Tax Strategies Under the OBBBA

Tax Strategies Under the OBBBA

Posted On August 11, 2025 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

The One Big Beautiful Bill Act of 2025 creates opportunities for Tax Strategies for many of my clients. I am in favor of lower taxes and hope that families will use these tax savings to increase their investment and add to their portfolio. Spending these savings would be squandering this opportunity.

Much of the OBBBA is to make permanent the key provisions of Trump’s 2017 Tax Cuts and Jobs Act. These include:

  • keeping the higher standard deduction amounts, which are increased to $15,750 ($31,500 married);
  • keeping the top tax rate at 37%, and not reverting to 39.6%;
  • making permanent the Estate Tax Exemption of $13.99 million ($27.98 million married).

We previously discussed the new $6,000 senior tax deduction in detail here. Today we look at three key components of the OBBBA for individual taxpayers.

Higher SALT Cap

The OBBBA raises the cap on deducting state and local taxes from $10,000 to $40,000. This is for taxpayers who itemize. For those in high tax states, who pay a lot in state income tax or property tax, the $10,000 Cap meant that most were taking the standard deduction and not eligible to itemize. Of course, with the standard deduction at $31,500 you need to have a lot of deductions in order to itemize.

A quick reminder: Itemized deductions include four things: State and Local Taxes, home mortgage interest, charitable donations (see below), and medical expenses which exceed 7.5% of your AGI.

Tax strategy: It may make sense to look at bunching your property taxes (and donations). What does this mean? You bunch two years of property taxes into one year by paying one in January and the next one in December. For example, if your property taxes are $25,000, you are below the standard deduction of $31,500 (married). You would end up taking just the standard deduction in both years and get no benefit, assuming you didn’t have any other itemized deductions.

Bunch those two property tax payments into this year and now you get a $40,000 deduction this year and a $31,500 deduction next year. Note that the $40,000 limit reverts to $10,000 after 2029.

Charitable Donations

There are some big changes coming to Charitable donations and tax deductions. Starting in 2026, you can deduct $1000 ($2000 married) as an Above The Line deduction. This means you do not have to itemize to get this tax deduction for a charitable donation. The new deduction, however, will only apply to cash donations, not to donations to a Donor Advised Fund, or donations of appreciated stock.

The other big change is a new 0.5% AGI floor on deducting charitable donations on the itemized line. If your Adjusted Gross Income is $200,000, you can only deduct your donations which exceed $1000. This also starts next year, 2026.

Tax Strategies:

  • If you can hold off 2025 donations until January 1, you will be better off, assuming your donations would be under the $1000 / $2000 (married) level.
  • If you are already itemizing for 2025, calculate your situation for donating now versus in 2026. Especially if you are donating appreciated stock. Be sure to consider the new SALT Cap when calculating if you will itemize.
  • Starting in 2026, tax payers may want to donate cash first, up to the $1,000/$2,000 (married), and then switch to donating appreciated stock above those amounts.
  • QCDs, Qualified Charitable Donations from your IRA remain unchanged. Those over age 70 1/2 can donate QCDs of up to $105,000 a year and not count the distribution as income. Since the QCD can count towards your RMD, this can reduce your taxable income.

Elimination of Clean Energy Tax Credits

Unfortunately, the OBBBA is eliminating many tax benefits for converting to clean energy. If you are thinking of making a purchase, you still have some time before these programs expire.

Tax Strategies:

  • The tax credits for electric vehicles will expire on September 30, 2025. There are two programs, one for new vehicles and one for used vehicles. Both tax credits are being eliminated.
  • The Residential Clean Energy Credit, a 30% tax credit for solar panels and battery storage, will end on December 31, 2025.
  • The Energy Efficient Home Improvement Credit, for heat pumps and insulation for example, will end on December 31, 2025.

The Long-Term Outlook

Everyone likes lower taxes and being able to keep more of their hard earned money. I would be more enthusiastic about these tax cuts if they had been paired with cuts to spending. The deficits we are accumulating will eventually become a problem for our children and grandchildren. While the markets are flying high right now, the debt could eventually erode confidence in the economy and crowd out money being used for more productive purposes. The deficits will make the under-funding of Social Security and Medicare a harder problem to address in 2033. These criticisms of the OBBBA are widespread.

In spite of these concerns, most Americans will see some tax benefits under the OBBBA. I’ve highlighted three areas where many investors might benefit with some additional tax planning. First, look at the SALT Cap and determine if you can take any steps to maximize your itemized deductions, or alternate years of standard versus itemized deductions. Second, understand the new charitable donation rules. I have many clients who are generous with their resources and we want to see them take any tax benefits which they can. Third, if you are planning on any clean energy upgrades to your home or vehicles, those tax credits are going away soon. Better act right away!

Taxes can take a big bite out of our income and ability to save. Taxes can be a significant drag on investment returns and accumulating assets. That’s why tax planning has been a central part of our wealth management process from the very beginning. Tax rules change all the time, and we are not surprised to see some pretty big changes for 2025. We will continue to look for ways to use the tax code to help clients reach their goals.

Read More
New Tax Break for Boomers

New Tax Break for Boomers

Posted On August 11, 2025 By Admin In Tax Strategies /  

As part of the “One Big Beautiful Bill”, there is a new tax deduction for Americans over age 65. There will be a new $6,000 “Bonus” tax deduction which will be on top of your standard deduction or itemized deductions on your tax return. This will be per person, so a married couple who are both at least 65, will receive $12,000 in additional tax deductions.

Here are the new tax deduction amounts for 2025:

TAX YEAR 2025Single Married Filing Jointly
Standard Deduction$15,750$31,500
Over 65 Deduction$2,000$3,200
New “Bonus Deduction”$6,000$12,000
TOTAL$23,750$46,700

While the White House posted that “No Tax on Social Security is a Reality” under the OBBB, that is an exaggeration. Social Security will still be taxable, although more seniors will end up owing less taxes under the expanded tax deduction. Many retirees will owe no federal income taxes. The Bonus Deduction is not linked to Social Security and you do not have to claim SS to receive the deduction.

