Pure’s Director of Tax, Amanda Cook, CFP®, CPA, Esq, walks you through the tax-saving opportunities available to you. Learn strategies that can make a meaningful difference come tax time.
Outline
- 00:00 Intro
- 00:43 Important deadlines
- 2:02 Tax terms
- 5:48 One Big Beautiful Bill Act (OBBBA)
- 9:32 Standard Deductions
- 12:20 Tax bracket example
- 12:45 Q&A
- Can you explain the Trump accounts in relation to the OBBBA?
- Vehicle loans, is this only applicable to 2025?
- Can you reiterate the SALT limits?
- Can you explain what tax year AGI that I need to refer to regarding IRMAA charges for 2026?
- Do the $500,000 MAGI phasing out figure apply to all filers?
- 20:19 Capital gains rate
- 21:46 Retirement accounts
- 28:05 Tax triangle
- 34:44 Tax reduction strategies
- 46:00 Q&A
- Do Roth conversions put you over the AGI?
- Can a Roth IRA be established in retirement?
- So, if I pull money out of my Traditional IRA then convert it to a Roth, can my heirs take out tax-free?
- Can you clarify the charitable deduction if I’m in the 24% tax bracket?
- I’m retired but my wife is still working, can I contribute to a backdoor IRA conversion?
- I have a side job in retirement; can I deposit any of it into a Roth?
- Can you clarify the medical expense deduction?
- Are capital gain tax brackets based on taxable income?
Transcription:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Kathryn: Thank you for joining us for this tax planning webinar with our own Director of Tax and CPA Amanda Cook. Please welcome Amanda.
Amanda: Thanks for having me. And this is a very consequential end of tax year. compared to many other years, there’s been a lot of changes that affect the current year. So we’re gonna talk about some of those 2025 changes that you’ll need to know before the end of the year that may impact what kinds of decisions you’re making between now and December 31st.
And we’ll also talk about things that are changing for 2026 and going forward. so you can kind of start thinking ahead to next year. So without anything further, we’ll just get started. All right, so the first thing to, to know is what’s the deadlines, right? April 15th is the deadline for most tax filers.
it seems like that would be the same every year, but oftentimes there’s a holiday. call Emancipation Day. That changes that deadline for 2026. It is April 15th for your 2025 tax returns, AP October 15th if you get the automatic six month extension. this is a little fun fact that we found recently, the average person spends $525,000 in taxes over the course of their lifetime.
So if you’re feeling like taxes are a huge burden in your life, I mean, you’re not alone, right? This is, a huge burden, over. Over the course of most people’s lives, it’s around 30% of most people’s lifetime expected income. And it does include things like income tax, property tax, sales tax. But you know, ultimately we wanna figure out how we can lower all of these taxes over the course of our lives.
So let’s talk about what we can do this year specifically. Before we get too far into actual strategies, I wanna make sure that everybody really understands the tax terms that we’re talking about. So this is a quick little glossary you can follow along on your actual tax return, and you’ll see these words in on there.
So first, all of your income is gonna add up to be your gross income. then you’ll have adjustments. These used to be called Above the Line Deductions because there used to be a line under them. that line is gone, but they’re still called that. They’re also called adjustments. That’s the formal name.
They are subtracted from your gross income to come up with your adjusted gross income, and that AGI number is super important. That number gets used for all sorts of different phase outs, including some of the ones that we’re gonna be talking about today. Then you can claim itemized deductions.
These are usually called below the line deductions, and these include your typical, you know, your state and local income tax, mortgage interest, medical expenses, charitable deductions, all of these different. Deductions are limited in some way or another. some of you may recall that, new mortgages were limited to $750,000 of principal that has been extended under OBBBA for.
Ever basically, so $750,000 not adjusted for inflation. That’s the limit of the mortgage principle. You can have that. You can deduct interest on state and local income taxes was previously limited to $10,000. This is one of those, 20, 25 changes this year. If your modified adjusted gross income, which is basically your AGI.
Minus, or I mean plus, any foreign income that you have that you excluded. if that number is below 500,000, then your state and local tax also called salt. that deduction is limited to $40,000 this year. So particularly for married people who weren’t itemizing the last several years. That is gonna be a huge boost in high tax states.
previously it was limited to 10,000. If your MAGI is above 500,000, then it begins to phase out and it’ll phase back down to that $10,000 limit. This expires in 2029. Medical expenses have to exceed 7.5% of your MAGI. So again, same thing. We’re using that number and charitable contributions cannot be more than different percentages depending on what you donated.
30% for capital gain property, which we’ll talk about later. Once you’ve determined all of your deductions, all you’re below the line deductions, you’re usually gonna come to taxable income. and this is what your tax bracket is based on. So when we look at a tax table and we see which tax bracket are you in, we’re looking at this taxable income.
