What's takeaway 1 on Top of the Morning?

UBS highlights essential planning priorities for retirement and taxes.

What's takeaway 2 on Top of the Morning?

Recent tax reforms may enhance consumer spending and investment behavior.

What are the market implications for Top of the Morning?

Traders should closely monitor how elevated disposable incomes from tax reforms influence market sentiment, particularly for sectors reliant on consumer spending. EUR/USD could be particularly influenced by these fiscal dynamics, prompting reassessments of monetary policy stances ahead of 2026.

What are the risks to this view on Top of the Morning?

A significant reversal could occur if inflation surpasses expectations, eroding the positive effects of tax reforms. If central banks respond by tightening monetary policy to combat inflation, this could dampen increased consumer spending and adversely affect market sentiments.

Top of the Morning: Year-end planning priorities - Retirement and tax strategies

What the desk is arguing

The desk frames this as an opportunity for more robust retirement planning strategies that could lead to increased disposable income for consumers. The recent tax changes augment the environment for savings and investment, allowing families to reassess their financial positions. Improved financial flexibility may lead consumers to allocate more towards risk assets, which could support further market gains.

Key considerations include the incremental increase in the standard deduction to $15,750 for single filers and $31,500 for couples filing jointly, set to rise with inflation annually. This alteration provides a direct benefit to taxpayers, potentially translating into increased consumer spending and investment activities.

Where it sits in our coverage

JPMorgan: Target 1.10 (Mar 26)
BofA: Target 1.04 (Mar 26)

The desk’s outlook aligns closely with JPMorgan, which anticipates a stronger consumer base due to enhanced tax benefits. That said, BofA stands in contrast, forecasting a more cautious consumer response as they weigh the mixed implications of tax changes against broader economic conditions, placing emphasis on inflationary pressures that could erode purchasing power.

How other firms see it

Several firms are aligned with the idea that the tax reforms will bolster consumer spending and investor sentiment. JPMorgan stands particularly optimistic about the anticipated economic uplift along with favorable tax conditions. Conversely, BofA presents a more tempered view, suggesting that potential economic headwinds might restrict the anticipated benefits from these reforms.

Watch for implications on the EUR/USD outlook as changes to taxation and consumer behavior develop, especially considering how central banks might adjust their policies in response to shifts in economic activity stemming from these reforms.

Hi, everyone. Dan Cassidy here. Welcome back to the UBS Conversations podcast channel.

For today, we will focus on year-end planning priorities and what's on the horizon for retirement and tax strategies in 2026. Whether you are decades away from retirement, getting ready to transition, or already enjoying your retirement years, the end of the year is an ideal time to review your plan for both risks and new opportunities. So joining us to help us break down the latest changes and strategies, glad to welcome back today Justin Warren, head of UBS Wealthways Strategy and Solutions.

Justin, great to have you back here on UBS Conversations. Thank you for dropping by and for spending some time today with our listeners and our clients, a very topical focus for today given the time of year. So glad that you can join us.

Thanks so much for having me, Dan. So with that, Justin, let's begin with the big picture. Now, there have been a lot of changes this year, especially with the passage of the One Big Beautiful Bill Act.

Mindful of that, what are some of the key tax changes for 2025 that families should be aware of as they approach year-end? Yeah, so the One Big Beautiful Bill Act, as its name implies, did incorporate a lot of big changes. The overall theme was extending or making permanent several of the tax changes that were first introduced in the 2017 Tax Cuts and Jobs Act and were set to expire at the end of this year.

And so that's one major theme of changes in the bill. There were also some additional benefits that are new. And so, for example, starting this year, there's a new increase in the standard deduction, so $15,750 for single filers and $31,500 for married couples filing jointly.

And that number will be increased by inflation every year going forward. So that's the standard deduction for people who don't want to itemize their deductions for taxes. There's also a new bonus deduction for taxpayers over the age of 65, which is going to be $6,000 additional per person in the family who's over 65.

And that's available whether you itemize or if you take the standard deduction, although it does phase out at some higher income levels, so not all families will be able to benefit from that. Another major change is the infamous SALT cap, the cap on state and local tax deductions. That has been raised to $40,000 for most filers through 2029 from $10,000, but this is also subject to income phase-outs.

And so that, a lot of families prior to that deduction from being taken away have used that and itemized their taxes to get a lower tax bill. So that's back, and that's likely going to mean more families are going to itemize than they did last year, because it's a pretty big itemization category. Another change is the lifetime estate and gift tax exemption.

So this had been set to sunset back to like $6 million a person at the end of this year. It's actually been increased again to $13.99 million per person this year, and next year it's going to jump to $15 million, and it'll be inflation adjusted from that point on. There's no longer a sunset for that estate tax exemption.

So that means it's sort of permanent. However, I'll put permanent in quotation marks because a future Congress can always change those limits again or repeal the exemption. And so this is an opportunity for families to potentially take advantage of the higher exemption while it's available.