The Fine Print

If you itemize deductions, rather than taking the standard deduction, you are still eligible for the Bonus Deduction of $6,000 per person. So your deduction could be even higher than the deductions listed above. There are two other tax savings in the One Big Beautiful Bill:

  • A new deduction for interest on car loans, up to $10,000, for new vehicles made in the USA and purchased in 2025-2028. (I still hate the idea of borrowing money for a depreciating asset.)
  • The cap on deducting state and local taxes (SALT) has been increased from $10,000 to $40,000. This is great news for people in high tax states who itemize.

There is, however, a catch: there will be income restrictions on the $6,000 Bonus Deduction. The Deduction will be phased out if your MAGI (Modified Adjusted Gross Income) is above $75,000 single or $150,000 married. This will create planning opportunities for those over 65 to keep their taxable income under these income thresholds. Some ways we might do this include:

  • Avoid, reduce, or smooth IRA/401(k) distributions if you are under age 73. That’s the age RMDs start.
  • Withdraw from your Roth IRA if necessary, instead of your Traditional IRA.
  • If you are over age 73, Qualified Charitable Distributions (QCDs) from your IRA will reduce your MAGI while fulfilling your RMDs.
  • Avoid selling taxable stocks or funds which create capital gains. Capital Gains are included in MAGI.
  • Defer interest income with a fixed annuity (MYGA).
  • Defer your Social Security benefits until age 70.

Tax efficiency remains a core focus of our financial planning work for clients. As tax regulations change, we will find new ways to help manage your tax liabilities.

The Bad News

The new Bonus Deduction of $6,000 is not permanent – it will expire after 2028. It is not an accident that the expiration will be in the election year. The Republicans will take credit for the tax savings and promise to extend the deduction if they stay in control. And if they lose and the deduction goes away, they can claim Democrats took away your tax deductions. It is a brilliant move politically, although also manipulative and a way to bribe voters. Both sides do this, but this feels quite slimy to me.

The tax cuts in this tax bill will increase the deficit by an estimated $3 trillion over the next decade. We are giving a tax cut to grandparents which will have to be paid for by their grandchildren. Just because this is popular doesn’t mean it is a smart policy for the country, long-term. Our growing debt will have many side effects:

  • Interest on the debt is now the largest item in the US budget, surpassing defense spending in 2024.
  • Debt will crowd out investment in growth, leading to higher inflation, a weaker economy, and eventually undermining market confidence.
  • We will be worse prepared to address the failure of Social Security payments in 2033.
  • Deficit spending will rise to 7% of GDP by 2026. If we have to borrow 7% to achieve a GDP growth rate of 3%, we do not have a healthy economy.

Final Thoughts

I am in favor of lower taxes and anything which helps my clients keep more of their money. My job is to help investors grow and preserve their wealth which includes using every possible tax advantage we can find. I am passionate about this work and it makes a direct impact on people’s lives.

I am pleased to see the Child Tax Credit continued under the bill and increased from $2,000 to $2,200. Other than that, however, the Bill serves to transfer wealth from the young to the old, which will further widen the income and wealth disparities in our country.

It is disappointing that neither party wants to address the long-term issues of our debt and underfunded entitlement programs. I’d like to see tax cuts linked to corresponding savings in government spending. At some point, we have to figure out how to reduce deficits, manage the debt, and fix our broken Social Security and Medicare systems. Unfortunately, the Big Bill doesn’t look very beautiful for tackling any of those problems. Washington today cannot look any further out than the next election and that’s why we keep making short-sighted choices.

In 1957, John F Kennedy won the Pulitzer Prize for his book, Profiles in Courage. He wrote about eight Senators who had the political courage to make unpopular choices in the long-term interests of the country. Kennedy noted that politicians face the challenge of three pressures: to be liked (to do what is popular), to get re-elected, and the pressure of special interest groups. That remains true today. I wish more of our current politicians would give the American people the same credit as Kennedy did: “the people will not condemn those whose devotion to principle leads them to unpopular courses, but will reward courage, respect honor and ultimately recognize right.”

Read More
Taxes Living Abroad

Taxes Living Abroad

Posted On November 17, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /  

Since we moved to Paris in February, we’ve become much more familiar with taxes living abroad. This may be of interest to anyone who is thinking of living or retiring to another country. I will share the situation for me as a US citizen living in France, but the basics will apply to most countries.

If you thought US taxes were complex, things get really difficult when you add in a foreign tax system and then have to figure out how they will interact together. Given this complexity, this article should be considered just a primer on basic terms and not used as individual tax advice. You need a tax professional who has experience with US clients living abroad.

In general, US citizens have to pay US income taxes on their global income, regardless of where you live. You don’t get out of US taxes by going abroad. But you may be able to reduce your US taxes and that is what we will discuss. Also, there are many other tax considerations besides the annual income tax bill to understand.

Tax Residency

If you spend more than one-half of the year in France (183 days), they will likely consider you a Tax Resident of France. This makes you subject to full France income taxes, which is levied on your global income. If you live in France less than half the year and are not a tax resident, you would still be subject to France taxes on any French derived income.

If all your income sources are from the US, you could potentially live abroad for just under half of the year and not become a Tax Resident. And then you would only have to file US taxes. Currently, as a US tourist, you can stay in the European Union for up to 90 days out of the rolling previous 180 days. Make sure you fully understand the “rolling 180 days” part – it is not based on a calendar year. If you can stay a tourist and not become a tax resident, this will make your life much simpler!

Avoiding Double Taxation

For a US citizen living abroad, you have the problem of double taxation. Your income will be taxed by your resident country and then it will be taxed again by the US. Thankfully, there are tax treaties with 70 countries which provide some benefit and there are several ways to reduce or eliminate the double taxation. Still, you will need to file a US tax return even if you don’t end up owing any US taxes.

Foreign Earned Income Exclusion

The US tax code allows for a citizen to exclude up to $120,000 (2023) in Foreign Earned Income from being taxable on your US taxes. This is doubled to $240,000 for couples who are married filing jointly and who both have foreign wages. You must live abroad for 330 out of the past 365 days. For someone whose income is below the FEIE threshold, you could end up with zero taxable income for the US. You would calculate this exclusion on IRS form 2555 “Foreign Earned Income”.