So in a way, you can think of all of these adjustments and itemized deductions as they were almost like tax free money. And then now you’re getting to what’s your taxable income. once you’ve determined your tax, if you have any credits, are better than deductions ’cause they’ll offset the tax dollar for dollar.
if you have any credits, they’ll come right off the tax before you get to the final amount that you’re paying.
All right. So I mentioned the one big beautiful bill act. This was passed, July of this year with several items that are taking effect this year. So I already mentioned the, the salt increase, but in addition for business owners, there’s a hundred percent bonus depreciation. This is really popular with business owners.
It allows you to basically take, assets that you would have to depreciate over time. And deduct the entire expense of that asset in the current year. so it’s a little bit more in line with your cashflow if you are not financing those assets. and it allows you to save more on taxes now so you can reinvest more into your business.
It’s supposed to fuel growth. There’s this new category of between the line deductions is what I’m calling them. That’s not their official name, but they are after AGI is determined and they are, you can take these deductions even if you’re not itemizing. So they’re below the line deductions in a way.
But they’re not itemized deductions, and they include the new senior deduction, which is really a personal exemption. This is applied for people, over age 65. I’ll go into more detail on this on the next slide. Also, no tax on tips, no tax on overtime, and no tax on automobile interest. all three of these are brand new.
They’re from 2025 to 2028. You don’t have to itemize to claim them. but they’re all, income limited.
So the senior deduction I said I would talk about on this slide, one big piece of publicity that came out about OBBBA implied that Social Security. Income is gonna be taxed differently than it has been. It is, in fact being taxed the exact same way it always has been since 1984. it’s based on, you know, a provisional income amount.
Those numbers are still not adjusted for inflation. you may pay up to 80 tax on up to 85% of your Social Security income. What has changed is that we have this. The standard deduction increased and the new senior deduction, which is $6,000, for. Each person. So if you’re married, filing jointly, it can be $12,000.
It’s income limited and it phases out. So if you’re married, filing joint, the phase out starts at 150,000. If you’re any filing status other than married, filing separate and married filing joint, then it’s 75,000. And if you’re, and if you’re married filing separate, it’s zero. But the idea is that basically between the increased standard deduction and the senior exemption, your, unlike your taxable Social Security will be offset by these.
So that was the idea that public, public publicized information about the change to tax and Social Security income, but the way Social Security income is taxed is, has, actually not changed.
I mentioned the increased standard deductions, so for 2025, at the beginning of the year, if we were talking about this, we would’ve said for a single person, the standard deduction is 15,000 even. And for married filing joint it was 31,000. Even. you can see those numbers have been boosted a little bit, and then they adjust for inflation each year as they have.
So for 2026, the new numbers have come out at 16,100 for single 32,200 for married filing joint. But you can see that this year there’s a $750 per person increase to the standard deduction over what we said at the beginning of the year. Individuals, age 65 and older get a supplemental deduction as well.
2025 tax brackets. This is where you’re gonna look at what is your taxable income number. So this is not your total income amount, but what’s the taxable income number? And line it up to where you are on this chart, depending on your filing status for, married filing separate. All the way up until, I believe it’s the 35% bracket, the, it’s gonna be the same as single.
But if you’re joint, or head of household, then it’s gonna be a little bit different. So you can kind of just see where you’re at, based on your prior year tax return. If everything is pretty similar, you can see where you will be for 2025. And then I’m just gonna slide over and you can see where you’ll be for 2026.
These numbers increase slightly each year based on, inflation. These 20, 26 numbers just came out, maybe two weeks ago.
All right. And then let’s get, let’s talk about, one example of how these tax brackets work. so when you’re looking at, let’s go back when you’re looking at these brackets. The way that it works is that on the first amount you pay that amount, then on the next amount you pay that amount and so forth and so forth so when you, if your income taxable income is 212,000, you don’t pay 24% on all of that income. You pay 24% on only the last $600 of that income, and other than that, you pay 22, 12 and 10. So to illustrate how that works, you know, we have, taxable income of 110,000 here for a single person, and we’ll show that from zero.
This is assuming the taxable income. So this is after adjustments, after itemized deductions, after between the line deductions, if any, apply. From zero to 12,400, that amount will get taxed at 10% and then the next amount would be taxed at 12 and then 22, and it’s just that last bit that’s gonna get taxed at 24%.
Catherine, does this seem like a good time for some questions?
