Featuring:

Host: Terry Sylvester Charron, Head of Investment Advisory & Planning Solutions

Guests: Jere Doyle, Senior Wealth Strategist, and Lesley Holland, Regional Director of Portfolio Management  

[00:00:00] VO: What do you want your wealth to do for you? Welcome to Your Active Wealth from BNY Wealth, where we offer insights that can help support the life you want to live and the legacy you wish to create. We tackle timely topics through the lens of the five strategies that comprise our Active Wealth framework: Invest, Protect, Manage, Borrow and Spend, and provide guidance on navigating the unpredictable to help you build and sustain wealth.
 

[00:00:33] Terry: Hi, I'm Terry Charron, head of investment advisory and planning solutions at BNY Wealth and the host of today's episode. Welcome back to Your Active Wealth. Thank you so much for listening in. This year, President Trump signed the One Big Beautiful Bill Act into law, permanently instating the tax brackets from the 2017 Tax Cuts and Jobs Act as well as its higher standard deductions. Many other provisions will also impact high net worth individuals, including an increase in the state and local tax deduction and a higher federal estate gift and generation skipping tax exemptions. There are also provisions that will impact small business owners. Today, I'm joined by two of my colleagues who will help break down the most important components of the bill while sharing strategies for financial planning and investing that we are currently implementing on behalf of our clients. Please join me in welcoming BNY Wealth experts, Jere Doyle, senior wealth strategist, and Lesley Holland, regional director of portfolio management. Thank you both so much for joining us today.

[00:01:55] Jere: Thank you, Terry. I'm excited about talking about the changes in the recent legislation.

[00:01:59] Lesley: Yes, it's great to be here. Taxes are more important than ever, as they have the potential to impact wealth plans in a large variety of ways.

[00:02:07] Terry: Jere, it seems the two biggest takeaways from the One Big Beautiful Bill Act were that the personal income tax brackets of the 2017 Tax Cuts and Jobs Act from Trump's first term in office were extended and there were some changes to deductions. Can you please talk about these?

[00:02:28] Jere: Yes, Terry. The legislation generally makes permanent the seven rates created by the Tax Cuts and Jobs Act. There's an inflation adjustment in 2026 for the first two tax brackets, 10% and 12%. So right now, the permanent tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and a maximum tax bracket of 37%. The bill also makes a larger standard deduction, which was created by the Tax Cuts and Jobs Act permanent, so the amounts for the standard deduction for this year will be, if you're a single or married filing joint, it will be $15,750. If you're head of household, it would be $23,625. And if you are married filing joint or a qualified surviving spouse, it'll be $31,500. There's also an increased deduction for seniors, that's defined as people who are 65 years of age or older. They can take an additional $6,000 off their taxable income. But don't get too excited about that because the deduction has limited the seniors with lower incomes. To qualify, your modified adjusted gross income must not exceed $75,000, or if you're married, filing joint $150,000. Finally, the SALT (state and local tax) deduction provides a federal deduction for income and property taxes paid at the local and the state level. The existing SALT limitation is currently $10,000, but now that's going to be increased under the new legislation to $40,000 for those making less than $500,000. If you make over $500,000, then what's going to happen is the cap is gradually going to be reduced by 30%, but the SALT limitation can go no lower than $10,000. And that limitation is going to be increased by inflation every year by 1%. Finally, in the year 2030, it goes back to $10,000. So, we lose that $40,000 SALT limitation. What's going to happen is that increased SALT deduction may change whether or not people are going to itemize their deductions as opposed to claiming the standard deduction when you go to file your income tax returns.

[00:04:37] Terry: Great, thank you so much for that, Jere. As I noted in the opening, there are several important changes for small business owners. Can you also talk about those?

[00:04:48] Jere: The bill will basically allow investors who have qualifying C-corporations that are so-called qualified small business stock or QSBS. They'll be able to exclude a certain amount from their taxable income when they sell their QSBS. What the legislation did is it made three important changes. First of all, in order to qualify as qualified small business stock, historically, you could not have more than $50 million of gross assets at the time you issue the stock. The new legislation is going to increase that threshold to $75 million. Second, it's also going to increase the exclusion amount that you can exclude from your taxable income when you sell your company from $10 million to $15 million. And historically, there's been a five-year holding period to qualify as QSBS. The current legislation has changed that. There's going to be a new tiered system that's going to allow tax breaks for those who want to sell before they've held the stock for five years. So, what's going to happen is you will get a 50% exclusion if you hold the stock three years, a 75% exclusion if you'll hold the stock for four years, and 100% exclusion if you hold the stock for five or more years.