The FEIE does not apply to any US wages or to any US capital gains, dividends, interest, rent, or other US sourced income. So if you have US wages or income, those earnings are still taxable outside of the FEIE amounts.

In addition to the FEIE, there is also a US tax exclusion for foreign housing expenses, which has a cap of 30% of the FEIE, or $36,000 for 2023. If you reduce your US taxable income to zero through the FEIE and/or housing exclusion, please note that you will be ineligible to make any IRA contributions. (Because your taxable income is zero.)

Foreign Tax Credit

Alternatively, you may be able to claim a credit on your US tax return for foreign taxes paid. The FEIE may take many people’s taxable income to zero and you can stop right there. However, US citizens who make more than the FEIE thresholds, or who have some US-sourced income, may still owe US taxes. And in those situations, applying the Foreign Tax Credit may be preferable. Please note that you have to choose either the FEIE or the Foreign Tax Credit, but cannot do both.

In my situation, we will probably end up using the Foreign Tax Credit. That’s because we have both US and France sources of income (US for me and France for my wife). And since the French taxes will likely be higher than the US taxes, it may take our US tax bill to zero.

Except for one thing: although France taxes us on global income, they exclude Real Estate income. They believe that all real estate income should be taxed locally. And indeed, if you buy a rental property in France, they will charge you income tax on that property even if you never set foot in the country or become a tax resident. As a result, our AirBnb Properties in Hot Springs will remain solely taxed in the US.

One challenge with using the Foreign Tax Credit is that it requires that you finish your foreign taxes before you complete your US tax return. For many, this will require filing a US tax extension past April 15th. And once you are beyond April 15th, you have passed the window to make Traditional or Roth IRA contributions or to calculate 401(k) profit sharing amounts. You may not be able to determine your eligibility until you complete your tax return, so you might miss out on some opportunities.

Social Security

In France, the payroll tax for Social Security is 20%. That is much higher than the US contribution of 7.65% for Social Security and Medicare. However, the French contribution includes all social programs, including Health Insurance, unemployment, maternity leave, as well as “retirement” Social Security.

Although 20% is 12% more than what we would pay in the US, we don’t have any health insurance expenses in France. And so it may be fairly comparable to what we would pay in the US for total costs. As a self-employed person in the US, we might pay $1,200 a month for a family plan with a $5,000 deductible. That’s a $19,400 annual expense we don’t have in France. And the medical system here is excellent.

We just had a baby girl a month ago, and I have no complaints about the value we have received. I will say that the social charges here are a great deal if you have a modest income, but if you have a very high income, you may feel that you are paying in more than you are getting back.

Social Security Vesting

There is one problem for us, however, with social security taxes abroad. Just like the US Social Security, the French retirement system has a 10-year vesting period. Only after you have contributed for 10 years do you become eligible to receive a retirement pension. We do not plan to stay in France for 10 years, so all the money we will pay into their Social Security will not come back to us later in retirement.

Our French earnings are not credited toward the US Social Security system either. US Social Security benefits are calculated based on your highest 35 years of inflation adjusted earnings. We are effectively losing these years of contributions. We are paying in France for no future benefit, while losing the years that could have been added to the US benefits. There’s no 401(k) in France, so no other employer retirement contributions, either.

If you are considering working abroad, make sure you understand its impact on your future benefits! We have enough in ongoing savings and investments for this not to be a major problem, but it is an opportunity cost that we are missing by working outside the US.

Pitfalls Abroad

Besides wages, there are other tax events which could become major pitfalls when living abroad. Here are a few things which could become huge tax bills for US citizens in other countries.

  1. Home capital gains. In the US, we have a $250,000 capital gains exclusion on the sale of your primary residency. France does not. If your US house sale closes a week after moving to France, it occurred while you are a tax resident of France! Maybe you have a $100,000 capital gain which is ignored in the US but now taxable in France. Sell your house before you move! Or keep it.
  2. Gift Taxes. Large gifts to children or others are fine in the US with a lifetime Gift/Estate tax exemption of $12.92 million. Not so in France. Gift taxes could be 20% and apply with thresholds dependent on the relationship. There are even gift taxes between spouses! The French gift tax exemption is only 31,865 Euros per 15 years.
  3. Trusts not recognized. Based on Civil, not Common Law, France does not recognize trusts for tax purposes. Don’t set up US Trusts before becoming a tax resident abroad.
  4. Inheritance Taxes. If you are in France for more than six years, you are subject to inheritance taxes. These are paid by the recipient, unlike US Estate Taxes, which is paid by the Estate. The US threshold is $12,920,000 before any Estate taxes are due. In France, inheritance taxes start at 5% at 8072 euros, but steps up to 45% tax on amounts above 1,805,677 euros (2023).

Get Help

If you are contemplating working or retiring outside the US, taxes living abroad can be complex. Luckily, you’re not the first one to do this. You will want to have tax advisors in the US and in your new country who have experience navigating these complex rules. And having a Wealth Manager who understands the tax implications of your portfolio construction is very important, too.

When my wife’s employer offered her a position in their Paris office, it was an offer we could not refuse! It has been a remarkable opportunity. If you could have the chance to live or work overseas, I would encourage you to see if it is possible. The taxes are a headache and will take a bit more time, but I do think it will be worth it for the experience. Certainly part of achieving the Good Life is being able to fearlessly make the choices to live your life as you dream it could be!

Read More
Backdoor Roth Going Away

Backdoor Roth Going Away?

Posted On October 15, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Under the current proposals in Washington, the Backdoor Roth is going away. If approved, investors would not be allowed to convert any after-tax money in IRAs to a Roth IRA as of January 1, 2022. This would eliminate the Backdoor Roth strategy and also kill the “Mega-Backdoor Roth” used by funding after-tax contributions to a 401(k) plan.

We have been big fans of the Backdoor Roth IRA and have used the strategy for a number of clients. We will discuss what to do if the Backdoor Roth does indeed go away. But first, here’s some background on Roth IRAs.

The Backdoor Roth Strategy

There are two ways to get money into a Roth: through making a contribution or by doing a conversion. Contributions are limited to $6,000 a year, or $7,000 if you are 50 or older. For Roth IRAs, there are also income limits on who can contribute. For 2021, you can make a full Roth contribution if your Modified Adjusted Gross Income is below $125,000 (single) or $198,000 (married).