Kathryn: Can you explain anything about the college accounts? I know that we weren’t gonna dive into the OBBB, but anything that you can say about the college accounts that were mentioned about the kids getting-
Amanda: it’s, yeah, there’s a new account called a Trump account I think that might be what you’re, yes. What you’re about. I forget they had a different name in the original iteration of the bill, and then just like right at the last minute before they passed it, they changed the name to Trump. Trump accounts. It’s for the, I forget the amount of time. I think it’s this year and maybe next year for children that are born, it will be automatically funded. with around a thousand dollars. I wanna say it was, I don’t remember the exact details about it. and then after that, it’s like a saving, it’s like a tax favored savings account. It doesn’t really provide a ton of additional benefits to a traditional 529, in the sense that.
A 529 plan for college. the, all the earnings would be tax free if it’s used for college, and they can be rolled over to a Roth IRA, at if there’s any unused funds. So those are pretty powerful advantages. The Trump account can be used for more things than just college, but it does, it does include some capital gains taxation. And that’s about as detailed as I really wanna get into it.
Kathryn: Well, I, should say also that before we get into all the, you know, we, the questions that you all are giving me that, thank you. if you’re not a client of Pure’s, please take advantage of our free Tax Reduction Analysis that Amanda has been preparing.
A Pure Financial professional will take a deep dive into your returns and see what you might have been missing, if you’ve missed anything, and also, future projections to see if we can take advantage of all the things that we’re gonna be talking about today. Of course, being armed with the right information you can control to a certain extent how much tax that you pay now and in retirement. So we wanna make sure that you know that if you are in our Pure family, we hope that you’ll just reach out to your advisor. They have all this information as well, but if not, please go ahead and take advantage of that tax reduction analysis.
Vehicle loans is this applicable to only vehicles purchased in 2025. Do you know that?
Amanda: Yes. It’s 2025 and later while the, while this law exists. So from 2025 to 2028, and it weirdly does not start on January 1st. and it doesn’t start on, on July 4th when the bill was passed. I think it starts mid-January. So vehicles purchased after maybe January 18th or something like that.
Kathryn: Okay. And then someone just wants you to reiterate, they missed the part about the $10,000 deduction for the local, the salt taxes, just and the mortgage interest with the new bill. So we just said about the mortgage interest, but just reiterate the 40,000.
Amanda: Yeah, so beginning 2025, the SALT limit. So state and local tax limit. This includes, State income tax and state property tax and state sales tax. So altogether, your deductible amount is increased to up to 40,000, for all filing statuses with, AGI of less than 500,000 except for married filing separate. Who are limited to 20,000 and an AGI of two 50, so half as much as the married filing joint. After that it phases back down to the preexisting limit of 10,000. that deduction is available this year, 2025 through 2029. It expires in 2029.
Kathryn: Okay, we’ve got a lot of these questions about, will you explain what tax year filing AGI that I need to refer to regarding Irma charges for 2026 and 2025? So are they, go ahead.
Amanda: Sure. 2025 your, Medicare for 2025 was based on your 2023. income, but it’s based on the 2025 tiers. So when you’re looking at what is the chart, you’re gonna compare the current chart to your two year ago income. The same thing for next year, 2026, will be based on your 2024 income.
This year’s income 2025. Will impact your 2027 premiums. And those will be based on those charts which haven’t come out yet. That’s gonna be contingent on what inflation does over the next two years.
Kathryn: Good point. And then lastly, does the 500,000 MAGI phasing out figure for the $40,000 for salt that you were just discussing apply to all filers, is that, did, does everyone get to take advantage of the $40,000 if you’re single married, filing jointly, et cetera?
Amanda: Married filing separate is half, but all the other filing statuses are the same.
Kathryn: So single is 20,000?
Amanda: Yep. No single is 40,000 and 500,000 AGI. So that’s consistent. This was, there’s a number of marriage penalties, we’ll call them in the tax code. And this was one right where the limit was already $10,000.
And that applied for single people. It also applied for married filing joint people. So even though married filing joint, people might practically pay TWI twice as much in state tax. They were limited to the same deductible amount for federal tax purposes. The same thing is true now. It’s 40,000 for everybody, but married, filing separate, married, filing separate with a lot of these kinds of rules is half of married filing joint.
Kathryn: Right, and you can still, if you’re over 65, you can still qualify for those $6,000 credits that are the new credits for over 65.
Amanda: Yes, but you’re unlikely to get both right? Because, there’s a, an AGI phase out for the senior exemption that’s 75,000 for like single head of household and it’s 150,000 for married filing joint.
So most of the time when your AGI is that low, you’re not paying enough. enough state and local tax that you would be taking advantage of more than a $10,000 deduction. Sometimes if your property tax is very high, then you would, but income tax wise, it would be unlikely. Okay.
Kathryn: Alright. You’ve been doing a great job. I know there’s a lot of very detailed questions, come back to me when you are ready for more questions.
