John Nersesian: Make These Tax Moves Before 2026 Arrives

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Welcome to Barron's The Way Forward. I'm Greg Bartellis, and my special guest is John Nersessian, Head of Advisor Education at PIMCO. John worked previously at Nuveen and Merrill Lynch Private Client Group and knows plenty about educating advisors, having provided executive education to financial professionals at both Yale University and University of Chicago. Today, we're going to dig into a timely topic. Year-End Financial Planning Strategies. Welcome to the podcast, John.

Thanks, Greg. It's great to be with you and great to tackle this very important, very timely topic.

Absolutely. And really excited to have you on for obvious reasons. This is very much something you can speak about authoritatively. Now, for listeners, typically on this podcast, the conversation is much more ping-ponging ideas going back and forth. But in this case, there are a lot of important points that that I want Jon to cover. So we're going to have him hold the floor most of the time. I'm going to interject where appropriate, and we're going to cover 4 key themes. We have income tax planning, investment portfolios, retirement planning, and legacy planning. So we, let's not belabor the point. Let's jump in and begin with income tax planning.

Yeah. So let's talk about that. And a lot of people, Greg, assume that year-end planning only refers to income tax type of of activities, and that's not the case. I think the checklist that we provided is a little bit broader than that. And to be fair, these kinds of strategies that we're discussing today, Greg, don't necessarily have to be conducted at the end of the year. Some of them make sense throughout the year, but many of them are relevant for investors as they consider the December 31 deadline. It's kind of a use-it-or-lose-it proposition. So let's start first with income tax planning and some of the things that advisors can bring to their clients. Greg, you know this from our prior conversations. I'm a big a believer that the value an advisor provides that end client goes beyond or in addition to the investment counsel they provide. Many of the strategies that we're going to be discussing today, Greg, provide a level of alpha that doesn't necessarily come from investment performance, but maybe better financial decision-making and better financial outcomes. Let's start first with income taxes. As you know, July 4th, OB3 was signed into law. And there are a lot of changes that took place. Clearly, we're not going to cover all of them in our conversation today. But the important thing that I want people to remember is this: some of the changes are going to be effective in 2026. It's typically how tax legislation is enacted. We pass something during the year, it becomes effective a couple of months later at the turn of the new year. But that's not true with OB3. Many of the provisions are effective this year, including that higher standard deduction, which was made permanent, $31,500 if you file a joint tax return, including the ability, which I think is very important for so many people, to take an itemized deduction of up to $40,000 on their SALT taxes.

That's a big deal 'cause it was $10,000 before, so that's—

It was capped at 10. That was a significant issue for people maybe like yourself who lived in states like New York or California or other high state income tax states where those significant tax dollars they paid for their property taxes or their state income taxes were not fully deductible on their personal tax return. They were capped at $10 grand. The number's $40 today, but like so many provisions in the code, the ability to use these deductions or other benefits are subject to a phase-out at certain levels of income. So step number 1, or point number 1 I'd like to make, is it's more important than ever for both investors and advisors to recognize how these tax benefits work and to recognize, if you will, that interrelationship between their income levels and their ability to maximize their tax benefits based on these phaseouts. Advisors have a significant ability to control or to manage their clients' annual income. I know that, for example, I can do a Roth conversion, which increases my income. I can recognize a capital gain in my portfolio, which raises my income. Conversely, I can encourage my client to make a larger contribution to their donor-advised fund or to realize losses that would offset their realized gains. These are the kinds of activities that I think advisors want to be having with their clients as they approach the end of the year to make sure that they're taking full advantage of the deductions that are afforded.

Yeah, and I just want to add on the SALT. I mean, so that phases out, I believe, in 5 years, right? Correct. And, but I think there also is a, potential downside are related to the AMT as well. Yeah, correct.

Great observation. So let's stop and think about this for a sec. We know that there are two tax regimes: the regular tax regime with those progressive rates going from 0 up to 37%, and then the onerous AMT with a whole other set of rules. One of the most obvious reductions in the AMT calculation is that I don't get a full deduction for my state and local taxes paid like I do under the regular return. So now, interestingly enough, while I'm glad to take a $40,000 deduction, assuming I'm not phased out at $500,000, if I get that full $40,000 deduction, the unintended consequence could be that larger $40,000 deduction taken under the regular calculation, non-deductible under AMT. And all of a sudden, the individual who was not subject to AMT in years past finds themselves subject to it in the current year.

Yeah. Great point.

