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Steven Jarvis, CPA (00:53)
Hello everyone, and welcome to the next episode of the retirement tax services podcast. I’m your host, Steven Jarvis, CPA, and I’m very excited to do this week’s episode because, as any of you who have been listening to this show for a long time know, I’m all about helping people take action and making what we talk about as specific to real life as possible. And one of my favorite ways to do that is to answer questions from financial advisors. I love to hear how advisors are asking the questions, the things that are coming up.

The things that stand in their way of getting tax planning done for their clients. So over the last several months, we’ve really ramped up the amount of office hours we’ve done with financial advisors, specifically for our Premiere members. You can go to retirementtaxservices.com to check out our memberships. Twice a month, I sit down with a group of financial advisors to talk through their tax questions. And I love this format. They get to submit questions ahead of time. do live questions as well. We get to really dive in and not just say, okay, what’s the rule, but how does this apply in practice? Where does this go wrong? What can we do to make sure we’re delivering really great outcomes for clients? So as we wrap up the year, I thought I’d go back through, grab some of the questions that have come up from financial advisors who are in similar situations to many of you, so that we all can benefit from these questions and then the answers that go with them. So I’m gonna run through a bunch of questions here if you’d like to get involved in office hours in the future so that you can not only hear these types of questions We get to ask the questions yourselves get to ask follow-up questions clarifying questions all those kinds of things again Go to retirementtaxservices.com checko out memberships. So the first question this was from earlier in the year, but it’s worth repeating because I still run into advisors who aren’t aware of this and the question is Specific to catch up contributions of 401k plans. I received communication from a TPA this week indicating that as of January 1st, 2026, all catch up contributions for individuals age 50 plus must be made to the Roth after tax side of the K Plan. I hadn’t seen this change mentioned before was curious if this is accurate or also your understanding. So yes, this is one of the provisions of secure 2.0. It’s one of the ones I’ve brought up several times in presentations I’ve done this year because especially with 03BA coming out this year, it’s easy to forget that we have other fairly recent tax law changes that haven’t been fully implemented yet. And so this is one of the kind of one of the stragglers from secure 2.0. And yes, as of January 1st, 2026, four retirement plans, catch up contributions have to go to Roth after a certain income level. So it’s not across the board. And this is going to be based essentially on W-2 wages. It’s on our payroll Income not not not on our global taxable income So there we have another new definition of what the IRS considers as making too much money. But but yes at a certain income level Then when we’re considered high earners for this for these purposes Those cash up contributions have to have to go to Roth. Which means we run into issues if there are plans that don’t have a Roth option available the latest I saw is that if there isn’t a Roth option available, then the plan participant is just not eligible to make contributions to the plan at all.

Steven Jarvis (04:03)
They have to be, it’s kind of Roth or nothing, which in theory was part of the reason they waited so long to implement this portion of Secure 2.0 to give plans the time to add this as an option. But if you’re making those catch-up contributions beginning in 2026, they do in fact need to go to a Roth or after tax option. So something we definitely want to be aware of, want to be mindful of heading into this new year. All right, so then next question we have on here, if clients are expected to be between 500K and 600K of modified adjusted gross income in 2025, what should we be considering to help them keep their income closer to 500K if they have enough deductions to maximize the 40K salt limit? So really great question and definitely one of the changes that came out of 03BA, we have this increased salt deduction, this potential potentially increased salt deduction. A couple of things we want to keep in mind before we specifically talk about how to reduce income. So that increased 40 K deduction is available based on your income. And so that’s why the 500 K to 600K is in there. And that’s the phase-out range. Then it gets completely completely phased out after that. When it gets completely phased out though, we’ve got to remember that it doesn’t go back to zero. It goes back to the 10K that it’s been before 03BA. So just something to be aware of there. We also want to make sure that anytime we’re looking at deductions or credits or anything that has a phase up that we’re thinking about the right type of income as far as where that limitation is going to come in because there are so many different ways the IRS defines someone as having made too much income.

Now this increased salt cap deduction does just go towards our itemizing. So it’s gonna go on schedule A. So this isn’t separate from just our overall considerations for whether we are itemizing or not. Now, obviously if somebody is getting the full 40K, that’s gonna be over the standard deduction and they would in that case be itemizing and then we can consider the other deductions they might have as well. As far as strategies for reducing income, the question is being asked specifically about salt, but if we’re going to talk about adjusting income on purpose, we really need to take a step back and remember that these things don’t operate in a silo. And so it really isn’t what would we specifically do to adjust income for the salt deduction. It’s just what would we do and does it make sense to reduce our income overall? Because again, these things don’t happen in a silo. So absolutely, if we’re in that 500 to 600 K range and it makes sense this year for us to intentionally increase our deductions or defer income, lower our income, then we might also benefit from the increased salt cap deduction. So we’re gonna be looking at things like, are we making pre-tax or after-tax contributions? Are there ways that we can go ahead and defer more of our income into a future year? That income’s gonna come back, so this is why we like to do multi-year tax planning.

