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Text on screen: John Nersesian, HEAD OF ADVISOR EDUCATION

Nersesian: Hi everybody, I’m John Nersesian, Head of Advisor Education at PIMCO. Thank you for joining us for our discussion

Text on screen: TITLE – 2024 Tax Planning – 3 Strategies for today. Increase retirement account contributions, Book capital losses, and Bunch itemized deductions.

today around opportunities to reduce our current tax bill in 2024. Now we know that taxes are an important concern to many taxpayers today, both to the advisors that they work with and the investors that they serve.

Text on screen: TITLE – The importance of professional advice; SUBTITLES – The gap: Services desired vs. services received

Overview: Below the title and subtitle is a bar chart measuring what financial advisors desire for professional wealth management services against the number of advisors who are receiving professional wealth management services, sampled from a survey of wealthy families conducted by Spectrem Group. The chart includes a list of professional services with two bars next to each, indicating the percentage of services desired (in blue) and the percentage of services received (in green). The chart indicates that the market for professional wealth management services has room for growth as services received need to catch up with desired services.

The chart consists of 11 services, ranked from most desired to least desired. Every single service shows a significant gap between Services desired and Services received. From top to bottom, the services listed are:
1. Investment management - Services desired: 92%, Services received: 73%.
2. Financial planning - Services desired: 92%, Services received: 59%.

In fact, a recent polling done of wealthy families suggests that while we desire help and guidance in many of the financial planning activities in our lives, taxes remain a critical or key focus. 89% of wealthy families want help and guidance in understanding taxes and incorporating tax planning into their financial planning efforts, but unfortunately, the large majority of these individuals are not receiving the help and the guidance that they seek. Here are a few ways in which we can consider lowering our tax bill for the current year.

Text on screen: TITLE – Strategy 1 Increase retirement account contributions

Opportunity number one is to increase our retirement account contributions. Retirement account contributions are not an itemized deduction, but are an above the line deduction that serve the purpose of lowering our taxable income and the associated taxes paid at the end of the year.

Text on screen: TITLE – Increase retirement account contributions

The graphic is titled, Increase retirement account contributions. The graphic features a table detailing the regular contribution limits, catch-up contribution limits, and 2024 Adjusted Gross Income (AGI) phaseout ranges for married and single tax filers with various types of retirement accounts— including Traditional IRA, Roth IRA, 401(k) / 403(b), SIMPLE IRA, SEP Plan, and Total defined contribution plans.
The table has four columns: one for the type of retirement account, one for regular contribution limits, one for catch-up contribution limits (marked with an asterisk for taxpayers age 50 and older by 12/31/24), and one for AGI phaseout ranges, differentiated for married and single filers.
The accounts and their respective limits are as follows: -Traditional IRA: Regular contribution of $7,000, catch-up contribution of $1,000, AGI phaseout range of $123,000-$143,000 for married filers and $77,000-$87,000 for single filers.
- Roth IRA: Regular contribution of $7,000, catch-up contribution of $1,000, AGI phaseout range of $230,000-$240,000 for married filers and $146,000-$161,000 for single filers.
- 401(k), 403(b): Regular contribution of $23,000, catch-up contribution of $7,500, no AGI phaseout range provided.
- SIMPLE IRA: Regular contribution of $16,000, catch-up contribution of $3,500, no AGI phaseout range provided.
- SEP plan: Regular contribution of $69,000, no catch-up contribution, with a note indicating the AGI Phaseout range as the lesser of 25% of the first $345,000 of compensation, or $69,000.
- Total defined contribution plans: Regular contribution of $69,000, catch-up contribution of $7,500, no AGI phaseout range provided.
A note at the bottom indicates that for those not covered by an employer retirement plan but whose spouse is covered by a qualified plan, the IRA deduction is phased out for Modified Adjusted Gross Income, or MAGI, of between $230,000 and $240,000 in 2024.
Data is sourced from the IRS.

Let us quickly review the numbers Traditional and Roth IRAs annual contributions are capped at $7,000 per year with a catch-up contribution opportunity of a 1000 dollars for those over the age of 50. 401(k) the common form of employer provided retirement accounts. The maximum contribution limit this year is 23,000. Another unique advantage of the 401(k) plan is that many of them afford or offer an employer match accelerating or leveraging our retirement account growth opportunity.