If your income is above these levels, the Backdoor Roth may be an option. Let’s say you made too much to contribute to a Roth. You could still make an after-tax contribution to a Traditional IRA and then convert it to your Roth. You would owe taxes on any gains. But, if you put in $6,000, after-tax, and immediately converted it, there would be zero gains. And zero taxes. Yeah, it’s a loophole to get around the income restrictions. But the IRS determined that it was legal and people have been doing it for years.

This change won’t happen until January 1. So, you can still complete a Backdoor Roth now through the end of the year. I have some clients who wait until April to do their IRAs, but this year, you had better do the Backdoor by December 31. If you are eligible for the Backdoor, you should do it. Why would you not put $6,000 into an account that will grow Tax-Free for the rest of your life? Couples could do $12,000 or up to $14,000 if they’re over 50.

Instead of the Backdoor Roth…

Your 401(k) Plan may offer a Roth option. Many people are not maximizing their 401(k) contributions. You can contribute $19,500 to your 401(k), or $26,000 if over 50. Let’s say you are currently contributing $12,000 to your 401(k) and $6,000 to a Backdoor Roth. Change that to $12,000 to your Traditional 401(k) and $6,000 to your Roth 401(k). You can split up your $19,500 in contributions however you want between the Traditional and Roth buckets. I often find that with couples that there is room to increase contributions for one or both spouses.

Self-employed? Me, too. I do a Self-Employed 401(k) through TD Ameritrade. Through my plan, I can also make Traditional and Roth Contributions. And I can do Profit-Sharing contributions on top of the $19,500. It’s better than a SEP-IRA, and there is no annual fee. I can set up a Self-Employed 401(k) for you, too.

What if you have both W-2 and Self-Employment Income? In this case, you can maximize your 401(k) at your W-2 job and then contribute to a SEP for your self-employment. Contact me for details.

Health Savings Accounts. HSAs are the only account where you get both an upfront tax-deduction and the money grows tax-free for qualified expenses. And there’s no income limit on an HSA. As long as you are participating in an HSA-compatible high deductible plan, you are eligible. If you are in the plan for all 12 months, you can contribute $3,600 (individual) or $7,200 (family) to an HSA this year.

529 Plans. You want to grow investments tax-free with no income limits and very high contribution limits? Well, that sounds like a 529 College Savings Plan. If your kids, grand-kids, or even great-grand-kids will go to college, you could be growing that money tax-free. They don’t even have to be born yet, you can change the beneficiary later. We can use 529 plans like an inter-generational educational trust that also grows tax-free. And 529s will pass outside of your Estate, if you are also following the current proposals to cut the Estate Tax Exemption from $11.7 million to $5 million.

ETFs in a Taxable Account. Exchange Traded Funds (ETFs) are very tax-efficient. Hold for over a year and you could qualify for long-term capital gains treatment. Today, long-term capital gains taxes are 15%, whereas your traditional IRA or 401(k) money will be taxed as ordinary income when withdrawn, which is 22% to 37% for most of my clients. Some clients will drop to the 12% tax bracket in retirement, which means their long-term capital gains rate will be 0%. A married couple can have taxable income of up to $81,050 and pay zero long-term capital gains! (Taxable income is after deductions. If a couple is taking the standard deduction of $25,100, that means they could have gross income of up to $106,150 and be paying zero capital gains.)

Tax-Deferred Annuity. Instead of holding bonds in a taxable account and paying taxes annually, consider a Fixed Annuity. Today, I saw the rates on 5-year annuities are back to 3%. An annuity will defer the payment of interest until withdrawn. There are no RMDs on Annuities, so you could defer these gains for a long-time, potentially. And if you are in a high tax bracket now, you could hold off on taking your interest until you are in a lower bracket in retirement.

Save on Taxes

If Congress does away with the Backdoor Roth, we will let you know. There are a lot of moving parts in this 2,400 page bill and some will change. Whatever happens, my job will remain to help investors achieve their goals. We invest for growth, but we know that it is the after-tax returns that matter most. So, my job remains to help you find the most efficient and effective methods to keep more of your investment return.

Read More
COVID Relief Bill

COVID Relief Bill Passes

Posted On December 23, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /  

A new bi-partisan COVID Relief bill passed Congress this week and will impact almost every American in a positive way. This stimulus legislation creates additional income and tax benefits to offset the economic damage of Coronavirus. The $900 Billion bill includes another stimulus payment to most Americans, an extension of unemployment benefits, and seven tax breaks. As of this morning, President Trump has not yet signed the bill.

$600 Stimulus Payment

The CARES Act provided many families with stimulus checks this summer. Those checks were for up to $1,200 per person and $500 per child. There will be a second stimulus check now, for $600 per person. Parents will receive an additional $600 for each dependent child they have under 17. Adult dependents are not eligible for a check.

Like the first round of checks, eligibility is based on your income. Single tax payers making under $75,000 are eligible for the full amount. Married tax payers need to make under $150,000. There is a phaseout for income above these thresholds.

Payments will be distributed via direct deposit, if your bank information is on file with the IRS. If not, like before, you will be mailed a pre-paid debit card. This payment will not be counted as taxable income. Payments should start in a week and are expected to be delivered much faster than the two months it took this summer.

These $600 payments are again based on your 2019 income, but will be considered an advanced tax credit on your 2020 income. What if your 2019 income was above $75,000, but your 2020 income was below? If you qualify on your 2020 income, the IRS will provide the $600 credit on your tax return in April. If they send you the $600 based on your 2019 income and your 2020 income is higher, you do not have to repay the tax credit. This is a slightly different process than the first round of checks, and will benefit people whose income fell in 2020.

Unemployment Benefits

The CARES Act provided $600 a week in Federal Unemployment Benefits, on top of State Unemployment Benefits. This amount was set to run out on December 26. The new COVID Relief Bill provides an 11-week extension with a $300/week Federal payment. Now, unemployed workers will have access to up to 50 weeks of benefits, through March 14. Unfortunately, because of how late the legislation was passed, states may be unable to process the new money in time. So, there may be a gap of a few weeks before benefits resume.

