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Tax News Now Ep. 20 - Permanent Until It Isn't: Navigating Tax Complexity in a Post-HR1 World with Damien Martin
293 Plays11 days ago
In this episode of the Tax News Now Podcast, Mark Gallegos and his guest, Damien Martin, Partner at Ernst & Young, mark the one-year anniversary of HR1 (the One Big Beautiful Bill Act) reflecting on what the landmark tax legislation has actually meant for high-net-worth clients in practice. They dig into estate planning under the federal exemption, the nuances of state-level estate taxes, and key changes to charitable giving deductions that took effect in 2026. The conversation wraps up with a discussion on AI's growing role in tax advisory work and how practitioners can embrace it as a tool while maintaining the human, consultative edge that clients genuinely need.
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Transcript
Context and Introduction to HR1 Bill
00:00:02
Speaker
Music
00:00:09
Speaker
One year ago this week, every tax and estate planner in America was sprinting toward a cliff, December 31st, 2025. The exemption was supposed to get cut in half. Clients were signing trusts at midnight, attorneys were booked solid, and the HR1 bill passed and the cliff just, well, vanished, right?
00:00:28
Speaker
And so here we are, and there was a lot of exhale and a lot of people taking a sigh of relief. But welcome to One Year Later's. since we've passed HR1. And welcome back to Tax News Now, a Becker Accounting podcast, where we cut through the headlines, decode complexity, and focus on what actually matters for CPAs, advisors doing work for real clients, and in the real world.
Impact of HR1 on Individual and Transfer Tax Code
00:00:50
Speaker
I'm Mark Iagos, tax partner at Portie Brown, and I've been looking forward to this conversation for quite a while. Because a year ago, HR1, the One Big Beautiful Bill Act, landed on July 2025.
00:01:02
Speaker
It was the biggest rewrite of the individual and transfer tax code since 2017. And in the first few months, all anybody could talk about was what was in it and the provisions, the numbers, the sunset that didn't happen.
00:01:14
Speaker
But a year in, the more interesting question isn't what's in the bill. It's what's actually happening in our clients' lives because of it and what we as a profession do next. So in this, this is not just some sort of recap episode. This is how we implement, how we have the conversations, and how we provide that advisory.
00:01:32
Speaker
Joining me is Damian Martin. Damian is a partner at E&Wise Private Tax Practice inside the firm's financial service organization, where he advises high net worth individuals, families, fiduciaries, and with a real focus on family offices and the people behind private equity and hedge funds.
00:01:48
Speaker
If you want someone who lives at the intersection of serious wealth and serious complexity, Damian's our guy. And a lot of you know Damien another way, for he's hosted the Simply Tax podcast.
00:01:58
Speaker
These days, he's behind the mic on EY's elements of private tax. He comments all over the place, tax notes, Bloomberg, Wall Street Journal, Barron's. He is a fixture out there that has a lot of wealth and um people you want to listen to. So today, we have two tax nerds, two podcast hosts, two Chicagoans, one hour.
00:02:17
Speaker
But what could possibly go wrong? So Damien, welcome to the show. It's great to be here, Mark. Thanks for having me back. i'm excited for the conversation. Absolutely. And so, Damian, let me set the stage. HR1, as we said, got signed on July 4th, 2025. So almost a year ago.
00:02:33
Speaker
And the headline for our clients was certainty. The seven brackets for 2017, right? um The higher standard deduction, now made permanent. QBI deduction for pass-throughs, permanent.
00:02:44
Speaker
100% bonus depreciation, back and permanent. And the big one for the world, the estate and gift exemption was preserved, not just preserved, but raised to $15 million.
00:02:54
Speaker
And so we've planned around this for a decade. We've been talking about it probably more than you and I have ever had to. But when you take a step back, what has surprised you the most about how this year has actually played out since the passage of that bill?
Complexities and Planning in Tax Changes
00:03:08
Speaker
Yeah, you know, i think to your point, Mark, and maybe it's it's in the setup is – There's so much conversation that went into it. we We knew it was coming when we got through the Tax Cuts and Jobs Act because there was this cliff that that you mentioned, right?
00:03:22
Speaker
um In some respects, I guess you could say it was a bit anticlimactic, the you know h r one the One Big Beautiful Bill Act, because we got more of the same... We can talk probably more about why, you know, there are some some important nuances there that that don't make it more the same and make it maybe um added layers of complexity. um What's been interesting to me probably in in whenever you ask the question, Mark, I yeah always frame it from like recency bias, right? You know, of the conversation you're having, but it's almost like i think with a lot of other things going on and in the
00:03:57
Speaker
you know clients' businesses and taxpayers' businesses. you know A lot of these things take time to plan for and there's you're you're trying to outvaluate all of your options. So the long lead up to the short answer i'm going to give you the question is, is I think people are still one year end really trying to understand what it means for them in some respects. I mean, you can figure it out, but the issue is you need a little bit of like for looking, I think, of a lens to figure out what it really does mean for you um and how you would maybe take action or plan for that. And that, I think, because of, you know, some of that uncertainty on on other fronts, non-tax fronts, I think it's caused people to still kind of be, you know, figuring that out a bit, if that makes sense.
00:04:40
Speaker
Oh, absolutely. And i think I think there's just a lot of, you know, everybody was excited that there was a tax bill. And then even I know in the profession, there's kind of like a sigh of relief, like, okay, now we're good, right? And and but that's when the real work really starts, right?
00:04:55
Speaker
It does. And, you know, a lot of things were made permanent with the HR1 tax bill. So I want to dig into that word permanent because I think It's doing a lot of ah quiet work behind the scenes. The permanent really means until the next Congress decides otherwise. Right.
00:05:11
Speaker
That's right. We've got control. The Republicans right now have control the House. They have control the Senate. And that's in play right with this upcoming election in the fall. And so how are you talking to clients about planning confidently without pretending the rules are carved in stone at some level?
Permanency and Vigilance in Tax Planning
00:05:25
Speaker
Yeah. You know, I will say I'm a big ah fan. I'll just say it'll speak from my own perspective. And i know we we both do ah a significant amount with the AICPA and who's also a fan of kind of, you know,
00:05:37
Speaker
Permanency in terms of tax policy, because it helps you then to be able to make a a plan, right, to at least know your environment. Like you said, I mean, one thing about tax law that I will tell you is always true, right, is it's only as as ah permanent as ah you know until they change it. Right. So the next Congress, I guess you could say. um But I mean, I think it really has taken the temperature down quite a bit because you do know where that sits.
00:06:00
Speaker
So the way i I look at it, I think those many that I work with, many that I'm talking to, I know many other ah tax professionals are maybe looking at the same way as, you know, you know, the playbook right now. It's not set to change, you know, with except for some you know things around the edges, we'll maybe say certainly not with the estate planning world. Right. And the exemption.
00:06:20
Speaker
So what let's let's. lock it in now or think about it now. I mean, it also probably goes with the old adage, like, as I often put it is, you know, the best day to do estate planning was yesterday. If you have a state tax problem, right. And the next best day is today. So, you know, there, you, you want to look at things that I think don't need to be rushed. We're an environment, thankfully that I'd say from my perspective, though, but you don't have to be rushed, but you also don't want to sit around. um And cause yeah, there, there could be changes on the horizon.
00:06:50
Speaker
You know, I always talk about the crystal ball, right? My crystal ball doesn't necessarily answer all the questions that I don't think yours does either. um So you you kind of plan for what you know, you know, the the playbook now and and you do what makes sense. And we have that luxury, I'll say, because we don't have a cliff that is sitting out there.
00:07:07
Speaker
Now, again, we'll see what happens in midterms. We'll see what happens in the next presidential election. You know, that could change. That sentiment could change. There are proposals out there that would maybe change that um if they were to become enacted and become part of the of the tax law. So like I say, but you know, yeah you play the hands you have right now with the rule book that you have right now is is sort of the the course that many are taking.
00:07:30
Speaker
Yeah. And here's what I keep running into. Last year or even the last couple of years, fear to some level was a motivator. Clients moved because they were scared of the cliff, right? Hey, what's going to happen if we don't do anything by this date? And, you know, everything goes back to the it was, right? Yeah. And so this year, the motivator is somewhat gone. And so for certain clients, so is the urgency, right?
00:07:55
Speaker
They think they're done. We're good. We don't have to worry about things. And are you seeing any form of that complacency out there or or how dangerous could that really be if someone doesn't take it too seriously?
00:08:06
Speaker
Yeah, I mean, look, it's interesting you say that too. And just, I mean, this is, you know, I will say we've seen the movie before too. Like, I mean, at the end of 2012, we saw a cliff.
00:08:16
Speaker
That cliff might have even even been so of greater concern or or steeper um concern. And so but a lot of people went out and did some things and set up some trusts. Again, you know, kind of like you said, that when there's this, you're under the under the threat of something changing, Maybe you didn't think through things all the way. And estate planning done right is is really something that, you know, it's it's thinking about legacy. It's about family. It's it's also thinking about things, know, the time when you're not here. So there is this natural urge to like not want to deal with it and put it off. Right, Mark. But like the thing is, is, you know.
