Ep. 99 – Julie Herres – Potential Tax Changes Coming
Potential tax changes are coming, and it is important you understand what is proposed and how it might affect you.
It is advisable that you get in touch with your financial advisor to help you understand how to navigate the proposed tax changes if they were to happen today. To have a peaceful and secure retirement planning process, you have to familiarize yourself with what is expected of you when it comes to taxes.
In this episode of the Secure Your Retirement podcast, we have Julie Herres talk about the potential tax changes on different income levels. Julie is a tax expert and the owner of GreenOak Accounting, where they provide bookkeeping, accounting, CFO, and tax services.
In this episode, find out:
- Understanding the progressive tax system when it comes to income.
- Effective tax rate – total tax rate divided by total income.
- The potential income tax rate changes especially on high-income earners.
- The proposed tax change for capital gains on income over a million dollars.
- The various tax proposals on property inheritance cost bases.
- Why you shouldn’t over plan before and after the proposed tax changes happen.
- The potential significant tax change on estate planning.
- The potential social security tax rate changes for over $400k per year income earners.
- Have business books as a business owner to always have the right financial data and plan.
- “If it happens, then we can always plan for the changes, but there’s no reason for us to over plan today if those tax changes were to take place.”– Radon Stancil
- “If you have a business, you’ve got to have business books to have the right financial data.”– Julie Herres
Get In Touch with Julie:
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Here’s the Full Transcript:
Welcome everyone to our Monday podcast. Every Monday, our goal is to bring somebody to you that can add value. And that is an expert in a field that we think can help you as you are trying to plan your lives, get ready for and live through retirement. And I think we’ve done it again today. We’ve brought somebody that we think can add a lot of value and her name is Julie Herres.
And we’re going to talk about all these different things that we might need to know about when it comes to taxes or being able to deal with our money and that kind of area. So let me just say this first, thank you so much, Julie, for coming on and talking with us and to all of our listeners.
Thanks for having me. It’s fun to be here.
Yeah, Julie. For anyone listening, I got to know Julie a little bit. She actually had me on her podcast talking about retirement planning and everything like that. And Julie owns an accounting firm and they work in a lot of different facets virtually all over the country. And they mainly specialize working with physicians and different practices in that aspect. So she’s got a lot of knowledge around taxes and one of the biggest things that has been in the headlines ever since the change in the administration is, well, there’s some tax changes that are potentially coming our way and everyone’s getting a little nervous about it.
One, because it’s a little bit unknown right now and the other is there’s a potential of taxes going up or maybe losing some of the benefits that we’ve gotten so used to. And so I thought it’d be nice to have a good conversation with Julie just so we can start understanding some of the major things that are happening or propose to happen. And I think the first thing that we should do is just start off and say let’s remind everyone of what the basics are when it comes to our federal tax system, Julie. So when I say that our tax system is progressive, can you explain what that means?
Yeah. So we have a progressive tax system. Our tax brackets go from 10 to currently 37%. And what that means is that depending on how much money you make, you’re going to get taxed at a certain bracket, right? So every dollar up until X amount gets taxed at 10% and then the amount above that gets taxed at the higher bracket.
So sometimes you probably heard someone say, “Oh, well, I don’t want to make more money because then I’m going to have to pay more in taxes.” And that’s simply not true just because every, every additional dollar might be taxed at a higher rate, but that doesn’t all of a sudden make all of your dollars taxed at that higher rate. And the brackets themselves depending on how you file, so whether that’s single, married filing jointly, head of household, married filing separately. So the thresholds are different for all four of those categories.
Great. So, I mean, that is confusing. We run into that all the time where people just think, “Oh, I don’t want to go into that next bracket.” And they get that rather than confuse themselves on that. So when we say something like effective tax rate, can you say, “Well, what does that mean?” Because people I think use that terminology, they say, “Oh, your effective rate is this, but you hit this particular higher tax bracket.” So could you explain the differences between those two terminologies so people can get it?