Amanda: Sure thing. All right, so that kind of covers the, the initial tax calculation. Now we’ll complicate it a little bit with capital gains, right? So starting with your taxable income, you’ll find where you are on the, On the tax scale and then subtract out your long-term capital gains and qualified dividends, and that will be your ordinary income, taxable income, and whatever that number is, that’s what you would line up here to determine how much is subject to capital gains tax. So the easiest way to think about that is the capital gains tax is your top income.
So it sits on top of all of your other income. And so these tiers are at zero, 15, and 20. So unlike what I said about the, the ordinary income tax brackets where you would pay 0% up to a certain amount and then 15% up, you’re gonna start in whichever one of these, is applicable. So for most people, they’re gonna be in the 15% tax bracket for capital gains and may move up to 20.
But if you’re in the 0% tax bracket, which is usually your taxable income is kind of around the 12% tax bracket, then that’s where we’re gonna see some, things you can do strategically with your capital gains. So I just wanted to make sure that we talked about that. All right, so let’s talk about, what we can do before the end of the year.
The first thing I wanna talk about is contributions to your retirement plan. Unless you’re self-employed, your contributions to your retirement plan through your payroll at work need to be done by December 31st. So if you have not already maxed out your employer plan, now is the time to really think about how much can you spare to get closer or to max that out.
this year for 2025 elective deferrals to 401(k)s. 403(b)s, TSPs, et cetera is 23,500. There’s an additional catch up for, most people who are over age 50, which is 7,500. This is consistent with how the law has been in the past, but there’s an, new special catchup for people who are age 60 to 63.
This is actually not part of OBBBA. It’s either, I think it was either the Secure 2.0 Act a couple of years ago. Pretty sure it was that one. but the, it’s 11,250 if your age, 60 to 63 at the end of the year. And if your plan allows it, if you have a 457(b) plan, that is not. accumulated with these other plans so you can actually double up on your elective deferrals, which is really helpful.
if you’re trying to catch up on contributions. oftentimes these will offer a matching contribution from your employer. So at a minimum you wanna try to maximize your match most of the time. ’cause that’s sort of like free money on the table from your employer. and most of these plans have a Roth option so you can decide do you wanna pay the tax today?
And then potentially have tax-free distributions, or do you want to defer the tax today and pay the tax when you take the money out? And we’ll talk a little bit about that dynamic as we go further through the slides. If you’re self-employed, including if you have a job and then you also have kinda like a side gig, that’s profitable, so maybe an Etsy shop or You know, an Uber driving or anything like that. Definitely consulting income, being an expert witness, lots of different things that you could do, on a business return. You can use the net earnings from that to establish any of these kinds of plans. So if you have a, so like a 401(k) at work already and you’ve maximized your contributions at work, then you know, maybe you wouldn’t wanna use the 401(k) here because it’s going to, It’s gonna be that same 23,500 limit is gonna apply across all of your 401(k) style plans. But otherwise, the solo 401(k) is usually, going to allow you the most, contributions from your self-employment. Otherwise there’s a step IRA and a simple IRA. These are both IIRA based plans. they don’t require any special reporting, but they do have different kinds of limits.
The step IRA is employer contributions only, so it’s a relatively small amount and simple IRAs just has lower limits and requires a match from yourself.
There’s a few other options if you have employees. so those other plans are good if you’re just by yourself, in a one person business or if you have a side gig. But in the case where you have employees, then you have to think about how are you gonna cover those employees as effectively as possible.
There’s a Safe Harbor 401(k), which Operates as, a required matching plan, but it doesn’t require you then to do all of the testing, which makes 401(k) management more expensive. there’s these other kind of new plans, starter plans, pension linked plans, and then in California, if you have any employees.
This year, end of year 2025, if you have even one employee that is not yourself, you are required to offer some sort of a plan or enroll in Cal Savers. Cal Savers is just a Roth IRA, basically for your employees that they can contribute to through payroll.
All right, so speaking of IRAs, there’s two different types. There’s the traditional IRA, which is mostly, pre-tax, but maybe non-deductible. And then there’s the Roth IRA, which is after tax. It’s always non-deductible. the limit this year is $7,000 for taxpayers under age 50. It’s $1,000 above age 50.
The limits for 2026, there’s a lot of speculation, but they haven’t been formally published by the IRS yet, so I’m not sure. I don’t wanna, disclaim what those numbers are gonna be. you can contribute to an IRA even if you don’t have, an employer plan, but you do have to have earned income. if you do have an employer plan, that’s where you may end up with those non-deductible.
