Episode 75

The One Episode On Politics (Sort of)

October 15, 2024

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

With only a few weeks until the election, Ben and Steven share their thoughts on how you should change your tax planning based on who wins. Spoiler Alert: regardless of the outcome of the election, you are most likely going to keep doing the same foundational things. Tax laws change; it’s normal. The people who do their best to minimize their lifetime tax bill take a proactive, long-term approach, and that means not overreacting to headlines and sound bites. Listen in as Ben and Steven share their thoughts on how to navigate uncertainty on taxes.

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What You’ll Learn In Today’s Episode:

  • How likely it is that taxes will change in 2024
  • Tax law changes we already know are set to take place
  • Why focusing on the foundation is what most taxpayers should be doing
Ideas Worth Sharing:

“What can we do with imperfect information that will benefit our clients?” – Benjamin Brandt

“I’m confident that tax code is written in pencil, and at some point in the future, the tax laws will change.” – Steven Jarvis

“We want to operate on the information that we have and not give too much mental energy to the what-ifs because the what-ifs can be somewhat scary sometimes.” – Benjamin Brandt

Resources In Today’s Episode:
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Read The Transcript Below:

Ben (00:06):

Welcome back to the Retirement Tax Podcast, also known as the Least Boring Tax podcast. I’m your humble co-host. As always, Benjamin Brandt, joined by my even more humble co-host, Steven Jarvis. How are you doing today, Steven?

Steven (00:17):

I’m feelling so humble Ben, definitely more humble than you.

Ben (00:20):

I’m actually the glare coming off of your world’s most humble medal is kind of blinding me. If you could turn that away from the camera, I’d appreciate it. Yeah, I’ll get right on that. So this is October 15th. We’ve got kind of an election coming up around the corner here. Now I’m not one to talk about politics. I hate everybody equally. No, I mean I don’t talk about politics at all either with clients or with anybody else, but we thought we should talk some politics on today’s episode, not in the form of assessing each candidate’s promise, but talking about how will politics affect our tax advice for clients and how should you as the end consumer of this knowledge and paying the taxes, how should you think about proposals that we hear from candidates. Candidates, they go and they do their stump speeches and they promise us all kinds of things, and then what comes out of the other end is sometimes very similar to that and sometimes very different. And so how do we plan for our future taxes with partial information?

Steven (01:17):

Yep. We’re definitely going to keep focused on the fact that this is a tax podcast, so we’re going to keep focused on that angle of it. But I think it’s a good reminder just in general on taxes, but on all things that when we have these elections every four years, we just need to remind ourselves that four years ago there were also lots of promises. There were also lots of talking points. There were also lots of things around taxes. Same with eight years ago, 12 years ago, 16 years ago, 20 years ago, and that’s the extent of my four year math. This is a normal cycle that these things are going to get lots and lots of attention and at the end of the day, especially when it comes to the tax side of it, we need to make the best decisions we can based on the information we have and the laws that are currently in place. Because my crystal ball is just as broken as yours is, Ben, I’m confident that tax code is written in pencil and at some point in the future, the tax laws will change. Congress and the executive branch like taxes too much as a political tool to not change them again. But I don’t know how they’re going to change and you don’t know how they’re going to change. And sitting around waiting for them to be perfectly clear just means we won’t take action and we won’t sand off the rough edges of our retirement tax bill.

Ben (02:24):

I think acting on hypotheticals and what ifs is going to leave you burned more often than it’s going to reward you by jumping the gun. There’s so many what ifs thinking about politics when a presidential candidate says, I’m going to do this or I’m going to do that, that’s an idea. And we use that idea to judge the validity of what they’re saying and whether or not they’re going to earn our vote. But that’s a far cry from what actually happens. The president does not decide tax law, right? We have lawmakers that decide that. So the president might have a proposal that someone will co-sponsor and it becomes a bill and then it goes through the chain of command, and that’s why we have checks and balances within our government. So just because you hear a candidate say that we are going to tax unrealized gains, we don’t know if that’s even constitutional.

(03:08):

We don’t know that the Senate or the Congress will approve of something like that. There are so many unknowns. We would be, I think, pretty foolhardy to make radical changes to how we’re investing or how we’re paying taxes in anticipation of something like that. It’s going to come up a lot. It’s going to get a lot of digital ink for headlines, but that doesn’t necessarily mean something we should act on or even really be worried about right now it’s just prognostication. We were talking before we hit record, there’s this saying from this stoic named Seneca that says, we suffer more in our imagination than in reality. We want to operate on the information that we have and not give too much mental energy to the what ifs because the what ifs can be somewhat scary sometimes.