Seven Other Tax Benefits

  1. Child Tax Credit and Earned Income Tax Credit. Under the new legislation, tax payers can choose between using their 2019 or 2020 income to select whichever provides the larger tax credit.
  2. Payroll Tax Deferral. For companies who offered a deferral in payroll taxes in Q4, the repayment of those amounts was extended from April to December 31, 2021.
  3. Charitable Donations. The CARES Act allows for a $300 above-the-line deduction for a 2020 cash charitable contribution. (Typically, you have to itemize to claim charitable deductions.) The new act extends this to 2021 and doubles the amount to $600 for married couples.
  4. Flexible Spending Accounts (FSAs). Usually, any unused amount in an FSA would expire at the end of the year. The stimulus package will allow you to rollover your unused 2020 FSA into 2021 and your 2021 FSA into 2022.
  5. Medical Expense Deduction. In the past, medical expenses had to exceed 10% of adjusted gross income to be deductible. Going forward, the threshold will be 7.5% of AGI. This will help people with very large medical bills.
  6. Student Loans. Under the CARES Act, an employer could repay up to $5,250 of your student loans and this would not be counted as taxable income for 2020. This benefit will be extended through 2025.
  7. Lifetime Learning Credit (LLC). The LLC was increased and the deduction for qualified tuition and related expenses was cancelled. This will simplify taxes for most people, rather than having to choose one.

Read more: Tax Strategies Under Biden

Summary

The new COVID Relief Bill will benefit almost everyone and will certainly help the economy continue its recovery. For many Americans, the stimulus payments and continued unemployment benefits will be a vital lifeline. Certainly 2020 has taught all of us the importance of the financial planning. Having an emergency fund, living below your means, and sticking with your investment strategy have all been incredibly helpful in 2020.

Read more: 10 Questions to Ask a Financial Advisor

If you are thinking there’s room for improvement in your finances for 2021, it might be time for us to meet. Regardless of what the government or the economy does in 2021, your choices will be the most important factor in determining your long-term success. We will inevitably have ups and downs. The question is: When we fall, are we an egg, an apple, or a rubber ball? Do we break, bruise, or bounce back? Planning creates resilience.

Read More
Tax Strategies Under Biden

Tax Strategies Under Biden

Posted On October 2, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

With the Presidential election next month, investors may be wondering about what might happen to their taxes if Joe Biden were to win. Let’s take a look at his tax plan and discuss strategies which may make sense for high income investors to consider. I am sharing this now because we might consider steps to take before year end, which is a short window of time.

Let’s start with a few caveats. I am not endorsing one candidate or the other. I am not predicting Biden will win, nor am I bashing his proposals. This is not a political newsletter. Even if he is elected, it is uncertain that he will be able to enact any of these proposals and get them passed through the Senate. The discussion below is purely hypothetical at this point.

My job as a financial planner is to educate and advise my clients to navigate tax laws for their maximum legal benefit. I create value which can can save many thousands of dollars. Some of Biden’s proposals have the potential to raise taxes significantly on certain investors. If he does win, we may want to take steps before December 31, if we think his proposals could be enacted in 2021. I would do nothing now. I expect no significant changes under a continued Trump administration, but I will also be looking for tax strategies for that scenario.

Other Biden proposals will lower taxes for many people. For example, he proposes a $15,000 tax credit for first-time home buyers. I am largely ignoring the beneficial parts of his tax plan in this article, because those likely will not require advance planning.

Tax Changes Proposed by Biden

1. Tax increases on high earners. Biden proposes to increase the top tax rate from 37% back to 39.6%. He would eliminate the Qualified Business Income (QBI) Deduction, which would penalize most self-employed business owners. He would limit the value of itemized deductions to a 28% benefit. For those with incomes over $1 million, he proposes to increase the long-term capital gains and qualified dividend rate to the ordinary income rate, an increase from 20% to 39.6%, plus the 3.8% Medicare surtax. He proposes to add 12.4% in Social Security payroll taxes on income over $400,000.

Strategies:

  • Accelerate earnings, capital gains, and Roth Conversions into 2020 to take advantage of current rates.
  • Accelerate tax deductions into 2020, such as charitable donations or property taxes. Establish a Donor Advised Fund in 2020.
  • Increase use of tax-free municipal bonds, and use ETFs for lower taxable distributions. Shift dividend strategies into retirement accounts.
  • Use Annuities for tax deferral if you anticipate being in a lower bracket in retirement.

2. 26% retirement contribution benefit. Presently, your 401(k) contribution is pre-tax, so the tax benefit of a $10,000 contribution depends on your tax bracket. If you are in the 12% bracket, you would save $1,200 on your federal income taxes. If you’re in the 37% bracket, you’d save $3,700. Biden wants to replace tax deductibility with a flat 26% tax credit for everyone. On a $10,000 contribution to a 401(k), everyone would get the same $2,600 tax credit (reduction). This should incentivize lower income folks to put more into their retirement accounts, because their tax savings would go up, if they are in the 24% or lower bracket. For higher earners, however, this proposal is problematic. What if you only get a 26% benefit today, but will be in the 35% bracket in retirement? That would make a 401(k) contribution a guaranteed loss.

Strategies:

3. End the step-up in cost basis on inherited assets. Currently, when you inherit a house or a stock, the cost basis is reset to its value as of the date of death. Under Biden’s plan, the original cost basis will carry over upon inheritance.

Strategies:

  • If parents are in a lower tax bracket than their heirs, they may want to harvest long-term capital gains to prepay those taxes.
  • Life Insurance would become more valuable as death benefits are tax-free. Or Life Insurance proceeds could be used to pay the taxes that would eventually be due on an inherited business or asset. Read more: The Rate of Return of Life Insurance.

4. Cut the Estate Tax Exemption in half. Presently, the Estate/Gift Tax only applies on Estates over $11.58 million (2020). Biden wants to cut this in half to $5.79 million (per spouse).

Strategies:

  • If your Estate will be over $5.79 million, you may want to gift the maximum amount possible in 2020. Alternatively, strategies such as a Trust could be used to reduce estate taxes. (For example, the Intentionally Defective Grantor Trust (IDGT) or Grantor Retained Annuity Trust (GRAT).)
  • Be sure to use all of your annual gift tax exclusion, presently $15,000 per person.
  • Establish 529 Plans, which will be excluded from your estate.
  • Shift Life Insurance out of your Estate, using an Irrevocable Life Insurance Trust (ILIT).