00:08:53
Speaker
If you if you end up back in a situation where maybe you're back under that, you know, threat of something changing and that's your motivator. you know, that that is a luxury now that we don't deal with. And so I think the the concern I have is is that you maybe didn't do something that was the, you know, the most optimal or you didn't fully understand. Look, change facts change, right? And that that's ah that is an important part of all this is revisiting it. And this is a good time and has created an inflection point to doing that. But I mean, I think really the risk of of complacency is, you know,
00:09:23
Speaker
One, you end up back under a situation where you know you're you're doing it because the sky is falling. And i'm mean I'm not a big fan of tax planning or even just you know suggesting planning around the sky is falling. and i don't you know I think you always try to look to how how can you do things that that can optimize for all factors that you can you know think through. Knowing that you have incomplete information because you're you're making best guesses or, you know, you're dealing with things, you you know, the one thing that I like, I don't know the time of my demise. Right. So I don't know. like How do you
Estate Tax Planning Strategies
00:09:53
Speaker
plan for that? Exactly. You can't. Right. I mean, it's just it's not possible.
00:09:56
Speaker
um I guess in some circumstances, perhaps you can it can add some certainty to that. But but but it regardless, is you know you want to operate in a situation where you you can think about it not under a rush.
00:10:07
Speaker
Then the next piece of it is, it's like I mentioned, um and this isn't you know this is only true for those that have, I'll call it a state tax problem, meaning you know you be over the the lifetime exemption and and owe a estate tax in particular. Again, can think about income tax, whatnot as well. But you know, time is not in your favor when you when you wait on those things oftentimes, right? As values go up, you want that appreciation out. There are techniques that can do that.
00:10:32
Speaker
um You know, you also want to be thinking about the other side of maybe there is an a estate tax concern, but you have other income tax considerations. Well, Again, once the tax year is done, right? Like it's it's a little hard to undo things that were done, you know, after the fact, right? During the year you can, um we're sitting here in the middle of the year, right? So like you have some time and some runway to think about things, um you know, that becomes a little more challenging you get down to it. And, you know, it's two weeks to the end of the year and you're, well, what should I do now? You know, that that's time's not on your side. So i think really what I'm saying is is, time
00:11:05
Speaker
is an asset. And it's something that we have now both in terms of, hey, we've got some permanency, you know, maybe on the state side, we've got some time left on the clock for 2026. So, you know, the cost of waiting can sometimes be the ability to do something, to do it under, you know, don't want to say duress, that's a strong word, but you know, you're feeling rushed, right? Don't feel like you time to think it through. And maybe lost opportunity, because you didn't do it and either you can't now or, you know, values have shifted or whatever it might be. So we're sort of in this environment now where, again, there isn't something that creates urgency and I get it, right? The last thing sometimes, you know, people are thinking about summer break and things like that and, you know, enjoying the nice weather, you know, not usually on the top the list. You know what should do is I should think about my tax planning right now, you know, like that isn't necessarily it. I get it, you know,
00:11:56
Speaker
um but you know It's one of those you know those hygiene things that you you could sometimes go back later and say, man, really wish I had done. So um that's kind of how I think of it. So it's not so you know stressful. I think turning down the temperature on the stress is is helpful because you want to be able to think things through with a kind of a clear head.
00:12:15
Speaker
Yeah, no, I think that's great. And I think these are the things that as you're listening to this, I think, you know, they'll be thinking about, especially as we're now heading into the summer here. And, you know, maybe maybe you have a lull in your busy season and you're trying to think about how do I help my clients, right? So this is what Damien's talking about is I think some fantastic ways that everyone should be proactively looking at this.
00:12:37
Speaker
So let's put some numbers on the table so kind of everyone's oriented. So starting January 1st of 2026, this year, the Unified Estate Gift and Generation Skipping exemption is $15 million dollars per person. $30 million for a married couple, right?
00:12:52
Speaker
And this will be index for inflation going forward. And the top transfer tax rate stays at 40%. So portability is still here. So that's a good thing. So a surviving spouse can pick up an unused exemption as long as somebody actually files the Form 706 and elects it.
00:13:08
Speaker
And critically, the step up in basis of death, survive is still in the code. So there's all the great things that are theirs. So Damien, big picture here for a genuinely high net worth family, the ones that are, let's say, above 30 million,
00:13:22
Speaker
What does this permanence actually change about how you plan for them or the conversations you're having with them? Or just trying to figure out, do you even have the right structure in place to kind of start planning? What do you what does that look like for you?
00:13:34
Speaker
Yeah. You know, one thing that came about, right, and we've been able to say this for the last little bit and we'll be able to continue to do it going forward, at least again until, ah you know, as permanent as the tax law is, we'll say, um right? The lifetime exemption is the highest it's ever been.
00:13:49
Speaker
um And to your point, it's indexed on inflation. So I get to say that again next year and next year. So what that has allowed, even those that have done ah a large amount of state planning, maybe you previously utilized a lifetime exemption, right? And topped it off and all that. You know, there's there's there's room that's added with it being that high, having the annual inflation adjustment to be able to revisit that.
00:14:10
Speaker
I think what it also helps is is to add some degree of, okay, There's you know the trade-off, as you mentioned, with a step-up in basis. you If you were to do a lot of planning, looks like getting assets outside of the taxable estate to manage to keep within the the exemption amount or or you know to to reduce your taxable estate so that way you're reducing the 40% federal estate tax liability. um Again, all with the spirit of of transferring you know that legacy and that wealth to the next generation or you know facilitating whatever those goals might be. can be philanthropic, whatever.
00:14:45
Speaker
Right. um Well, having, you know, the amount as what it is, the flip side of that is, well, if it's outside of the estate, you're not getting to step up in basis. a Large, you know, just to some simply generally put, right? um So that is your tradeoff is okay, you're getting it out, not paying the full estate tax, but then you're not getting to step up in basis. So there's income tax considerations for that. So I think to your question, which is a really good one, and it's been very interesting to watch because it does, it means different things.
00:15:12
Speaker
to different people and where they sit, right? And to say like, if you're well north of it, I think it it's an opportunity to revisit, like I was saying, maybe with some adjustments or whatnot or revisit. If you're right about at it, that's where you start to think about, well, I wanna think about what am I putting outside of my estate?
00:15:30
Speaker
um What does that look like? um do i you know Would I rather have the this trade-off of the step-up basis or not? um And then if if you're below it, that still doesn't mean you can ignore it, right? Because again, you've you've got some exemption to work with, but there's there's other practical considerations to think about. So I think what is always so interesting about it, but also perhaps frustrating um to clients um and you know or those maybe that don't work in the space quite as much is you want to be able to say, Hey, this is, you know, you should do this.
00:16:00
Speaker
Or, you know, oftentimes a lot of conversations, Mark, I know we've spoken about some of these too, right? They start from a, Hey, I was talking to a buddy or I was talking to a, you know, a family member or whatever. And I've heard about X, Y, Z. And should I be doing X, y Z? Is that for me? Well,
00:16:15
Speaker
Anything, and particularly when it comes to estate planning, is it really depends on your personal situation, your wealth that makes up of the assets, the types of assets, all of those things, right? um And it it can't be devoid of thinking about it in the broader picture, you know, income tax, right? Like i said, we've got a trade a trade-off.
00:16:36
Speaker
with a step up in basis. um There's state considerations, there's you know liquidity and financial planning considerations. And I'm not even running down the list of all them Like those are the big factors that sometimes come into play. So there isn't a one size fits all, but I think that's what makes it also, I enjoy it, makes it really rewarding.
00:16:55
Speaker
Again, I recognize sometimes clients want the like, okay, I want the, you know i want option B on the plan. Can I just do that? It's like, well, no, I mean, well, you could, but like, you it's, it's, it might not be the right one for you. And so I think generally we're seeing is, is because it's so high, again, can start with that size has ever been, and I get to keep saying that, right?
00:17:14
Speaker
It means it's it's a good time to be having a conversation and revisiting where you are, you know, especially whenever there's been a change in life event. And that's kind of the ongoing, you know, when you look for inflection points of you marriage, divorce, death, um you know, significant change in level of wealth um from events, um liquidity, like all those sorts of things all go into the mix.
00:17:36
Speaker
To help to evaluate it. So I think what I decided here, Maria, in answering your question is there is no one size fits all answer. um And but it's been very engaging. It's a great time. As an advisor, i will say, um i look at my job as helping people every day. Right. That's that's really i that's that's what i do is help them navigate, manage, you know, risk, manage.
00:17:54
Speaker
you know, their project management of, you know hey, we're going to do this, you know, this plan. It's not something like we were saying, you know, it's necessarily on the top of the list that people want to tackle. But it's something I would argue they very much need to tackle. Yeah, I know you would, too. And so, you know, helping them manage that.
00:18:11
Speaker
So it's very rewarding, but also appreciate it's not without, you know, one size fits all approach. Yeah, and i think I think what you're mentioning there, and this is for everybody, I mean, and your answer is perfect. It it depends. And, you know, based on clients' facts and circumstances, what they have going on, and just because 20 years ago they had certain facts and circumstances, things change.