Steven (03:51):

Yeah. In the last episode, we were talking about things to do between now and the end of the year, and we alluded to the fact that we had talked about politics today, but in that episode we weren’t talking about, Hey, we’ll hold off on making any decisions until after the election because especially in the short term, that really shouldn’t come into our tax decision making because not only does the due process of making a new law need to take place and who knows how long that will take, but if you go back a couple of episodes, we were talking about the finalized rules of secure Act 2.0 around inherited IRAs, and not only did that take a long time for that bill to get passed, it had literally taken years, multiple years to figure out how that rule is going to be applied. So even if we allow for time for Congress to decide if they can agree on a tax law change of any kind, then there’s the timeframe of when does that get implemented, how does it get implemented, what will the final rules be? So yes, I’m with you that really our takeaway here should be that we need to make our tax planning decisions based on the long term and based on what we know now, we shouldn’t wait and take no action and we shouldn’t stay up losing sleep over what may or may not be.

Ben (05:00):

So thinking about things that we know or things that we may know, known unknowns, unknown knowns, I’m not sure what they would be, but the Tax Cut and Jobs Act, right, is that what is going to the final year to take advantage of these tax cuts ends in 2025? Am I understanding that correctly?

Steven (05:15):

Yeah. So the Tax Cuts and Jobs Act, which was originally passed in 2017, so again, it gives you an idea of how long major changes can take to happen is set to expire at the end of 2025, or at least there are provisions of that tax change that are set to expire. And the way I like to remind people to think about this is that if Congress does nothing, which is what they’re good at, then these laws will expire the end of 2025, which is an important distinction because we’re hearing a lot of headlines, a lot of stump speeches, a lot of articles about ideas of tax law changes, but those all still take an act of Congress to happen. The expiration, the sunset of the tax Cuts and Jobs Act will happen if Congress does nothing. And there are some things in there that 2026 will feel very different.

(06:04):

And I guess for the real tax nerds or the tax historians out there, a lot of those changes will just be reverting to what taxes were prior to 2018. So if you remember your tax returns really well that far back, some of this is going to sound familiar, the standard deduction is going to get essentially cut in half. What we can deduct is going to change. We get rid of the limitations on state and local taxes being deducted. We get rid of limitations on the size of our mortgages that the interest can be deducted on. For our business owners, the qualified business income deduction goes away. Tax brackets, tax rates immediately go up in certain brackets. And so there are quite a few things that in general point towards, again, with no other changes from Congress, taxes being higher in 2026, that really just come back to the foundational concepts that you and I talk about so often, Ben, of looking at the longterm and incrementally making changes where it makes sense to fill up marginal tax brackets and intentionally pay taxes when we’re in relatively low income years and hold off paying taxes. We’re in relatively high income years. So Ben, around this topic of the Tax Cuts and Jobs Act, I like to bring it up so that people have context for the headlines that they hear, but really we are just continuing to execute on the plans that we’ve been working with clients on for years. We’re not making dramatic changes even in anticipation of the expiration of the Tax Cuts and Jobs Act.

Ben (07:30):

Yeah, I was just scribbling a note to myself. We meet with all of our clients in the spring and the fall meeting is always dedicated to taxes. We kind of covered that in the last one, but I was thinking if the Tax Cut and Jobs Act expires at the end of 2025, some of the actions that we may or may not take in 2025, I was just scrolling a note to myself that in spring maybe it would be a good idea to refresh clients on if the standard deduction gets cut back in half. What were things that we were doing prior to 2017 that we might want to think about doing? So charitable is what popped into my mind. It used to be that if you were giving $200 a month to the March of Dimes when the standard deduction doubled, well that just went away because most people weren’t giving to charity at that level.

(08:15):

But if we go back to having it, I wonder if it would be a good idea in the spring to just from just a mental standpoint, try to remember how we did things prior to 2017 and say, should I start maybe tracking some of my own books? We’re speaking for clients here. Do I have to go back to some of the old ways of thinking, not knowing of course what’s going to happen. The whole thing could sunset. The standard deduction is probably going to change for everyone I would suppose, but things where they could reset above the 22% bracket and keep everything the same below. So there’s a number of different ways that they could parse this. Standard deduction is probably going to be either all or none, I’m guessing. I dunno if we’ve ever had a time where there’s been different standard deductions at different income levels, I can’t remember, but just trying to think of what do we need to start keeping track of in January if that changes. But I’m totally digressing, but that’s the note I was scribbling for myself.