Yeah. Yeah. So it is important to recognize income. It is important to recognize a couple of basic points, Greg, when it comes to income taxes. I know that some of the advisors that we work with actually do tax work for their clients. Others maybe coordinate but don't necessarily do tax work or tax planning. But there are 3 things I would encourage every advisor to know about their client in order to deliver the very best possible advice. Number 1, you got to know what my annual income is. And what my marginal bracket is going to be, because that's going to drive a lot of our decision-making together. My charitable giving, my retirement account contributions, the kinds of investments I hold in my portfolio— a lot of that's driven by my income and marginal bracket. Number 2, you should definitely know whether or not I'm subject to the standard deduction. And as a reminder, that larger number was made permanent under OB-3. It was actually increased to $31,500 MFJ. You should know if I'm taking the standard deduction or whether or not I'm going to be itemizing under Schedule A. That distinction is going to drive a lot of our activities. And then the third thing that we should definitely know or include in our planning process is whether or not I am subject to the AMT with its lower rates of 26% and 28% versus the higher rates of 37% under the regular code.

Okay. Is there anything else on income tax planning or—

Yeah, when it comes to income tax planning, I'm going to identify a particular cohort that I hope is relevant to our listeners today, and that is the closely held business owner. So, Greg, you may remember under TCJA, corporate rates dropped for C corporations, dropped from 35% to 21%, and offset for the closely held business owner, the pass-through entity, think limited liability company, S corporation, sole proprietorship. Their tax break was something known as the 179 deduction. Okay, that is an immediate deduction for depreciable property. And the second break that they got was called 199A or QBI. It was a 20% deduction that they got on their consulting or self-employed business income before it hit their personal tax return. But like I mentioned before, Greg, that particular tax benefit is subject to a phase-out. It's about $390,000 where the phase-out kicks in. And so that's a really valuable tax deduction. We should be conscious of that in managing our clients' income levels, raising it or lowering it depending on a lot of these activities to ensure that our client who would otherwise be entitled to that 20% deduction doesn't inadvertently lose it because of some faulty or unintended planning.

Great. That's very helpful. Shall we move on to investing?

Yeah. You know, so many of our audience, our listeners are, of course, focused on investments. And I suspect many of them are engaged in these kinds of activities. But let's remind them, obviously, we want to realize capital losses to offset gains and we want to be conscious of that wash sale rule. Right. So I've got a loss in my Zoom stock. By the way, my son works at Zoom. He started there when the stock was $200. I think today it's trading around $80. He's got a pretty significant loss. The good news is he can monetize that loss and use it to offset realized gains in his portfolio. He's got to make sure that he complies with that 61-day window, 30 days prior, 30 days after. There are ways to get around that, to have your cake and eat it too. A couple of other things that might make sense regarding investment portfolios. This one is not tax related. But it's really more about discipline or policy or adherence. It's the idea of rebalancing. Rebalancing, Greg, forces the investor to do what is emotionally uncomfortable but financially productive. Stop and think about what's required. I've got a diversified portfolio of stocks and bonds and other securities, and throughout the year, as I revisit my portfolio, review it with my advisor at the end of the year, Some of the assets are up and some of them have done maybe less well. The natural behavioral instinct is to do what? Get rid of the losers and to add more money to the winners. But rebalancing, of course, doesn't ask you to time or to pick winners versus losers, but it asks you to adhere to its strategy, to make sure that you do not fall victim to those emotional biases of loss aversion or recency bias, where we're tempted to kind of chase winners as opposed to maintaining a balanced approach to portfolio construction.

Yeah, and it totally makes sense, but it also is easier said than done for the very points you described.

Yeah, that is a perfect validation of the role of the advisor. Not to suggest that the other functions aren't critically important as well, but maybe one of my best and most important contributions to my client's success in addition to the intelligent advice I deliver, is behavioral coaching. It is to make sure that the investor doesn't underperform the assets or the markets that they're invested in because of these behavioral biases. I'm sure you've seen the studies.

You see it all the time. And then if you often look at charts where you see the price performance along with volume, a lot of the buying tends to happen right at peaks and a lot of the selling— I mean, it happens over and over and over.

I teach a class on behavioral at University of Chicago with some very accomplished people. Richard Thaler, of course, who who wrote the book "Nudge," won the Nobel Prize in Economics 7 years ago. He talks a lot about choice architecture, but he talks about the very important role of emotions in financial decision-making. Greg, I'm a big believer that my greatest cost as an investor is not the 50 basis points a year I pay my advisor for the care and the counsel they provide. My greatest cost is the cost of the bad decisions or mistakes I would make without their help and guidance. Yeah, so rebalancing is important to do. Does it have to be done at the end of the year? No, but I like that timing or mechanism. I'm reviewing my returns, I'm looking at my allocation. It's kind of like changing my oil and changing the batteries in my smoke alarms. I want to do it at least once a year to make sure that I'm staying disciplined.

