On episode 121 of Plan For Life Now, Steve and Dave break down the recently passed “Big, Beautiful Bill”. How does this bill affect you? If you’re very rich, you’ll be very happy. If you’re retired and a typical client of ours, we think you’ll like some of the things you hear. If you’re on Medicaid…there are so many other podcasts out there for your listening pleasure.
Steve:
All right. Welcome to Plan for Life now, episode number 1 21. Here we are. We’re recording this on July the 15th. I hope everyone has been having a great summer. It’s certainly been a hot summer here with lots of rain here in the DC area.
Dave:
It’s definitely a wet, it’s a wetter than normal summer, even July, which is usually dry, has been, yeah, I know we have occasional showers and thunderstorms, but it seems like daily showers and thunderstorms versus occasional.
Steve:
Yeah, I mean, it seems like the number of flash flood warnings are through the roof. Seems like it to me, but who knows? I just got back from a week vacation down at the outer banks week down at the beach there, so that was very nice. Dave, you’re kind of at the beach most of the summer, right?
Dave:
Most of the summer I come back for our meetings, occasionally with our clients who like to meet in person, but besides that, I’m at the beach for the summer and it’s a bit like you said, a little rainy, except when we get flash floods here, close to ocean view, close to Bethany Beach, we get real flash floods. My trash cans out. Were left out because they didn’t pick it up and the other day they floated away in the street.
Steve:
You find ’em a couple blocks over.
Dave:
Let’s face it, most of the time when you see flash floods in DC area, I’ve never had, I’ve seen some water, I haven’t seen my trash cans float away closer to the beach. Stuff floats away. It looks like you can kayak down our street occasionally.
Steve:
Alright, well, we are not here to talk about kayaking down Dave’s Street, however much fun that sounds like. We are here to talk about the big beautiful bill, the triple B, and in case you haven’t been paying attention after lots of back and forth wrangling here and there, the house, the Senate, president Trump, this has gotten past. So we want to talk about what are the impacts for our clients? What are the impacts For all those of you out there listening,
Dave:
And maybe we’ll talk a little more because the long-term impacts could be, when you call it triple B, that may be our Fitch rating for our country in 10 years. But I don’t know how much of the long-term we need to talk about with this in that sense of 20 years it’s going to be a problem for our children.
Steve:
I mean, we can touch
Dave:
On it even though it could be,
Steve:
I’m not going to spend an awful lot of time talking about it. There’ve been a lot of people that spend a lot of energy and breath concerned about the debt and the deficit. And I’m not going to sit here and say it doesn’t matter, but I’ve been listening. I’ve been in this industry now for 23 years and I’ve been hearing about how the debt is out of control and everybody’s going to stop funding the government. It’s all going to collapse. I mean, there’s a contingent of people out there for the whole time that I’ve been doing this have been saying that. So not going to say it doesn’t matter. I think that’s ridiculous. The people that are on that extreme, what they call the modern monetary theory side of things, the extreme side, oh, governments can spend whatever they want, it doesn’t matter. No, I think that’s too far. But the idea that the government has to run like a household, which would make sense to most of us, that’s just not true. And I think that’s been proven again and again.
Dave:
Yeah, that’s a good point.
Steve:
You don’t have to balance the budget all the time when you can print your own money. Alright, let’s put that aside for a little
Dave:
Bit. Thank goodness all of you can’t do that or Steve and I would not have a job.
Steve:
Wow, that’d be awesome. Right? Print your own money. All right, so let’s set the table here of what the heck is this big, beautiful bill. So let’s go all the way back to Trump 1.0. Trump 1.0 got his tax cuts passed in 2017. And what it meant for most of us out there was on the federal side of things, you saw reduction in federal tax rates three or 4%. The big deal last time around was the corporate tax rate going from 35% down to 21%. That was the really big deal. And the reason why that was such a big deal was the corporate tax cut was permanent. The personal tax rates, the down three or 4%, those were only for seven years. And don’t even start to ask us why that is. Has to do with budget reconciliation. If you don’t find a way to pay for it, you can’t make it permanent. Those tax cuts, I think they called it the Tax Cuts and Jobs Act, the TCJA or TJCA, whatever it was, those were going to expire at the end of 2025. So what year are we in right now? 2025.