Traditional IRA contributions. Roth IRAs also have an AGI income phase out. So when we’re thinking about, you know, how much is your earned income, that’s a lower floor. Like you have to have at least as much earned income as you want to contribute. And then there’s, for Roth IRAs, there’s an upper floor which is your AGI above which you cannot contribute.
So let’s talk about how these all work together. I have a pen here and I’m going to use white. So hopefully that is visible. I know sometimes, this pen is a little hard to see on the screen, but hopefully you guys can see what I’m, pointing out here. these pre-tax accounts are, well, these are your retirement accounts, these tax free and tax deferred accounts.
So when I was talking about Roth style accounts, those are up here. When I was talking about your traditional, regular 401(k), 403(b) IRA, these types of accounts are usually tax deferred, and the way that this works is that you put the money in and you pay no tax, whereas in the Roth accounts, you pay tax.
Then when you take the money out here, you pay ordinary income taxes. So that’s our 10 to 37% from the tables we were looking at earlier. This one, if they’re qualified distributions, you pay no tax in both of these types of accounts. All of the growth that’s happening inside of the account is tax free from year to year.
So your two taxation points are when you put the money in and when you take the money out, and that’s the main thing to decide between these two accounts is if you find that it’s, better to pay the taxes today. On a Roth account or if you wanna save the taxes today. So how do you decide that? You know, usually it’s based on when do you think the taxes are gonna be the highest?
Do you think that they’re gonna be higher later, because either tax rates go up or because your income goes up? Or do you think that they’re gonna be lower later? Then we also have this taxable account here. This is our zero, 15 and 20% account. For long term capital gain. So this is our typical brokerage account.
that’s when we’re thinking about capital gains rates. Those rates are lower than your ordinary income tax rates, so that’s also a really valuable account to be saving in. as opposed to cash, which is also gonna be taxed at ordinary income. you can have net investment income tax. here too, which is an additional 3.8%.
a couple of features about these accounts in the long term is, while you’re working, you know, you’re saving into whichever accounts are most appropriate. This is unlimited. You do pay tax on the money that goes in and you pay tax each year. And then when it comes out, it’s at these reduced rates.
while you’re working, you decide where you’re gonna put your money, and then when you’re retired. You can decide where to pull your money so that you can control your taxes if you have money in each of these pools. The one exception is that this account, this tax deferred account, is gonna require you to take required minimum distributions at a certain point, and that point keeps getting later and later it was 70 and a half.
So some people started then. But if you’re approaching 70 and a half, don’t worry. it then went to 72, but only for the people who were 72 in the year that existed. So if you’re already past 72 or approaching 72, you know, don’t worry about it. If you were born in the 1950s, now we’re talking about age 73 is your required minimum distribution age, and if you were born 1960 and later it’s age 75, but this.
Timeframe when you have to take required minimum distributions is designed to force this money out at these rates, whatever they end up being at the, time when you’re RMD age. If you do not use up this entire account during your own retirement and you die with value in this account, then it’s called income in respect of a decedent and it will be taxable to your heirs.
So that’s a main difference between this account and these other two accounts. These two accounts, there’s no requirement that you ever take money out of them. And this one, after five years and a qualifying event, that’s how you get these require, qualified. Distributions at 0%. So your heirs pay no tax.
The taxable account gets what’s called a step up in basis, and so that also is not taxable to your heirs. They can take it out whenever they want Here. The, income and respective decedent for most beneficiaries needs to be withdrawn within 10 years at ordinary that person’s ordinary income rates. So thinking about this balance.
Is really critical, while you’re working, and while you’re saving and especially in those pre RMD years in retirement, to get to a balance where you can, have enough flexibility for your own life and then also for your beneficiaries.
All right, so how can we move some money around if we want to? One is that, I mentioned there’s a MAGI limit for Roth IRA contributions you can contribute to a traditional IRA and then convert it to a Roth IRA to avoid that limit. This only works if your balance in your traditional IRA accounts, including SEP IRAs and simple IRAs is zero.
Otherwise you have a pro rata calculation. It’s called where. A portion will be taxable. And so you’ll just be creating basis in that traditional IRA. But for most, for people who don’t have another IRA account. This is a way to get around that MAGI requirement for Roth IRAs. And the reason that, I wanna talk about this is because converting a traditional IRA to a Roth IRA is actually allowed for everybody no matter what your income is.
So going back to this chart, you know, if you can’t contribute to a Roth IRA directly, a conversion is really just moving money from this account to this account. So we’ll call that a backdoor Roth IRA, when it’s a contribution this year and a conversion in the same year. It’s sort of like. Moving around that AGI requirement.
But you actually can do this at any time, at any age, and in any amount. The trick is you just have to pay the tax in the year when you do the conversion. So thinking about strategies for that. One, one strategy you could think about is, filling up your tax bracket. So in my example earlier, you know, we had the 10% was already filled, the 12% was already filled.
