Episode #120: “The U.S. Tax System Revisited: Updates, Changes, and Key Reminders”

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Transcript

Welcome And Setup

SPEAKER_02 0:01

Welcome to the physical physical podcast. Jonathan Stateweek is With Stephen with the founder of Alchemy Wealth Management and author of your physical physical, Ryan Nelson. Tune in to gain valuable insights and practical tips as we simplify complex financial concepts into digestible lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Revisiting The U.S. Tax System

Aaron Hoisington 0:33

Welcome everybody to this week's episode of the Fiscal Physical Podcast. We are back here. Hopefully, you guys have uh set your uh set your clocks, set your timers, set your reminders to when these episodes drop every Tuesday with myself, Aaron Hoysington, and my co-host, uh Ryan Nelson, the brains of this operation. Uh Ryan, what's what's new with you, my man? Not too much. What's new in your world? Not a lot. You know, crushing through uh 2026 here, crushing through podcast episodes. We're uh uh, you know, everything's everything's going well, at least at the time of recording this, I would say. So um, but uh you ready you ready to jump in? You got anything before we before we start here? No, let's do it. Let's dive in. Let's do it. So uh uh, you know, I I I've mentioned before on the podcast how I am a fan of when we overlap episodes. I think it's an important because a lot of these concepts that we talk about tie into each other. I'm not a huge fan of repeating topics and such, too. So um, you know, for our for our early listeners or early adopters, if you will, you might uh be like, wait a minute, didn't they do something on this topic here? And uh we did, but uh I think it's a good time. It's a good time to revisit it. Uh it's also one of my um self-proclaimed favorite episodes. Uh um the U.S. tax system. So we're uh we're gonna revisit that uh that wonderful thing. Uh just so happens right around the time this episode's scheduled to release, it's right about the time you should be finishing up your taxes uh here. So um it's a important deadline. So um, Ryan, I I I I think about it, you know, as a as a financial advisor, it's important that you know you sit down with your clients, you know, and and analyze their finances yearly, monthly, whatever it might be. I'm curious if there's been really, since we've I think that first episode was like episode eight or ten or something like that, if there's been any you know, changes to this. Are there any kind of reminders, anything we want to provide the listeners with as far as uh insights on this topic here? So I'll go ahead and pause and uh let you let you kind of take it from there.

Progressive Brackets Explained Clearly

Ryan Nelson 2:28

Yeah, so I'm happy to go over some of the the changes that have uh taken place over the last couple of years um since our first episode on this. Um maybe maybe we could do a quick refresher, just uh a really high-level refresher on um how the tax system works. Definitely and then dive into some of the nuances and uh or some of the the changes and updates for 2026 specifically. I like it. Um so that being said, so we have a progressive tax system. Maybe I'll let you what's no idea. Never heard of it. Yeah. I know this is one of your favorite topics. Wait, wait, so wait, what yeah, what is a progressive tax system?

Aaron Hoisington 3:03

Yeah, so the best way I I mean you described it the first time I read it was f figure this out. I think I was 32, which is I should have probably learned that earlier. Sure. Um, just about you know, the the uh idea of like, oh, cool, like you pay a certain amount of taxes for the amount of money that you make. It's not like hey, you make a hundred grand, you're gonna pay the same tax rate on every single amount that you make there. Think about it like you're you're putting water into a bucket. But first you've got to fill up like that bucket that could be like, okay, you make you know zero to fifty I'm making the numbers up here, zero to fifteen thousand dollars. You pay a certain amount of taxes on that at a certain rate. You make you know fifty thousand dollars, that next you know, thirty-five thousand that you just added to that, maybe that gets taxed at a different rate, and it goes up from there for the different uh um, I don't know the exact percentages, but um pretty much it's like, hey, like as you make more, you're probably gonna have to pay more taxes eventually as you hit these different thresholds, if you will, if you progress up. Um, but you are uh anyway, that yeah, that's it. Let me maybe just try to clean that up a bit for us. Yeah, yeah. No, that's perfect.