So those were all going to expire, and if Congress and the president did nothing, most of us we’re going to see our federal tax rates go up by three or 4% next year. So that’s setting the stage for everything that was going on. So what does this big beautiful bill do? It extends those tax cuts from the tax cuts and jobs act from last time. So it makes those permanent there, and let’s go through a few of the other things that they did. So I think the biggest impact for most of our clients is going to be around not just extending those tax cuts, those lower taxes, but it’s going to be the changes in the standard deduction and the itemized deductions. Now, a lot of you out there listening live in some of the higher tax states. I’m talking to you in Maryland. I’m talking to clients out in California
Dave:
Also, Northern Virginia,
Steve:
Northern Virginia, the whole state. Yeah. Well, it’s not the higher free, not really talking to those of you in Maryland, in Florida, and who else doesn’t have a state tax? Texas, you guys don’t care about this nearly as much as we do. But what happened last time in the biggest change to the tax code, well, I shouldn’t say biggest change, the most impactful to a lot of our clients was the cap on the state and local taxes. They call it the salt deduction. So prior to the last tax change, if you lived in a state where you paid a hundred thousand dollars in state taxes, so this could be your property taxes, your state taxes, local taxes, all of that stuff, you could take a deduction, you could itemize your deductions and take a deduction for that 100,000. But after the last changes, that all got capped out at $10,000, which for a lot of people, I mean, they hit that cap really quickly.
And so what that meant was that if you looked at the itemized deductions prior to the change last time, prior to 2017, it was about 68% of people took a standard deduction. That went all the way up to 88% after the change because you had people even making significant amounts of money. Were the standard deduction just made sense. Now, I’ll say on one side of things, yes, I know those of us in these high tax states, we like to grumble about it and look and say, man, if only I could take this bigger deduction, that’d great. But on the positive side of things, I will say that it simplified a lot of tax filing. If you could just say, you know what, I don’t have to worry about state and local, what kind of deductions, charitable deductions, medical expenses. I could just say, you know what? Take the standard deduction and I’m done
Dave:
Using TurboTax. Probably good for TurboTax stock.
Steve:
Yeah,
Dave:
Who knows,
Steve:
Right? I mean, it just makes it easier to do it there. So big change this time around, they’re going to increase that cap up to 40,000. So that state and local tax cap will go up to 40,000 or it gets phased out if your income is more than 500,000. So I don’t want to weigh in too much about the fairness of the tax code, but to me, on the surface, that seems fair. If you’re making a million dollars a year, okay, I’m going to phase out that deduction so you don’t get as much. And I think that probably makes sense there,
Dave:
Right? Vast majority of our listeners are not making $500,000, especially in retirement. So the reality is that that is a very positive for most people listening to this. That’s a very positive part of the BBB.
Steve:
Yep, absolutely. Now, what is the impact that I could see? I could certainly see an impact where because of this, people are taking more of the state and local tax deductions where you would need to or want to be focused more on charitable donations about medical expenses, other things that when you were taking the standard deduction, I don’t want to say it didn’t matter, but you didn’t have to think about it quite as much. So that could make sense to have a little more of an eye on that and tracking those things. In the future years, the elevated standard deduction was made permanent. That’s great. Like I said, that makes it easier. Here’s the other thing that I would probably rank as the second biggest impact from this, which is making that gift and estate tax exemption, increasing that to 15 million per taxpayer and indexing that for inflation.
So what was going to happen if the tax cuts and jobs act expired was that that exemption, which it’s hard to keep all these numbers straight. I think the exemption had gone up to about 13 million per person. I think that was going to drop back down to, I dunno, five, 6 million. It was going to drop significantly if we didn’t do anything. Now you’re talking about something, once again, I know that we’re, we’re not crying for the people who are dying with seven, eight, $9 million, but you are talking about people who, these can be regular people who they inherit a little bit of money, they’re good savers, they’ve got some significant money there. These don’t all have to be Silicon Valley millionaires or lottery winners or something like that.