Maybe this person thinks they will be in the 24% in the future, so they’re going to have. A lot of money that’s gonna be taxed at the 22%, they’re gonna be filling up that bracket, like it or not, eventually. They could do a conversion, fill up this 22% bucket in the current year, and then that would allow them to get growth on that money tax free indefinitely.
So that’s one strategy to think about. Another one, in the questions earlier was about, Medicare tiers, right? Maybe you could go to the top of your Medicare tier. So that you don’t go over that Medicare tier in a future year from RMDs. So the idea here is that you don’t wanna overpay the taxes, right?
So maybe you don’t wanna pay 24% if you’re going to be in a similar tax bracket in the future, but you do want to mitigate your future taxes by creating some tax-free growth and some control over those RMDs.
So let’s talk about some other tips. these are some last minute things before the end of the year that you can think about. We talked about contributions and we’ve talked about conversions. now we’re gonna talk about capital gains. So I mentioned, that, well, the market goes up and down all the time, so in any given year, you can.
Take advantage of those losses and create basically like a tax asset. And it’s a little bit like creating a tax free pool of money inside of your taxable account. So for example, you have a stock that went up, you know that you paid $5 for, now it’s worth $3. You claim that loss of $2. but you buy something that you know, keeps you invested in the market that costs.
you know, that same $3. So then you’ve realized that loss, $2. And now this stock is free to grow because at any given moment, you know, any given stock might be lower than what you paid. Even if the whole market is going up. So by realizing that $2 loss now you’ve banked it. Each year you can only claim $3,000 of losses on your tax return.
So any excess losses from that than that are banked for future years and they’ll just carry forward until you can use them. So tax loss harvesting is really helpful for managing that taxable account, especially in retirement. But I mentioned earlier that some people are in the 0%. Capital gains rate.
So if you’re in that kind of a situation, it also might make sense to gain harvest, right? Because if you can harvest your gains for free, then you might as well take advantage of that in the year that it’s available. And then in a future year, your basis now is higher. So if you sell in a fu, you know, repurchase that share, and then sell it in a future year when it’s gone up even further.
You’re paying less tax in that future year because you took advantage of this 0% amount in this year. So this is also a cool strategy to pay attention to. But remember that capital gains sit on top of everything else. So if you then backfill your income with some other type of income, it’s gonna push your capital gains up into those higher brackets.
Another strategy is, when we’re thinking about charity, actually I wanna talk about this one first. when we’re thinking about charity, you can avoid capital gains completely on, on your capital gain assets by donating them to a donor advised fund or directly to the charity. So if you, donate.
stock. Let’s say you paid $10 and now it’s worth $20. When you donate that stock to either a donor-advised fund or directly to a charity, you get to claim a deduction of $20. That’s the fair market value and you do not have to claim the capital gain of $10. So it allows you to avoid the capital gain and still get the full deduction for itemized deduction purposes.
So this is a really good strategy. Donor advised funds, allow you to contribute as much as you want to in a current year. And then you can dole it out to the charity over time. That way you can avoid the situation where maybe the charity calls you next year and wants the same contribution when you were trying to like bunch a couple of years into one.
You can use a donor advised fund to allow you to make a large contribution in one year. Then spread it out to the charity over several years. This is exceptionally valuable this year, 2025 because in 2026 there’s a couple of changes coming under OBBBA for, for charitable contributions. One of those changes is if you are in the 37% tax bracket, so that’s the very top tax bracket, the maximum.
Value for your charitable deduction that you can receive is 35%, so basically your charitable contribution will be reduced by 2 37 next year. if you’re in that top, top tax bracket, so that’s not gonna affect everybody, but for the people that it does affect, that’s a really material change and a reason to, accelerate some of that giving into this year.
Another thing that’s changing next year is that if you are donating, and itemizing, then the first half a percent of your AGI. Is not allowed as a deduction. So if your, AGI is a hundred thousand, then a half a percent is I think 500. the first $500 would not count as a deduction. So. it’s creating a little bit of a squeeze on the value of your charitable deductions.
If you’re not itemizing, there’s a little bit of a reprieve. Some of you will remember in, the COVID years, you could do a deduction of like three or $600, to charity without itemizing. That is coming back. For next year as well. but only if you’re not itemizing. So there’s a bunch of different changes happening.
You can lock in your benefit this year by using a donor advised fund, and then you can distribute to the charities or you can even decide what charities at a later time.
And then going back to qualified charitable distribution, if you are at least 70 and a half. So I mentioned that earlier as the RMD age, the former RMD age. It used to be kind of tied to that. Now they’ve made the RMD age later, but they have not changed this one. So if you’re at least 70 and a half, you can donate directly from an IRA account to a charity, and that money will just be completely tax free.