Ryan Nelson 4:08

So so yeah, so I think a lot of people, one of the mis major misunderstandings is things we have a t a flat tax system at different thresholds. So so maybe if you start making uh, you know, like let's use actual numbers here. They they you know, the let's say the 32% tax bracket for married filing jointly, or let's say the the the the 22% tax bracket for married filing jointly starts at about a hundred grand. So a lot of people think, oh man, if I make a hundred grand, I'm gonna pay twenty-two percent on a hundred grand, that'd be twenty-two thousand dollars in tax, right? Um, that is not how it works. The first twenty-four thousand dollars is taxed at ten percent, so that's kind of the bucket you're talking about. Right. So the first ten percent bucket can can it can take twenty-four thousand dollars of income, give or take, twenty closer to twenty-five thousand actually. Um, but so the first bucket that's ten percent tax, that can take about twenty-four, twenty-five thousand dollars of income. Then you earn a little bit more than that, it starts filling up the twelve percent bucket, and that could take about seventy-five thousand dollars of income, and that's all taxed at 75 or 12%. So, and then if you make another, say,$1,000, that starts filling up the 22% bracket. So, in this example, if somebody was making like$101,000, they're not paying 22% tax on$101,000. Right. They're actually paying 10% tax on$25-ish,000, uh, 12% tax on$75 ish thousand dollars, and 22% tax only on$1,000. Right. So if they were getting a pay raise from$80,000 to$100, they don't have to worry about, man, is that gonna kill me? I'm gonna go from a 12% tax bracket to a 22% bracket. Yeah, I'm getting more money. I'm making twenty thousand more dollars, but my tax rate's almost doubling. They don't have to worry about that. All of the say first eighty thousand dollars they earned is still being taxed exactly the same. Just the new$20,000 is gonna finish filling up that 12% bucket, and then the last thousand dollars will kind of trickle over and start filling up that 22% bracket. So that's what we call a progressive tax system. That's how the US tax code is written, um, and that's how we pay all of our taxes. And again, that it there's a there's there's a lot of misunderstanding around how that tax how those taxes work.

Raises, Marginal Rates, And Myths

Aaron Hoisington 6:07

Yeah, I think there's misunderstanding around taxes just in general, too, because I think that there's the piece that you that I think about of or maybe I thought about in the past of like, oh, I'm making$101,000 now. Oh my gosh, like I I can't make that because I'm gonna pay a ton more taxes on it. And I think there are different thresholds that you should be aware of, like if you're married finally jointly, like for contributing to a Roth or these certain kind of things. So potentially there there could be some things you might have to do or things you may have to think about. But I I think you put it eloquently one time. It's very rare that making more money is a bad thing. Like when it comes to that. Now, everyone's situation is different, like, but yeah, you know, if you're the normal middle class, lower class, whatever person, like you get that raise from 80 to 100,000, you're you're still gonna be able to enjoy the fruits of your labor quite a bit from that, versus like, oh, Uncle Sam's taking all the money kind of thing.

2026 Tax Landscape Overview

Ryan Nelson 7:01

So yeah. Yep, exactly. Um cool. So now let's dive into maybe some more specifics about 2026 specifically. Awesome. Um, so um there were some originally there was some tax legislation that was due to be sunsetting out, so it was like these temporary decreases that were then gonna go away with some more recent legislation. Um, those have now been made quote unquote permanent. So they're you know, nothing in the tax world is permanent, it's only permanent until the next legislation changes it, right? Um, but the reality is like they were scheduled to start increasing again. Those schedules of increase have gone away. So the tax rates, uh, like the percentages and stuff are due to stay the same. Um, so anything you've heard about sunsetting, most of that has gone away. Um, but so some things that are interesting. So the um federal estate um tax uh exemption has gone up. Um any guess what it is? Uh federal estate. Is it a state tax? Like so basically, how much money can you earn to not have to pay an estate tax? Or how much money can you have to not have to pay an estate tax?