Dave:
But for the vast majority of people, this is basically eliminating that tax
Steve:
Because you got a husband and wife, now you’re talking about done properly, $30 million that could be passed on indexing that for inflation. Most people are not having to worry about that. So a couple of thoughts that I have coming off of this, and this was a question that people started raising immediately after Trump got elected was, oh, should we stop worrying about doing Roth conversions? Because a discussion point that we’ve had with people, I want to say for the last decade, maybe longer, has been this idea that, hey, the country is running a deficit every year. We’ve got this huge national debt. Maybe at some point tax rates are going to have to go up. It doesn’t seem like I was going out on a limb to say that to combat that maybe we should do some Roth conversions and pay taxes now to avoid paying taxes at a higher rate later. I still think that does not fundamentally change. I know there’s not an immediate impetus to saying, oh, tax rates are going to go up next year. I still think the longer term strategy of, okay, I am willing to pay taxes now because they might be higher later or simply to diversify the taxation of my assets. I love the idea of diversifying away from all of my money is going to be taxed as ordinary income when I withdraw it.
Dave:
Yeah, I agree.
Steve:
And that’s the position that a lot of people are in. And hey, this is not a bad thing. You probably did a great job saving, you were putting money into your 401k, putting money into your IRA, getting a matching contribution. But the downside is, and this is not uncommon, you’ve got 1.5 million in your IRAs, a couple hundred thousand dollars in your brokerage account and nothing in a Roth account. That means all of that 1.5 million is going to be taxes, ordinary income, and that means your required minimum distributions are going to be pretty big when you have to take ’em. So the idea of trying to diversify and minimize that, I can’t predict the future. No one can, but I don’t
Dave:
Think common sense says that’s still a good thing to have. Nobody’s unhappy when they see a good amount of money in their Roth IRA and they know they’ll be taking that money out tax free.
Steve:
And let’s take it just one step further, and we talk about this with clients when we do it is, okay, let’s say we have a nice balance between Roth IRAs and traditional IRAs and we have a choice. Let’s put more of the aggressive growth oriented assets into the Roth RA. And if they grow and they continue to do well, that money all comes out tax free. And let’s put more of the conservative assets, the lower growth stuff, the CDs, the fixed annuities, the bonds, things like that in the traditional IRA because we don’t expect it to grow by big amounts, and that’s okay. That’s part of the portfolio, but when it comes out, we don’t have as much in taxable income. So that’s taking it a step beyond just let’s do a Roth conversion because the tax rates now we’re being strategic with what types of assets we’re positioning there just to feel like I’m covering all of our bases of other changes that have been made in the tax code here. I don’t know this is going to be a big impact, but something I found interesting, you can actually deduct interest on a car loan. So this is something that was added in up to $10,000 loan, and this is going to be eliminated after 2028. So I guess it’s only for three years.
Dave:
Yeah, I found this to be one of the more interesting things and better things in this whole bill. If you’re buying a car between now and then, most people do a car loan, or at least a lot of people do. Now you can write that off. That’s incentive right there.
Dave:
That’s incentive. So must’ve been the senator, the senator from Michigan. We need something from you. Well, you got to give me something back.
Steve:
That is interesting how this one really has nothing to do with most of our clients, but I’ve been hearing in the gambling world, have you heard about this, Dave? One of the changes that was included,
Dave:
I don’t gamble. I actually skimmed and didn’t please inform me. I saw something that I don’t gamble.
Steve:
So here’s how the current laws work, and this actually sort of makes sense to me. If you’re a gambler and you have a thousand dollars worth of winnings and then you have a thousand dollars worth of losses, you have a net gain of zero, right?
Steve:
So what’s your tax liability? Your tax liability is zero because you had no gains there. The new bill actually restricts the losses to 90% of your losses. So if you had a thousand dollars worth of gains
Steve:
A thousand dollars worth of losses, you can only use 90% of the losses to offset your gains. So now all of a sudden you didn’t actually make any money gambling, but you’re still going to owe taxes on my example, a hundred dollars worth of
Dave:
That is anti, I thought DraftKings was sponsoring his new plane. I guess
Steve:
Not. Okay. Yeah. I mean it is amazing. I know you listen to a lot of podcasts. I do. The money that DraftKings and FanDuel and all them, all that they throw around, it’s amazing that they didn’t have a stronger lobbying effort to eliminate this. I mean,
Dave:
It doesn’t,
Steve:
But it’s one of those things where I was listening to a podcast and they were talking about how did this get included? And it was some staffer and some senator’s office that said, Hey, throw this in there. It’ll raise a few bucks. Of course, none of the senators, congressmen look at the stuff. They just, okay, sign off on it. Anyway, that was one that’s, I hope that does not impact many of our clients who are significant gambling income, but that’s one of those that got included in there.
