Today's Cardinal lesson is keyword sunset. So in
2026 or at the end of 2025, the current tax rates the current would have are lower than they
used to be tax rates are going to Sunset. And the sun's going to rise in 2026 with the
old tax rates so right baked into the law, the tax law, the federal tax law is a tax increase
starting in 2026 so that was put in the original law back in 2018. It was actually passed in 2017,
that we're going to have 8 years of these lower tax rates and then beginning in 2026 they're going
to revert back to what they were in the past. So what that speaks is an opportunity to do some
things before 2026 happens. I want to bring Tom on it's really talk about that. Yeah and so, why
we are doing this video and we're starting to do this on already give you the why up front is we
want to give you some real numbers as to why we do or why we recommend some of the planning
strategies we do like Roth conversions and those type of things is taking advantage of these
low tax brackets that we currently have and give you some numbers behind why it makes sense to do
that. Okay so let's explain why we have this is a pretty busy board today and it has you know a
lot of information. So what's right here is 2023 as in right now. The tax rates the lowest federal
tax rate is 10% you know, the highest is 37% and you know you can see that it takes a married
couple to get up to $364,000 in 2023 before they leave the 24% bracket and get into the 30% or get
to 32%. It takes a single person when they exceed $182,000 of taxable income,
they fill up the 24% bracket and get into the 32% bracket. So, why do we
need to know this? Well, we have a lot of people that are contemplating Roth conversions and
I would tell you that Roth conversions are probably going to make sense for some people
even at the higher tax rates in 2026 and after but if they make sense then they really make sense
now. And so, I just want to walk you through what it's actually going to look like in 2026. So
I want to bring Tom on and we really want to explain the numbers on the board and how we use
these in financial planning. Yeah and so, I mean I think if we look at the board you can like I said
it is pretty busy. Um, one of the things that we had to do in creating this is is there's a lot of
variables and tax rates we had to fix something constant and so we've we've kept the tax report
the brackets the income brackets the same for the 2026 to do some calculations so in actuality
it's actually probably going to be worse than what we've shown on the board but we had to simplify
the video some. And so, what we have going on is if we look at that column on the board the 2026
column, those breaks 15%, 25%, 28%, that's what those new the old rates are what it's going back
to in 2026 and so you can sort of see you know if you're in the 12% now and oversimplification but
you're gonna be in the 15% bracket in 2026 and you can just follow along there. And what we have done
off to the far right side of the board under that married and single column there is shown you the
additional tax you'd have to pay in that bracket by filling up that full bracket, so if you go to
the very top of the 22% or the 12% bracket that is done then going to be the 15% bracket that's an
additional if you're a married couple additional $2,023 in taxes by doing nothing keeping your
income the same you paid that much more in taxes by by waiting until that year and then you know
you can sort of add those up those are cumulative so you know if you're in the 22% that bracket
you're paying $3,000 more plus the $2,000 more from the previous packet into so far so so on and
so forth. And so that sort of to explain a little bit the board is there it is a lot of numbers but
I don't know if Hans you want to have any context more. Well, what I want to explain is that a lot
of people that are looking at Roth conversions they go for this number right
here $364,200. So, if we have a couple that are like at $150,000, $170,000,
$130,000, somewhere between $100,000 and $200,000. They what, we're going to do is we're
going to take their income as it is now subtract it from 364,000 so, let's say their
income was $164,000, they can do $200,000 of Roth conversions and by doing that they'll bring
their income up from $160,000 to $360,000 and they're going to do $200,000 in a year and
they're not going to pay any more than 24% federal tax on that bracket. Now they could get
into some state income taxes so we're going to factor all that in depending on the state you're
in or if there's a tax, but the point being is this a lot of times ends up being the target
number. Is our customers have said “okay I can live with 24% taxes to pay my taxes now to turn
some of my pre-tax money into post-tax money or tax-free” okay and for a single, we end up a lot
of times at this number right here $182,000. And so, it's the same thing for a single person so if
they have an income at $100,000 a year that means that we can convert $80,000 a year and we can