Aaron Hoisington 8:07

Okay, I'm gonna guess uh uh 250,000. 250,000. 15 million.

Estate And Gift Thresholds Updated

Ryan Nelson 8:13

15 million good guess. Oh boy, we'll cut that. Yeah, yeah, yeah. So so 15 million for an individual, 30 million dollars for a couple. Holy smokes. So what that means is uh if there's a husband and wife, if their net worth is less than 30 million, um, they don't have to worry about an estate tax. So most of the time when um you inherit money from you know a parent, you're not paying taxes on the money you're inheriting, um, unless in this case now it's over 30 or 15 million. Yeah. Um yeah. Um that being said, there's some different state laws. What we're talking about today is only federal um federal tax, not states. So it's different, some different states might have their own thing. Um, but basically, you know, as long as the so$15 million per person,$30 million is married couples, um, they can pass down. Anything above 30 million will be taxed at 40%. So if somebody passes away with 50 million, you're right, the people inheriting would receive 30 million tax-free. That 20 million above and beyond would be taxed at 40%. Uh, and that's the estate tax. Okay, gotcha. So the reality is most people, the vast majority of the population has a net worth below 30 million. Sure. Um, and so most people will never owe an estate tax. Um that being said, um, there's also a gift exclusion. Um, so you can gift, that's also gone up in 2026, so you can gift up to$19,000 per person per recipient. Um, and that does not count towards your um your gift your bait or your federal estate um exemption. And so, you know, uh that's per person,$19,000 per person. So like a grandma and grandpa, that'd be per person, so$38,000,$19 a piece, so$38,000. So like a grandma and grandpa could give$38,000 um to people and just have no tax consequences. So if they have eight grandkids, they could give$38,000 to each of those eight grandkids, have no tax implications. Wow, okay. Um, yep. And that wouldn't affect um the lifetime exemptions whatsoever. They could give more above that$38,000, but that would start affecting the um lifetime exemptions.

Aaron Hoisington 10:14

Um was is that is that was that number a lot lower at some point? It's slowly been changed. Okay, it's slowly, yeah. I I remember I remember growing up, never actually came into fruition, but my grandma talked about like at the time, I think it was like 10,000 or something like that. Like at some point when I was growing up. So it would make sense. I mean, just that that's probably half my life ago now that I think about it, it might have almost gotten gone up double with that, too. But um, yeah, that's a that's a that's a good one that gift tax lovely.

Ryan Nelson 10:40

So it's been steadily increasing, yep.

Aaron Hoisington 10:42

Totally.

401k Limits And Catch-Ups

Ryan Nelson 10:42

Um 401ks, how much you can contribute to your 401k has gone up. So the new standard contribution to your 401k in 2026 is$24,500. So if you're putting less than$24,500 into your 401k, you are not maxing it out. Um so something to be thinking about if you can afford it. Um that contribution limit has gone up, so you could increase it. Now, if you're 50 or older, you also have a catch-up possibility to do another$8,000. So if you're$50 or older and have access to a$401k, you could do$32,500 in 2026. And what's kind of cool is there's a new rule starting just this year for people age 60 through 63, where they can do like almost a super catch up, and instead of doing an extra$8,000, they could do an extra$11,250. Yep. So if you're under age$50, you can do$24,500. If you're over age$50, you can do$32,500. And if you're between 60 and 63 and your plan allows for these kind of super catchups, you could do$35,750. So something to be thinking about there. Um if you've kind of set set some of your limits and kind of set it and forget it. Um if you don't keep up with it, sometimes uh you you might not be maxing out your plans anymore.

Aaron Hoisington 11:54

Yeah, no, that's that's smart that they call those different hours because you like once you're at that age, you're like you're like, oh man, I wish we would have done this 30 years ago, but it kind of gives you an opportunity to catch up. To catch up. Yeah, that's that's literally kind of what it's designed for.