Steven (09:07):

No, it’s a good exercise to be going through though, Ben. And a good point of clarification because when we talk about this Tax Cuts and Jobs Act, sun setting 2025 is expected to be very similar to what it was in 2024. So it would be having these conversations in 2025 so that in 2026 we’re keeping track of those things to use in our 2026 tax return. And a lot of times on those things, the charity is a great one because we’ve now had years of a lot of people feeling like, well, it’s not even worth tracking and it’s always easier to document things upfront than have to try to go back and dig ’em up years after the fact. So I think that’s probably not a bad recommendation that as we get into 2026 with the expectation of the tax Cuts and Jobs Act expiring, it’s going to pay to along the way, keep a little bit closer track of our receipts of our donation confirmations, things like that so that we have them because it’s only going to take you a few minutes at a time as you go to keep ahold of those things.

(10:03):

It’s going to be much more difficult if you have to retroactively go back and try to dig up receipts for donations you’re making.

Ben (10:09):

Yeah, I think I was a year ahead of myself, but

Steven (10:11):

It’s the joy of tax law changes. It always gets so convoluted because it’s the Tax Cuts and Jobs Act of 2017 is what it’s called, but it didn’t take effect until 2018 and we talk about the sunset in 2025, but it’s for effective for tax year 2026. And then that brings us back to all these conversations that all of our wonderful elected officials like to throw around of, well, do we look at taxes on unrealized gains or not taxing tips or going to a flat tax? These are all things that get thrown around and quite often when people are running for office, they throw them around as if they have the ability on day one to enforce those changes immediately. And that’s where this gets so convoluted.

Ben (10:53):

It gets really tricky and it’s going to be so difficult as content creators and as advisors to keep our eyes on the prize. What can we do with imperfect information that will benefit our clients? And I think that is focusing on the big pieces. So the big pieces are anything that we can decide to do proactively is going to be better than reactively understanding that we’re going to pay for a lot of our clients, they’re going to pay high six figures or low seven figures in a bill, and that could just be paying $20,000 a year for a few decades. It’s rarely going to be one big change that saves us a huge amount of money. It’s going to be small changes rolled out incrementally over time, little things done consistently. And that’s what we talk about sanding the rough edges off this really, really big bill.

(11:42):

So when we’re thinking about the election and we’re thinking about how these politicians are making these promises or making these threats, that’s an easy thing to focus on and there’s going to be a lot of headlines on that, but the basics, the fundamentals, the foundation of retirement tax planning, I don’t think is going to change. How many years in the future can we look ahead? Can we do grouping and bunching and all these different things? Can we look at our, not get distracted by our marginal rate, and can we look at our average rate and say, does that feel like a good deal or does it feel like we’re going to get a better deal in the future? Looking at things like IRMAA and saying, I only want to violate that intentionally, right? I don’t want to accidentally go over by $2. I want to either go over by 25,000 or I want to be $25 short. So the big pieces of planning I don’t think are going to change when they change. We’re going to jump on the podcast and tell you about them, but don’t take your eyes off the prize. The easy stuff that we can do consistently over time is still going to save us a fortune in taxes and nothing that I’ve seen is going to change that.

Steven (12:42):

Yeah, Ben, I’m a hundred percent with you. It’s really easy to get distracted, particularly when these cycles come along. But at the end of the day, we were focused on how do we minimize our personal tax bill over our lifetime, over our retirement so that we have more control over our hard earned money to accomplish the goals that we’re most excited about. So yes, Ben, we ran out of time last time and so I want to make sure we get to a listener question. We want to focus on what are things that people are outside of the people who want our votes, what are real taxpayers curious about? What are things that we can do to help people take actions regardless of these fun headlines?

Ben (13:18):

Yeah. I’ll read the listener question I did looking at our notes here, no tax on tips. How many people do you think read that headline and thought that it would be a good idea to invest in treasury inflation protected securities because they thought there was going to be no tax? As I’m seeing that, I think that’s what my brain sees, treasuries tips, not I’m working at the bar and getting tips, but that’s just probably something that only happens in my brain. But listener writes in, Victoria, writes in. Hey Steven and Ben, I am a new listener and I love your podcast. Thank you very much. Thank you. I’m wondering if you can address retirement planning for those of us who want to retire outside of the United States, say Mexico or somewhere in Asia because the dollar goes farther. I’m assuming we would still need to file the federal tax return, but what about state tax returns? Is there some planning that can be done to optimize state tax liability? Should I become a resident in a state with no income taxes like Washington, Texas or Nevada or South Dakota? Thanks so much for any insight. I will say, Steven, that is an interesting question. Way out of my debt. I have lived abroad, but I didn’t pay any income taxes that was part of the United States military, so I have zero experience in this area.