So it, how I say it is it takes pre-tax money and it turns it into negative, never tax money. So you can take, up to $108,000 in 2025 from your IRA account completely tax free. It does not touch your AGI and donate it directly to the charity. The trick is it has to go from the IRA. To the charity, so you can’t pull it from the IRA and then yourself donate it to charity.
It needs to go directly from the account to the charity, but it’s a really powerful vehicle if you’re charitably inclined to allow you to avoid some of the tax on that pre-tax money that you have in your IRAs.
Kathryn: Before we get to all the questions, if you are not a client of Pures, then please take advantage of our.
Free tax reduction analysis. It’s a great resource. you’ll be able to get questions answered that pertain directly to you. and of course, as I said before, armed with the right information and the light, the, you know, you can control or have more control over how much you spend in taxes, to, let’s see.
if you are a. Fam in the Pure family, please reach out to your advisor. They have all of this information because as I said, Amanda is our director of tax, and so she meets with the advisors all the time, and so they all are armed with all of this information. but this tax reduction analysis is no cost, no obligation tailored specifically to you.
And as a reminder, pure Financial is a fee only company. So you can meet with a pure financial professional and get your questions answered. So one of the questions that was asked was, regarding the Roth conversions, so does that add to your AGI to potentially put you over the limit for the Roth contribution?
For the 150,000 annual cap. 165.
Amanda: I’m, nodding and forget my nod. It does not for the, Roth IRA contribution for, for Roth IRA contributions. Your MAGI is your AGI minus your conversions. So conversions do not disqualify you from making Roth IRA contributions, but they do count in your AGI for pretty much everything else.
which is why sometimes, you know, you’ll wanna strategize around, you know, what tax bracket are you in, what Medicare tier, things like that.
Kathryn: Great. All right. And then, so can a Roth IRA be established in retirement and you’re no longer working but I have an IRA am I able to actually. You know, contr convert?
Amanda: Yeah. You can establish a Roth IRA and you can convert to a Roth IRA from a traditional account. What you cannot do is make contributions of non-retirement money, to that Roth IRA, unless you have earned income, but you do not have to have earned income in order to do a conversion. Okay.
Kathryn: And then just a clarification, someone was asking about the inherited IRA, where our heirs have 10 years typically to deplete the accounts.
but he was questioning the usual RMD schedule for his own non inherited IRAI think he just means his own, IRA, that’s just the life table. he’s just wondering, is there something else that he needs to know about that or does he just go to get the life table online?
Amanda: Yeah, it’s, I know exactly where it is actually.
It’s publication five 90 B oh, so five 90 dash B from the IRS. in the appendix section there’s three tables. Table one is for beneficiaries. table three is for the original owner. So if it’s your, if it’s your IRA and you’re trying to determine how much your RMD is for this year. Then you’ll use table three and you’ll use your age for this year, and you’ll divide your 12 31 20 24 balance.
So the balance on the last day of last year by the number that’s on that table. And it’s publication five 90 B. Is that what you said? That’s
Kathryn: right. Just putting that in the chat for y’all so that you remember table three. Alright. let’s see. So if I pull money outta my traditional IRA, then put it into a Roth, so we’re talking about a Roth conversion after five years, my heirs can take it out tax free, I guess.
Yeah. Maybe a little more clarification on that.
Amanda: Yeah, a Roth IRA is, it’s completely tax free for yourself, for your own contributions. So when you put contributions in, those come out first and they are tax free. Then if you’ve made any conversions, there’s a little bit of like some kind of gray area depending on how old you are and how much of it was earnings and things like that.
but those will come out next and then earnings will come out last. So that’s what happens, for all, contributions, all conversions, everything. Then once that account has existed for five years, or actually once, it’s been five years since your very first Roth, IRA account was opened and you have a qualifying event for most people that’s turning 59 and a half, but it could also be, you know, becoming disabled, dying, you know, just different.
different events. Once a qualifying event happens and it’s been at least five years, then any distributions will be tax free, and that’s true for your heirs as well. Excellent.
Kathryn: I’m trying to add things into the chat for a few people that have asked about the tax, the Tax-Free Retirement Guide. I just added it in there again for you in case you missed it.
if you came in late, and then somebody would just ask, asked about the clarification for the charitable deduction. If I’m in the 24% tax bracket and I give a hundred dollars gain to charity, I lose a hundred to get 24%. That’s. Kind of a, I’m not really sure exactly. Maybe just re-clarify the quest, the, charitable deduction if you’re in the 24% tax bracket and giving a hundred dollars of your gain.