Nothing lasts forever, especially not in the tax law. There were also new deductions for qualified tip income, overtime, and car interests on new cars assembled in the U.S. Each of those have their own income limits and phase-outs, but that may be an opportunity for some families.

And so the main takeaway here is that a lot of households are going to have a lower tax bill starting this year, but it's important to review your situation to see which of these changes might apply and how you might want to change your strategy from last year. Well, that was a very helpful overview, Justin. Certainly a lot there to keep track of.

And with all of these moving parts, Justin, how should families approach their year-end planning? Are there particular strategies you recommend? Yeah, I think as we approach year-end, we're going to be approaching a deadline for a lot of retirement and tax planning strategies.

So one overarching theme that I would emphasize for year-end is tax diversification, which is a way of saying spreading your money across a variety of taxable, tax-deferred, and tax-exempt accounts. Because when we have money in each of those three buckets, it gives us more flexibility to manage our tax bill today and in the future. And so there's really two sets of recommendations.

For families that are still in their working years, this is an opportunity to review your contribution strategy. Make sure that you're getting your savings into accounts that are going to best help you create after-tax growth potential. So my team and I have published a piece called the Savings Waterfall, and it's a worksheet that can help you look at all of the different account types out there and try to prioritize where you put your savings based on how much you're able to save and which accounts are likely to give you the best after-tax growth potential.

So for example, you should really try, if your company does match 401k contributions, getting that full match should be a priority because that's like 100% immediate return on your investment. And also, if you're in a high-deductible healthcare plan and you have the ability to contribute to a health savings account, that would be also a priority because health savings accounts offer tax-free contributions, tax-free growth, and tax-free distributions for qualified medical expenses. So it's a very powerful account to have your assets grow on a tax-advantaged basis.

And then after that, you might want to think about maxing out your 401k, funding IRAs, college savings plans, et cetera. So setting up this savings plan allows you to then automate those decisions by setting up your payroll deductions and direct deposits so that as your paychecks come in, they flow into all the right accounts for your savings goals and make sure that your spending needs are also covered by cash flow into a checking account. So that's the advice for people in their working years is sort of review your contribution strategy, make sure that you've taken advantage of all your opportunities before year-end because in many cases, that's when your contribution opportunities are going to be over.

And for those who are in retirement or nearing retirement, I think that the focus is more on how actually do we strategically draw down our accounts? How do we do that in a tax-efficient way? And so just like we have the savings waterfall, we have a concept called the spending waterfall, which really helps families smooth out their taxable income over their retirement period.

So fill up lower tax brackets when you have the opportunity to access them, and then hopefully stay out of higher tax brackets in other years, because higher tax brackets not only mean higher tax rates, but it also means that you might pay more Medicare premiums. It could cause you to be phased out of certain tax breaks and benefits. And so one element, especially as we approach year-end, would be considering partial Roth conversions.

So partial Roth conversions allow you to move money from a traditional IRA to a Roth IRA. You pay taxes on the conversion, but if you are in a lower income level than you normally are, for example, if you've recently retired and you haven't yet started to take Social Security or required minimum distributions, it's likely that you're in a lower tax rate today than you will be in the future. And so this is an opportunity to convert some of your IRA assets at a lower tax rate than you would pay in the future when the government forces you to take those dollars out as a taxable distribution.

So those are the two key focuses as we approach year-end. Okay, so a lot there to consider. Makes a lot of sense.

Justin, as a follow-up, could you walk us through an example that might be helpful of how someone might use these strategies at year-end, bringing this all to life a bit? Yeah. So we walked a little bit through the partial Roth conversion opportunity.

I would recommend thinking about this as an opportunity to fill up a tax bracket rather than just converting an arbitrary dollar amount. Really, our goal should be to fill up tax brackets today and hopefully move money out of higher tax brackets in the future. So that's the overall approach, and we have financial planning tools that can help with that calculation to assess what size of a partial Roth conversion might be helpful, as well as to estimate how much value it will add to do the conversions today, as opposed to wait until RMDs begin to take those dollars out of the traditional IRA or 401k.

There's also some strategies I didn't mention. So if you have money in your taxable account, I know that markets have been pretty healthy this year, but certain parts of the portfolio may have possible capital losses, where your investments are trading below where you bought them. And that's especially true if you own bonds or if you've been reinvesting into stocks over time, so you have more tax lots to give you these loss-harvesting opportunities.

But yeah, selling investments that are down, reinvesting them into a similar investment can help you stay invested, but also harvest a capital loss that can help you offset capital gains elsewhere in your portfolio. And if you don't need those losses to offset gains that have been realized in the current year, you can carry them forward into the future. And so that's a strategy that can help to mitigate tax consequences.

And if you're charitably inclined and over the age of 70 and a half, you may also want to think about funding your charitable contributions using a qualified charitable distribution. So this is making a gift directly from your IRA to a public charity. You can do up to $108,000 per IRA.