Yeah. So when we talk about effective tax rate, right? There’s a lot of different pieces that go into how much tax you’re going to pay. There’s your deduction. So are you using standard deduction? Are you itemizing? Are there any adjustments to your AGI? So usually it’s looking at what’s your total tax divided by what is your total income? That’s your effective tax rate. So you might be in a 37% bracket, but your effective rate might be lower than that and that would be a very normal thing.
Yeah. So just to make that easy. If I had $100,000 income and let’s just say I paid $17,000 in total tax, then my effective rate would be 17%?
Correct. Exactly, exactly.
Right. And even though your tax bracket, the top bracket that you may have hit was higher than that 17. It’s so common that sometimes you go into another tax bracket and all of a sudden you feel like all of your money is being taxed at that highest rate, which that is not the case. And so sometimes we have to remind people of that. So that’s a good baseline just to give everyone a reminder as to how the tax system works. And now we can kind of draw some comparisons as to, well, what is potentially going to change with some of the new bills are being put into place and being talked about.
And there is no timeline here. We don’t know when this stuff is going to get passed, but it’s out there and it’s making people nervous. So we thought we should address it and put it into some perspective. So I think we can start with the tax rate increase from an individual tax perspective. Can you talk about that? What is it right now as far as what the highest is and what are they talking about taking it to?
Sure. And I think when it comes to taxes, especially change can be really scary, right? My firm is based outside of DC so every couple of years we just kind of see the pendulum swing of politics and ultimately change is inevitable. So officially as of today as of we’re recording today, there’s not a whole lot of tax changes for this year. There’s a handful of changes that came through in the American Rescue Plan that was enacted in March and that affected mostly the child tax credit, earned income credit. And there were some premium reductions for ACA health insurance, right?
So there were a handful of things there, but not a whole lot that affects tax rates. So what we’re looking at right now is currently as I mentioned, the tax brackets are between 10 and 37%. It looks like the 37% tax bracket will be going away and we’ll get a new tax bracket around 39.6 or at least that’s what’s kind of been floated. So again, nothing is official here, but that’s what’s being discussed. And so there would be a higher tax bracket.
Ultimately if you’re in the higher income earner so over 500,000 for married filing jointly couples. And one thing that the Biden administration has said in their tax plan is that they don’t want to increase tax on households making less than 400,000 per year. And everything that we’re seeing so far is indicative to that. That if you are somewhere in the zero to 400K per year household, you’re probably not going to see a whole lot of change. But if you’re a high income earner like a lot of my clients are business owners, then there probably will be some tax changes if you’re over the 500,000-plus mark.
Great. Well, not great, but thank you for answering. That was a great answer. We’ve heard a lot of talk what affects us in our world a lot is capital gains. And we know that a lot of people want to wait in their selling of something to get into the long-term capital gains because it’s taxed at a more favorable rate, but what are you seeing there as far as the effect on capital gains?
Yeah. Well, and this is all very theoretical right now, but in the current system, you would pay on capital gains anywhere between zero and 23.8%. The 23.8 is technically it’s zero to 20, 23.8 if you have a net investment tax income. So that’s the current system. What has been proposed and again, we’ll have to see if it happens is that if you were earning over $1 million in gross income and that’s not super clear is if it is this AGI, is this taxable income?
But that anything above the million dollar market might get taxed in the highest tax bracket. So either at 37 or 39, 40, it kind of depends on which proposal you’re looking at, but somewhere in that range. So that would be a really large change for capital gains.
So you’re saying if it’s below a million though, there’s not really a proposed or at least they’re not talking about changing that for below that amount.
Well, I believe it’s either the American Jobs Plan or the American Families Plan did not include changes to capital gains for under a million dollars in gross income per year.
Gotcha. So once again, it kind of comes back to the statement you made earlier of the Biden administration saying we’re going this potential tax change would affect a certain income level. So it applies to the long-term capital gains as well. So sometimes in the media, the headlines, the things that we read and all you see is the headline, which is potential tax changes that are going to affect us negatively.