The catchup contribution for those over the age of 50 is 7,500. Those who might be self-employed can consider something like a SEP plan where the total contribution limit is 69,000 and for those who are maybe a little bit older and earning higher levels of income might contemplate instead of a defined contribution plan, a defined benefit plan affording the opportunity to set aside over $300,000 in saving for our retirement preparedness.

FULL PAGE GRAPHIC TITLE – Strategy 2 Book capital losses

Our second tax saving strategy is to take advantage of those unfortunate losses that exist in our portfolios.

We know

FULL PAGE GRAPHIC TITLE – Capital Gains and Qualified Dividends. The chart is divided into two sections. The first section on the left shows Long-term capital gain rates for tax filers classified by income ranges for Single, Married-filing jointly, Head of household, and Married-filing separately. The Long-term capital gain rate is zero for: singles with incomes between $0-$47,025; $0-$94,050 for married, filing jointly; $0-$63,000 for head of household; and $0-$47,025 for married, filing separately. The long-term capital gain rate increases to 15% for: singles with incomes between $47,025 to $518,900; $94,050 to $583,750 for married, filing jointly; $63,000 to $551,350 for head of household; and $47,025 to $291,850 for married, filing separately. The long-term capital gain rate increases to 20% for: singles with incomes of $518,900 or more; $583,750 or more for married, filing jointly; $551,350 or more for head of household; and $291,850 or more for married, filing separately. The second section on the right shows Net Investment Income Tax, or NIIT. A 3.8% NIIT is assessed on the lesser of net investment income (for example, interest, dividends, capital gains, etc.) or Modified Adjusted Gross Income above the thresholds stated for each tax filing status as follows: Single $200,000; Married, filing jointly $250,000; Head of household $200,000; and Married, filing separately $125,000. Gains subject to unique rules as stated in the bottom of the chart are as follows: Collectible gain of 28% of maximum long-term capital; Gain on qualified small business stock equal to the section 1202 exclusion of 28%; and Unrecaptured section 1250 gain of 25%.

that capital gains long-term in nature are taxed at 20%, short-term capital gains are taxed at a maximum rate of 37%. Both of those are subject to the ACA tax of 3.8% for families at incomes of 250,000 and above. So what do we do to offset gains that have been realized in our portfolio? We may contemplate the realization of existing, but unbooked capital losses that can be used to offset the gains that were already realized.

Here is the methodology.

Text on screen: TITLE – Book capital losses

The graphic is titled "Book capital losses"
The graphic is designed to provide information on managing capital gains and losses for tax purposes. The upper section of the graphic is divided into two boxes demonstrating calculations regarding short-term and long-term investment positions, while the lower section of the graphic is a table demonstrating the tax implications of three different gain and loss scenarios.
The upper section shows the following—
In the Short-term transactions box:
- Total short-term gains minus total short-term losses equal net short-term position.
In the Long-term transactions box:
- Total long-term gains minus total long-term losses equal net long-term position.
Meanwhile, the table below shows the following tax implications—
- Both short-term and long-term gains: Each taxed at applicable tax rate.
- Both short-term and long-term losses: Deduct up to $3,000 currently (short-term first), excess carries forward.
- One gain/One loss: Combine the two to net short term or long term, and net capital gain or capital loss. Net gains are taxed according to applicable rate. Net loss is deductible, up to $3,000 currently, with the excess carried forward indefinitely
Additional notes include:
- Short-term gains are taxed at ordinary income rates (maximum of 37.0%) plus 3.8% net investment income tax (NIIT) if Modified Adjusted Gross Income (MAGI) is greater than $250,000 Married Filed Jointly Income (MFJ), or $200,000 if single.
- Long term gains are taxed at preferential capital gain rate (maximum 20.0%) plus 3.8% net investment income tax (NIIT) if MAGI is greater than $250,000 MFJ, or $200,000 if single.

We start first with short-term property and we use short-term realized gains against short-term realized losses producing a net short-term position. We then transition in step number two to focusing on long-term transactions. Property held in excess of 12 months, once again netting out gains versus losses.

The third step, of course, is to combine the two together recognizing that losses can be used on a dollar for dollar basis against gains, any losses earned or achieved in excess of that amount up to $3,000 can be used against ordinary income, any number in excess of that amount can be carried forward indefinitely for future tax reporting years.