So I guess long-term capital gains to charity. She loses the a hundred dollars because she’s donating it to get a hundred dollars back on her taxes. I’m,
Amanda: yeah, it would not be a hundred dollars back on your taxes. And that’s a really important point anytime that we’re thinking about deductions, even like the bonus depreciation I mentioned for businesses.
I talk with business owners about this all the time, that in general, it’s better to have your money than it is to save the tax, right? You don’t wanna create expenses, right? You want to make sure you deduct everything that you’re entitled to deduct. But there’s no reason to create expenses. Our tax rate is not higher than 50%, so you’re always gonna be paying more than half of the expense.
but if you are charitably inclined, if you are, already giving to charity this year, maybe the first year in a while that you’re deducting because of that salt increase. And so this might be a good year to take advantage of. That increased salt limit, and some sort of a bunching strategy. So you can avoid next year’s half a percent floor, by doing it all this year.
And that’s where the donor advised fund can be really powerful.
Kathryn: let’s say, I just saw another one, so just, reiterate. So somebody was asking about the $3,000, you can only get $3,000 of your losses, but explain that’s after. You, balance after you net.
Amanda: Yeah, so that would be net losses. So for example, if you have, an account where you’ve got, $50,000 of losses and you’ve got $50,000 of gains, and you just realized it all in the current year, you would be at zero.
You wouldn’t be offsetting anything. But if you only realized all of the losses, so you realized the whole 50,000 of losses, and then you bought, you know, other stuff, and then in the current year you would have a $3,000 loss. Next year you would have $47,000 that carried forward. So next year, if you needed to pull some money, now you’ve got more gains in your account.
Hopefully, because you used that, those loss assets to buy new assets that are growing and you already had 47,000 of gains. So you can pull money from that account tax free and you offset that $47,000. So that’s what I mean by it creates a little bit of like a tax asset or a tax free pool for future years.
Kathryn: All right. And how are we doing on time? Doing okay. Okay. So how about, I’m retired, but my wife is still working. Can I contribute to an a Roth IRA in, in my case a backdoor? IRA conversion. So he doesn’t have income, but is it still able, does he have the opportunity to do the spousal contribution?
Amanda: That’s right. Yeah. Married people who are filing jointly can use each other’s earnings to qualify for an IRA contribution. so if you file separately, that’s not true, but if you file jointly, then then you can use your spouse’s earnings to create that floor for your own contributions.
Kathryn: And then just if you’re retired, but you do have earned money from a side job, can you deposit any of that into a Roth, I guess as long as it’s W2 income, correct.
Amanda: As long W2 or self-employment. and you can deposit all of it up to the limit of $7,000 into an IRA of some sort. you can deposit it into a Roth if you meet the AGI limits. So that’s where, you know, even if your earned income is only 10,000, let’s say, you could put 7,000 into any type of IRA unless your AGI went over the other limits.
Kathryn: Correct. And then just please clarify the medical expense deduction. So when you were talking about the 7.5% over your AGI, just one more time. Like how much, so they need to take their AGI multiply it by seven point a half percent and anything over and above that if they are itemizing, correct?
Amanda: That’s right.
And it’s only your out-of-pocket expenses. So for some people, that’s kind of what. It’s a little frustrating, right? You pay your, health insurance premiums out of your paycheck, let’s say, so that doesn’t contribute to that floor because it’s already pre-tax money, so you can’t deduct it again. so it’s really just those out-of-pocket expenses.
Also, if it’s paid with an HSA, it’s not gonna qualify. ’cause again, it’s being paid with pre-tax money. But if you’re paying out-of-pocket expenses. That are more than 7.5% of your AGI, then that’s when they become deductible. And if you look at your, schedule A, or if you look at a Schedule A, you’ll see that calculation happen right at the top, where it asks you to put your medical expenses kind of like off to the side, and then calculate 7.5%, subtract that from your total expenses, and now you can put it on the side where all of your deductions are.
Kathryn: Then last question, we haven’t gotten to all of ’em, but last question. Are the capital gain tax brackets based on adjustable gross income or taxable income? When you put up the brackets and you were talking about, we find out where you are.
Amanda: They’re based on your taxable income. So you’ll find out where your, what your total taxable income is, and your capital gains type of asset will be the last taxed income.
So if the top of it’s in the 15, then you know that last income is gonna be 15% capital gain.
Kathryn: Excellent. Well, Amanda, you have done an amazing job. Thank you so much. To begin implementing the end of year tax strategies we’ve been talking about today. Sign up for your free tax reduction analysis with one of our experienced professionals here at Pure Financial Advisors.
Thank you so much everyone, for being here with us. We appreciate your time and we look forward to seeing you again. Have a wonderful day.
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