00:18:33
Speaker
And, you know, it's we have to approach everybody differently. And I think just number one, being educated on what the rules are, what we can do is just the starting point. Yeah, no, i think that's right. and And one other thing I'll mention that it that came to mind as you were speaking there, that, um you know, even just thinking about, and there's been a lot of headlines around, you know, this generational wealth transfer that that's underway and whatnot and and seeing that happen and and really thinking about not even just, you know,
00:19:03
Speaker
if if you're if if you're having a conversation with me, Mark, thinking about me, right? But like, and I've had this conversation with client recently too, where, you know, you really do need to think about, well what is, you know, the the generation above, I guess, if you will, you know, what is mom and dad and the in-laws look like? What is it, are there, is there other generational wealth transfers that are happening at the same time?
00:19:22
Speaker
i mean, it's always been there, but I think it's just, it's ah it's something, sometimes it's easy to focus on, okay, well, I know what's on my balance sheet right now, but the other thing that I think is increasingly becoming a consideration is is is actually adding, which adds more complexity and dimensions to your your math here, right? But, you know, what else is happening within the broader family and even non-family members? and And what does that look like um in situations where if you have a non-traditional um relationships or or, you know, friendships or whatever, right? Like it' it is truly multidimensional and sometimes needs to factor in other factors. so Yeah. Yeah, it depends is is is the long way to summarize ah and my answer there. Absolutely. Now, here's where I want to bring it home. And i mean, literally for us, you and i we both sit in Illinois.
00:20:11
Speaker
And Illinois is one of those states where the federal headline is dangerously misleading some level, meaning Illinois is a state tax exemption is sitting at $4 million dollars still. yeah Even though we have $15 million per person federal, right?
00:20:24
Speaker
No portability at the state level. You can have a $10 million estate that owes zero federal tax on the estate side, but still owes a couple hundred thousand dollars on Illinois tax. So talk to me about this state level trap, because I think sometimes when people say, well, I'm under $15 million, dollars I'm good. i don't have to worry about this. could be very misleading. Am I right?
00:20:45
Speaker
You're absolutely right. and And that's where I say, like, you know, it it is is it is not one dimensional. And sometimes you think, yeah, I'm good. I don't have to worry about it. saw that's 15 million. It is absolutely not, to your point. And it it takes some some thoughtful planning and definitely working with an attorney, you know, updating an a estate plan that contemplates the fact that you have an Illinois resident and continuing to be an Illinois resident, right? Because, Yeah, it is something that will kick in. So with proper planning, you you can you can set up trust to help with the first to die to defer to second to die. Right. At a high level.
00:21:18
Speaker
um But it does. It changes the equation. It can even um for those that and I've sometimes had people get a little surprised by this to say, well, if they're there. You're up and over the the level of of owing, you know, the exemption amount in Illinois, for example. But you have, let's say that you were, you, you know, now I'll call him Bob, right? Bob used to live in Illinois, right? Bob has some significant real estate in Illinois, but now he lives in Florida, right? he had some family down there. He moved, um you know, he's over...
00:21:49
Speaker
the Illinois exemption amount. He's single, so let's just keep it simple, right? He's got $4 million amount. So um Bob always thinks in this case that like, well, I'm good, right? Like I'm outside, i'm I'm not an Illinois resident. I don't owe Illinois tax. Well, you'd have to look at it again because you've got property inside of Illinois.
00:22:06
Speaker
In this case, he's got some real estate here, right? um He's actually still subject to Illinois tax. So there are no short answers, and and it is very involved it is a very involved and sometimes counterintuitive. I'll put that in the counterintuitive bucket. um There's things you can do planning-wise, but it really does take special consideration to think about it from the state side.
00:22:26
Speaker
And in in perhaps because it's just like ah another overlay that what you need to look at the entirety of the estate plan, right? Like I said, it it it'll color the the trust documents and the drafting there. It'll color maybe the assets and where you want them to sit.
00:22:40
Speaker
um Maybe how you have assets held, um you know, difference between first and second to die, maybe maybe you want to go ahead pay it at the first to die um instead because you you think there's going to be growth. or I don't know. There's a number of reasons you could look at doing that.
00:22:55
Speaker
um But it is not as simple as, and I think that is one thing that that can be both maybe surprising, but also i think a ah risk, I'll call it, I put everything on a risk spectrum, right? I don't know. Maybe I deal with a lot of ah asset managers and and they're always thinking about things in the lens of of risk. But, you know, a risk, I think, with the fact that we say, hey, it's the highest, it's 15 million per person, the highest has ever been, right, is that, yeah, you overlook the Illinois. or I mean, there are other states like Illinois,
00:23:22
Speaker
that have you know some version of ah an estate tax or an heirate tax. And so you absolutely cannot overlook that. um And yeah, it's something that needs to be considered. And that's where, again, you look at that whole, the holistic planning and the direction to say, well, if...
00:23:38
Speaker
If that is a factor, you know, our a residency changes a consideration, yeah you really have to go big picture on it. um But yeah, it definitely adds some complexity. And in sometimes in a way, like I don't like the unpleasant surprises, Mark, you know, like i not until like like Bob over here, right? That's not a pleasant thing. Bob's thinking like i'm'm I'm on the side of it. Good. Like somebody told me about this i Illinois, you know, 16, because you're at you're you're basically 56 percent, right? Between federal and state if you're facing both. I guess you're. we're talking about a situation maybe where you're between the two and you're just facing the extra 16%. But, you know, that that is something that can really come out of left field for folks.
00:24:14
Speaker
um And something really need to be thought through um both, you know, I'm looking at it from the lens of an and you know an individual Bob here, right? But also as a planner, right? Like that that's where I can make a misstep if I didn't think about that.
00:24:27
Speaker
and later it comes back and into the equation. So it just is a good demonstration of of how much complexity there really is right now. um And while, again, i mean I'm gonna like go bring back to your point about the, you know, we were in a point of permanency of of ah federal tax policy, we kind of know where that sits, like, you can almost like you feel like, you know, complacency, like, is isn't it easier? i mean, it' it's really sort of like an extension of Tax Cuts and Jobs Act and whatever else, right?
00:24:51
Speaker
It absolutely isn't right. Like state complexity, even just added federal federal complexity with the provisions of H.R. one. um It is a time that is a tax practitioner. um And again, ill I'm going to try not to get entirely on my soapbox. i I'll step back down here, Mark, because this is a soapbox for me. It's like, you know, it is such an interesting and I love I love what i do.
00:25:14
Speaker
because of the complexity here, but that also is a risk at the same time, right? Like you have to think about that as a practitioner of of, and this is why I value so much the relationships that I have with other practitioners like you, Mark. I mean, I know we go to lunch and we just start like, you know, going down rabbit holes and having some fun, like, you know, just nerding out on the tax law and all these different things, because that is really what it takes to think about like this Illinois layer.
00:25:37
Speaker
um you know, is is building your network and and and listening to podcasts like this and great hosts like yourself, because, you know, there are so many things to think about. Like the it depends sounds like a cop out, but it really isn't because it really depends on a lot of factors. And I think that's really what the takeaway is. And and I mean, I kind of went a little broad on your Illinois point there and maybe less specific to it. But to say, hey, you know, no matter where you sit, I don't care the state of residents or whatnot, like,
00:26:04
Speaker
this is a multi-dimensional to include state um dimension consideration. Yeah, no, one hundred percent. And I think not just Illinois, but I think, I think there's total of like 18 or so States that have their own estate tax regime. So, yeah. well So before you tell your client, Hey, i I think you're good on your federal side, you know, make sure, you know, they're not operating in that living with residency in that state. And, or you have Bob who, you know,
00:26:31
Speaker
Move to Florida or move to Wyoming or Nevada or name the state. And, you know, he thinks he's good, but, you know, he still is connected to these states. Maybe he has a business there. Maybe he has property. Maybe he, golly, knows what he has in these states. and And these are the things we have to have discussions on.
00:26:49
Speaker
Part of the planning, as you said, Damien. Yeah. Now, another thing that I do find, and I've been having a lot of conversations with clients on is, hey, let's talk about get you up to speed. and they're like, oh, yeah, no, we're good. i you know um um I have a trust. I have a will. My documents are solid. we got those I got an attorney that set them up. We're good.
00:27:09
Speaker
When did you get that done? And you're like, well, and it was like 10, 12 years ago. and And what I would say about old documents, I'm not saying they're wrong. I'm not saying there's nothing. Maybe they're perfect, right? But a lot of trusts were drafted with formula funding clauses, language that says fund the credit shelter trust up to the federal exemption amount.
Charitable Deductions and Itemized Deductions for 2026
00:27:27
Speaker
Well, maybe at that time, the exemption was five or 11 million or somewhere in between. Right. And that meant one thing. Now, with it being 15 million, that same sentence can shove a fortune into a trust the client never intended.