Steven Jarvis, CPA (06:54)
We don’t want to get so focused on 2025 that we’d defer income into 2026 and create a bigger problem for ourselves if that’s how the years pan out for us. We can also look at accelerating deductions for especially a lot of W-2 earners. That really comes down to our charitable giving intentions. If we’re working with business owners, there’s other things that we could potentially look at as far as timing of deductions. But again, we wanna make sure that we’re making great life decisions, great business decisions, and then…figuring out the most tax-efficient way to go about them. We’ve got to keep that balancing act there. We don’t want to get so focused on one area of the tax code that we make decisions that are long-term negative for us. We’ve got to just keep these things balanced. Okay, we’ll switch gears here to a different topic. How does the additional Medicare tax for the amount exceeding the threshold? My understanding is it will not apply to withdrawals from IRAs. Let’s see if that’s true or false, but might apply to cap gains or other income sources. How does that all work? So the additional Medicare tax, which is one of these fun other taxes that show up on the second page of the 1040, along with net investment income tax, this is one of those ones that for a lot of people just kind of get swept under the rug and really not even noticed. I work with clients who will have these every year for years and then five years in, six years in, say, hey, hold on a second, this feels new, what is this? And it’s not that it’s new, it’s just that taxes are this kind of mysterious black box to everyone. And so unless you’re taking the time to explain these things to clients, there’s a good chance they haven’t ever had somebody walk them through it. There’s also not always a lot we can do to help clients reduce these additional taxes, but. Even that understanding, taking the surprise out of it can make all the difference. Now, specific to the additional Medicare tax, this is specific to income, this is specific to earned income, wages, self-employment income, are the primary sources of where this is gonna be applicable. And it’s an additional 0.9% on income above the threshold.

Steven Jarvis, CPA (08:57)
This is an interesting one because for single the threshold is $200,000 of income for married filing jointly is $250,000 and then for married filing separately surprising no one it gets cut in half. The way this this should work for W2 earners is that the employer is calculating this and withholding that additional amount, and most of the clients I work with that does get calculated correctly as long as they have the same employer throughout the year, where this can get a little bit jumbled is when people are switching jobs and those employers don’t communicate with each other about what those withholdings should be. So that additional Medicare tax really only applies to earned income, think W-2 wages, self-employment income, and it’s an additional 0.9 % above and beyond that threshold. But it’s great question, one that definitely gets misunderstood on a really regular basis. Okay, next question. For seniors who qualify for a partial enhanced senior deduction, are there any moves they can make before year-end to reduce their AGI and qualify for the full deduction? So as this podcast releases, we’re going to be in pretty close to the end of the year, but this will come back at least over the next couple of years. So it’s a good discussion to be having. And really, it goes back to the same conversation we had around the salt deduction. This is probably more widely applicable. I don’t have the stats in front of me. I would guess there are more people who are potentially eligible for the enhanced senior deduction. That’s what we want to call it, as opposed to benefiting from the expanded salt deduction. But that also might just be a reflection of the clients that I work with, because I work with a lot of people getting ready for or who are into retirement. The other distinction about this new senior deduction from 03BA is that it is separate from any consideration of whether we are itemizing or taking the standard deduction. So whether we are itemizers or non-itemizers, this senior deduction might be applicable. Now there is the AGI phase-out for this deduction, which is really what the question surrounds. And so again, we want to take a multi-year approach. We want to make sure that we are making good life decisions and then figure out the tax-efficient way to go about them.

Steven Jarvis, CPA (11:01)
But then at end of the day, it’s really our same list of go-to things. For people who are eligible for that senior deduction, a lot of times these are going to be people who are retired. It might not be so much of are we deciding between pre-tax and after-tax or Roth contributions. We might be deciding, hey, do we wait a year to do a Roth conversion? Do we reduce the amount of a Roth conversion that we’re going to do this year to keep ourselves under that threshold so we get the full senior deduction?