Ryan Nelson 12:07

Hopefully you have more, you're earning more money. It's there's potential that you're earning more money at that stage in your life. So now you have more disposable income, you have the ability to catch up. Now the IRS is allowing you the flexibility to catch up to. Yep. Awesome. Um another uh interesting rule change this year that's just starting in 2026 is for some higher income earners, these catch up contributions we just talked about, they have to be Roth. Okay. There's never been before, to my knowledge, uh any requirements that any contributions had to be Roth until now. To my knowledge, this is the first time. So catch up contributions um for high income earners are now forced to be Roth. Okay. Um, yep. Um regular contributions to your 401k, you can still pick. No matter what your income is, you can still pick if those if you want those to be pre-tax or Roth. So that hasn't changed at all. This is only applying to catch-up contributions. Um now let's talk about IRAs. So the individual retirement arrangements or individual retirement accounts. The contribution limit to an IRA has also increased. It went up to$7,500. And if you're 50-year older, the amount that you can um uh do for a catch up there also went up by eleven, went up to eleven hundred dollars. So if you're 50 year older, you can put in$8,600 to your IRA. Um, so same thing if you've been contributing to your IRA and you've you're still putting in the$7,000 or$8,000, you can increase that to$7,500 or$8,600 if you're over age 50.

IRA Limits And Weekly Math

Aaron Hoisington 13:38

Just a fun, fun little math trivia question here for you. So if you if the contribution limit is the the$7,500, um, if you're you know a normal person or whatever, and uh you know how much that is a week you'd have to put in? Uh I would guess, well, it's got to be like around uh 175. 144. Oh, 144. It's a yeah, just I just did that and I was just like, oh wow. Like you because you think about like I I like to break down like I don't know, I've just always been weird like this, but like break down like how much money I'm making per hour and like uh uh break it down like per minute or per day or these certain things. So I get my paycheck and like sometimes when I'm like, oh, if I want to like the idea of like maxing out like oh my gosh, like we have to, you know,$7,500 like in in in reality sounds like a lot of money, right? But then you break it down like per per week that you have to put in there and it's like$144, like, oh, like I've spent$144 in a week. I I sometimes just piss away money like that too. So um anyway, that's kind of it's kind of interesting there out there for if you guys are looking to max out your Roth, like maybe that's a little bit more uh, you know, you're you're you're eating the elephant one bite at a time. Yeah, exactly.$144 at a time.

New Non-Itemized Deductions

Ryan Nelson 14:46

So anyway, sorry, continue. Cool. Um there's also been some new interesting changes this year to some non-itemized below-the-line deductions. So there's always been what's called the standard deductions. You've always probably heard people talk about when they're filing their taxes. Did you did you itemize or did you take the standard deduction, right? Um now there's some new non-itemized, so if you're not itemizing um below the line deductions. And so um there's a new six thousand dollar, so for seniors who are 65 plus, there's another six thousand dollar um um deduction per person for eligible people um based on income levels, which is interesting. Um, there's some new charitable deductions that kind of replicate something that was going on during COVID. But so um historically you've had to itemize to get credit for charitable donations. Now there's some ways for you to get credit without itemizing. Um overtime, you may have heard. Overtime I saw I saw that, yeah. Yep. So certain amounts you know, up to up to$25,000 for married filing jointly um can be deducted. So you're not paying taxes on that uh on overtime dollars, depending on your income level. Um, some there's some tips that won't be that can be deducted as well. So same thing. If you're earning money uh via overtime or tips, you might get some deductions there. There's a new car interest loan um and some changes to QBI, but some interesting changes there. So if you work a lot of overtime or tips or donate a lot, um, or if you're 65 or older, you might have some new deductions to you here in 2026 that hadn't been available to you in the past unless you itemized. Awesome. That's that's great, man.