Dave:
What about, did we already talk about this, that standard deduction for seniors,
Steve:
The increased standard deduction got made
Dave:
Like $6,000 more, something like that?
Steve:
Yeah. So I mean that’s been in there. Let’s see if I can find my tax guide here. So what’s our standard deduction right now? Standard deduction, married filing joint lease, 30,000. But then what’s the extra amount that you get? This is what you get for trying to look stuff up on the fly. But there is an extra amount if you’re over age 65, which I can’t find in front of me right now. But yeah, I know the higher standard deduction was made permanent as well.
Dave:
Okay, got it. So that’s good.
Steve:
Yeah, so I think you will see a change, probably a lower number of people taking that standard deduction, but for the most part, I don’t think most people are going to see a huge impact there to their taxes. I will say some of the things that people were hoping got, I don’t want to say hoping got eliminated, but that were being kicked around out there. One of the things, and I think both parties have used this and campaigned on this, but of course it didn’t get changed, is the change to the taxation on carried interest. And man, this is a really nerdy geeky one, but when you and I, Dave, if we were to go out buy a stock and then sell that stock more than 12 months later, that is considered a long-term capital gain and that is taxed at a much lower rate than ordinary income.
So for most people, that’s 15% versus depending on your income, it could be 32, 30 7%. So that’s a pretty big difference there. The complaint, and like I said, this has been both parties. Trump said he was going to close this. I think Biden said he was going to close this. Hillary certainly did, and back so on and so forth. The companies that engage in purchasing a company, private equity, venture capital, they use that capital gains tax treatment just like you and I would if you and I went out and bought a stock. But the argument is that because they are in the business of doing this, it should be treated as ordinary income. And this usually, when you talk about it doesn’t get a lot of sympathy from people because the people that are doing this are extraordinarily wealthy. They make fantastic sums of money. And so you say, oh yeah, they’re going to pay taxes at 37% instead of 15% on their $50 million annual income. Sure, go ahead and do it. But surprise, surprise didn’t get included in there because those guys, men and women can,
Dave:
Yeah, these are people who are basically, they’re still upset about the estate and gift tax combo of 30 million being too low. But at the end of the day, at the the day where our job is to, the listeners of this podcast on average are over 60 years old and on average they have above the median amount of net worth than the average American well above. And when you look at this tax bill, you say to yourself, this is helping that cause, or at the very least, the notion that the Trump tax cuts were just continued is probably the biggest story out of the big beautiful. Yeah,
Steve:
It takes away that uncertainty, the idea that, okay, it’s possible that next year I get a three or 4% increase in my taxes. And I mean, that winds up being real money for people,
Dave:
Right? The arguments, the arguments against the bill, I mean it is what it is doesn’t affect our clients that much. The future generations having to pay for it. We discuss that and yeah, the hits to and how that all works, which to be very honest with you, I’ve not studied like a scholar because it’s not for the most part affecting our clients, but from what I’ve read independently, do I think it’s a great thing? I don’t, but at the end of the day, our job is to worry about our clients and financial things like this. I’m worried about our clients and how it affects them. And I would say at the end of the day, I would say net positive for our clients. In my analysis of this,
Steve:
I would tend to agree. So let’s finish up this podcast with a quote here. Dave, I know you’re a political buff much more so than I am. Do you know this Senator Russell Long? You ever heard of this guy?
Dave:
I am a political buff, but I don’t know this guy.
Steve:
I don’t know. I mean, he could have been from 50 years ago. Who knows? He has a quote here. A tax loophole is something that benefits the other guy. If it benefits you, it’s tax reform.
Dave:
Hello. Alright, Senator Russell Long, you nailed it.
Steve:
So I think for a lot of those listening, you’re going to say, that’s tax reform, that’s good. Maybe I’ll get a little bit more of that state and local tax deduction and it’ll benefit me a little bit more. All right. Thank you for listening. Hope everybody stays cool, stays dry, stays safe, and we will check in again real soon.