While we don’t know the outcome of the election, there could be valuable tax strategies under Biden. We will continue to analyze economic proposals from both candidates to develop planning strategies for our clients. When there are significant changes in tax laws, we want to be ahead of the curve to take advantage wherever possible.

Read More
12% Roth Conversion

The 12% Roth Conversion

Posted On February 23, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

If you make less than $117,150, you’ve got to look into the 12% Roth Conversion. For a married couple, the 12% Federal Income tax rate goes all the way up to $89,450 for 2023. That’s taxable income. With a standard deduction of $27,700, a couple could make up to $117,150 and remain in the 12% bracket. Above those amounts, the tax rate jumps to 22%.

For those who are in the 12% bracket, consider converting part of your Traditional IRA to a Roth IRA each year. Convert only the amount which will keep you under the 12% limits. For example, if you have joint income of $70,000, you could convert up to $47,150 this year.

This will require paying some taxes today. But paying 12% now is a great deal. Once in the Roth, your money will be growing tax-free. There will be no Required Minimum Distributions on a Roth and your heirs can even inherit the Roth tax-free. Don’t forget that today’s tax rates are going to sunset after 2025 and the old rates will return. At 12%, a $47,150 Roth conversion would cost only $5,658 in additional taxes this year. And then you will have that $47,150 growing with no future tax liabilities.

Take Advantage of the 12% Rate

If you have a large IRA or 401(k), the 12% rate is highly valuable. The key to the 12% Roth Conversion is doing it repeatedly over a period of years. If you have eight years where you can convert $40,000 a year, that’s going to move $320,000 into a tax-free account. Once you start Required Minimum Distributions, you really won’t have a choice about taking those taxable distributions. I have so many clients who don’t need their RMDs, but are forced to take out their money.

Here are some scenarios to consider where you might be in the 12% bracket:

  1. One spouse is laid off temporarily, on sabbatical, or taking care of young children. Use those lower income years to make a Roth Conversion. This could be at any age.
  2. One spouse has retired, the other is still working. If that gets you into the 12% bracket, make a conversion.
  3. Retiring in your 60’s? Hold off on Social Security so you can make Roth Conversions. Once you are 73, you will have both RMDs and Social Security. It is amazing how many people in their seventies are getting taxed on over $117,150 a year once they have SS and RMDs! These folks wish they had done Conversions earlier, because after 73 they are now in the 22% or 24% bracket.

Retiring Soon?

Considering retirement? Let’s say you will receive a $50,000 pension at age 65. (You are lucky to have such a pension – most workers do not!) For a married couple, that’s only $22,300 in taxable income after the standard deduction. Hold off on your Social Security and access your cash and bond holdings in a taxable account. Your Social Security benefit will grow by 8% each year. Spend the cash or bonds and defer the Social Security.

Now you can convert $67,000 a year into your Roth from age 65 to 70. That will move $335,000 from your Traditional IRA to a Roth. Yes, that will be taxable at 12%. But at age 73, you will have a lower RMD – $12,641 less in just the first year.

When you do need the money after 73, you will be able to access your Roth tax-free. And at that age, with Social Security and RMDs, it’s possible you will now be in the 22% tax bracket. I have some clients in their seventies who are “making” over $250,000 a year and are now subject to the Medicare Surtax. Don’t think taxes go away when you stop working!

Read more: Can You Reduce Required Minimum Distributions?

How to Convert

The key is to know when you are in the 12% bracket and calculate how much to convert to a Roth each year. The 12% bracket is a gift. Your taxes will never be lower than that, in my opinion. If you agree with that statement, you should be doing partial conversions each year. Whether that is $5,000 or $50,000, convert as much as you can in the 12% zone. You will need to be able to pay the taxes each year. You may want to increase your withholding at work or make quarterly estimated payments to avoid an underpayment penalty.

What if you accidentally convert too much and exceed the 12% limit? Don’t worry. It will have no impact on the taxes you pay up to the limit. If you exceed the bracket by $1,000, only that last $1,000 will be taxed at the higher 22% rate. Conversions are permanent. It used to be you could undo a conversion with a “recharacterization”, but that has been eliminated by the IRS.

While I’ve focused on folks in the 12% bracket, a Conversion can also be beneficial for those in the 22% bracket. The 22% bracket for a married couple is from $89,451 to $190,750 taxable income (2023). If you are going to be in the same bracket (or higher) in your seventies, then pre-paying the taxes today may still be a good idea. This will allow additional flexibility later by having lower RMDs. Plus, a 22% tax rate today might become 25% or higher after 2025! Better to pay 22% now on a lower amount than 25% later on an account which has grown.

A Roth Conversion is taxable in the year it occurs. In other words, you have to do it before December 31. A lot of tax professionals are not discussing Roth Conversions if they focus solely on minimizing your taxes paid in the previous year. But what if you want to minimize your taxes over the rest of your life? Consider each year you are eligible for a 12% Roth Conversion. Also, if you are working and in the 12% bracket, maybe you should be looking at the Roth 401(k) rather than the Traditional option.

Where to start? Contact me and we will go over your tax return, wage stubs, and your investment statements. From there, we can help you with your personalized Roth Conversion strategy.

Read More
Tax Planning

Tax Planning – What are the Benefits?

Posted On February 3, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Taxes are your biggest expense. Tax Planning can help. A typical middle class tax payer may be in the 22% or 24% tax bracket, but Federal Income Taxes are only one piece of their total tax burden. They also pay 7.65% in Social Security and Medicare Taxes. If they’re self-employed, double that to 15.3%. Most of my clients here in Dallas pay $6,000 to $20,000 a year in property taxes, more if they also have a vacation home. After getting to pay taxes on their earnings, they are taxed another 8.25% when they spend money, through sales tax. 

High earners may pay a Federal rate of 35% or 37%, plus a Medicare surtax of 0.9% on earned income and 3.8% on investment income. There’s also capital gains tax of 15% or 20%. Business owners get to pay Franchise Tax and Unemployment Insurance to the state. Add it all up and your total tax bill is probably a third or more of your gross income.