00:27:41
Speaker
And maybe even, you know, skewing against the plan or against a spouse or heirs. So that could be a problem. So do you recommend, you know, hey, it might make sense to kind of like recircle the wagons on your plan in your documents.
00:27:56
Speaker
100%. could not agree more with what you said. i mean, even if it's you're not talking a taxable situation, they say like, yeah, I'm not okay, Damien and Mark, right? Like, i'm I'm not even close to 4 million, right? Like in net worth. And that's not a risk for me, whatever. Like, just even the basic, you know, hygiene of of an estate plan,
00:28:16
Speaker
um That shifted, right? i mean, look, we the one thing that i I do know, and I realize this is like in like in just in life, right? As you go through and you know relationships change, you know you know family members you change. you know What you are so certain of, and I'll put it this way, like what I was so, so certain of when I was like 18, right?
00:28:36
Speaker
right I didn't know what I was talking about when I was 18, right? I mean, like just your even your perspective of what you think to be truth for yourself changes. And so if you did that, like let's let's ignore the fact that like we've had fundamental changes with the exemption going up so much, right? Let's just put that aside for a minute and just say, even just the basics of like,
00:28:57
Speaker
who would you want your wealth to go to, right? Maybe it was contemplated before ah you know a separation and a remarriage or the addition of children or grandchildren or whatever it might be circumstantially.
00:29:09
Speaker
Like that really changes the answer. I mean, and there's so many stories. And again, i don't like the doom stories, right? Of like, well, this is the worst that could happen, right? Like you didn't update your beneficiary designation on your IRA and now your 401k and now it's going to, you know,
00:29:25
Speaker
your ex-wife that you didn't want it to go to, like things like that, right? Or, you know you've created this trust and all of a sudden everything is going over here to a point to a massive extent that you didn't expect. And maybe that's not what you would have wanted to have had happen because of some other event in life. So, I mean, the the basic point there is it's it's not stagnant.
00:29:44
Speaker
It's always moving. And so therefore you should do that in particular. But most importantly, because like we said, highest federal exemption, lifetime exemption ever. Right.
00:29:54
Speaker
That fundamentally changes how much wealth your funding trusts. And I've been, I think so many conversations with folks too around, um you know, well, it, was there a number that you were thinking, you know, like I, so I have, I have boy, girl, twins, right.
00:30:07
Speaker
We'll use them for example. like Maybe I was thinking, you know what? I want to transfer x dollar amount to the two of them and then i want the rest to go to charity or something like that. Or I want it I don't know what I want to do. You know, let's just, but I had a number, right? Well, to your point, Mark, like with with the increasing exemption, maybe you're funding whatever you know vehicle that's going to ultimately go to them with more than you thought.
00:30:28
Speaker
um Maybe you want that. Maybe you don't. I don't know. Like again, and even how you feel about those kids can change over time. I've had a lot of those conversations. and And so for that reason, I think it's it's absolutely like now is a great time. We're one year in like, I don't know. There is something to be said about like,
00:30:43
Speaker
you know, landmarks in the sand, right? Like everyone always likes New Year's because it's like, hey, I'm gonna make that resolution. I'm mean yeah actually i'm actually gonna go to the gym this year. I'm actually gonna do this. I'm gonna, whatever, right? It just gives you, you know, I mean, heck, even like, you know, Sunday evening, you're like all right, this week.
00:30:57
Speaker
All right, Damien, this is the week I'm going to get XYZ done. Like whatever, right? It's just, ah it's an ah an inflection point. Well, one year in on HR one or, I often call it OB three is a, you know, um one big beautiful bill act um is ah for short. But, um you know, you're one year you know, we know a little bit more. there's There are still some unknowns that are sort of evolving. Now's a great time to do it. Right.
00:31:20
Speaker
um And not to mention the fact that, yeah, then there's also been some state law changes. Right. To say even just under, you know, fiduciary rules and, and, you know, and that, that side of things. um But, you know, all of this comes down to, and this is, I go back to like, you know, you heard from the friend or the buddy or the whatever on the golf course or wherever, right? Like the different planning idea and they're all tools in, in, in the toolbox, right? A lot of the planning ideas that people come up with after, you know, said round of golf or whatnot.
00:31:52
Speaker
Well, you know, i and I admittedly, Mark, am not the most handy around my house. You know, i nearby I aspire to be more handy. But, you know, like if I if i if i have to go a screw in screw it, I grab a hammer.
00:32:05
Speaker
that's That's not going to go well. Right. Like, but you know, and maybe it's not that dramatic of a difference. Maybe I just use the wrong, you know, so type of screwdriver. I don't know. but So whatever you want to, however far you want to go with that metaphor. But the point is.
00:32:17
Speaker
Not all tools are created equally, right? and they're not for the same purpose. And so maybe you created a you know credit shelter, to like you know an AB traditional plan, maybe that's overdoing what you wanted. Maybe you now, because of you know um levels of wealth and appreciation assets, and you know you have this business that's now you know kicking on all cylinders, you know maybe ah you know some sort of a different intentionally defective grant or trust makes more sense.
00:32:42
Speaker
um And you won't think so if you were to go to talk to me today and you come back five years later and you're you know, you got you've added a couple zeros behind your net worth. Well, we'd be having a different conversation, Mark. Right. And and so um around the tools, around the tools that are possible. um So I think right now is just to land the plane here is a great time to be talking about these things, to be thinking about these things, revisiting them, even if you did it two years ago.
00:33:09
Speaker
I think it's you know it's a great great thing to always be kind of checking in and just doing a checkup. And and if I'm if i'm a you know a tax advisor, I mean, I am, you are, right? Right now is a good time to be just having in those conversations. Even just, you know it's a great way to engage with your clients. I mean, I know a lot of taxpayers really want like, they're seeking like the proactive, right? It's the relationship side of it, right? and And that is, that in my opinion, is one of the most, you know, the the unique things that we have in our relationships with our clients is, you know, we're talking about these things that are so near and dear to their their hearts and like nothing makes them feel
00:33:47
Speaker
Like you're looking out for them more, you're thinking about them more than is that you say, hey, you know, we're at this inflection point, whatever, however you lead into it. And I, you know, I want to check in and make sure things are on track with your long-term goals, right? And the answer might be not today. Maybe it's, you know, next year. i don't know, right? But at least you're having the conversation, you're thinking about it, you're you're teeing it up. Like, I think that is 100%. I mean, it really is kind of what I'm, my my day-to-day has been, I'd say, in the last little bit, is just focusing on that, saying, yeah, like, we know what we know now. Like,
00:34:18
Speaker
let's Let's talk more about it. Right. And sometimes it's an ongoing conversation. Oh, that makes sense. And I think there's some great things there. And I think at the end of the day, again, it comes down to being proactive, talking to your clients, advising them, asking rhetorical questions and trying to make sure that you get ah get your footing as to what do you need to explain to them and get them up to speed. So very important.
00:34:41
Speaker
Now, let's follow the money in a different direction. And that is, I think starting in 2026, generous clients are going to be a little bit surprised if planning isn't being done about three big changes that are hitting charitable giving this year, right?
00:34:55
Speaker
One, we have, there's now a floor for itemizers. You only get to deduct charitable contributions to the extent They exceed half a percent of your adjusted gross income. So that 0.5%. So a client with a million dollars of AGI loses the deduction on the first $5,000 of giving flat out. Boom.
00:35:12
Speaker
You can't get it right. Second, for the top bracket clients, those in the 37% bracket, the value of itemized deductions, including charity, is now capped at 35%, even though there is their rate is 37%. This is the quiet comeback of the old P's limitation idea, remember?
00:35:32
Speaker
And every dollar of tax bracket donor gives now saves them 35 cents on the dollar instead of 37 cents. yeah And then third, on the flip side, there's finally a permanent above-the-line deduction for non-itemized deduction.
00:35:45
Speaker
People that don't take the itemized, it uses standard deduction. Yeah. So, Damian, you spend a lot of time with serious philanthropic families, right? When you stack the half percent floor on top of that 35 percent piece cap, how much does this actually change the behavior versus um after tax cost savings for these clients?
00:36:05
Speaker
what What are you doing in this area? Yeah, no, it has been a very hot topic of conversation, I'll say. And it's going to be, it's an ongoing non-static conversation as well.
00:36:15
Speaker
um I will say there was a big inflection point of things to overly use use this inflection point word, apparently. that's um're We're stuck on inflection point today. um There was a big uptick, we'll say, at the end of last year.
00:36:26
Speaker
And why was that right? So end of 2025? Well, because this provision, these provisions didn't go into effect until 1-1-2026, right? So, you know, in 2025, the rules didn't apply. In 2026, they do. So maybe maybe you wanted to accelerate giving.
00:36:42
Speaker
in 2025 to you know avoid the floor, if you will, um to avoid the haircut. Like I often to call it like a haircut in the floor, right? Is kind of what you're dealing with.