Now, while that senior deduction is potentially very beneficial, we want to make sure that we’re making decisions based on real dollars and not just concepts. Because I definitely, as 03BA came out, definitely heard advisors talking heads, social media, that kind of nonsense, saying, well, this means that we just can’t do any Roth conversions in that range. And I don’t take nearly that aggressive an approach. I want to make sure that we actually understand what the implication is. Same thing if we’re approaching an IRMA threshold. Don’t let it be the boogeyman that just stops you from taking action. Take the time to do the math. If we have a married couple, but only one of them is over 65 and getting the senior deduction, OK, great. If we blow through that entire income range, how much does that increase the cost of a Roth conversion? And does that make sense in our overall timeline? If we’re working with a client who has been converting the 12 % bracket, and likely will use a lot of their Roth dollars themselves and probably won’t ever be outside the 22% bracket, maybe we hold off on Roth conversions and take advantage of that senior deduction. But I certainly work with clients who are doing Roth conversions because they’re trying to set their kids up for success. They want to give as much after-tax money to their heirs as possible. And so for them, going from the 22 % to maybe in total paying closer to 25 % with the phase out of the senior deduction, is still way lower than their kids, who are on track to be lawyers and doctors and high earners will ever pay as an income tax rate. And so we’ve got to take that long-term approach. We’ve got to make sure that we’re thinking about, when is this money going to be used? And then, of course, we can be looking at our charitable giving. Do we make a donor advice fund contribution this year to lower income? When I’m working with clients, I like to start…and kind of have an order of operations to how we look at things. And so I’m always going to start with what are our non-discretionary sources of income?

Steven Jarvis, CPA (13:16)
Have we started taking social security? Are there pensions? How much portfolio income is getting kicked off of our taxable portfolio? What are the things that we can’t control? And then where does that leave us? And so if the things we can’t control already put us at 250K of income, OK, maybe I’m not going to spend as much time of how do I figure out how to get them back to a point where they can take advantage of the senior deduction.

But if my non-discretionary income only puts me at 80 or 90 or $100,000 of income, and we had planned on doing massive Roth conversions or we’re thinking about when we start taking social security, now we can start looking at, okay, how do these factors all come together? And again, we always want to keep in mind that tax planning should not, it does not happen in an asylum, so we cannot think about it in an asylum if we want to do effective tax planning for our clients.

Okay, let’s switch gears and do a couple of questions that came up around rental properties or around properties in general. So this is question came in from an advisor. says, have clients both age 68 who want to gift to their two daughters. One daughter is interested in buying our client’s home and they’d like to give her a deal on the purchase or possibly structured as a gift of equity. We’re trying to determine the most tax-efficient way to make this happen as their liquid assets outside of IRAs are limited. They also plan to gift an equal amount to their other daughter, likely in the form of a check. The home is valued at approximately, let’s call it 300K for discussion purposes on this podcast. With no debt, they plan to purchase a new home as the client plans to a new home as well. And their daughter is expected to have about 100K for a down payment. So, love when these questions can come up because this is when we make these things real. It’s easy, on the internet, a podcast to theorize. In fact, recently I was at a tax conference, not for financial advisors, for tax preparers, a very detailed technical tax conference, and one of the presenters even said from the stage, like, Hey, these numbers are all just made up. There’s just hypothetical situations not really based on any real clients. And that kind of blew me away because we all spend so much time working in the real world. Why would we ever make up a client situation?

Steven Jarvis, CPA (15:27)
Maybe that’s just personal preference. I’m sure it is that’s probably a big part of why you all listen to this podcast and not another one is because the real world the real world application is to me what really matters and so if we can’t make this specific to a client situation what’s the point? So go back to this the question that came up so we have? Parents age 68 want to do some gifting to their daughters one they’re gonna give to house to one They’re gonna give cash to the other and kind of question is how do we do this as tax efficiently as possible. And I love these questions in particular because it’s a good reminder of what piece of our decision is tax planning and what pieces legacy planning or there’s legal or liability issues that come in. We got to make sure we understand that taxes are a passenger on the bus, not the driver. So in this case, we’ve got a couple different pieces here. If we were just talking about gifting a house, we just had one kid involved, we can leave family dynamics out for a second, I’m always going to ask a few other questions because when we’re talking about gifting real property, we always want to make sure that we’re taking that long-term view here of, hold on a second. If we wait and let the property be inherited as opposed to gifted while the clients are still alive, we have a potential step up in basis. Now we don’t want to do things purely for the tax benefit. And so I definitely work with clients who because there’s multiple kids involved, just because of what they want to do or be involved in or how they want things set up, that it does make sense to go ahead and make those gifts while the parents are still alive and miss out on the tax benefit. So there’s always more to consider than the taxes. But from a tax standpoint, gifting the house is not going to be a taxable event, assuming they don’t have any issues with the lifetime estate tax exemption.

