to adjust the tax brackets. Congress hadn't done that in quite a while at the point
that the Tax Good and Jobs Act came along, and they They hadn't done it for a
while and most people were finding themselves in the 22 or plus tax bracket,
which was significant. You were earning $30 ,000, $40 ,000 a year and you were paying
20 % plus to the federal government. There are also a whole lot of provisions that
came about that make life a lot easier for most people, make life easier for the
IRS, that were included in the Tax cut and job tax. So the most significant of
those is number one, it automatically adjusts the brackets for inflation.
So the IRS doesn't, Congress doesn't have to every year come along and adjust it.
It adjusts automatically. What that means is the last five years where we've had
really significant inflation, the tax code has kept up with that inflation. Those
brackets have increased. So you haven't found yourself Automatically in a higher tax
bracket, just because you're making more money because everything costs more money mm
-hmm, however, if if the tax gun at Jobs Act expires and We go back to the old
tax code all of a sudden everyone's gonna be in the highest tax bracket just
because of inflation So that that is a major part of the provision another one was
People used to have to itemize their deductions You had to keep receipts for
everything, and you would submit that along with your taxes. You calculated it all
up, and that would reduce your taxable income. Some people got huge deductions.
Other people didn't have a lot of deductions, and so it kind of wasn't fear, and
it was a lot of work, and it was something that everyone got audited on, was on
those deductions. And so, one of the things that Task Code and Jobs Act did was
created a standard deduction that's adjusted for inflation that says the first 15
,000, the first 30 ,000 of income, and again, increases every year, is automatically
wiped off the table. You don't have any taxes on that. And so, that combined with
tax brackets that are pretty favorable and are adjusted for inflation, keep people in
a lower tax bracket than they ordinarily would be. That one of the,
now that's the great part of the Tax Cut and Jobs Act. It's set to expire in at
the end of this year. So this year is the last year that the Tax Cut and Jobs
Act will be in effect. At the end of 2025 to 2026,
Congress has to either extend the law, renew it or make it permanent,
'cause that's actually what it says, is that it needs to be made permanent, or they
need to come up with a new tax code. So, what's going to happen? Do your tea
leaves say that it will be extended?
So, conventional wisdom says, "Well, Trump made it the first time. It's his legacy.
He's going to want to extend it. It's just an automatic thing." I've heard that
said from so many people that it's just going to automatically be extended. However,
somewhere buried in those provisions, because it did require bipartisan support to
pass, buried in there is some provisions that were designed to make this not be an
election issue. So that's one of the reasons why it's set to expire at the end of
2025, not in 2024. They didn't want it to be central to an election, even though
it sort of became one. However, the other thing they put in there is that in order
to renew it, it did not need just a majority of the Senate to pass it.
It required 60 votes. Supermajority. Well, not quite a supermajority, just more than
a majority.
So, the question is, can we get bipartisan support for it again?
Right. And I don't know if those cards are on the table this time around.
Interesting. So what can we do to protect ourselves as investors, as retirees?
Is there a way to maneuver our tax liability so that if we do take a loss that
it'll be minimal? So yes, we do want to, we need to keep our eye on what's
happening in Congress, So we also need to act under the assumption that this is
going to be the last year of this tax code. Because I think no matter what, even
if they just extend it as is, I think it's going to be used as an opportunity to
make changes to the tax code, whether that is to add taxes or to decrease taxes,
right? Who knows which one, but there's going to be changes made. Also we have the
fact that we do have a number of natural disasters that that are occurring or have
occurred. Those are being footed by our tax payers, and the money needs to come
from somewhere. So far, we've spent money that doesn't exist, and we haven't had to
pay the bill yet. But when we have to pay the bill, it's going to have to come
from somewhere.
How those taxes get raised, that's still a big question. Having said that, the moves
that we're looking at for making for our clients. And this is not an exhaustive
list, but the big ones that you should consider. Number one, Roth conversions, right?
Because tax brackets are favorable right now. We know statistically speaking, tax
brackets probably have to increase for most people, not for everyone, but for most
people, it will probably go up at some point in the future. So Roth conversions is
something that you really wanna take a close look Other things that you want to
take a close look at is tax loss harvesting and resetting your cost basis on
things. So tax loss harvesting is when an asset goes down, you sell it by something
that is not substantially similar so that you can lock that tax loss on your tax
return, but you don't lock the loss in the market. Lots of different strategies for
how to implement that. That is something that we are getting very aggressive with
for our clients. Something else to consider is resetting your cost basis, so using
those losses off because one of the things that Congress could do is just say,
"Okay, we're not going to have the tax loss carry forwards, capital loss carry
forwards, where you're going to be able to use that indefinitely into the future."
They may cap them and say, "Well, you got one year to use it. You got to use it
in the tax year that it occurred, right? So you want to think about, well, what
are the things that I can do to kind of use the current tax code to my advantage?
Something else, you know, if you've gotten out of operating losses, that's something
to consider, 'cause that's one of the things on the chopping block. The other thing
is unrealized capital gains, right? So that's also where resetting the cost basis
makes sense. One of the things that Congress has talked about repeatedly is taxing
the unrealized, The unrealized, so you have assets that you haven't sold, and you
have all these gains baked into them, they're talking about taxing that before you
sell it. Even though you didn't sell it, so now you got to think about, okay,
maybe I want to strategically sell that so that I bring down what that cost is so
that I don't get impacted by the capital gains, unrealized capital gains in the
future. Think about the moves that you can make gifting, if that's something that
you're considering and something that you want to look at. The good news is that
the Secure Act codified a whole bunch of the gifting stuff. So, it's separate from
the tax code, but there is still overlap between the two because you have gifting
and where you're getting the source of that gift, that's going to be dictated by
your taxes. So, something to think about. We're just about out of time, but it
seems like from this discussion that you're of the opinion that taxes are going to
go up. Is that right? I think there's no two ways about it. Taxes have to go up.
Interest rates aren't going back to zero. Our debt has increased dramatically. We
have a whole lot of drains on our economy that we have to pay for and that money
has to come from somewhere, and taxes is kind of the next logical place for it to
come from, because I don't think that they could cut benefits to Social Security and
Medicare, and if that's out of the window, then really, raising taxes is the next
best bet. I understand. He's Leibel Sternbach. We've got to leave it right there,
but if you'd like more information, you can visit yields4u .com. for you,
that's the number for the letter you .com. I'm Freddie Bell and I'm glad that you're
with us today. That's all the time we've got. So join us again next week as we
talk about the future of interest rates and how they relate to your investments.
- If you would like to see how the yields for you team can help you get off the
Wall Street Roller Coaster and save you money on taxes so you can live the life of
your dreams. Book an appointment online at Yields4U .com or call 410 -914 -4894.
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