John Petika, Jr.: All right, we'll get started here, I'm going to punish the punctual. My name is John Petika, Jr. I work over at UBS Financial. UBS is the Union Bank of Switzerland. We were recently in the news a couple years ago in 2022 and we took over Credit Suisse. By doing that, we became the biggest global wealth manager in the world and certainly the biggest bank over in Switzerland. And I was talking to Paul earlier last month and we were just talking about some things that people should be thinking about to do now you're towards the end of the year.
And I'm here with my partner here, Justin Waring. He's head of the UBS Wealthway Strategy and Solutions Desk with UBS, and we're going to be talking about pretty much what's on the horizon for retirement and some tax strategies that you could think about going into 2026. And it doesn't really matter whether you're decades away from retirement or you're thinking about transitioning next year. There's definitely always things to do and things to think about as we get in towards these holiday months here.
So Justin, thanks for joining me today.
Justin Waring: Thanks for having me. Great to be here.
John Petika, Jr.: Great. Well, let's just start, Justin, with the big picture here. Obviously there's been a lot of changes, especially with the One Big Beautiful Bill and there's also some key tax changes for 2025 that families should be aware of. Could you go over some of those?
Justin Waring: Yeah, absolutely. It's been a big year for tax changes. The One Big Beautiful Bill Act was passed on Independence Day this year, and some of the tax changes actually take effect already starting this year. Others will be phased in next year. Most of these are temporary changes, but the One big Beautiful Bill Act also did a sweeping change that was more or less extending the 2017 Tax Cuts and Jobs Act. So there were many provisions of the tax code that were set to change at the end of this year, and this new tax law has made a lot of those changes permanent. And there were also some temporary changes under the 2017 Tax Cuts and Jobs Act that were set to expire but remain permanent.
And so one major change in addition to extending things like the lifetime gift and estate tax exemption and things like that was there were some changes to income taxes for everyday people. And so for example, the standard deduction was increased already starting this year to 15,750 for single filers and 31,500 for married filing jointly. That's up from $15,000 or $30,000. So $750 boost for single filers, $1,500 boost for married filing jointly. There's also a new bonus deduction for those who are over the age of 65, and so that's going to be $6,000 per taxpayer who's over the age of 65. This is only going to last from 2025 to 2028, but this was highlighted by the administration as one of the things that will reduce the tax cost of social security for retirees.
Now this bonus deduction does get phased out if you're making more than $150,000 as a married couple. And so if you have income above that level, the deduction goes down. But this does mean that as of 2025, if you and your spouse are both 65 years or older, you could get a standard deduction that totals $46,700. So you get your $31,500 standard deduction, then you get a $1,600 per spouse age-based deduction that already was on the books, so that's another 3,200 and now you get $12,000 extra in bonus deductions. And so that adds up to a pretty significant income deduction, which means that your taxes this year might be a lot lower than normal.
Another change that happened was for those who itemized their taxes, the so-called SALT cap, the limit on how much you can deduct state and local taxes in your itemized tax filing has been increased from $10,000 to up to $40,000. That also phases out with higher income levels. One of the provisions that got a lot of headlines this year, but I'm not sure it's really going to be that big a deal for the everyday taxpayer is deduction for tips and overtime. So there's a $25,000 deduction for qualified tip income and 12,000 and similarly $25,000 for married filing separately of qualified overtime compensation. And so there's a lot of strings attached to those deductions and they phase out at relatively low income levels, but for those who have a significant share of their income coming from those sources, that should result in a quite lower tax payment coming up in April.
And then last, but not least, on this list at least, is the deductibility of interest on car loans that for new car loans taken out this year through 2028 for cars that are new and assembled in the United States and a couple other strings, you can deduct up to $10,000 of qualified vehicle loan interest. And so those are all factors that are new.
And one that isn't on this list that I thought was interesting and it hasn't gotten a lot of headlines, is I believe this is starting next year, there's going to be a limit on how much gambling losses can be deducted. So under current law, if you win one million dollars gambling and you lose a million dollars gambling, those wash out, and when you file your taxes, you don't pay any taxable income. Starting next year, the losses will be capped at 90% of the gain. And so even if you keep track of your losses throughout the year, which many people struggle to do, this means that you could end up making no income but having taxable income. In that example I just gave you could end up with $100,000 of taxable income that wasn't covered. You weren't allowed to deduct your losses against your gains, so you didn't make any money, but now you've got $100,000 extra taxable income. So yeah, as gambling has gotten supercharged in recent years, I do worry that this is going to have a pretty big impact on people's bottom lines.
John Petika, Jr.: That's pretty rough. You have a bad year and still pay taxes.
Justin Waring: Yeah, exactly.
John Petika, Jr.: Geez. Well, Justin, that is a lot to keep track of everything you just went through right there, but as we're approaching year-end, are there particular strategies that you would recommend?