But at the end of the day, we really have to think and see who this going to affect and sometimes it doesn’t apply at all to a lot of people. And then it will apply to some others. But it’s all about understanding what has been written in there. So another big one that I saw is a cost basis step up change potential. We always had to say potential because nothing [crosstalk 00:09:59]
Potential. Yeah. Disclaimer, this is not official, right? Like this is not law. So all of these things, even the million dollars per year it’s in the proposal, but could it change in the Senate, in the House? It could change along the way so it might not exactly be this. But so cost basis, right now when there’s an inheritance I like to use an example for this because I think it’s a little bit easier. So let’s say Murs, your parents bought a house in 1960. The house was $40,000. And unfortunately they pass away and they leave that house to you. The house is now worth $600,000.
As the system is right now, your cost basis is going to be, what is that house worth on the date of their death? Assuming they die in the same day just to keep the situation simple. So that’s now your cost basis. You own this house with a basis of 600,000. So if you turn around and sell it tomorrow and you get 600,000, you do not pay any taxes because you don’t have any gain beyond your basis. Should you keep it for 10 years and the house appreciates? Then you’ll pay taxes on the difference between your cost basis of 600 and whatever you sell it for in 10 years.
So that’s a really big advantage when an asset is passed along from generation to generation you’re inheriting the cost basis of the day of death, which can be a lot higher. So if that went away, there could be some significant tax there. Everything I’ve seen has said, family farms will not. This will not apply to family farms, for example, that are passed on from generation to generation because what could happen ultimately is that you might have to sell an asset in order to pay the tax on that asset if you were taxed at the time of death. There’s various proposals out there and that could be one of the consequences.
Yeah. I would say that that is a huge inheritance planning type of vehicle, the step up in basis. I mean, we have some clients that have been holding on to the stock that they worked at this company, they got awarded a bunch of stock and they said, “At this point, if I was to sell all this, the gain is just way too high. It’s made money. It’s done great, but I just don’t want to realize this gain. So I’m going to use this stock as an inheritance to the kids because they’re going to get this step up in basis.” And at the time of death, they’ll get to really realize that for almost nothing from a tax perspective.
So it’s a huge strategy for inheritance. If that goes away, I could see a lot of people having issues with that one in particular. And so once again, it’s all up in the air.
I’ve got a question for you if that’s okay. What are you hearing on the financial planning side? Are you hearing or do you think this has legs and this will happen?
We try to do exactly what you’re doing, which is say, “Hey, if it happens, then we can always plan for the changes.” But there’s no reason for us to over-plan today if those changes were to take place. But yeah, we are hearing, if you want to say it that these things are probably going to change. There’s probably going to be some changes. What they are, how they play out, have no idea, obviously, just like nobody does until they actually get passed. And then once they do, then we can start planning and putting strategies in place to deal with it. But I would say, yes, our inclination is that we’re definitely going to have some of these changes.
Yeah, something going to happen. And at least on my team, our advice for our clients is don’t make any decisions right now without talking to your financial advisor without all the information. Because just because you think this might be coming it doesn’t mean go gift your home to your children. That also has repercussions. That is possibly not a good idea. So there’s not necessarily anything to do right now other than just wait and see in a lot of cases.
Yeah. I agree with you 100%. That’s exactly what we tell people when it comes to any one of the topics that we’ve talked about is there’s no reason to do something now without knowing the rules. Once we know the rules, then we can start planning and we can start helping with that. But right now it’s all speculation. And what if you go do a bunch of things and it was not needed or what you did was actually worse than was weighted?
So, absolutely. So one more quick one, when we talk about estate tax. That’s a big one in our world is estate tax planning. And we work along with estate planning attorneys to help us plan for those issues. And obviously right now, we have a very high ability to be able to leave quite a chunk of money behind having to get the estate tax. But what are you hearing on that particular topic or what is your thoughts, or I guess the way you see the rules playing out on that?
