Join us as we discuss what we think is everything you need to know about taxes in the new Trump era!
There is a lot of uncertainty around the future of tax laws under the new Trump administration. Although there's a lot of speculation, no concrete changes have been made yet. It is important to be aware of what is happening, but don't act until there is something concrete to guide your decisions.
John recalls how the Roth IRA and Qualified Business Income (QBI) tax law changes were passed quickly and unexpectedly, noting that similar surprises might happen again in the new Trump tax regime, but it is very important to not make tax decisions based on rumors or proposed changes until legislation is signed into law.
We speculate that there are a few key areas that may change, including the expiration of tax cuts and job acts at the end of the year, health insurance tax credits for middle- and lower-income individuals, the child tax credit, and potential reforms in business taxation.
Stay informed but do not react prematurely. While there's uncertainty about the future of tax laws, it's crucial to be ready to act when new information becomes concrete. Remain aware, monitor the situation, and be prepared to adjust tax planning strategies as needed once definitive changes are made.
Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
- Find us on Facebook: www.facebook.com/friendstalkfinancialplanning
TRANSCRIPT:
John: With a new administration in Washington, there's a lot of talk about what to do with tax planning and how that's going to change. On this episode of Friends Talk Financial Planning, we're going to investigate what you might want to do with the new Trump tax regime. Hi, I'm John Scherer and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. And if you like us, please subscribe. Okay, John, let's talk about how we're processing and thinking through the new tax regime.
John: What's the new tax regime? We didn't even know. I mean, they haven't had any time to do anything here yet. So one of the things about whatever the new tax regime is going to be is we don't even know. And we talked about that before we hit record. The news that comes in on Facebook or Twitter or all the things, just remember this is all rumor. There's nothing concrete—whatever was said during the campaigns, whatever's being said now.
And you taught me this, Bridget, when we deal with something like this, be aware. “Oh, they're talking about what might maybe happen.” Okay, good. Let's not be ignorant. But we're not going to do anything until there's something concrete. And I'll tell you, last election, when Joe Biden took office and the Democrats had control of Congress, there was a lot of conversation about estate tax reform and how that was going to change, and inheritance taxes and these sorts of things.
And if you remember back to four or five years ago, Biden campaigned on those things. They were topics of debate before the election. He wins the election, and there's more conversation, and a lot of consternation and angst about how is this all going to change and what to do. And that's when I remember you saying, “Yeah, let's pay attention to this, but I'll believe it when I see it.”
And now here we are four years later. I haven't heard a single person, whether it's client, friend, news, or otherwise, talk about estate tax reform. And it was one of the hot button items 4 1/2 years ago. And for me it's helpful to look back on those things and go, “Oh no, there's some legitimate concern.” I mean we've got clients who took some action for things. Not that they shouldn't have done it anyway, but you go, “Hey, let's see. That was a lot of fluff, a lot of vibrating water, but now the waters are calm with regard to that.” So that's one of my big takeaways. I don't know if anything's different for you these days.
Bridget: Yeah, there's a bunch of people that make their living speculating on what's going to happen with taxes, and they actually do continuing education at financial planning conferences too. So it's kind of weird to me. This is how you're making a living by speculating about what's going to happen with taxes. I've been around long enough to know that we don't know. And what really woke me up to this was Roth IRAs. So Roth IRAs were a major change in tax law. It created a whole new category of IRA and what you can do.
And it was back in the 90s when they started. And at the time I had just started my tax practice, so I was following closely what they were talking about doing, because I wanted to be able to inform my clients. But it seemed like the Roth IRA slipped in in the middle of the night and nobody even knew. And then it was the law of the land. I hadn't heard anything about this type of account or Roth IRAs. And I thought, “Oh, okay. That's interesting.” There's a whole bunch of stuff that might not even be talked about at all, maybe even a new concept.
The last new concept was qualified business income. And again, it was a totally new concept. And again it seemed like it kind of took place in a couple of weeks because the large businesses were getting a tax break with lowering corporate tax. And so, then the small businesses were saying, “Hey, wait a minute, we want some of that action too. We don’t want to become a C corp just to be able to take advantage of these lower tax rates.” And again, I think it kind of passed in about two weeks.
John: Right.
Bridget: It was a whole new concept. And actually, if I was going to speculate about what might happen, I wouldn't be surprised with some reforms around that particular program because it was put together in two weeks. They could make it a lot simpler. Yeah, I think that would be nice.