[00:06:02] Terry: So, Jere, any other changes for small business owners that have created planning opportunities?

[00:06:08] Jere: Yes, there sure are. The Section 199A deduction, which provides eligible pass-through entities like partnerships and S-corporations, a 20% deduction for qualified business income has been permanently extended. Also, the first year bonus depreciation deduction has been permanently extended. And the Section 179 business expense deduction has been increased to $2.5 million, with an increase in the phase-out threshold to $4 million, both amounts indexed for inflation.

[00:06:37] Terry: That's great, Jere, thank you. Lesley let's bring you into the conversation. The extension of the tax cuts is a relief to many individuals, but does that lessen the importance of managing for taxes within investment portfolios?

[00:06:53] Lesley: It's a great point, Terry. One of our goals when working with high net worth clients is to help minimize the taxes they pay on their investments. The drag from taxes is often underestimated by investors and our goal is to help educate them. Just consider an investment in the S&P 500 over the last decade, which has generated on average a return around 13.1% and that's through the end of last year. After taxes, the return does decline to 12.6%. Although that half a percentage point loss to taxes may not seem like a lot, it can add up over time and take quite a bite out of your portfolio.

[00:07:35] Terry: So, what type of strategies can help minimize taxes on an investor's portfolio?

[00:07:42] Lesley: We emphasize a variety of strategies at BNY, from taking advantage of tax-deferred vehicles, such as 401(k), 403(b), and IRA plans, to the location of where assets are held, to tax-advantaged investments, like municipal bonds, where investors typically don't pay federal tax on the income.

[00:08:03] Terry: Well, given most of our clients are taxable, municipal bonds can be a particularly attractive investment option, especially for those clients who reside in high income tax states.

[00:08:15] Lesley: Absolutely, and they are particularly attractive now, given the interest rate volatility that we've seen. In fact, high quality, intermediate term municipal bonds are offering a very attractive tax equivalent yield of 6% to 7%. For individuals living in high income tax states, such as New York, Massachusetts, or California, longer dated bonds can offer about 10% on a tax equivalent basis for an investor in that top tax bracket. So, it is a good time to take advantage of these very attractive entry points.

[00:08:53] Terry: So, Lesley, I know we've also been taking advantage of recent market volatility to tax-loss harvest in client portfolios. Can you touch on how it works and the best ways to implement such a strategy?

[00:09:08] Lesley: Of course. Tax-loss harvesting is a rather simple concept. It allows you to sell a security or fund that has declined in value since it was purchased and use those proceeds to buy another security or fund with similar characteristics. This way your portfolio can maintain consistent market exposure. The losses can be used to offset realized capital gains in any area of your portfolio. If losses exceed gains, the surplus can be used to offset up to $3,000 of your ordinary income for those married and filed jointly, and carry forward any unused portion. At BNY Wealth, tax-loss harvesting is part of regular portfolio management and usually takes place when a portfolio is rebalanced. But we also have equity and fixed income tax managed strategies that utilize tax-loss harvesting throughout the year. These strategies are tailor-made to capitalize on periods of market volatility, and they are an effective way to help minimize the impact of taxes on your wealth.

[00:10:17] Terry: Lesley, thank you. Switching gears a little bit. Jere, I'm going to come back to you. The estate and gift tax exemption was set to be cut in half if the lifetime exemption extension wasn't made permanent. What does this mean for estate planning?

[00:10:34] Jere: Well, now that the exemption has been made permanent at $15 million indexed for inflation, individuals now can engage in more strategic long-term financial planning. Now that the uncertainty of the temporary tax provisions has been removed, wealth transfers can be structured with greater confidence. The expanded exemption may also prompt a reevaluation of existing trust structures and the establishment of new ones to optimize tax efficiency and preserve generational wealth. For example, there will no longer be a year end rush to make taxable gifts to use up your gift tax exemption, which prior to the One Big Beautiful Bill Act was scheduled to be cut in half.