Justin Waring: Yeah, sure. Actually, I'm sorry, I forgot to mention some of the secure 2.0 changes. So one of the things I want to mention quickly there is that if you are over the age of 50, you may have a catch-up contribution that you can make to a 401k. Starting next year, you're going to have to make that as a Roth contribution. So that means you won't get a deduction upfront for the part of your contribution that's a part of that catch up contribution. And that means that you won't get a tax deduction upfront, but you will still be able to make tax-free withdrawals later in retirement as long as those are qualified withdrawals. So if your plan doesn't offer Roth 401
So I just wanted to mention that, as well. It's one of the provisions that's coming into place from the Secure 2.O Act, which was passed a couple years ago. There's some other minor changes, but that's the major one to focus on. But back to your question. Yeah?
John Petika, Jr.: Real quick, Justin, are they back to the Roth on the 401k? They're not getting rid of the after tax contributions as far as the mega backdoor Roth IRA in some plans, or is that still intact?
Justin Waring: That's right, that's still intact. So if your plan does allow you to do Roth in plan conversions and your plan allows you to make after tax contributions, you may be able to reach your limit of $36,500 or so on total contributions to your plan and then make after tax contributions up to the statutory limit, which is like $77,000 or so. And so you can make maybe up to $40,000, although a lot of plans will limit how much you can do after tax. So here at our firm, we can do $23,500 of after tax contributions, for example. And so you don't get induction for that front, but to your point, John, you can immediately turn around and convert the after tax dollars to Roth. So it's a way of getting more dollars into your Roth account, and that's called the mega backdoor Roth conversion.
John Petika, Jr.: Yeah, I think it's really powerful because it doesn't matter what your income bracket is, you could be Bill Gates, Warren Buffett, you could still be able to do those after-tax contributions you keep paying and not all 401
Justin Waring: Yeah, even if you're earning a lot today and you're in a high tax rate versus where you are in retirement, the way that I think about it is you max out how much you can deduct making pre-tax contributions, and then once you reach that limit, the mega backdoor Roth conversion happens on top of that. So it's money that otherwise would've been taxed anyway because it's no longer eligible for tax-deductible contributions or pre-tax contributions, as they say. And so yeah, to your point, I think that, that allows you to build wealth in the pre-tax dollars that'll be taxed later in retirement, hopefully at a lower rate, but also in Roth dollars that are going to, they've already been taxed and they're never going to get taxed again. So you've got tax-free growth and that gives you more options in retirement, as well, when it comes to managing how much taxes you pay. You can manage your withdrawals from both types of accounts to stay out of higher tax brackets. And so yeah, that's a very good point to bring up.
John Petika, Jr.: Absolutely. Any other particular strategies you recommend as far as going to year-end?
Justin Waring: Yeah. So I think first of all, like we were just talking about, you want to have, make sure that you've taken advantage of all of your contribution potential this year. If your company offers a 401
But another factor is that if you are contributing to a health savings account, please make sure that you're investing in it, because a lot of people have money sitting in their health savings account, which has substantial tax-free growth potential, but by default, the plan has them sitting in cash. So if you are participating in one of those, please check because it's something like 90% of investors leave it sitting in cash and it's a huge missed opportunity. And then of course, make sure that you've maxed out your 401
And then last, but not least, is the mega backdoor Roth conversion. So you make a non-deductible contribution to your 401
So that order that we just walked through is something that we call the savings waterfall. It's a document we update every year with contribution limits, and we send it out to working-age clients and investors to help them prioritize where they put their retirement savings. The next step is if you're in retirement or approaching retirement, I think it's a good time to be thinking about a spending waterfall. So we talked about the savings waterfall being how do you put money into different retirement accounts. A spending waterfall is more half a strategy for how to withdraw the accounts, the funds in retirement. So one major thing that I think everyone should consider and consult with a financial advisor in early retirement is the idea of Roth conversions. So to the extent that you have saved a significant amount of dollars in a traditional IRA account, that can turn into a tax bomb later in retirement because it's going to continue to grow on a tax deferred basis, and when you are forced to make required minimum distributions, the taxable income from your IRA distributions could force you into a higher tax rate later.
But in those first years when you're retired and your salary is gone, you tend to be in a lower income tax rate. And so those are great years for doing Roth conversions. So you voluntarily take money from a traditional IRA, put it into a Roth IRA, and in the process, you pay taxes at the current tax rate for that conversion, but then the dollars grow tax-free from that point on in the Roth. So doing that during those early years between retirement and when you start collecting social security and when your RMDs begin, this is a series of years, we like to call them the gap years where investors tend to be at a lower tax rate than normal. And so Roth conversions during those years can really help. And then if you do end up in a higher tax rate later on, you can tap those Roth accounts to fund your spending, which is a way to get tax-free income for spending, and therefore, stay out of the higher tax brackets later.