Okay, so that's what—

that was—

you anticipated my question. I was going to ask you what the cadence is, what's the frequency.

So, you know, I did a paper a couple of years ago on different rebalancing methodologies. Do you do it annually or quarterly or monthly? Do you do back to your original target or do halfway point? There are lots of different ways to do it, but I'm gonna borrow, maybe steal, a phrase from our friends at Nike. How you do it is less important. What is most important is just do it.

Yeah, okay, great. Anything else on investing or should we move on to retirement planning?

Yeah, the only other thing I'll mention very quickly on investing is those of you who work with individuals who receive equity awards, I'm talking about stock options, and restricted stock, etc. Year-end is a perfect opportunity to revisit those awards, make sure that you understand how they work. I'm going to give you an example. Let's assume that this year my income wasn't particularly great. Let's assume that the company didn't do as well. I didn't get a big bonus, and I'm sitting on some vested options in my control. Now I have the ability to time when I exercise those options. If I find that my income for the year, and I'll make up some numbers, is $200,000, that puts me in the 24% marginal bracket. I don't hit the next marginal bracket of 34% until my income exceeds $300,000. So, so what does that mean? I have $100,000 of income capacity that I can intentionally recognize in that year to have it taxed at today's lower rate of 20-something percent instead of recognizing it later on and exercising all my options when I'm back at 37%. So reviewing, if you will, the equity awards that I've received, my expected annual income for the year, and then being thoughtful or strategic as to how I choose to recognize that income can be an important year-end conversation as well.

I think that's a very important point. It's something I think a lot of people don't think about, but it's, but it's a simple thing. It's easy to overlook, but very important.

You know why it's often overlooked, Greg? So I have a relationship with my financial advisor. And I go online at night or on my phone and I take a look at the different holdings and my balances and it's top of mind. How many individuals actually read their stock option award plan agreement? How many of them understand the statements that they're actually getting from their plan administrators? It's almost out of sight, out of mind. And for many individuals, they're kind of keeping their fingers crossed, hoping that the stock continues to do well, but they're not necessarily intentional in terms of how they manage what is often a really large percentage of their net worth or financial assets.

Exactly.

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Exactly. Okay, let's move on then maybe to retirement planning.

Yeah, let's talk about a couple of others. And once again, we've got a checklist that summarizes the, I don't know, 26 or 27 different planning strategies that we've identified. Let's talk about a couple that pertain to retirement planning. So we know that contributing to retirement accounts is great, right? I want to max out my 401(k) if I can. I want to get the match. I want to defer the income as long as I can. One of the things that I know my two kids look for at the end of the year— Greg, what is it that everybody gets in the mail from their employer in October? They get that enrollment packet. And that's when my 30-year-old son and 26-year-old daughter call me saying, Dad, What is all this stuff and what do I do with it? And so that is the perfect time of the year to revisit. Are we contributing to the right retirement account? Are we contributing in the right manner? Are we allocating our contributions in the right way? A related issue is something that a lot of people overlook. I'm going to talk about the HSA. Now, OB3 expanded the definition and opportunity to contribute money. I think the contribution limit is just over $8,000 for a family this year. And Greg, while that doesn't sound like a lot of money, I'm going to share something with you. I'm going to take advantage of every tax break that is afforded to me, even if it's low-hanging fruit like an HSA. So stop and think about a regular retirement account.

All right.

I contribute to a 401(k) or an IRA. I get a deduction today. The money grows, but I pay taxes later on when I hit my RMD age. Roth accounts work in opposite fashion. I don't get a deduction today. But what I do receive or benefit from is tax-free distribution later in life. The HSA gives you both. It gives you a lowering of income today, a tax break today. The money grows without taxation as it compounds, and then it comes out tax-free, assuming that it's used for qualifying medical expenses. So that, that can be a really great opportunity for investors to take advantage of if they haven't already. Another retirement account Let's talk about Roths. And I know Roth is a 4-letter word, I guess. And there's a lot of debate as to whether or not Roth conversions make sense. I'm gonna make the argument. I gave you the example a little bit earlier of the individual who had a lower annual income this year. And so I love this idea. If a client, for whatever reason, is facing less income in the current year and a lower marginal bracket, Maybe it's not a full conversion of my $3 million account, but maybe it's a partial conversion to fill up the lower rungs of that marginal tax bracket ladder, to have that income recognized at a lower rate today, and to compound that money tax-free. The second individual who might consider a Roth conversion is a guy who looks like me. I'm 67 years old. So let's assume that I stop working. All right, what I've got is I've got 3 years before Social Security kicks in. I've got 6 years before RMDs kick in. And so maybe my advisor and I discuss a strategy where we do partial conversions of my existing retirement account balances to create some diversity, some retirement accounts that will be taxable when withdrawn, but others that will grow tax-free. And as you know, the big benefit of Roth is not just the tax-free growth, it's the avoidance of RMD. I mean, I hate this idea that I work hard, I save hard, I want to, you know, provide resources for my future indulgences or to my family, but the government requires me to take distributions on money that I may not even want to or need to spend. And so the Roth conversion can make a heck of a lot of sense for those types of individuals.