Yeah. And this certainly is a really important topic for high income earners, but I kind of try to bring it in perspective to our clients where I think last I read less than 1% of estates had to pay estate tax in 2020. It’s usually the very wealthy, which are mostly likely the people working with you, but currently there’s an exclusion of 11.6-ish million per person for estate tax. So that means for a couple over 23 million exclusion, that’s a huge amount. So it almost doubled in 2017. So it was about half of that before then.
What I’m seeing or what was at least in some of the proposals was around like the $3.5 million mark. And so that would mean for a married filing jointly couple if they have under $7 million in assets when they die, not a whole lot of change. But certainly if you were above that $7 million in assets, there’s probably a significant change going there with the exclusion going down and probably the estate tax rate going up as well.
Yeah, yeah. And once again, so that is a pretty significant change. And I think that would put quite a few of our clients into a position of, “Well, we need to start restructuring some things.” Or maybe having another conversation with the estate planning attorneys to make sure everything is structured properly to work within the best way that we can within the new tax changes if this actually does go through. But once again, the moral of the story here is, yeah, there’s some things out there, but we have to wait and see. And after we know that something is written down in stone, then we can start to make adjustments and adjust the plan accordingly.
Now, I’ll just leave this one open-ended. Is there anything else that we haven’t talked about that you see as important when you’re talking to your clients or just in the general world of tax planning? Is there anything else that we’ve left out?
Yeah, well, Social Security I think is a big ticket item. And I don’t mean on the retirement side, but as far as wealthy business owners, there is talk of Social Security coming back over 400K because right now you only pay Social Security and Medicare on your wage base, which is around the 140,000 per year mark.
And so, again, there’s talk no changes if you’re under 400,000, but that Social Security might come back after the 400K mark. And so that could create a lot of planning opportunities from a business perspective, but create a really significant expense in significant additional tax there as well.
Yeah. So I know that you work with in all essence, like you said, self-employed individuals or business owners, but if you just had to kind of maybe give a tip or two. What are some big things because we have a lot of our clients that are consultants or small business owners in from that perspective.
What’s your big, I guess, tip or two that you’d say, “Hey, make sure you do this and you might want to do this before the end of the year so that you don’t get tripped up.” Are there any little things that you’re kind of like constantly reminding your clients?
Well, I always think if you if someone has a business, you’ve got to have a business books, there’s just no other solution as far as I’m concerned. And a couple of the reasons are this. If there are any changes, we had a client just last week come to us and say, “Hey, I’ve heard that this is going to be a better business entity for me,” but we’ve been waiting for months on specific information. We don’t have the right financial information to be able to actually say, “Yes, that’s true or no, that’s not based on your situation.”
And so having the right financial data at your fingertips is so, so, so valuable. Because if there are changes, you can go to your accountant, you could go to your financial planner and say, “Here’s exactly what my situation is, what do we do with this?” But if it’s just a mess and you actually don’t know are you profitable? Are you not? Are we talking 100K in profit? Are we talking 1.5 million in profit? If you don’t have those numbers, it’s really hard to be able to put pen to paper and put together a plan because we don’t have the right information.
Right. Right. Yeah. So Julie, thank you very much for your thoughts, your tips, your advice, working with us through some potentials. A lot of hypotheticals in this podcast today. We wanted to just get some information out there for everyone that is listening. So thanks again for your time.
As people have listened, I know that we said this and you told us you have a pretty large team that works all over the country and you mainly work with people, business owners as well as therapists, family practice and stuff like that. If they’re listening and they said, “Hey, I’d like to have a conversation with Julie.” How would they go about doing that?
Sure. You can head over to our website, greenoakaccounting.com. And we have a free consultation button on there. You can schedule a consultation with my team to see if we might be a good fit for working together.
Well, thank you so much. It is certainly been helpful and we appreciate your time and your expertise.
Thanks for having me.