And if we’re talking about gifting the hundreds of thousands of dollar range, we’re probably free and clear of that. If we make a gift that is over the annual gift reporting threshold, then we might have to file a gift tax return. But that’s really just a record keeping step to let the IRS know, hey, we’ve used up some of our lifetime exemption. And so really for the parents, the only reason there would be a tax consideration or a taxable event in what they’re trying to do here, because gifting the house is not a taxable event to the parents or the daughter, depending on the value of the home. If they, instead of gifting it, they’re selling it at a discounted rate, we might have some things we need to do with making sure we appropriately track the basis and the valuation at that time.

Steven Jarvis(17:44)
But gifting it is not going to be, gifting it and of itself is not going be a taxable event. If gifting the cash to the other daughter requires them to take money out of a pre-tax account, we might have a taxable event from the distribution from that account, but it’s not the gift itself that’s creating the taxable event. One other piece to make sure that we’re thinking about on, the gifting of the property side is we do wanna make sure that we’re really clear and that this gets documented. Was it a gift? Was it a sale? Was it a combination of the two? And so these aren’t things we just wanna do verbally because in the unlikely event that the IRS comes back and asks questions, we wanna have documentation of what was the intention here? What was the agreement? How is this going to play out to make sure that these things hold up if the IRS ever asks questions. Because a big premise from the IRS when they are asking questions about different things that go on in your tax return is the idea of contemporaneous documentation. The IRS is not interested in what you can go back and recreate after the fact. They want to know what was in place at the time the transaction took place. And so even if this is just amongst family, it’s a really good idea. It’s definitely a best practice to write all this down and have everybody acknowledge it of. Mom and dad gave the house to daughter on this date, it was a gift, there was no payment involved. Or, hey, we sold it for X amount at a discounted valuation. Whatever that looks like, let’s get it in writing. So if questions were to come up, we could go back and support them. Okay, another question that came up recently on office hours, a client retired this year and he’ll continue getting bonus payouts over the next few years. Since this is ordinary income, does it qualify for making Roth contributions? So this is a great question. I definitely run into this where clients have deferred compensation packages or severance agreements, whatever it might be, that they continue getting W-2 wages after they retire. So they’re no longer showing up to work, but they’re going to get a W-2 at the end of the year.

And the question was asked since this is ordinary income, which it is ordinary income, but we need to make another distinction. If we want to be able to make Roth contributions, it’s not just ordinary income, we need earned income. Which in this case, if it’s getting reported on W-2, it’s absolutely considered earned income. And so yes, as long as they are receiving that earned income, they would in fact be eligible to make Roth contributions, which is great news for them. Let’s keep making those Roth contributions is if that makes sense in their in their overall financial plan Another question that came up around the The senior deduction is the extra deduction for seniors being honored by states as well as federal it’s a great question and I certainly spend more of my time talking at the federal level maybe that’s in part because I live in a state that well now has a capital gains tax, but for most intents and purposes, Washington state is still income tax free. But we have, we essentially have 41, now 42 states that charge some kind of income tax. And while there are some principles that carry over from state to state, in general, each state can take its own approach, and there are some nuances. So we got to make sure that we’re looking at individual states. But, If we use some rules of thumb here that certainly can get us in trouble if we’re not double checking with our individual state. A lot of states will start with what was federal taxable income or federal AGI, one of those two numbers. More often I see federal AGI. And then states will do their own standard deduction, itemized deductions, things like that from there. Some states do start at hey, what was total income?

Steven Jarvis, CPA (21:33)
California certainly comes to mind there of going through and identifying, were the sources of income? What was total income? Not just what was federal AGI? And so, don’t, whether it’ll be honored or not, I don’t know that that’s really necessarily the right question because already states take their own approach to deductions and how itemizing works. And so, in general, since that deduction comes after AGI, I would not expect that the new senior deduction to also lower a state income tax. So again, it’ll be state dependent, but I have not seen anything specific to this from states that says, yes, we’re gonna go ahead and add the same deduction at the state level. This one’s related to charitable donations. So,the charitable donations limited to a percent of income. Is it 30 %? Can it be active and passive income? Does the donation amount in a donor-advised fund, is that different than if it’s given directly to a charity? Okay, so a couple of things here. the limits on being able to deduct charitable contributions as a percent of our income. It’s gonna be based on AGI, adjusted gross income, and so it, yes, all types of income are gonna go into that. We’re gonna take adjusted gross income and multiply it by the relevant percentage to determine what the limitation is. The type of income’s not important, but the type of contribution is. So the 30 % number that is relevant when we’re talking about non-cash charitable gifts. When we’re talking about appreciated stock is when this most often comes up. So if we’re giving appreciated stock, either directly to a charity or to a donor-advised fund, then we can only get a deduction for up to 30% of our adjusted gross income. And so that’s definitely something we want to be aware of because for very charitably minded taxpayers, this can certainly, I’ve definitely run into this where we run into limitations on how much we can gift in a single year because of that AGI limit.