00:36:53
Speaker
um and And so there was there was a lot of activity at that point time, modeling it out, thinking about what it looks like, that sort of thing. Now really, you know being in 2026, why I say it's an ongoing conversation,
00:37:05
Speaker
is you know in order for me to tell you the federal tax benefit of your charitable contribution deduction, which, yeah, I work with a number of very incredibly philanthropic and and and you know donative clients, right? and And they're doing a lot of good with the dollars. And you know this is one of those like silver lining things, the the tax benefit of it, right? I mean, certainly, I mean, I think that maybe some are more voted by motivated by the tax deduction and than others.
00:37:31
Speaker
But I mean, at the end of the day, the this deduction also allows for more giving. Right. If you think about like in terms of directing. So there's definitely planning and for me to tell you the amount of your deferral deduction. I need to know your income to your point. Right. um And that applies to everybody that's itemizing.
00:37:46
Speaker
Right. Regardless of bracket. So, you know, that is definitely changed the thinking to say, OK, you know, for example, let's just say that I have somebody that's going through a very, very large liquidity event this year. um You know.
00:37:58
Speaker
Billion dollar gain, right? They just, they hit it out of the park. Okay. Well, you know, oftentimes in your sale businesses, you know, there's, there, there there are a lot of things that kind of happen. there A lot of people come, you know, advisors, a lot of things that are coming at at them. Right. And it is the like the largest financial event and often tax event in in their lives. Right. Great things. But then you say, okay, well, I've always wanted to do this donation. Right.
00:38:23
Speaker
Now, I need to run the math and say, okay, well, because evaluate the trade-off, right? Because, I mean, look, everything in tax kind of comes down to you know whether you know you' you're waiting as long as possible to pay and and and pay the lowest rate as possible, right? They're all kind of some derivative of that.
00:38:38
Speaker
Okay, well, the trade-off is saying maybe I wouldn't want to wait until 2027 because I know my income is not going to be a billion dollars. Um, and because I'm going to get more bang for my charitable buck, right?
00:38:51
Speaker
Well, that means I don't get the deduction this year too. Um, right. But also maybe my income is lower, which means now that I, because those those there are AGI limitations that come into place um based on the type of giving and who you're giving to, right? Up to 60% of your income is you can give in any one year. Now you get to carry over the excess for five years, right? But that becomes an attribute you have to plan for because after the five years, it goes away, right? So so it is, a again, back to this multi-dimensional planning, right? Is to figure out, the only way to answer in my mind is you got a model. And of course, you're making assumptions because
00:39:23
Speaker
you know Maybe you don't know what your income is going to be in 2027, but you got you got to think about how that plans out. And by the way, the other dimension to this, to your point, is so it's 237, which was the fraction they came up with that mathematically gets you to say, like, if your benefit was 37 cents on the dollar before, right, when you're in top tax bracket, now it's 35 cents.
00:39:43
Speaker
um So the way they mechanical mathematically do it is say, all right, we're going to take 237, say your deductions, we're going to just remove those, call 5%, right? Okay, well, um if what if you're in a net capital gain position? You had a billion dollars. My billion dollars markets, it's all capital gains, right?
00:40:01
Speaker
I am definitely above the top tax bracket. So I'm in the 37% tax bracket, but I am not paying 37%. I'm paying 20%, maybe 23.8. But, you know, I'm paying 20%. um Well, it effectively takes the benefit from...
00:40:13
Speaker
20 to 19%, right? But now that's another dimension you have to think about because, you know, maybe again, thinking, all right, I want to minimize my tax bill in 2026. Okay, well, if I'm waiting, am I getting that against ordinary income in 2027 maybe? Or do I have ordinary income because I was selling a partnership and I had some hot assets in there and I have some ordinary? Maybe I, again, it it just goes back to the point. It is it is very complex and and there is no straight answer to what's the best. I can tell you what's going to happen If you give me an assumption for what your income is going to be for the year, what that's going to look like.
00:40:45
Speaker
um But it's definitely like the messaging I'm sending. And I think I've got a lot of those that I work with, um you know, on board with this to say, well, let's have a conversation before you do it. Right. let Let's have a conversation. Would we rather like let's play that game? Right. Would we rather do it now? Would we rather do it in 2027? Would we rather give it to a donor advised fund? Do you want to do a foundation? Like it it brings up all these conversations and really puts it into the bigger picture because at the end of the day, what I find most motivates a lot that ah many of that i work with is they've they've got this philanthropic goal in mind.
00:41:18
Speaker
And like I said, like we were saying, right, like the the federal deduction allows you to, you know, reduce the the federal tax bill that that also allows you to give more potentially. Right. So thinking about the right structure, again, tool for the job, i think also matters.
00:41:32
Speaker
um But it has been front and center in a lot of the conversations I've been having. And like I said, we'll continue to do so. And and to your point, the 237th, the 5 percent, whatever you want to call it. You know, it doesn't just apply to charitable, right? It applies to all itemized deductions, including investment interest expense, which are ah our our our favorite P's limitation that that now is no more um didn't apply to. um So, you know, there's there's some some added complexity there perhaps as well in just thinking about itemized deductions overall. But yeah, it's ah it's ah it's a fascinating time to be thinking about these things and and takes a lot of, you know, care and thought, I think.
00:42:07
Speaker
Absolutely. And let's talk strategy. I mean, because this is where as advisors, we really earn our keep, right? And we you you alluded to this prior at the end of 25, but, you know, bunching multiple years of giving it to one year to clear the floor.
00:42:22
Speaker
So donor advised funds take a big deduction now and grant over time. Maybe it's giving to a foundation, but also gifts of appreciated stock instead of cash. Dodge that capital gain and still get the deduction, right? Which of these are you leaning hardest on or you are these things that are in your you know toolbox of strategies for helping clients?
00:42:41
Speaker
I love the toolbox. Yeah, it is because it's literally how I think about it. They're all in the toolbox. And again, I think that's where even having a conversation, donor advice funds are are, I've seen a significant uptick over, again, since the TCJA, I'll just say enactment and and ongoing because it is a great tool for the job ah for many, right? There are there are times that maybe um there are aspects they don't, they you know, they don't like about it or or whatnot. But I'd say by and large, that is the the the tool most people go to because it does. It allows you to bunch without, you don't have to dole off the dollars, right? Day one, they're in the DAF now. I mean, of of course, now you don't control it any longer as as the taxpayer. um And, but and you have a sponsor and you're youre applying for, you're making a recognition of where you want the dollars to go um as you dole them out. But it it strikes in really nice balance. And also the administrative cost is,
00:43:30
Speaker
considerably less for many than than running ah you know having a private foundation, for example, as an alternative. um Or just going straight and saying, hey, I'm going to give you know all that money in one year to one organization that sometimes doesn't fit with people's broader goals. So I think the Donor Advice Fund is is a is a great has been a great tool um to do that, make sense to people, um and easy you know moment more to to administer. and But yeah, it's bunching that really that comes into play there, for sure.
00:43:56
Speaker
That's great. And before we leave deductions, yeah i cannot I wouldn't be remiss if i didn't hit on SALT because the state and local tax story is its own roller coaster, right? So we know that AFSCOT raised the $40,000, climbing 1% a year through 2029. phases out for high earners, starting around $500,000 of modified and then completely phased out at $600,000.
00:44:13
Speaker
for high earners startingring around five hundred thousand dollars a modified agi and then completely phased out at six hundred thousand So we've got four year window, right? So meanwhile, the pass through entity tax, the PTAT regime survived the bill completely, pretty much intact.
00:44:29
Speaker
How are you coordinating the bigger salt cap with PTAT elections for your business owner clients? And how are you are you still making sure that's part of the planning process here? Absolutely. Absolutely. Yeah. I mean, to me, that was one of the biggest aspects of of the HR1, right? and I could probably say about a lot of things, but this was one of the big things, right? and And it absolutely, to the point about estate planning and now is a great time to revisit, now is a great time to revisit the pass-to-end tax regime and decision around that, and and many states are revisiting to including ours, right? um ah Because many of them were pegged to you know the end of the the federal statute, right? Because this limitation was gonna go away, right? We were gonna wake up on 1-1-26 and no longer have the SALT cap. um Obviously, that didn't happen. And so states are looking at maybe be tweaking them a bit, right?
00:45:19
Speaker
But the pass-through and the tax election is is a very, um like you you'd say on the surface, it's like, ah it's a no-brainer, right? Like, i mean, you know, hey, if i if I elect to have it at the pass-through level, my escort, my partnership, right, this allows me to get this this federal deduction. like Like, why wouldn't I do that, right?
00:45:34
Speaker
well there are definitely times where it does not make sense to do it or or you may not want to do it or it's, it's, it creates other complexities. Um, because I will even, I'm like, I will say, i mean, again, even to looking at like the Illinois statute, right? I mean, it was temporary in nature.
00:45:49
Speaker
I mean, the cap, the photo cap was temporary in nature. So I, I think a lot of people, and I know, I mean, they were, I was having conversations around, you know, because it's temporary, maybe we don't want to, you know, make shifts or, or, or plan into, or whatever that might look like. Right. And also it looks at the business, right? Because sometimes if you have, um you know, Members or are partners or shareholders and in many states, that adds complexity. um You know, it creates more filing requirements. So there's, again, back to the whole not to overuse the no one size fits all, that is definitely the case. But there are some complexities, even just in terms of making sure you have proper elections made.