And so a spending waterfall is a great thing to think about, especially at this time of year as you're thinking about how am I going to raise funds for next year's spending? I think it's a great strategy and we have some research on how to implement that. So if you are thinking about doing a Roth conversion this year, really, it's best if you think that you're paying if your future tax rate will be higher than it is in the current year. So if you're still working and you think that your future tax rate's higher than it is currently, that's a sign you should probably make Roth IRA or 401
John Petika, Jr.: Justin, real quick on that, and in this group, too, they deal a lot with commissions in the boat yacht broker arena there, and on some years, if there is a down year and your income is lower that year, even though you're not close to retirement, think about switching those 401
Justin Waring: No, no, I totally agree. And that's a great point. The ultimate goal of these approaches is to smooth your taxable income as evenly as possible over time because the government loves it when you make a lot of money in one year. We have a progressive tax system, so the more you make in a single year, the more they get in tax payments. And so whether that's during your working years or in retirement, we want to smooth out those bumpy things. I'm a fan of chunky peanut butter, but I'm not a fan of chunky income. So if you're going to have taxable income, like a high year of taxable income, make sure you're using your deductions to get that down. In a low year of taxable income, you're exactly right. Let's fill in that gap by doing some Roth contributions or conversions depending on where you are in your life cycle, and that'll help smooth things out. Ultimately, a smooth level of income taxes over the course of your life is the way to reduce the overall tax burden your family faces, but more importantly, it'll improve your after-tax growth potential. So yeah, it's a very good point.
So another thing that we focus on year-end, this is the season of giving, and so we've outlined some strategies for giving money to your family. So this year, you can give up to $19,000 per spouse, per recipient without tapping into your lifetime exemption for gift and estate taxes. You can also, this is something that a lot of people don't know. You can make payments directly to schools for tuition or to hospitals for medical expenses, and that doesn't count as a gift. And so that's a loophole that can be used without affecting your annual exclusion or your lifetime exclusion. If you are going to use up some of your lifetime exclusion for this year is $13.99 million per person, or twice that for a married couple filing jointly, that number's going to go up to $15 million and $30 million next year as a result of the One Big Beautiful Bill Act, and then it will increase by inflation every year.
So that's until congress changes its mind. Using up some of your lifetime exemption may be useful. It gets some assets out of your taxable estate and, therefore, allows you to ultimately transfer more after taxes. And so there's some trust strategies that can help with that, as well. Irrevocable trusts gifting, discounted or limited non-controlling interests in entities. But another strategy for everyday people I think is superfunding a 529 plan. So again, 529 college savings plans are about much more than just college these days. There's an increased amount that you can use for K through 12 expenses and the number and type of expenses that are allowed to be distributed from 529 plan on a qualified basis has also gone up over time. So superfunding essentially means you can do five years of annual exclusion, so five times $19,000, $95,000 per spouse, per recipient, and that can be done without using any of the lifetime exemption. So you can't make any gifts to that person until another five years has passed. But that's a great way to superfund or supercharge the 529 funding for your family members.
Another strategy we focus on at year-end is giving to charity. So that there are some notable changes to the tax code when it comes to charities starting next year. So one is that there's going to be a floor on how much you need to give to charity before you get any deduction. That floor is going to be 0.5% of your adjusted gross income. This means that if you're wealthy and you've got a very high income, you're actually going to not be able to deduct the first 0.5% of your income that year. Another factor is that cash gifts are going to be limited to 60% of AGI and the tax benefit you receive from a deduction will not fully count against your highest income level. So it'll be capped at 35% as opposed to 37% that you're going to pay on your top income tax bracket.
So those things all argue in favor of doing a larger gift this year, and we call it Brady Bunching. You may want to bunch multiple gifts this year into something like a donor advised fund, get your tax deduction today, the full deduction is still available through the end of this year, and then you don't have to make those charitable donations right away. You can have the money sit in a donor advised fund and grow from now on until you ultimately decide to discharge them into a charity. And so that's something that is a really big focus for wealthy investors at the end of this year. And I will say there's another tax change that is better for everyday charitable donations. There's going to be a new allowance for people who claim the standard deduction. They can give up to $1,000 if they're single or $2,000 as a married couple to charitable and still claim the standard deduction, as well. And so that'll allow for smaller gifts in regular years going forward.
And then another factor, if you're in retirement and you're over the age of 70 and a half, it's a good idea to consider qualified charitable distributions. These are gifts directly to eligible charities. You can give up to $108,000 per person and this counts towards your R&D, but it isn't included in your taxable income. So you're essentially getting a tax deduction on that charitable gift, which can be quite powerful.