So like if you and your spouse both have IRAs, you can get two bites at the apple. And these distributions count towards your RMD, but they are not including your taxable income. So they could be one of the best ways to fund your charitable contributions.

Well, those were great examples, Justin. Very helpful to have that all in mind. Let's shift now and talk about charitable giving.

Again, very topical given the time of year. Now, I have heard about a charitable bunching, so to speak, in order to maximize charitable deductions. What does that mean, Justin?

And why is it especially relevant for this year? Yeah, that's a good question. So charitable bunching, we sometimes call it Brady bunching, is a strategy where families combine several years worth of charitable donations into a single tax year rather than spreading them annually.

And the reason that this can be valuable is because when you bundle lots of donations into a given year, the deductions that you get from those donations can all stack into the year, which might make it more worthwhile to itemize deductions rather than take the standard deduction. And therefore, you get more potential benefit from the charitable deductions that you get from your charitable gifts. And the reason why this is especially relevant in 2025 is because this strategy might be hampered somewhat starting next year.

Starting in 2026, there's going to be some new rules that limit the deductibility of charitable contributions. For example, only the portion of your gifts that exceeds 0.5% of your adjusted gross income will be deductible. And so that means sort of if you look at your overall taxable income and you multiply that by 0.5%, that's the amount of charitable donations that won't be eligible for deduction.

So in other words, there's sort of a floor above which you need to contribute in order to get any deduction at all. And the other changes are that the maximum tax benefit from itemized deduction is going to be capped at I think 35% tax rate. So if you're in the 37% tax rate, you might only get 30, 35 cents for every dollar of donations.

So by bunching donations into 2025, you can take advantage of the current more favorable rules, thus potentially increasing your charitable deduction and reducing your tax bill. And so that means for families who regularly support charities, it might be a good idea to accelerate planned gifts into this year. And if you still want to spread your grants over many years, you might want to consider making a gift directly to a donor advised fund or a private foundation so you get the deduction up front.

The money can continue to grow until you ultimately decide to distribute those funds to a charity in the future. And that way you get your deduction up front and you can still distribute those funds as you see fit over the coming years. Well, some very helpful clarity and guidance there on charitable giving.

Thank you for that, Justin. So we covered a lot though. Before we wrap up for today, Justin, what are some practical steps and even some common pitfalls families should watch out for as they plan for year end and even beyond?

Yeah, it's a great question. So just to recap, if you're working, review your contribution strategy, make sure you're maxing out your contribution opportunities before year end. Second up, especially if you're in retirement, consider partial Roth conversions to take advantage of lower tax brackets that are available this year that you may not have access to in the future.

Third, evaluate your gifting strategies. So both how you give to your family and giving to charities, especially in light of the higher in estate tax exemption. And also look for opportunities to harvest capital losses in your taxable accounts.

And then last, something we didn't mention, but it's always a good idea. Double check the beneficiaries that you have assigned to your retirement accounts and insurance policies. Make sure that you don't have ex-spouses or family members who no longer need the money set up.

Make sure that it reflects your current wishes. That's a pitfall that we see often, not double checking those. Other pitfalls include missing the year end deadline for RMDs or missing the deadline for getting the money into the retirement accounts during your working years.

These year end deadlines are pretty important and it can be easy to forget to do those steps. Another pitfall is overlooking the impact of these new tax rules or failing to coordinate strategies across accounts. It's important to take another holistic view, work with your financial advisor and your tax advisor to make sure that you're taking advantage of all the new rules.

There are some challenges to being in a very high income tax level in a given year that sometimes people forget. If you have a very high income tax year, it can force you to pay more in Medicare premiums in two years. That's called IRMA.

It may also lead you to be phased out of certain tax benefits, such as the SALT cap deductions, for example. If you make over a certain amount, your ability to take SALT deductions actually comes back down towards that earlier $10,000 level. I think it's $500,000 is when the phase out for SALT cap deductions begins.

By the time you make more than $600,000, you can only deduct $10,000 instead of the full $40,000. This is something that can often be overlooked. Last but not least, a lot of investors fail to harvest all of the capital losses while they're available.

This can be challenging because markets usually grind higher. If you do have something that you own today that has a capital loss, it'll probably go away eventually. You have to really strike while the iron's hot.

It's really important to review these strategies with your financial advisor and your tax advisor. They're going to help you tailor a plan that fits your unique goals and circumstances and help you adapt as the rules continue to evolve. Justin, great catching up with you, as always.

Thank you for dropping by UBS Conversations to spend some time with our listeners and their clients, sharing with them these year-end planning insights, a lot of valuable information for families as they approach year-end. For you, our listeners, I want to point out that for more details, you should check out the full UBS report, year-end priorities, and a preview of 2026. And please consult with your UBS financial advisor for personalized guidance.

So, Justin, thank you again for dropping by today and look forward to having you back on again with us soon. Same here. Thank you for tuning in.

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