Steven Jarvis, CPA (23:26)
The great news is that, especially if we miscalculated a little bit. This is going to be based on estimates. We find out income for the full year. If we donated too much, that amount can carry forward to be used in a future year. it’s not lost in that first year, but definitely something to be aware of. Now, if we’re giving cash contributions either to a donor-advised fund or directly to a charity, that can go up as high as 60 % of AGI. Depending on the type of organization and these are ones I don’t have committed to memory there are certain types of organizations that the even the cash contribution gets a little limited a bit lower than that 60% it’s 50% instead but in general if you’re if you are contributing if you’re getting main charitable contributions to a 501 c3 it’s gonna be that 60 % of AGI so definitely great great questions to be asking great things to keep in mind as we work with clients on charitable giving and then that long term tax planning. Okay, we’ll do one more question here to make sure that we are getting these things covered, these questions that come up in the real world from real advisors. And save one of my favorites for last because there’s definitely some debates that will come up around this topic. So we’ll end on this one. And again, if you’d like to join in on office hours in the future so you can participate in these conversations, ask your own questions and really get into the weeds. The other thing I love about those office hours is that advisors get to share with each other. And so when we get to the nuance of how do these things get executed, other advisors can weigh in. One more bonus question here, because it’s really related to that. An advisor not long ago had asked about the tax implications of switching between share classes of the same fund, which definitely gets a little bit detailed and beyond what I’m often involved in, because I don’t do the investing, don’t do the money movements. But this advisor is looking at how do I, if I move my client to a fund share class that has a lower expense ratio, is essentially what they were after, am I gonna create a taxable event? And my understanding, and we dove into this together,

Steven Jarvis, CPA (25:37)
What is that a little bit? depends on the custodian and how they do the transaction But you are able to move between share classes the same fund without creating a taxable event. But it’s the kind of thing where you you got to make sure you’re doing it in lockstep with the custodian, and when this came up on Office hours an advisor on the call who had been through that was able to share here’s how I made this work and how I made it successful So I’d love being able to see that happen. Okay, so the question I’d save for last your thoughts on tax loss harvesting, I’m working with a potential client who has a $2 million brokerage account. He emphasized early on how impactful his advisors have been in using tax loss harvesting to save taxes previously. The more I explore, the more it seems his previous advisors have oversold the benefits of tax loss harvesting. Just curious as to your general experience of working with clients of advisors who are using tax loss harvesting in their accounts. So really love how this was set up and appreciate the advisor giving so much context. And again, I’m not the one doing the investment. So a full disclosure here, I have never personally executed tax loss harvesting. That’s not my area of responsibility. But what I see working with financial advisors is that tax loss harvesting can absolutely be beneficial, but it’s still a consolation prize for losing money. And so while we continually see more and more sophisticated strategies for how people can be doing tax loss harvesting, it’s still a consolation prize. And so I have no problem with tax loss harvesting. I’m not opposed to it. do take issue with how it gets marketed at times and how it gets promoted. If you as an advisor are leading with tax planning in your marketing, in your sales pitch to a prospect, in your onboarding, whatever step of the process, if you are saying that, tax planning is one of the values we provide and all that you do is tax loss harvesting, I really think you’re missing the mark. Won’t go so far as to say that you’re intentionally being dishonest, because it probably isn’t intentional, but tax loss harvesting is at best a consolation prize for the money that’s been lost. Tax planning to me is about, proactively and intentionally doing things for the future. And so if we want to… If we want to lead with tax planning, if we want to deliver massive value on tax planning, we are helping our clients consistently do the simple things over time so they can sand off the rough edges of their tax bill.

Steven Jarvis (27:35)
And that can look a lot of different ways for a lot of different clients. And in some cases, that will absolutely include tax loss harvesting, but that in my opinion, that should not be the centerpiece of the tax plan that you do. So, I’ll keep accumulating these questions. I’m sure I’ll do an episode in the future recapping these again, but we’ve been having a lot of great success helping advisors help their clients by doing these office hours twice monthly. So I wanted to take the time to share some of the questions, share some of the answers, and let you know about that opportunity. You can go to retirementtaxservices.com, check out our memberships to get involved in the next set of office hours. Thanks for being here and until next time, good luck out there and remember to tip your server, not the IRS.