Just running through the last two items on the list, it's a great idea to harvest capital losses. One of the great things about investing is that you can defer capital gains a long time and if you wait, if you're able to defer gains until the end of your life, the government forgives the taxes on any unrealized gains in your estate. And so harvesting capital losses when they appear is a really powerful strategy. There's likely to be something in the diversified portfolio each year that is eligible to be sold for lower price than you bought it for. And if you're able to swap into a similar investment and retain the same exposure, there's no reason not to implement a tax swap in order to lock in that capital loss. If you have net capital losses in a given year, you can actually use up to $3,000 to offset taxable income. So whereas you would pay something like a 23.8% tax on capital gains, your net capital losses can actually be deducted at up to whatever income tax bracket you're at. So if you're in the 37% tax bracket, you've got a nice little bit of arbitrage there.
And then last, but not least, it's always a good idea to make sure that the beneficiary designations on all of your insurance accounts, your retirement accounts are all up to date. Make sure that the money, if something were to happen to you and your spouse, the money goes to the right people. Make sure that this is up to date and clear. The more clear things are, the less likely you're going to have to deal with probate and the less likely your family have to deal with some sort of conflict within the family or legal issues. And so that's all I had, John.
John Petika, Jr.: Yeah, I got a couple of things to add on the charitable giving and year-end strategies. Obviously the last few years have been very good in the stock market and some people have some amazing unrealized gains on their balance sheet.
And what we've been working with a lot of our clients is figuring a way as you're getting, let's just say everyone's got Amazon and Microsoft, if you have Nvidia, these are wonderful companies and they are growing at an astronomical pace because of this AI industrial revolution that we're going through. But at some point when you get into retirement, you need some income and these things don't produce any income. So we've been working with a lot of clients on taking those shares and working with an attorney in creating what's called a charitable remainder trust, which is a vehicle where you actually take a stock, highly appreciated, you donate it to a charitable remainder trust, you're not paying those capital gains. You sell it once it's inside that trust, you take your charitable deduction. From there, I'm able to sell and you actually get income for the rest of your life, and then the remainder will then go to a charity of your choice.
I've seen some folks put them into their donor advice fund or private foundations, but that's a way to mitigate taxes, get that charitable deduction, and you're still generating income in your lifetime. You're not just giving it away. Some people will pair that with a donor advice fund where you could actually do the same process but you're not getting any income, but in your lifetime, you could actually start giving gifts. So I think that's a really powerful strategy. You still have time to do that. We've also seen people when they're selling their business, they could put parts of their business that's owned by the charitable remainder trust where you're not paying any gain on that sale of your business and now you're getting income. So very powerful. Make sure you talk with your advisors and your attorneys because you need an attorney to draw one of those up, we're happy to walk you through on the mechanics of those things, if that makes sense.
The other thing that we've been talking to a lot of people about is if we know that there's going to be a tax event down the line, there is a strategy called direct indexing that's getting a lot of steam. It started off with a major Wall Street firm where all the main members, partners of the firm had a bunch of shares, shares went public. Now all these owners are sitting there and partners are sitting there with highly appreciated shares and they can't do anything with it. So what they do is they created a strategy called direct indexing where I'm just going to make this very simple, but let's say the S&P 500. Instead of just own in the ETF, you could actually directly own the 500 shares or so inside the S&P 500 and take losses throughout the year, and you're still participating in the gains of the S&P 500 because they might sell Home Depot and buy Lowe's so you still have exposure into that home improvement sector.
And it's a great way because you're able to realize those losses and carry those on from year over year and you're still participating in the market. And the reason why it's gaining popularity is because technology has advanced so much that you're able to use computer algorithms. If a stock in the S&P 500 is down 5%, 10%, they could automatically sell without a human having to be there. So it's very, very powerful. It's called direct indexing.
And matter of fact, Justin, I'm going to share my screen really fast if I'm able to. You can go on to our website here, the Patika Wealth Management Group website, and if you have any questions, you could hit the contact button there and contact us and we can get you any of the material that Justin was talking about. But on our podcast, we talked about direct indexing. You could subscribe to it on Apple Podcasts or Spotify or just go to our website. We've also got top 10 tax tips that's available to you, but feel free to reach out. We can get you some of these year-end planning guides that Justin was talking about, and it's really powerful stuff. Make sure you're being proactive, and if there's something that you have a question on, just feel free to reach out to us and just go on that Patika Wealth Management Group website and you could just shoot us an email and get you taken of.
So with that, Justin, you have any final thoughts before we close out?
Justin Waring: No, I totally agree with you on the charitable remainder trust. That's a great strategy, and yeah, I hope everyone has a wonderful holiday season.
John Petika, Jr.: Awesome. All right, well, that concludes our call, and we appreciate you guys taking the time out of your day and listening, and hope you guys have a great strong end of the year. Take care, everybody.
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