I had a question about the Roth conversion. So there's a longstanding concern that's been out there that has not come to fruition. You know where I'm going with this.

I think I know where you're going.

You know where I'm going with this, okay. Yeah, that, well, you know, eventually the government's gonna change the rules and maybe, you know, change. So do you think that's eventually plausible or do you think, you know, what's your take on that, I guess?

So my colleague Libby Cantrell, who's a, friend of Barron's as well. She writes on all sorts of public policy issues and tax-related issues. It's our view that it is very unlikely for the government to come back and to change the rules of something that we've already taken action on, like a Roth. You paid taxes when you did the conversion. Now all of a sudden we're going to change the rules and tax you later when you want to take the money out. I know that that is a concern among some individuals. We see that as a very, very, very low probability of occurrence. What could happen is a curtailment. Maybe there's an AGI limit that is imposed in terms of how much a higher income individual can sock in a Roth account. Maybe there's, you know, some other tweaking to the future rules or benefits as opposed to changing the rules halfway through the middle of the game.

That seems far, far more plausible were there to be a change.

Yeah.

Okay, so anything else in retirement planning?

I got one more for you. I got one more for you. And we'll jump ahead to talk about wealth transfer and legacy. How about social benefits? And the two I'm talking about are Social Security and Medicare. Now, once again, the average advisor, that's not something that's showing up on the client's monthly statement. It's, you know, maybe kind of a non-related financial decision, but I've got news for you, or maybe it's not news to you, but it was news to me once I reached this age and I'm now contemplating these two very important decisions, Social Security and Medicare. Social Security is nonlinear, right? There's all these different inputs. Are you married? Does your spouse have an earnings history? Are you still working, which would lower the benefit that you would ultimately receive? What is your life expectancy? What is your capital market assumption on dollars that you either take or don't take today versus those that you defer upon? Social Security elections are kind of difficult. And if you stop and think about it, I know it's a monthly check, But I did some math the other day, 'cause I do like math, and I pulled out an HB 12C and I took the average monthly income from a Social Security benefit and took the present value of it for the typical husband and wife or couple. The number, Greg, is $1.2 million. That is what the asset is valued at. If we look at it as a lump sum asset, as opposed to a monthly income stream, I think we need to pay more attention to that decision. And Medicare, once again, I've gotta make an election as to whether or not I do an Advantage plan or whether I'm gonna do Medicare and where I'm gonna be living and all these issues. I'm enrolled in Medicare. I had my right hip replaced last year. Too much pickleball and yoga and golf and everything else. See if you can guess, what do you think the cost of a hip replacement in Naples, Florida might be?

Oh, I have no idea whatsoever.

It's probably a bigger number than most would guess. It was $87,000.

Wow, I was thinking more like $30,000 to $40,000, so okay, way off.

It probably might be, and depending depending on where you are and what kind of procedures performed, $87,000. Now, as I mentioned to you, I'm enrolled in Medicare. So my out-of-pocket cost was zero. I mean, literally, I paid nothing for the procedure. The truth is, Craig, I didn't even need a new hip. I only had the surgery so I could extract a benefit for all the premiums I've been paying for 40 years of working career. So it's important for people to pay close attention to how these things work and make the right elections while they have the chance or opportunity.

I mean, these are real dollar amounts and very easy to overlook. So definitely helpful to flag.

Out about that.

Yeah.

You want to talk about wealth transfer and legacy?

Sure thing.