00:46:25
Speaker
um that you're adhering to the provisions that I think as many of them have changed. I mean, again, with the extension of Illinois, it changed, right? Now we have a new option um as to how that looks and what's included in the base um for a pastoral entity to make the election, right? um but But just thinking about that, how it relates to to go back and maybe draw this point out, say, okay, well, maybe I've done some estate planning, back to our estate planning soapbox here, um and i've i've you know I have an intentionally defective grant or trust. So what does that mean? Right.
00:46:55
Speaker
yeah That means I've transferred. I don't own it under state law any longer. It's outside of my state. Right. I've taken my my business interest over. It's over here. But but I still am treated as the owner under, you know, the grant or trust rules for income tax purposes.
00:47:07
Speaker
And so I'm going to keep paying the tax. Right. Well, when you make a past earning tax election, well what are you doing? Well, the past humanity is making the election or is making is paying the tax. Not me. Right.
00:47:18
Speaker
um So then that means like if the interest is inside of the trust, that means the dollars that are inside of the trust are paying the pass-through tax, not me. Right. So maybe, and again, I'm not saying this is a reason to not doing it, is it maybe that you have to consider and then model out that, you know, you one could argue that that is undermining some effective estate planning. Right. And that's just a one for instance. Right.
00:47:40
Speaker
ah my My former colleague, David Kirk, a member years ago, I think, Mark, maybe you were in the audience with me. like yeah And he would speak on it ah quite a bit about like, you know, the different reasons why, um you know, maybe a pass through any tax election doesn't make sense. And I'd say just to kind of bring the point home is like, what's the takeaway?
00:48:00
Speaker
Revisit it. Revisit it absolutely for businesses. um You know, what does it mean in the broader picture? You know, specific states, if people have changed residency, like all of these things, there it's a sliding scale.
00:48:11
Speaker
Because of the way that the thing evolved, you know, there are some general themes to how these regimes work, but they're different by state. And so you really have to look state by state. There is no sure answer to figuring that out um and to knowing if it's the right decision. So take see key takeaway here, Mark,
00:48:30
Speaker
PTED is here to stay, right? It survived. And and you it is really now is the time to revisit it because it it's substantial you know savings that can be, ah if you look at it from a tax perspective, by doing it. But there are trade-offs to anything you do um to include past-term tax elections. So you want to make sure you know what those trade-offs are.
00:48:48
Speaker
No, that's so good. Great, great advice there. And Damien, here's a belief I hold pretty strongly to, and I want to test it with you. Yeah. theory So the annual tax return, in my mind, is the worst possible time to start doing tax planning. Because by then, the year is over and you are kind of on defensive side of things versus offensive, right?
00:49:08
Speaker
yeah Everything we've talked about today, estate moves, gifting, bunching, QCD, salt timing, entity elections, the whole the whole gamut, right? Almost all of it has to happen during the year to mean anything.
00:49:19
Speaker
So for your high net worth clients, family office clients, whoever it may be, what does a true year round planning rhythm really look like just just from a high level standpoint? Yeah, no, i I fully agree. First of all, Mark, I say that, yeah, that like it's and it's sometimes that can create very uncomfortable conversations like, well, if I had only known, or why didn't you tell me or whatever? you know, that that is the worst conversation you want to be in, because, again, you're now at this point, the year is closed. i'd like Like I said, like middle of the summer, I can I can do something about it. You know, we get to this, time you know, we get to April next year. that That's a little hard to to do something about it right, in many cases. So um I think it's that. Plus, when you layer on the loss limitation rules that apply individuals, right, excess business loss limitation, um you know, passive loss limitations, like looking at those in particular, obviously, there's there's others.
00:50:08
Speaker
um But, you know, if we look at those two in particular, um you know, that is just a whole nother layer on top of to say, how are we thinking about these things, especially since now we live in a world where we have permanent bonus depreciation and we have permanent, you know, we make changes to 163 and to section 174, you know, research and and development um and expensing of those costs. So, you know, that that can create situations where you're maybe generating losses and you say, that's great, but maybe I want to think about that in the bigger picture and understand what that looks like. So that is a at least quarterly conversation.
00:50:42
Speaker
that I set up and I just say, hey, here's the baseline. and And I get it. Like there, are you got to meet people where they are. Right. And I say this to some people because i and I bet maybe even said this before. Maybe I haven't said on this podcast. I don't know. It's like I had someone once say to me, you know, Damien, don't take this the wrong way.
00:50:56
Speaker
But, you know, I kind of look like talking to you a little bit like going to a dentist. I'm like, you know what? break No offense taken, right? Like, I get it Like, you don't want to deal with taxes except for when you have to. um you You want to be a little proactive. You don't want to have to be pulling teeth out and and doing cavities or whatever else, filling cavities, right? But like, you know, I want to get in. I want to get out. I don't really want to talk about it unless I need to, right? um So some people are there. Others are, you know, they really want to, like, get into the weeds and really understand their calculations. you have kind of a continuum of where people are.
00:51:26
Speaker
And so I definitely adjust to that, um I find. But what I often say, even the ones that are a little further towards the, hey, dental chair, Damien, I want to get in, and get out. I don't want to talk about it. You know, something urgent, call me.
00:51:38
Speaker
but Otherwise, I'm good. um i say, hey, look, let's just at least let's just set a quarterly cadence of if like we'll put a call on the calendar because there's one thing I also know is calendars fill really, really fast. Right. Mine in particular. So, you know, let's just put a call on the calendar.
00:51:53
Speaker
don't have anything to talk about. We don't to talk. We can cancel it, right? But it's it's sort of like that whole, um and I don't remember where, I mean, you you you hear it many different times, like the you know the big rock equation, right? To say like, hey, if you've got a jar and you want to, you know, you've only got so much time in a day, right? You got to get the big rocks in first and then then the pebbles and then the sand, right? Because it'll fit around. Well, that's a big rock, right? like Because if you don't get it into the counter, you don't get a baseline, it's not going to happen. So I think at least quarterly, because what's helpful there is you're doing quarterly estimates You can ti kind of talk about it gives you an inflection point to say, wait, what else is going on?
00:52:25
Speaker
in the conversation. um i and so Even if in a lot of times say like, you know, again, obviously want to manage time. Is it right for everybody? No. um Some people don't want to pay for that either. Cause I mean, time comes into a equation here and fees and that's kind of part of white glove. Right. um But like there, I always find, even if I like say, hey I'm going to do this as an investment in relationship, um you know, is how I'm conceiving of it. Like something comes out of a just a touch point like that.
00:52:53
Speaker
about the business, about a life change, about a an idea that, you know, Uncle Bob had over here, you know, that they were pitching. um That adds value to helping me better not get in a situation where we're in April and be like,
00:53:07
Speaker
Man, I didn't know about that. And I wish we had known that because I would have told you to do X, y Z instead. Right. So it it it depends, I guess, Mark. But it really depends on the relationship, on the individual, on you know the situation. But as as much as as everybody can be comfortable doing is is really what I strive for, I'll say.
00:53:31
Speaker
Yeah, and I think, and think you know, just – it always goes back in tax. It depends. But i think bringing that – you want to make sure you're thinking about what the client needs and how you can help them along the way. Yeah.
00:53:43
Speaker
And no I know sometimes, you know, people might be listening saying hey, you know what? I'm not working for some massive firm. I'm not in a private wealth side or a private client side. But the bottom line is everybody listening probably works with high net worth people.
00:53:56
Speaker
And high net worth can be defined in so many different aspects, right? And there's a lot of coordination that goes into that level of work that we all deal with. And so you're rarely, right, Tim, the only advisor in the room, right? There's the estate attorney. There could be a wealth manager, the insurance person, um a business attorney, and sometimes maybe the entire family in their office, right? yeah And so as a CPA, do Do you find that quarterbacking well um and not just filing a tax return, providing coordination, maybe even view yourself like the tour guide, is frankly what the relationship needs at a lot of times?
00:54:32
Speaker
Yeah, no, I think that, and those are the most meaningful relationships. And, in and you know, you should learn over time too, you know, and look, we all have strengths and weaknesses and what we're drawn to and what, you know, what fills you up versus drains you, that sort of thing, right? The relationships where you've got all those players, right, in the in the equation, um because I think that's really what it takes.