Aaron Hoisington 16:21

And I think it's a good good time to to plug that like, hey, please consult your tax professional for these things because like you you mentioned a bunch of things, and I was like, oh shoot, I didn't know that. Oh, I didn't know that. Yeah. Should I look into that? I probably should, at least, like uh, or make sure that like my parents look into these certain things because uh uh you know you know you you think you like stay on top of these and like these programs like TurboTax or these other ones like H and R Block make it super they try to make it super easy to file and that's great, like but you know sometimes it as your life gets more complicated. Like I know that I've noticed over like my life my life, like you know, five years ago, like it was like I was just filing a W-2. Yeah, yeah. That's all I had. Yeah, yeah. And now I'm it's like, okay, well, I have this, I have this solar credit, I have this other credit, like, okay, where do I what I donated here, I got some overtime, like all these different things. So just make sure you're you're staying diligent on that as far as your your your tax planning and and how you're kind of doing it for sure. But uh uh consult your tax professional without a doubt to make sure you're staying on top of it.

Key Takeaways And Disclaimers

Ryan Nelson 17:19

Definitely. Um, yeah, you can't you uh definitely always consult your tax professional on this stuff. But I think those are the heavy hitters. So really um, you know, we we kind of refresh ourselves on what the progressive tax system means. Um largely we now understand that uh if we thought some of these tax rates were scheduled to go back up, you're right, they were scheduled to go back up. That's now been removed this so that current tax rates are scheduled to kind of stay in place for longer. Um the thresholds at what the income is increases a little bit every year, but uh the main numbers to be aware of from a retirement planning standpoint would be how much you can contribute to your 401k, which is$24,500 a year, plus those catch ups if you're 50-year older or 60 to 63. Um and then in your IRA, that contribution limit went up to 7,500, and the catch up on that went up to 1,100 bucks. Um so from a retirement savings standpoint, I think those are the most important numbers. And then some things to just kind of think about are these new in 2026, these new non-itemized below-the-line deductions. So if you have overtime or tips are gonna be the two main ones, or if you do charitable giving. Um, so I think those are the main kind of heavy hitters from a retirement planning standpoint. There's been a lot of tax changes, but from a retirement planning standpoint, I think those are the heavy hitters. Sure.

Aaron Hoisington 18:35

No, I think that that's uh and I think I love that you kind of prefaced it that like nothing of these are like set in stone. It's like, oh, these are the what's right now until the next legislation. Yep. Like I and I think that that is like cool that we can like adapt with that, but it's also like frustrating that like, oh man, I feel like I just got the hang of this or whatever. And then it's like, nope, we have a new administration or a new Congress, or we're doing these new things, and cool, that's adopted, and now that's no longer the case. And so I'm like, oh man, like are we gonna increase the child tax credit? Like, I always think about that. Like, and I'm like, oh, that that actually affects me now. So yeah, it's it's wild out there for sure. But uh appreciate Ryan, as always. So I think that's it's really important for at least to have a basic understanding of the US tax system, the progressive tax system that we use, and and just you know, if you're ever at a ever at a party talking about taxes, you can be like, someone's like, oh, well, you know, I I make too much money for this. And you're like, well, do you? Do you know how this works? Yeah. And like uh kind of go from there too. So um anything uh else to say on this topic before we go ahead and pause? Nope. I think that's it. Awesome. Everybody uh hang tight. We'll be right back.

SPEAKER_02 19:40

And now to put the personal in personal finance.

Aaron Hoisington 19:47

Welcome back to this side of the physical physical podcast. This is still Aaron, still here with Ryan, and uh we're on the uh the exciting side. Well, I don't know, I consider both sides pretty exciting, but this is uh the uh personal section here. So uh Ryan, you uh you ready? Yeah, absolutely. All right, man, here we go. So this is a fun one. We want anybody to di everybody to dial in. So uh if you could instantly learn a musical instrument, which one would it be and why?