do it at the 24% bracket. I think what Tom was alluding to is these numbers over here I've never
done this before preparing for this video, I said “how much are we talking about in real dollars,”
if we're saying maybe you're going to start doing Roth conversions a little in advance of when you
otherwise had planned to do it. A lot of people think they're going to start doing these after
they retire and maybe they they're postponing them till then and they've got a few years
till retirement for whatever the reason there's there's really a benefit of doing some
in 2023, some in 2024, and some in 2025. And to do that if you add up all 3 of these
numbers they add up to $12,000. So, if you've gone and we have some people that have gone right
to the dollar amount here so they've done you know for instance $200,000 of Roth conversions like
my example is when they're paying the tax on that that tax is $12,000 less than it would be if they
had waited till 2026 to do that. So, we're just trying to get some comparative numbers to show you
really what this with these lower tax rates mean year by year for a few more years and for a single
it's $6,000 so you add up all those numbers. So that's the general point, we don't want to get too
deep into the numbers today but we're showing you what we use to do a Roth conversion strategy
and with most of our clients that's a multi-year strategy. I mean we have people on like 5, 6, 7,
8 year strategies to you know smooth out the taxes and so they have a plan at the end of 6 years
to have maybe 70% of their IRA converted over to Roth so that's the income taxes and Tom you got
any more to say about that? Yeah, I mean I think one point I would make is don't use this video to
do all of your planning around Roth conversions, there are other factors you need to consider
so use someone who specializes in this call us. I mean one specifically comes to mind is this
does this is going to cause you to pay additional premium for Medicare, we don't use that as a
stop sign but we need to factor that in and so you know some people if you don't if you do
it on your own they look at this say great I'll do the all the 24% bracket, 2 years later they get
this bill for Medicare that they weren't expecting and they can be a little upset. So just you know
proceed cautiously if you're doing it on your own. Well yeah it's also going to cause them to pay
more taxes on their social security potentially not at these levels because they're already
at the max but it's going to cause that and many of our clients delay their social security
starting if they're going to do Roth conversions but then if they're going to do that then they're
probably going to need to pull money out of their IRA to live off of which is going to consequently
reduce the Roth conversion. So as Tom said, there's a there's a lot involved in that we're
just showing you one factor but it's a pretty big factor is the taxes are on sale for 3 more
years and that could tip you in the wanting to make the decision. Okay, the next thing
that's changing is the standard deduction. As many of you have just learned about this
as you've done your taxes is you don't really write off your home mortgage interest,
you don't write off your property taxes, you don't write off your charitable deductions,
because you just take $27,000 standard deduction because all that's deductible stuff needs to
exceed that or if you're a single it's $13,850, and if you're a senior I mean it's you know it's
it's over $30,000 and over $15,000 for a single so that's taken a lot of people out of the itemized
deduction game and it's really given them a whole bunch of credit for deductions they may or may
not have. Those are going to basically cut in half by the time we get to 2026 and it reverts
it's right in the law that this thing goes back to what it was it's going to have an
inflation index on it and then um they're put, I think they're going to add back in the personal
exemption so this isn't an exact you know stating the tax code in 2026 but it's it's showing us
roughly the numbers that we use to plug in into our formulas to make decisions about whether
we're going to take advantage of something. Then the third area that where there's a state
tax and this doesn't apply to a lot of people I mean the the estate deduction exemption, the
state exemption, is right now almost $13,000,000 per person so if you have a
couple that has $26,000,000 in assets they say where to structure things
properly they could literally use exemptions to get rid of the entire estate tax. And so, when
you start using $26,000,000 is your threshold um that eliminates a lot of people in America
probably a lot of people watching this video so I don't want you to turn me off now. I just want
to tell you what's happening is the exemption is per person it's going to cut in half so it's
going to go down to about $6,500,000 and that'll be adjusted for inflation and that's per person.