00:54:52
Speaker
to to you know really serve you know whether family, high net worth, however you define it, your point, right? And even for those that maybe aren't as high net worth as you would maybe think, right? like Like tax is a big line item on an income statement for folks, right? um and so thinking about that in coordinating like the vantage point that i have which i i often will say with the attorneys that i work with and the financial advisors i find a lot of times that you know the insurance folks coming out here and there like it depends on you know what's going on but like the the cpa the attorney the the financial advisor those those are the ones that like you know i again the relationships i'm drawn to that fill me up those is when i have a good working relationship with
00:55:33
Speaker
the other folks and in that equation. And what I oftentimes will say, because look, if I'm an investment guy, I'm not, i don't I don't even play one on TV, right? Like that, you know, I want to make sure that, you know, hey, that my, I'm getting the returns or we're getting the result for my client, right? and And that they're able to get, you know, grow the wealth and all that. Well, if we're not thinking about it, coordinating it, timing it, whatever it might be, well, maybe there was more tax drag, we'll call it, than was anticipated and it didn't create the result. Or I didn't know they were doing
00:56:05
Speaker
you know, a and so, you know, I didn't advise about B or something, right? Like, so coordinating there, and then the attorney the on the attorney, especially the estate planning, right, is, you know, usually it's more episodic, saying, hey, I'm gonna come and set up this trust, you know, and then, you know, call me if for any changes, right? um Well, we're seeing the tax return every year. Maybe I'm talking at least quarterly. Maybe I'm talking every month, right? um And so, you know, I have a chance from my vantage point to help them do their jobs well and defend. Again, I look it I'm a defender to your point of,
00:56:34
Speaker
the great planning that that they do. um And so it really is, um you know, a back and forth relationship. And I think there are certainly those, there's a perception, right? was like, hey I'm running a meter on if I'm a, you know, i'm I'm the client, right? You think like, gosh, I'm running the meter on all of these professionals. This is cost me a fortune, right? Right. I mean, certainly want to manage that, but like that that sometimes is actually something that is concerning to me. If I'm if i'm working with those that say like, no, I don't want you talking to the attorney. Like we're to each in our silos to try to manage costs.
00:57:05
Speaker
Because I will tell you though, like, I mean, and again, I'm not a doomsayer here, right, Mark? But like, those are the times when I get the you like the most frustrating things can happen or, you know, again, risk, risk to even me, right? that I mean, like I love what I do, right? and And I want to keep doing that. So I don't want to take on risk and that's see things go go well. So, you know, if there's like sort of doing things in a vacuum, that's when, again, I might recommend something.
00:57:31
Speaker
And that's why I think the answer really is depends just to like it maybe flush the hell a little bit. It it depends because- the risk that I get it wrong, if I just go in and say, you know, it's a hammer, Mark, that's what we need, is too great.
00:57:45
Speaker
Like, i um I might have, again, not not known something and done it in a vacuum and not done it well. And so therefore, like, you really need to be coordinating. And I think that the role of the CPA um Again, you you know, consider my bias. I know, consider your bias, right? We're CPAs, we enjoy it. Like we can really help and play an instrumental role in that.
00:58:05
Speaker
um I don't actually have to be the quarterback, right? But I can certainly play ah my part to making sure that, the you know, the care and feeding and the watering of all this planning that's going on is happening and look look out for red flags and maintain what they're doing, like all of those things.
00:58:19
Speaker
That's really how I look at my job. That's really what like my seat in the bus is. So, you know, yeah, absolutely. It is not a one person's job. And I think if you think of yourself as like, I'm the guy, I do all the things that all needs to go through me, that's dangerous because you can't. Like anymore, it is so complex.
00:58:36
Speaker
um i don't I don't care how simple it might seem. there are There's always something, another lens, another perspective that would be helpful to your client to have. And you don't want to hold all those cards because you can't. Like, it's just it's just not possible. My opinion, you can tell me I'm wrong, but my opinion, like that that's dangerous. And I think you run the risk of, you know, what gets me out of bed every morning is helping. Like I said, right? And that runs the risk that I don't do that to the best of my ability. That's great.
00:59:02
Speaker
Yeah. And you I mean, you sit, so you you do work with, you know, fantastic work with and y but also, you know, from a volunteer standpoint, you help out with the AICPA, you speak, you're on committees.
00:59:15
Speaker
um So you have a, you know, a national vantage point, yeah but also at the, you know, Illinois Society and, in you know, at the local level, you have a vantage point. So from your perspective and what you see in the profession right now, here we are middle of 2026,
00:59:30
Speaker
right, what changes are you actually seeing in how firms work, how practitioners are advising, how clients behave, AI coming into the profession more faster than ever? What does it look like from your side? and what are you What are you overseeing?
00:59:43
Speaker
Yeah, no, I mean, i think look, we made it this far without actually mentioning AI, which is, I don't know, right? like But that is like the conversation. whether it's working with family offices, it's like, how you know how should we be thinking about AI, whether it's businesses thinking about it, just individuals, you know my team, myself, right? um I actually this past year started, um designed a course and teaching at DePaul University as an adjunct around tech, technology and and research, predominantly because it was AI is a big part of that, generative AI, right? and And using these tools to help, you know, how do you use them and how do you use them efficiently and so forth. So it's definitely changing, um even just process and agents and how do you do a tax return and all that. um And what I would say is it actually increases...
01:00:33
Speaker
the need for for, you know, to be consultative, to be advisors, to be um thinking that through. I mean, the the number one thing that I will often hear from folks is like, oh, yeah, I mean, this is going to like, you know, just does the job. i don't need to, you know, like I could just put the answer and I've got it right. Well,
01:00:49
Speaker
but I always like to copy again, again, you're gonna get me on another soapbox here about, you know, it is a tool from the perspective of the AICPA statements of, of ah you know, SSTS is right. Number one. So it says that, you know, I have the responsibility as a CPA. I have to review any output from a tool. It's no different. Like, you know, I hire an intern, you know, they're going through finishing their coursework and whatever. And, um, you know, I have to review the work. I can't just go give it straight to the client. Right. Well,
01:01:14
Speaker
so different with an LLM, you know, of your choosing. So it's the exact same thing. But what really changes it is, you know, i have clients that, i mean, I know they're coming to me with what they got out of Clyde or, you know, again, choose your LLM of your choosing. Right. um And which is actually helpful. Like my, my biggest piece of advice to folks is like, cause sometimes they'll kind of like, Hey, I, I did this research and I put this little memo together. Like, could you take a look at it and tell me what you think? I'm like,
01:01:40
Speaker
okay, so you chat GBT, right? Like, can we just say, like, you know, some people are a less, like, open to, and I'm talking clients here, right? Like, less open to, like, sharing that that was the source of it than others. But once you get past that, it's it's helpful, right? But, like, I mean, i don't send, i mean, oftentimes, the lens I look at before I send out an answer is to think, well, okay, if they're going to go put this into,
01:02:00
Speaker
your LLM of your choosing, who my client is, what's the result going to be? So i'm I'm checking it that way. But what I think is really exciting. So if I'm sitting in the chair of somebody right now, I'm sitting, I'm, I'm starting for the CPA exam. I'm, I'm wrapping up school. I'm thinking about, you know, what I want, do I want to be a tax accountant and do I want to go into this profession? Cause wait a minute, like, isn't like the, they think the LLMs, they know all this stuff now, right? Like they know these complicated tax answers. And what I would tell you is two things. Number one,
01:02:26
Speaker
No, right? Like, because they're at least maybe maybe again, things can change and and the and they have developed incredibly since, you know, ChatGPT came onto the scene and really kind of blew up the conversation about generative AI and all that. um You know, the the accuracy, the all the how they've been trained and developed has really changed.
01:02:45
Speaker
but at the end of the day, it's just a prediction model. That's all it is, right? And so like, you know, bad facts equals bad prediction, right? And so, you know, there is a skill set that comes with it. There is a review. How do you know? What did i just say? What's happening? I have clients now that are asking I'll hold them if they're choosing um to, you know, X, Y, Z thing. And then they're sending me the output, right?
01:03:04
Speaker
Why is that? Because they need to read, they they they want to know, is this the right thing? Does it fit for me? Again, if you didn't put the right thing into the prompt, it doesn't know, right? So it changes the answer based on what you tell it and what it knows about you. So um so I think there's that piece, but also back to this, you know, I'm in the chair, I'm i'm just starting out. I'm looking
AI as a Tool for Understanding Tax Issues
01:03:22
Speaker
forward to it. Well,
01:03:23
Speaker
One of the the challenging things about getting into tax, right, is because there is so much, like we said, this complexity and all these different things and all these different considerations. And how can you think of it, right? Well, that helps you get the learning curve so so much faster right so now all the skill is how do i i don't need to know all these complex things necessarily like i'll i'll grow over time but i can use as a learning tool to help me get up the learning curve i can use it to you know as a first pass to to question like what am i missing in my answer like i can do all i can i can use it to you know tighten up the you know my drafting um
01:03:56
Speaker
All these things are things that you can use it for as a tool. I feel like I'm scratching the surface, right? But you have to do it in a smart way and then because then the challenge becomes, okay, what gave you the answer? And I'll use an example from my my class. like you know And these are um you know master's in tech students. Some of them are master's in accountancy students, um have not practiced yet or maybe just starting out in career, don't have a lot of on-the-job experience just yet, right? Right.
01:04:22
Speaker
Well, one of the areas is that, said okay, well, we've been having some developments around the limited partner exception to self-employment tax. It's a rather complex area of the tax law. relies on a lot of different areas, you know, a lot of, you know, history that build up to it, all of that.
01:04:35
Speaker
And so I gave, that was it. That was one of the assignments that I gave the class, which is not something I would generally give to ah like a you know a tax research class because it's it's it is so involved.