I’m happy to pay my fair share. But I’m not looking to leave Uncle Sam a tip on top of what I owe, so I want make sure I don’t overpay. I help people with their investments, prepare to retire someday, and to make sure they don’t get killed on taxes. It’s vitally important.

The tax code is complex and changes frequently. We have talked about how the Tax Cuts and Jobs Act changes how you should approach tax deductions. This past month, I’ve been talking and writing about the new SECURE Act passed in December.

It’s February and people are receiving their W-2s and 1099s and starting to put together their 2019 tax returns. I like to look at my client tax returns. We can often find ways to help you reduce your tax burden and keep more of your hard-earned money, completely legally.

Two sets of eyes are better than one.

I’m not a tax preparer, and I don’t mean to suggest that your tax preparer is making mistakes. While I have, of course, seen a couple of errors over the years, they are rare. However, I think there is a benefit to having a second set of eyes on your tax return. I may look at things from a different perspective than your CPA or accountant. As a Certified Financial Planner professional and Chartered Financial Analyst, I have extensive training on Tax Planning and have been doing this for over 15 years.

Tax preparers are great at looking at the previous year and calculating what you owe. What I sometimes find is that they don’t always share proactive advice to help you reduce taxes going forward. 

For example, this month, I met with an individual and looked over his 2018 tax return. He would have qualified for the Savers Tax Credit but did not contribute to an IRA. I told him “your CPA probably mentioned this, but last year, if you had contributed $2,000 to a Roth IRA, you would have received a $1,000 Federal Tax Credit”. Nope, he had never heard about this from his long-time preparer, and let’s just say he was displeased. While his tax return was “correct”, it could have been better.

When you become a client of Good Life Wealth Management, I will review your tax return and look for strategies which could potentially save you a significant amount of money. Such as?

5 Areas of Tax Planning

1. Charitable Giving Strategies. It has become more difficult to itemize your deductions and get a tax savings for your charitable giving. We identify the most effective approach for your situation. For example, donating appreciated securities or bunching deductions into one year. If you’re 70 1/2, you could make QCDs from an IRA. Or we could front-load a Donor Advised Fund to take a deduction while you are in a higher tax bracket before retirement. If you are planning to make significant donations, I can help your money go father and have a bigger impact.

2. Tax-advantaged accounts: which accounts are you eligible for and will enable the greatest contribution? No one can tell without looking at your tax return. Let’s maximize your pre-tax contributions to company retirement plans, IRAs, Health Savings Accounts, and FSAs. Often someone thinks they are doing everything possible and we find an additional savings avenue for them or their spouse.

3. Investment Tax Optimization. Do you have a lot of interest income reported on Schedule B? Why are those bonds not in your IRA or retirement account?  Are your investments creating short-term gains in a taxable account? Do you have REITs which don’t qualify for the qualified dividend rate? You could benefit from Asset Location Optimization. 

Showing a lot of Capital Gains Distributions on Schedule D? Many Mutual Funds had huge distributions in 2019. Let’s look at Exchange Traded Funds which have little or no tax distributions until you sell. There may be more tax-efficient investments for your taxable accounts. Are you systematically harvesting losses annually?

4. If you make too much for a Roth IRA, are you a good candidate for a Backdoor Roth IRA?

5. Tax-Efficient Retirement Income. What is the most effective way to structure your withdrawals from retirement accounts and taxable accounts? When should you start pensions or Social Security? How can you minimize taxes in retirement?

I could go on about tax-exempt municipal bonds, tax-free 529 college savings plans, the Medicare surtax, or reducing taxes to your heirs. It’s a long list because almost every aspect of financial planning has a tax component to it. 

Most Advisors Aren’t Doing Tax Planning

Even though taxes are your biggest expense, a lot of financial advisors aren’t offering genuine tax planning. For some, it’s just not in their skill set, they only do investments. For a lot of national firms, management prohibits their advisors from offering tax advice for compliance reasons. Other “advisors” specialize in tax schemes which are designed primarily to sell you an insurance product for a commission. I’m in favor of the right tool for the job, but if you only sell hammers, every problem looks like a nail. 

Tax Planning is making sure that all the parts of your financial life are as tax-efficient as possible. If you’d like a review of your 2018 return before you complete your 2019 taxes, give me a call. I get a better understanding of a client’s situation by reviewing their taxes and I really enjoy digging into a tax return. 

While I can’t guarantee that we can save you a bunch of money on your taxes, we do often have ideas or suggestions to discuss with your tax preparer. That way you can participate more than just dropping off a pile of receipts. If you do your taxes yourself, as many do today, you can ask me “Are there any additional ways to reduce my taxes?” Let’s find out.

Read More

2019 Year-End Tax Planning

Posted On November 17, 2019 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

As 2019 draws to a close, we review our client files to consider if there are any steps we should take before December 31. Here are some important year end strategies we consider.

1. Tax Loss Harvesting

If an ETF, mutual fund, or stock is down, we can harvest that loss to offset any other gains we have realized during the year. Some mutual funds will distribute year end capital gains, so it is often helpful to have losses to offset those gains. If your losses exceed gains for the year, you can use $3,000 in losses to offset ordinary income. This is a great benefit because your ordinary income tax rate is often much higher than the typical (long-term) capital gains rate of 15%. Any additional losses are carried forward into future tax years.

We can immediately replace a sold position with another investment to maintain our target allocation. For example, if we sell a Vanguard Emerging Markets ETF, we could replace it with an iShares Emerging Markets ETF. This way we can realize a tax benefit while staying invested.

2019 has been a terrific year in the market, so there will be very few tax loss trades this year. That’s a good thing. Tax loss harvesting applies only to taxable accounts, and not to IRAs or retirement accounts. Conversely, when we rebalance portfolios and trim positions which have had the largest gains, we aim to realize those gains in IRAs, whenever possible.   

2. Income Tax withholding under the Tax Cuts and Jobs Act (TCJA)

For 2018, the TCJA lowered the withholding schedules for your federal income tax. Although many people paid lower total taxes for 2018, some were surprised to owe quite a bit in April 2019 when they completed their tax returns. Since your employer doesn’t estimate how much your spouse makes, or what deductions you may have, it is very easy to under-withhold for income taxes.

