Why Lowering AGI Is More Important Than Ever

Welcome to another episode of the Student Loan Planner Podcast. I'm Travis, and today we are going to talk about why lowering your AGI is going to be more important than ever for student loan borrowers if this GOP reform bill passes in any capacity. And I'm gonna explain why. So if it passes, the IBR plan will be the primary plan that a lot of people that already have student loans will rely on. It's 15% of income for 25 years, right? Now, if you do the RAP plan, it's 10% of income, but again, remember that it's 10% of AGI straight up with no discretionary income deduction. So in some ways, the payment might even be kind of similar to IBR. It would mean like a lower marginal rate, but the overall payment for a lot of people will be somewhat similar to the IBR plan, even though the percentages are different. Now, I wanted to talk about if somebody does get stuck on the old IBR plan for five, 10, 15, 20, 25 years, what does it mean for your wealth growth plan? Now, I wanna highlight how big of a problem this is for people making work decisions, because this is really nuts. So the 22% tax bracket kicks in if you're single or married filing separate, roughly at 60-ish thousand of income, so really pretty low. And then about 120K if you're married filing joint. Now, think about if you have student loans. Let's say you have a bunch of student loans, you're going on an income-based plan. Let's say it's the old IBR plan that you're on. So you would pay about 22 for federal. Let's say you're in a state with 5% income tax, that's about 27. Throw on an additional 7.65 for FICA, right? Social Security and Medicare. So that bumps you up to like 34, 35-ish. Now throw on IBR, you're at a 50% marginal tax bracket, only making like 65, 65, or $70,000 a year. That is crazy. 50%, right? Now, let's look at a different scenario. Let's say that you were two medical professionals married to each other and earning a pretty good income. Let's say you're both earning in the mid 200s or so. You might say that that's really awesome, but think about the impact on your tax bracket for a moment. You'd be in the 32% marginal tax bracket for federal, and then let's just say that the average rate that you're paying is maybe like 5-ish percent for Social Security and Medicare because you've already hit the limit. On the FICA tax for Social Security, but then you get additional Medicare tax that would kick in too. So let's say you're like 37-ish for federal and Social Security. Throw on five for state. Now you're in the low 40s. Throw on 15% for IBR. You are now in like the mid to high 50 percentile range, like 55 to 57% tax rate overall. If you're in California or New York or like New York City, now we're talking you being in the low 60 percentile range for your tax bracket. That is insane. That means every additional $1,000 you make, you are losing like 63% of it or something like that if you're in a New York City kind of place. So in that situation, what happens is everything you do with your finances has to be examined or else you will blow yourself up compared to where you could be in terms of your financial goals just because of how much taxes you'd be paying. And I'm considering IBR in this case to be a tax because it is, right? It's just an income tax that happens to have a loan that looks, you know, it looks like a loan but it's really an income tax if you have a high debt to income ratio, right? So what would you do to achieve your financial goals if you're losing, you know, 50 to 60% of your income in taxes if this GOP bill passes? Now obviously the first priority for most people would be maximizing your pre-tax retirement accounts and your HSA accounts if you have those. That would be a wonderful way to grow wealth because you can do a lot of things with retirement if you absolutely had to. You could strategize with like strategic conversions for Roths at a time when you're in a lower tax bracket to see if you could access some of the principal early without penalties if you'd really tried to. Like you wouldn't want to do that but you maybe could, right? So putting a lot of money into pre-tax accounts here is a major deal. I will say that even if you're in a super high tax bracket it's not crazy to still save money. You still want to have an emergency fund. You still want to have a little bit of money going into a brokerage account just so that you could have access to that money if you have a big goal coming up. But here's another big idea. If this bill passes, the current GOP bill that's being debated, it would dramatically change the calculus on people being a business owner or being a W-2 employee. And I'll tell you why. When you're a business owner a lot of stuff becomes deductible. And a lot of stuff could become deductible if you put in a little bit of a time to figure it out. So things like certain kinds of health insurance, right? For a portion of it. If you have a home office and you drive between your workplace you can write off some of your vehicle. You can depreciate things with bonus depreciation. You know, maybe write off a huge chunk of your vehicle in a given year. You can buy a building. You can write off equipment that you do for practice. If you're making a lot of profit you can go buy a second location. You could set up a defined benefit plan in addition to a regular 401k plan and you can set up profit sharing for that. So you could put away, for example, mid six figures into retirement. Maybe not mid six figures if you're younger but low six figures to retirement pre-tax. Think about that impact. If you're a practice owner in Long Island or something with 400,000 of student loans from NYU or whatever that you took out in 2015. You might have 10 years of credit already but you need 15 more years to go. Do you want to be in a 60% marginal tax bracket for the next 15 years? Or would you want to set up a defined benefit plan with 401k profit sharing to save 60 something percent on taxes and then withdraw that money in retirement and max out your 24% tax bracket while you're living in New Hampshire if you like the cold weather or Florida if you don't like the cold weather with no income tax. Do you see what I mean? So you might be able to tap literally 40% more of your money in retirement for some situations for people if this bill passes and it forces everybody into this 15% of income kind of situation. They are talking about bringing back some things with like real estate depreciation. So things like certain kinds of like short term Airbnb kind of things like vacation homes may or