[00:11:16] Terry: So, what about charitable giving? Any changes there of note?

[00:11:20] Jere: Yes, it basically creates a new deduction for non-itemizers and limits for larger charitable gifts. Starting in 2026, people who do not itemize the deductions will be able to deduct up to $1,000 each year for their charitable donations or $2,000 for couples filing jointly. Also, for those who do itemize their deduction, there is a new half of 1% adjusted gross income floor, which applies beginning in 2026. And so that's going to a create a more strategic gifting environment. For example, since you're going to have a half a 1% reduction in 2026, it might make sense to accelerate charitable deductions in the 2025 to avoid that half a one percent haircut. Also, if you're over 70 and a half, consider making direct transfers from your IRA to a public charity, because that's going to avoid half a 1% reduction. Another suggestion is to gift highly appreciated securities. The timing is very good as the market has continued to cooperate and instead of trimming the positions and paying an income tax and donating the net to charity, clients very much appreciate the ways that they can support non-profits and their philanthropic goals by making gifts of appreciated securities.

[00:12:45] Terry: Lesley, the act is projected to add over $3 trillion to the national debt over the next decade. Could the increase in federal borrowing eventually lead to higher interest rates?

[00:12:48] Lesley: Terry, that's an excellent question. Interest rates have been volatile this year, and we believe it's due to the uncertainty of fiscal and trade policy and the impact on growth. Our nation's debt burden certainly has the potential to influence the longer end of the treasury curve if investors demand a higher rate on holding U.S. debt. But for now, concerns seem somewhat contained with the U.S. 10-year Treasury note, which happens to be a benchmark for borrowing costs, hovering around 4.2%. This is modestly higher than where it was a year ago. Part of the stability in rates is confidence in U.S. Treasuries, which are viewed as one of the safest investments in the world. Investors are also assessing if an increase in capital expenditure spending, for example, if a company upgrades their manufacturing or their building, and if we see improved productivity through advancements in AI. We believe these two things can help the economy grow its way out of the debt that you mentioned. In the near term, we believe there is a bias for interest rates to trend lower, led by the short end of the Treasury curve as the Federal Reserve is anticipated to start cutting rates later this year.

[00:14:06] Terry: So, Lesley, how should we think about the bill from a market perspective?

[00:14:09] Lesley: The pro-growth provisions of the tax package are not likely fully priced into the market yet. These provisions include the immediate expensing of research and development and full capital expenditure expensing and should positively impact companies' earnings growth. We see many market sectors benefiting from industrial stocks to technology companies, as the immediate expenses should have a positive impact on their earnings growth. Consumer discretionary companies, such as retail, restaurants and hotel stocks, should also benefit from an increase in discretionary income due to the fact that individuals are seeing tax cuts, including no taxes on tips, up to certain levels, a cut in Social Security taxes, and an increase of child tax credits. We also believe this legislation will benefit financial companies as we see an increased demand for loans, to grow businesses, and the potential for more mergers and acquisitions as we start to see more deregulation come through the administration. Overall, we think these provisions will be a positive for U.S. equities and, in particular, large-cap companies.

[00:15:26] Terry: Thank you both so much for your comments today in covering this really important legislation. Do either of you have any final takeaways for our listeners?

[00:15:38] Jere: Well, I think the new tax law offers an opportunity for clients to review their current planning and maybe to take advantage with some of the new provisions that are in the new legislation. But remember while a lot of the provisions are made permanent under the new legislation, permanent only lasts as long until the next Congress meets.

[00:15:58] Lesley: I completely agree, and you know, tax reform is top of mind. It is, however, a good idea to take advantage of tax-efficient strategies today. We strongly believe that keeping more of what you earn is essential to building wealth.

[00:16:13] Terry: Great insights from both of you. Again, thank you both for tackling the complex topic of taxes and highlighting key strategies for investors to consider. To our listeners, to learn more about how the tax act could impact your wealth, I encourage you to reach out to a BNY Wealth Manager or visit us at bny.com/wealth. Thanks for joining and we'll see you on our next episode of Your Active Wealth.

[00:16:43] VO: Thank you for listening to this episode of Your Active Wealth. Be sure to subscribe to this podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts, and visit bny.com/wealth to view the latest insights on the subjects that matter most to you.

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