If you did end up owing taxes for 2018, the situation will likely be the same for 2019 if you have a similar amount of income. For W-2 employees, contact your payroll department to reduce your dependents. If you are already are at zero dependents, and are married, ask them to withhold at the single rate, or to add a set dollar amount to your payroll withholding.
If you are self-employed, you should do quarterly estimated payments. For more information on how to do this, as well as how to avoid underpayment penalties, see my article: What Are Quarterly Tax Payments? 

3. Bunch Itemized Deductions

After the TCJA, the number of tax payers who itemized their deductions fell from around 35% to 10%. If you anticipate having itemized deductions for 2019 (over $12,200 single, $24,400 married), you might want to accelerate any state/local taxes (subject to the $10,000 limit) or charitable contributions to be paid before December 31. Bunch your deductions into one year when possible to make that number as high as possible, and then take the standard deduction in alternate years.
Read more: 9 Ways to Reduce Taxes Without Itemizing

4. IRAs and the Required Minimum Distribution

If you are over age 70 1/2, you have to take a Required Minimum Distribution from your IRAs by December 31. Additionally, if you have an inherited IRA (also called Beneficiary IRA or Stretch IRA), you may also be required to take an RMD before the end of the year. When you have multiple retirement accounts, each RMD will be calculated separately, but it doesn’t matter which account you use for the distribution. Investing in a home security system can improve home safety and protect your home from break-ins and theft. As long as the total distribution for the year meets the total RMD amount, you can use any account for the withdrawal.

If you have not met your RMD and are planning charitable contributions before the end of the year, look into making a Qualified Charitable Distribution from your IRA. This offers a tax benefit without having to itemize your return, and the QCD can count towards your RMD.Read more: Qualified Charitable Distributions from Your IRA

Read More

How to Pay Zero Taxes on Interest, Dividends, and Capital Gains

Posted On February 2, 2019 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /  

How would you like to pay zero taxes on your investment income, including interest, dividends, and capital gains? The only downside is that you have to live in a beautiful warm beach town, where the high is usually 82 degrees and the low in the winter is around 65.

If this sounds appealing to you, you should learn more about the unique tax laws of Puerto Rico. As a US territory, any US citizen can relocate to Puerto Rico, and if you make that your home, you will be subject to Puerto Rico taxes and may no longer have to pay US Federal Income Taxes. You can still collect your Social Security, use Medicare, and retain your US citizenship. (But not vote for President or be represented in Congress!) 

Citizens of Puerto Rico generally do not have to pay US Federal Income Taxes, unless they are a Federal Employee, or have earned income from the mainland US. This means that if you move to PR, your PR-sourced income would be subject to PR tax laws. In 2012, PR passed Act 22, to encourage Individual Investors to relocate to PR. Here are a few highlights:

  • Once you establish as a “bona fide resident”, you will pay zero percent tax on interest and dividends going forward.
  • You will pay zero percent on capital gains that accrue after you establish residency.
  • For capital gains that occurred before you move to PR, that portion of the gain would be taxed at 10%, (reduced to 5% after you have been in PR for 10 years). So if you had enormous long-term capital gains and were facing US taxes of 20% plus the 3.8% medicare surtax, you could move to PR and sell those items later this year and pay only 10% rather than 23.8%.
  • The application for Act 22 benefits costs $750 and if approved, the certificate has a filing fee of $5,000. The program sunsets after 2036. This program is to attract high net worth individuals to Puerto Rico, those who have hundreds of thousands or millions in investment income and gains. If your goal is to retire on $1,500 a month from Social Security, you aren’t going to need these tax breaks.

To establish yourself as a “bona fide resident”, you would need to spend a majority of each calendar year in Puerto Rico, meaning at least 183 days. The IRS is cracking down on fraudulent PR residency, so be prepared to document this and retain proof of travel. Additionally, PR now also requires you to purchase a home in PR and to open a local bank account to prove residency. (Don’t worry, PR banks are covered by FDIC insurance just like mainland banks). Details here on the Act 22 Requirements.

Note that Social Security and distributions from a Traditional IRA or Pension are considered ordinary income and subject to Puerto Rico personal income taxes, which reach a 33% maximum at an even lower level than US Federal Income tax rates. So, Act 22 is a huge incentive if you have a lot of investment income or unrealized capital gains, but otherwise, PR is not offering much tax incentives if your retirement income is ordinary income. 

If you are a business owner, however, and want to relocate your eligible business to Puerto Rico, there are also great tax breaks under Act 20. These include: a 4% corporate tax rate, 100% exemption for five years on property taxes, and then a 90% exemption after 5 years. If your business is a pass-through entity, like an LLC, you may be eligible to pay only 4% taxes on your earnings. If you are in the US, you could be paying as much as 37% income tax on your LLC earnings. Some requirements for Act 20 include being based in PR, opening a local bank account, and hiring local employees.

For self-employed people in a service industry, PR is creating (new for 2019) very low tax rates based on your gross income, of just 6% on the first $100,000, and a maximum of 20% on the income over $500,000. Click here for a chart of the PR personal tax rates and the new Service Tax.
A comparison of Act 20 and Act 22 Benefits are available at  Puerto Rico Business Link. 

When most people talk about tax havens, they would have to renounce their US citizenship (and pay 23.8% in capital gains to leave), or they’re thinking of an illegal scheme of trying hide assets offshore. If you have really large investment tax liabilities or have a business that you could locate anywhere, take a look at Puerto Rico. Besides the tax benefits, you’ve got great weather, year round golfing, US stores like Home Depot, Starbucks, and Walgreens, and direct daily flights to most US hubs, including DFW, Houston, Miami, Atlanta, New York, and other cities. 

Puerto Rico is still looking to rebuild after the hurricane and it’s probably not the best place to be a middle class worker, but for a wealthy retiree, it might be worth a look. Christopher Columbus arrived in Puerto Rico in 1493 and the cities have Spanish architecture from the seventeenth century. I’ve never been to Puerto Rico, but would love to visit sometime in 2019 or 2020. If you’d care to join me for a research trip, let me know!

(Please consult your tax expert for details and to discuss your eligibility. This article should not be construed as individual tax advice.)

Read More