Ryan Nelson 20:13

Yeah, I think I'd go with the uh the old uh guitar. Oh just easy, you know, you can you can I like I like the idea of like a piano or drums, but they're just not mobile. You know, you can't you can't take your piano out around the campfire. Yeah. Um so yeah, I like the idea of probably the like a guitar just classic, it's just a classic, right? Um I think I'd go with guitar. That said, I was just thinking there was there was a point in my life like uh when I was a kid growing up where I had this uh harmonica kick where I tried to learn the harmonica for a good, I don't know, six or seven days. Yeah. Um but I that that'd be kind of a fun one too. It's even more mobile than the you know, you can put a harmonica in your pocket, you know. So you could take that like anywhere, bust it out. So that'd be kind of a fun one too, now that I'm thinking about it. But um hard to beat the classic guitar. Yeah. What what about you?

Aaron Hoisington 21:02

No, that's a that's a really good point. I've had forgotten all about our our good pal harmonica there. Oh yeah. Um yeah, that one I think would be you really mobile with it. But I think you made a good point of like being able to, you know, uh bring it out around the campfire or something like that. Because I I I do think that it's really interesting. I I'm not a musical person at all, by the way, but say that. Like I took like three years of piano lessons growing up because my parents made me, and I immediately forgot everything about it. Like they're like, someone's like, Oh, can you read music? I was like, no. Like, I don't know. Like, um, but I maybe I could one point in my life. But I do think that music is just kind of a universal language, too. So like you go, like I have a friend who uh uh he's an acquaintance, his son is in uh South America right now, like doing a Mormon mission, and he's talking about he was saying how how difficult it is, he doesn't know the language, all these different things. He's like, but he can play, he's like a master pianist. And so he's like, he's like, if if I go into somebody's house and they have a piano, like Maybe I can't like convince them like to to you know convert to my church, but what I can do is I can bring the gift of music into their house and like play the piano and do these certain things and he said it's just and I was like, that's cool. Like I mean you don't have to like you know, you don't know the song or whatever, but maybe you know the beat, there's like whatever. So it's it's pretty so I think the piano would be awesome because that's just you can do that, but yeah, um you know I also think that I've always wanted to learn the saxophone. I think the saxophone is so cool. Like I see somebody uh shout out to anybody here in Reno. If there's a uh um if there's like a person who's panhandling or something and they have a saxophone firing up, I'm probably donating to their cause. Like it's just one of those instruments that I'm like, that's cool. And like if somebody knows how to play it, like that's that's pretty neat. So probably probably go with the old saxophone, I would guess, but uh there's probably a lot out there. I probably should just start with something easier though, like a flute. Yeah.

Ryan Nelson 22:53

I I I think it's always cool what uh the what are they, the buskers? Bus one who that which busks? Oh yeah, yeah, I don't know. I don't even know if that's a word. Panhandling? Yeah, is that what it is? I don't know. Anyways, um it is a financial podcast, not uh not a yeah. Anyways, uh I always kind of like the guys who are like panhandling, but they just have like pots and pans and buckets. It's like it's incredible. It's like oh they're making great music just with like anything, right? So that that's always kind of fun when somebody's making music with a uh a non-instrument, you're turning some a household object into an instrument. I always get a kick out of that. Definitely, yeah.

Closing And Listener CTA

Aaron Hoisington 23:30

You're like, oh wow, like the the ability to like do that. Like you're like banging on Home Depot buckets, and you're like, Yeah, exactly, that sounds like drums. Like exactly. Um awesome, man. Well, I appreciate it, Ryan. Uh, listeners out there, please let us know if you uh could instantly learn a musical instrument. What would it be and why? Let us know. We'd love to hear it. And uh other than that, these episodes drop every Tuesday. So uh please check us out. Wherever we get your podcast, we appreciate the listeners there and uh hope everybody has a uh great rest of the day. And uh, Ryan, I'll let you uh wrap us up here.

Ryan Nelson 24:02

As always, stay the course.

SPEAKER_02 24:06

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the show. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical, the book on Amazon. We'd be remiss if we didn't mention that personal finance is just that. Personal. Please don't take anything we say as advice. The pre-seating content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.