John: I'll tell you. This is why I love these discussions. I'm focused on all the stuff that we're talking about that doesn't happen, but then I completely forgot about this. What about the stuff that they're not talking about that will happen? It’s more proof that we just don't know. I really appreciate you sharing that. And one of the parts of the conversation is don't get excited until there's something that we need to get excited about.
Bridget: Once Congress has passed the law, and they're signaling that the president’s going to sign, then I actually start trying to look it up.
John: Right.
Bridget: And there's recently been a new change in Social Security. It's a minor change for most people, but it'll impact some people. We'll do an episode on it later. I was following it but just waiting to hear if it was actually signed.
John: Right.
Bridget: I don't want to hear people talking about it.
John: Yeah. Keep your cool. Let's figure out what happens when there's something to talk about. There are some things though that will be changing. And the one I'm thinking about is the Tax Cuts and Job Act. Our current tax regime of tax brackets and tax levels is scheduled to expire at the end of this year. So if Congress does nothing, there's no action taken, the tax for next year will be different than the tax law for this year that's written into the code right now.
And if Congress does something, then of course it will also be different or maybe it'll continue. Maybe they'll do something and keep it the same. But there will be a decision at some point, so we know that there's going to be something going on here with regard to taxes during the year. And how are you thinking about that? I'm curious as to what you're maybe doing or not doing or what's going on in your world about that.
Bridget: I think around the edges things will definitely expire and change. And I think we can safely think through the things that the different parties dislike. And so, for the things that the Republicans dislike, like energy credits and that kind of stuff, they'll probably try to let that kind of stuff expire and maybe, or maybe not, get in a big argument about it. For most people, I would say that’s a smaller level thing. The things that I think impact people more are the premium tax credit. So how they handle paying for marketplace health insurance for middle income and lower income people. And that affects retirees.
Sometimes people that retire early take advantage of the premium tax credit, so that affects our audience definitely. And so that I'm interested in what happens because there's a lot of rhetoric on the Republican side, but it's a hard issue. Medical insurance is a hard issue. So that takes a lot of work to try to figure that out. Qualified business income, I think that's an interesting place where they might make some reforms. The child tax credit is something that they banter about a lot. It's really popular for people who are making under $400,000 a year, which is most people.
John: Right.
Bridget: You get a nice $2,000 credit for each kid. So that's something they'll talk about. You get a lot of eyeballs on your feed if you're talking about cutting child tax credit, but it doesn't mean that they're going to do that.
John: Right.
Bridget: If anything, I would say they might try to beef it up. The other thing about what Republicans like versus what the Democrats is how much capital gains and dividends are taxed. This is probably going to be a major focal point.
John: Yeah. I really appreciate all those comments. I tend to think in terms of tax brackets and those things, but all those things you mentioned are major components of a lot of people's tax returns. As you described that, what came to mind were some of the other proposals that are out there or the gossip. I’m paying less than half an ear of attention to that. What's going to happen with child tax credit, QBI, some of these sorts of things? Something's going to change, so I've got a full ear on that.
I don’t have both ears pointed forward, ready to do something, but I’m more in tune because those things are on the table. I hear some folks now talk saying that since the Republicans are basically in charge of Washington, everything's going to stay the same. Well, maybe. It's certainly more likely than it was six months ago, but I’m much less confident about that. I've got a bet on breakfast with the CPA in town here that everything's going to stay the same or there's going to be some changes.
I don't know if it's going to fully expire, but I don't think it's going to be fully extended either. So there's uncertainty, there's still nothing to really do but pay attention to some of those things that you mentioned. In the past 10 years, I could pretty much tell you what next year's tax law looked like unless Congress did something different. This year I'm not 100% confident it's going to be the same as it is this year, and I’m not 100% confident it’s going away, so here's going to be some ambiguity. So for me, it's paying attention to the ambiguity and being ready to do something when there's something to do, as opposed to trying to be out in front of that stuff.
There's nothing to be in front of. But there’re levels of paying attention. One is just white noise. One is gray noise. There's something going on with some of the things you're talking about. There's going to be some action in some fashion, and then hopefully sometime before December 23rd, we'll have some information we can do something with as opposed to having four days before the end of the year to actually do stuff. Being aware and ready to do something when the time is right is key.
Bridget: So that seems like a great place to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so we'd love to hear from you. But if you'd like an advisor that's local to your area and you like what we talk about on our show, both Bridget and I are members of the Alliance of Comprehensive Planners group of tax-focused fee-only planners who think in a similar fashion to us, so if you're interested in somebody near you, check out acplanners.org.
Bridget: And please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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