Couple of other items. So one of the things that, once again, low-hanging fruit, use it or lose it, but it's often overlooked. Annual gifts. I get it. The estate tax exemption is $13.9 million per person this year. It's going to go to $15 million next year. And so a lot of people have been seduced into thinking, I don't have to do any estate planning. But the reality is, look, my money's going to go to one of three beneficiaries. It's either going to go to the government, it's going to go to a charity that I want to direct it towards, or it's going to go to the people that I care about. And so let's be a little bit more thoughtful about the estate planning work that we do. Annual gifts are great because they remove not only the present value— I think it's $19,000 per person, per recipient in the current year— it removes the present value. But what it also removes is any appreciation on those dollars. So I might go ahead and create some trusts for my kids or grandkids, and I can put in cash, but maybe what I wanna put in are assets that have high appreciation potential. Think about stock options, for example, if I've been awarded them and if they're transferable. Think about shares or units of a closely held business entity. Think about, you know, maybe a small cap or emerging markets type of investment that has high appreciation potential, to remove not only the present value, but the additional appreciation as well. If I'm going to do annual gifting, right, as opposed to simply leaving assets at my demise, one way to leverage it is through the 529, right? And so 529 plans, once again, low-hanging fruit, great opportunity to add alpha or value to the client outcome by taking advantage of it. 5— if the government is giving me a chance to put money aside in an account that will not be taxed wouldn't it make sense for me to put in as much as I can as soon as I can? It's exactly what the 529 plan does.

Yeah, and now for those filing jointly, I think, what is it, $10,000? Or I don't know if it depends on the state, but I think $10,000 can be— or what are the limits? Or what do you say?

So the limits are state mandated. You're 100% correct. But the general federal issue is 5 times worth. So it's a front-loaded contribution. Instead of the $19,000 annual gift, that I would make to a child or an intended beneficiary. 529 plan allows me to front-load 5 years' worth of that annual giving in a lump sum deposit if I happen to have the, you know, the available resources at that time. And once again, it compounds the money. It allows it to grow. You probably read about under SECURE 2.0 this opportunity if you've got an overfunded 529 plan to actually make a withdrawal Happened to my daughter. She went to TCU. She's a pretty good student. She did well there. And sure enough, after she graduated, there was a balance left over. Now under SECURE 2.0, I have the opportunity to take that. I can't take it back, although I really wanted to. I had these dreams of a brand new sports car for John, but it didn't work that way. What happens is my, the beneficiary, my daughter, can take a distribution of those dollars into a Roth retirement account for herself. It's capped at the annual contribution limit, and there's a maximum lifetime cap on that amount. But the good news is, is that if you have extra dollars in there, they can be redirected towards a retirement benefit as opposed to an education benefit. One other point on 529 I want to make, because I think our listeners might be affected by this. One of the OB-3 changes is now $529 can be used for professional certifications. So as you probably know, I teach for IWI the CIMA and the CPWA certification. My tuition cost and my continuing education and filing requirements can all be paid for using $529 as well.

That's a huge benefit. Yeah, it's great.

For sure. For sure.

So anything else on legacy planning? And if not, any final words to wrap this all together?

There is one important legacy planning issue I do want to discuss, and it is charitable giving. And that is probably a pretty obvious topic because that's when most individuals give money to charity. So $570 billion given to charity last year. Does it have to be done at the end of the year? Of course not. But the end of the year is a great opportunity to look at it. Now, as a reminder, charitable giving, the dollars that I contribute either directly to charity or maybe through my donor-advised fund or other structured vehicle, Those are a deductible item if you itemize. And we want to encourage people to plan their charitable giving, not to give reactively, but to give strategically in the way, in the manner, in the year in which it provides the maximum benefit. You want to bunch your giving to make sure that you exceed the $31,500 standard deduction. So you're actually deriving a tax benefit for the giving that you're doing. And there was another change that just took place. It's a good one for those who do not itemize. Starting in this year, clients now have the opportunity to give up to $2,000 as an above-the-line deduction. Don't have to itemize. You can get a tax break for up to $2,000. Anything more substantial, you want to make sure that you think about and you time it in a way that's most advantageous. Great year-end conversation with the advisor.

Well, I think that's a great place to wrap it up. This was a really edifying and useful conversation. So thank you so much for joining us. Joining and sharing all this with our listeners.

My pleasure. Thank you for giving me the opportunity to cover a lot in a relatively compressed period of time. I hope the conversation was helpful.

I think and hope it was. So thank you so much again. My guest has been John Nersesian. For more podcasts and the latest wealth management news, visit barons.com/advisor, and please check out The Way Forward: Next Generation, a new podcast hosted by Allison Tucci, that puts the spotlight on the emerging leaders who are shaping the future of financial advice. For The Way Forward, I'm Greg Bartalus.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.