GRAPHIC TITLE: Strategy 3 Bunch itemized deductions

The third strategy that we want to reference is charitable giving. Now we know that itemized deductions are rather limited under the current tax code. Those itemized deductions under Schedule A include the following medical expenses, but they are only available as an itemized deduction if they exceed 7.5% of our adjusted gross income, state local taxes are available itemized deduction but under TCJA, that deduction is capped at a maximum number of $10,000 per year.

The third item is mortgage interest if we have a mortgage and if we are itemizing, but the fourth opportunity is our charitable giving, which remains a very popular itemized deduction for many high net worth and affluent investors. Charitable giving reached an all-time high last year of $500 billion. The question is how are we giving? Are we giving reactively when solicited or are we giving intentionally to maximize the benefit of the giving that we are already engaged in?

Text on screen: TITLE – Bunch itemized deductions; SUBTITLE – Illustration of the benefits of selective timing

The graphic contains two tables illustrating the benefits of selective timing in tax planning. The tables compare the tax implications of two charitable donors, with each giving away $100,000 over a four-year period, from 2024 to 2027
The graphic shows that it is more tax advantageous to bunch charitable donations in the first year, as shown in the second table at the lower half of the page, rather than to split them evenly over four years, as shown in the upper half of the page. The donor that bunches charitable donations of $100,000 in the first year is shown to receive an additional $57,600 in additional deductions , compared with the donor that evenly divides charitable donations across four years.
Further details follow—
The first donor, represented in the first table on the upper half of the page, evenly distributes the $100,000 charitable donations across four years, giving away $25,000 per year. For each of the four years, this donor is shown to have total itemized deductions of $35,000 per year, standard deductions of $29,200 per year, and actual deductions of and $35,000 per year, which add up to $140,000 in actual deductions over the four years through 2027.
Meanwhile, the second donor, represented in the second table on the bottom of the page, bunches charitable donations worth $100,000 in the first year in 2024. The total itemized deduction is shown to be $110,000 in 2024, and $10,000 per year for the next three years through 2027, as well as standard deductions of $29,000 each year from 2024 to 2027. The actual deductions are $110,000 in 2024, $29,200 in 2025, $29,200 in 2026, and $29,200 in 2027, which add up to $197,600 in actual deductions.
Finally, there is a note at the bottom of the page stating, "Sample calculation for illustrative purposes only. PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions or concerns."

Here is a perfect example of bunching our deductions under charitable giving to produce an even greater tax benefit. Let us assume that we give annually $25,000 to our favorite charity. That of course is an itemized deduction and let’s start our examination in blue with an individual who has $10,000 of salt taxes, no mortgage interest and an annual charitable contribution of $25,000 per year.

The total itemized deduction in all four years is 35,000. That exceeds, of course, the standard deduction of 29,000 by a modest amount. Our client, of course, in this scenario will claim the $35,000 figure in each of the four years producing a total deduction of $140,000 in this four year period, but let us take a look at a client who is similarly inclined, who is giving a similar amount of a $100,000 over the four years, but does so using a more advantageous methodology.

This individual bunches their gift by claiming a larger deduction in one year and then bypassing the available deduction in future years. Let us take a look at how that might work. In 2024, our individual has $10,000 of state and local taxes, a charitable gift that they have accelerated of a $100,000 in this single year, maybe given directly to charity, maybe used to fund our donor-advised fund for future distributions in later years.

The total deductions available are 110,000 and of course, that will be the number that we claim in that tax-reporting year, but look at what happens in the three subsequent years. In 2025, 2026 and 2027, our itemized deductions are limited only to the $10,000 of salt taxes. The standard deduction of 29,200 is much more advantageous and that is exactly what is claimed in 2025, 2026 and 2027. The total deductions achieved by giving the same amount of money to the same charity over the same four year period of time produces an actual deduction of over $197,000 in incremental benefit, a $57,000 to our taxpayer in this example.

I hope that you have enjoyed our conversation today. To learn more about tax planning strategies, we encourage you to contact your PIMCO account manager to visit our website or to take advantage of the other resources that we built on this very important topic. Thank you for your time.

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DISCLOSURE

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