So again now we have a couple where we talk about $13,000,000 and again if people are going to get
away with paying no estate tax and they got right at $13,000,000 they're going to have to do a whole
lot of things right to make all that play out. So I wouldn't I don't want to dismiss people say oh
okay now there's a whole bunch of planning you need to do and the reality is is if there's one
person that is anywhere in the neighborhood of $4, $5, $6,000,000 or even a couple now and
they might not pass away for 30 more years even $2,000,000, $3,000,000 we at least need to
take a look at this because this amount in the tax cuts and Jobs Act was doubled so all it's doing
is it's just going back to what it was before. And it very well could be that this amount is
lowered even further and we're not talking about that on this video this is what it is and it's
very possible for people that are in their 60s now for one of them at least to live into their 90s
and we really need to have a conversation about this and really plan more around this number than
we do this number so. So some of the points that I'll make on the estate tax exemption is you know
we have a lot of people that are ‘I'm nowhere near that’ but then when we start looking at stuff.
They might have you know Farmland that's been in their family forever that's many many acres that
gets part of the that gets added to part of the estate. If you have a closely held business you
know a family business that's valued at a certain mean. You might not have a lot of cash, a lot
of money on hand but you do have an asset that can start adding up to some significant part of
their estate. These are all people that need to be mindful of what's going to happen in 2026.
I mean the worst situation is if we could tell you all sorts of different stories but we've had
you know Farmers come in they have a big Farmland that's been in the family forever it's you know
above the maybe not above the $26,000,000 now but could very well be above the $12,000,00 in 2026.
And when they look at their financial assets they don't have the money to pay that estate tax and
the family has to sell the land to raise the money to pay the tax. I mean that's kind of the you know
worst case scenario that could potentially happen and so we need to do you need to be mindful of
it and we need to do some planning around it. Well it sames true with the family business. Sure.
So and that's the reason that they raised them to these high levels politically is they were
lobbying in there and they're saying there's a lot of family farms a lot of small businesses
that are in the family they want to keep them in the family and paying the estate tax. I mean
these levels were like $600,000 when I got my Financial degrees an eight estate planning degrees
so it's now 10 times that per person so we used to have to plan this stuff for everybody it's now
a consideration. So, I want to go through and I want to just keep repeating that these 7 worries,
these are the 7 worries right here. These check boxes that we do our financial planning around,
our retirement planning, and so we've got them on the outside of the board and we want to make
reference to them because we want to show you how whatever we're talking about today applies.
And it really doesn't have much to do with Social Security but I'm going to go ahead and check
the box because you do pay taxes on Social Security based upon your other income, and
it has a lot to do with IRA/ 401k and what we talked about today because we spent a lot
of the day talking about Roth conversions. It has a lot to do with income because one of the
reasons we want to do Roth conversions is we want to source a tax-free income later in life. It has
to do with Estate Planning and it obviously has a lot to do with taxes. So with that being said
I want to bring Tom back on. So, what we have that we're going to do look at real briefly is
the show notes. We have these on our website, they're also in the link below the video. We're
not going to spend a lot of time here a lot of the information is on the board but if you want some
more detailed information this is where you can get them and so we have the first page is just the
the different brackets. It's where we pull a lot of the information I have this sheet right on my
desk I use this daily really to look at different planning stuff so this is something you can get.
And then the next one is really just uh is from directly from the IRS website that talks about you
know planning strategies what you can do with the gift estate tax how that's reverting back to in
2026. One of the big things that they have that they list in here is that if you do a gift now
they're not going to claw that back in when they reduce the estate tax you know they cut it back
in half in 2026. so if you have a really large estate what we have some people doing is giving up
to to using up this $12,000,000 almost $13,000,000 exclusion now and then they get to preserve that
into the future, so just if you have a very large estate let us know we can talk to you through
some planning strategies there. But again these are on our website, they're at the link below and
so if you want more information go look there. I'm Hans Scheil and I'm Tom Griffith and
we thank you for listening. Thank you.