Steven (14:21):

Yeah, that’s definitely a little bit different. If you’re part of the military, this is certainly an area where you’re absolutely right to be asking the question before you’ve taken the action. It’s great to understand these things before you move overseas, before you start trying to establish residency in a new state. I will also say that some of this is outside of what I typically do. Usually when we get into international tax issues, which particularly becomes an issue for earning income in a foreign country. So it is a little bit simpler if we’re just talking about, Hey, we’ve retired, we want to maintain our US citizenship and residency and we’re just going to go have fun overseas. It’s a different question if we’re going to be earning money overseas. And if that’s the case, you’re going to want to make sure that you’re working with someone who has experience with expat tax issues.

(15:03):

Let’s talk about the state piece of this because again, if we’re just going to go have fun overseas, it can make a big difference what our state of residency is because our social security is still going to be taxed. Our IRA distributions, our investment income, that’s all still going to be taxed in the US for sure if we’re going to maintain our US citizenship and residency. And so I actually a client I’ve been working with this summer who is in this situation that a few years ago, they intentionally reestablished their state residency out of a state with a high income tax and in their case, they chose Florida. And so we want to start with the same thing we would even if we weren’t looking at the overseas component, which is understanding how the state we are leaving and the state we are moving to treats residency for tax purposes.

(15:48):

So across some things that typically will lean in our favor as far as if we want to claim a state as our residency, is that where our driver’s license is? Do we have a permanent residence there? Is that we’re registered to vote? Do we have any bills that are getting processed to that state? Those are all things that help an argument for this as our state of residency. And on the flip side of that, making sure we leave those things behind. So we want to make sure that we’re not just trying to play games. There’s not just a magic box that you check that says, ah, I’m a Florida resident now because I want to be. Because if the state of more likely what’s going to happen is the state you left, if you leaving California and suddenly want to claim Florida, California is very likely to say, Hey, we want to make sure that for real, you’re not a California resident.

(16:32):

And so if you’re going to try to hang on to California property, if you’re going to spend a lot of time in California, if you’re going to have income that’s out California specific, it’s going to be really hard to make that argument. And then we also want to take a look at things like how deferred compensation might be taxed, especially if you were a high earning executive. There’s times where the state you earned the income is more important than where you take the income. So there are definitely some considerations there, but Victoria, it’s certainly worth looking into. There potentially are significant tax savings at the state level if we establish a residency in a income tax free state before we start spending fun time overseas.

Ben (17:13):

And what are some of the things, I think I’ve read blogs in the past about how to establish residency in the state. So if you read the blog post, it’s usually something along the lines of car registration, driver’s license, pet registration, things like that. So a lot of resources out there for people looking to do that, but you have to mean it. You can’t just pick a different state because there are clawbacks and things like that that other states have done for people that have tried to maybe be too cute about changing their residences. It’s more than just checking a box. There’s some physical things that you have to do.

Steven (17:45):

Yeah, absolutely. I like how you phrased there, Ben. You really have to mean this isn’t one to play games with. Don’t set up a PO box in Nevada and try to claim that you’re a resident there. If the tax savings are meaningful, then take the time to reestablish your residency and then go enjoy your retirement overseas.

Ben (18:00):

If the tax savings are meaningful, they’re meaningful in two directions, right? If they’re meaningful to you, they’re probably also meaningful to the entity you would’ve paid them to. So you do not want to go toe to toe with a person that has unlimited resources and the government has unlimited resources. So measure twice, cut once, don’t play games and mean it because if they come after you, they’re going to mean it. So you might as well mean it yourself,

Steven (18:21):

Especially if you’re coming from a high tax state like California or New York. I promise you’re not the first person to have thought of this. And so those states are familiar with the games that get played. And so if you’re going to play the same old games, you’re likely to get caught. But if you mean it, if you’re really going to establish the residency, yeah, absolutely. Go for it.

Ben (18:37):

Fantastic question, Victoria. Thanks for writing in and that’s what we got prepared for you this week. We always appreciate you tuning in. If you love this podcast, share it with a friend and until next time, don’t let the tax man hit you or the good Lord split you.

Steven (18:49):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.

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