01:04:46
Speaker
But to say, okay, I know you're not gonna really know this topic, right? um And it just evolved too, which also illustrates the point of, again, you have to, yeah how you set up your prompt and and asking and giving it the framing of like, hey, I want you to think about you know this timeframe or this tax year or you know this case or whatever, right? like it it can pull from someplace else and not know that that even existed. So something as fluid as this area of the tax law is, you know, not an easy thing necessarily to research sometimes.
01:05:15
Speaker
So anyway, you say like, we can get you up the curve. So now the question is like, how do you figure out that answer you got if it's right or not and testing it and figuring it out? So, I mean, I think my my my punchline here is it's an exciting time. It does not change my answer. If anything, I think it it allows you to to do more to because, again, some of these analyses to think about, like, should I do my charitable giving now or next year? Or should I do estate planning? Should I do a SLAD a grad? Or should I do like all these different things?
01:05:42
Speaker
They take a lot of time to model, like I said, and like this is helping to move that along so you can run more more situations. um It is a tool, um and I haven't even gotten into just like the you know the efficiency of of some of the tasks, right? i mean, heck, we've been using AI, I mean, OCR technology, right, not generative AI, for more than a decade. I mean,
01:06:01
Speaker
our Artificial intelligence is not new. It's around for decades, right? It's just that it's it's moving so quickly on the generative and agentic side. um i I mean, it's it's definitely changing, but in my opinion, I think it's just like when you know the advent of the of the spreadsheet many decades ago, right? And what that did, it allowed accountants to kind of do more.
01:06:21
Speaker
um I think that's what this is. I think that's the shift. So it's an exciting time. It means, you know, exciting also comes with challenge, right? Because it's change. It's, you got learn and, you know, learn, unlearn and relearn, right? It's like as a skill in and of itself. um But man, does it help.
01:06:37
Speaker
um But you just yeah I think really what my my overall takeaway is is is, is being open, having a learning mindset and also being open to, and you know, not being so concerned about, you know, well, what's Mark doing? Like, I don't know. Like, am I am I missing something? Like, just ask good questions, be curious, learn.
01:06:55
Speaker
And it's not scary. Right. You just need to learn the boundaries. Right. Number
Privacy Concerns with AI in Tax
01:06:58
Speaker
one rule again. So got to review the output. And number number two, if you don't have a proper setup, you dont have an enterprise setup and it's not, you know, your information isn't ring fenced. Like don't go putting taxpayer information into a, um you know, your your personal subscription to ChatGPT or Cloud or whatever else, because now you've now maybe come committed a 6103 violation and sent out taxpayer information. So let's let's not do that. But again, if you have it set up properly, you can. So you guys, so my what I guess I'm saying is,
01:07:25
Speaker
Have a learning mindset and you know ask the questions so you don't have to be afraid of it because I find a lot of people are afraid of it.
Advice for Young CPAs and Learning Mindset
01:07:31
Speaker
But once you start figuring out and how to use it and not to validate it, like it unlocks a lot of doors. So I guess I'm i guess i'm excited about it, Mark, if if I didn't make ah that clear in my response there.
01:07:41
Speaker
No, I love it. i love it. Now, you've mentored a lot of people and you know obviously you're an adjunct professor. you You've built real content for this profession through podcasts, speaking, volunteer work.
01:07:53
Speaker
So if you're a a younger CPA is listening right now or someone that even coming into the profession right now and they're feeling a little overwhelmed by all of this and all the changes and how fast things are moving, what's the one thing you'd want them to hear right now?
01:08:06
Speaker
Yeah, I think it's, um I'm going to go back to a colleague, buddy of mine, is Tony Nitti. He's in our national tax practice at EY. I've known him for years. if I've i've you know done podcasts, I've done presentations, all that kind of stuff with a guy, right? um And and yeah this goes back to when we, I think we were talking about Section 199 CAFE, so that's your 20% tax.
01:08:28
Speaker
that's your twenty percent you know, pass-through entity, if you want to call it that deduction, right? And the point that he made was, because it was a brand new section of the Internal Revenue Code that came about as part of the Tax Cuts and Jobs Act. And it was, i don't know exactly how this came about, but i just, I always remember him saying, he's like, you know, even if you're brand new, like you have a chance to be the preeminent expert in Section 199 Cap a because- it's a brand new section internal revenue code. So, so get curious, crack open the code, read it, you know, learn about it, dig in, you know, find, basically find it. There's a gap that somebody needs to know this answer and be the one to fill it.
01:09:04
Speaker
Right. And I think that's exactly what I would say now. Right. Like, There are so many different things about tax. There are so many different things to think about. It's changing. It's not going to stay the same. I i don't know. And I think anybody that tells you they know the exact process, like what the tax process is going to look like from a tech stack and all that, like five years out. I i mean, I don't want to say that they're they're wrong, but I mean, like, how could you is what I would say to that. Right. And so I think if you're in that situation, you're new or you're looking forward, like,
01:09:32
Speaker
it's It's that learning mindset that I mentioned, right? It's thinking of it like, um I always think about it because I was maybe in fifth grade when we do like, you know, you have like the trifold like science experiment and like we had like the, you know, the school cafeteria and yeah know your hypothesis and, you know, down to your conclusion and you run the scientific method, right?
01:09:50
Speaker
Use that as a framework, right? is to say like, what are you doing? You you you have a hypothesis, you're you're challenging at your question you're questioning, you're curious, you're learning. Do that. And like, and then you'll be surprised where it takes you is what I would say. I mean, I didn't start, like you just listen to all those things and I'm like, oh, that's interesting. I guess I do all those things. Don't I work? I don't know. Like, I just, look I'm curious. Like I want to know for myself or I am very driven by helping others as as I've probably mentioned more than once here. But, um you know, I think if you you follow your curiosity um and just genuinely want to learn um and and and answer questions like and solve problems, like,
01:10:27
Speaker
That's my advice, right? Whatever the thing is, it doesn't matter. 199 cap A, you know, the salt cap, all these things. How are you going to use generative AI intelligently in your practice? Maybe you're you're starting out, you're working at firm and you're feeling frustrated because you're like, gosh, you know, ding in over here. The partner is like, you know, afraid of AI and doesn't want to use it. And he's telling me not to use it and we don't even have it.
01:10:48
Speaker
Well, one answer is you could just say like, oh man, this stinks. I can kind of complain, right? The other answer is like, well, maybe now it's now it's my, I can help. Like I can say, hey, look at all these ah these advantages and these benefits and let's educate, let's learn about it. You know, maybe it's not the right, maybe there is a reason it is not the right answer.
01:11:04
Speaker
And I do have some that like clients that are saying like, I do not want you using generative AI. like I don't want my stuff going into it. You know, a little bit that sphere of the unknown, right? But like, You know, maybe that is the answer, but at least, you know, don't take it as a given and and get curious and see if you if you can't help the situation, right?
01:11:23
Speaker
um From, again, situation where you're bemoaning the fact that you don't get to use these tools or whatever, right? um So, yeah, ah long long way to say just just be curious, be a learner and, you know, get out the trifold scientific method, you know, and and do an interesting experiment, you know?
01:11:38
Speaker
It's so good. So good. And as we wrap up, one idea keeps coming through for me. Right. A year ago, HR1 felt like an ending. The cliff was gone. The exemption was up. Brackets were locked in.
01:11:51
Speaker
Everybody could finally relax. But the truth a year in is this law didn't close the planning book. It reopened it, as Damien given all this great information today. The pressure changed shape, but it never really left.
01:12:04
Speaker
So we now we had a $15 million dollars exemption that it's permanent until it isn't, like we talked about. the state estate The state estate taxes never went anywhere. The charitable rules quietly rewrote themselves along the way. And the appreciation sitting on our clients' estates is compounding every single day. So we need to be talking to them about this.
01:12:23
Speaker
And the best advisors aren't the ones who memorize every code section the week the bill is passed. Although sometimes i like to know them, and I'm sure you do too. Those are good people to know. But with that, they're the ones that keep the conversation going after the headlines fade. And again, like you said, Damien being curious, um trying to figure out things and just learning is what keeps us in the game.
01:12:44
Speaker
So Damien, thank you so much for bringing both the technical depth and the human perspective for our listeners. This was exactly the conversation I hope it would be. And you're welcome back in the show anytime. So thank you for being here.
01:12:56
Speaker
I appreciate it I admire what you do, Mark. um You know, yeah yeah I've told you before, right? But just I'm so impressed by the work you do with the great work that you do on this podcast. And it's a pleasure. I'd be back anytime, Mark.
01:13:10
Speaker
appreciate it. And thank you for listening to the Tax News Now, a Becker Accounting podcast. If today's episode hit home, do me a favor. Subscribe wherever you listen. Share it with a colleague who's elbow deep in this stuff. And go check out Damien's podcast, Elements of Private Tax, through EOI.
01:13:25
Speaker
Stay curious, stay proactive, and keep having conversations that matter. I'm Mark Gallegos. This has been the Tax News Now, and we'll see you next time.