may not be a thing once this bill with the dust settling. That could become very popular, professional real estate investor status for a spouse who doesn't work full time in any kind of typical professional field. They could become a professional real estate investor, spend most of their time on real estate while you do your medical career and you could go fix up places and rent them out and write off a whole bunch of the expenses when you renovate against your taxable income. That might be a really good strategy if you have a 50 or 60% marginal tax bracket because of this bill passing. One of the reasons why people have not been paying attention to tax planning in relation to student loans that much is just because of how much the can has been kicked and actually making people pay a percent of their income. If you really think about it, we are still not asking borrowers that were paying before COVID to pay based on their current taxable income because the Trump administration kicked the can down the road till February 2026 or something like that, right? In some cases, longer than that until like 2027 in some cases on recertifying due to IDR. But if they forcibly put everybody back into IBR with a congressional bill and they force everybody to recertify with current income, which is very possible, if they do that, suddenly your 2024 tax return, especially, I can almost virtually guarantee your 2025 tax return is gonna be used to calculate an IBR payment. That means that suddenly you're going to feel that pain when you have not felt that during COVID at all, right? During COVID, people could file separately or jointly and a lot of people who filed separately went and amended it to joint because they needed to, well, they were trying to lower their tax burden and filing separately creates generally a little bit higher tax burden in some cases very high compared to separate. And a lot of people just didn't wanna mess with having to amend the tax return even though that's perfectly fine to do that. So many people have not been feeling the pain of 10 to 15% of their income in general on student loans like the past five years. So this is something that even if you're thinking, oh, I'm fine, I don't need to worry about this. Well, it's because it hasn't been assessed on you and it will be assessed on you if this bill passes and it will be assessed in a brutally high rate if it passes. And so the thing you gotta think about is, well, what did people do in like the 60s, 70s, when marginal rates were like much higher than they are today, what did they do to avoid some of this bite out of their taxable income? I promise this is not where I go into some spiel about invest like the billionaires, invest like Rockefeller, buy whole life insurance. Like, no, that's not what I'm, that's in my opinion, very not, a very bad idea. There's a lot of like insurance products that were sold heavily due to like the 30s, 40s, 50s and 60s and 70s having really high marginal rates. That's why we have so many of these like random, like, you know, insurance investing combo products because those were around for decades because they actually had a lot, you know, more of a place in people's accounts if you're dealing with an 80, 90% marginal rates, right? If you're dealing with 80 to 90% marginal rates, yeah, you probably wanna have some whole life insurance that's tax exempt on the dividends or something, right? But, you know, when tax rates went down a lot in the 80s, whole life kind of became really sort of a thing that needed to be sold instead of bought. And so that's why you pay, you know, insurance agents, huge commissions, 100% plus of the first year premium in a lot of cases. So if you ever wonder why do people believe in whole life so much, it's because if you've convinced somebody it's an investment, you pay $1,000 a month in premiums, $12,000 of premiums in the first year, that agent made $12,000 just for a couple hour conversation. You know, so, you know, that's an example of, you know, some people will pitch whole life for this. I would not do that. In my opinion, that's a bad idea. It's really a big moneymaker for the insurance company because the fees are so high. And, you know, the thing that I like to think about is, you know, they tell you things are guaranteed. Well, if it's guaranteed, can you trust the guarantee in a Great Depression? Probably not. So if you can't trust the guarantee in a Great Depression, then there's no real point in the protection. It's just a psychological thing. So you might as well take the risk yourself, have a diversified portfolio with stocks and bonds according to your risk tolerance, you know, and protect yourself and not rely on some insurance company to do it, right? And not pay the fees that they're charging to do it. And I have to say, you know, the usual disclaimer is we're SLP Wealth's SEC Registered Investment Advisor, you know, past performance, no guarantee of future results, you know, whatever they say, you know, make your own decisions. You know, all investments come with a risk of loss of principle, you know. So, you know, this is for entertainment purposes, all the usual disclosures, right? So you would wanna really be careful on your realized taxable income if you have this bill passed. I'm gonna give you a quick story, too, about, you know, why more people should be business owners. Like, I had this dentist who really wanted to buy townhouses. He was really jazzed about owning, you know, real estate, really wanted to do that. That was just kind of his jam, and he wanted to just buy a bunch of townhouses in his community, and he had a practice that was earning like 450K in profit a year, and he was only working like 20, 25 hours a week. It was kind of like the dream. It was one of those, you know, two, three hours away from the nearest international airport kind of places, more out of the way, right? And he wanted to spend a lot of his time in real estate investing, and I asked him, I said, well, you know, have you ever thought about opening a second location? And you're already having a lot of associates that work for you at this current location, and it's working out fine. Like, have you ever thought about opening up another vacation and maybe splitting your time a little bit between the two locations, instead of investing in the real estate for now? And he's like, you know, I hadn't really thought about that. I was like, is there a place that you would set it up? He's like, yeah, I can think of a few places that I would, and I said, well, what has a better chance of succeeding? You going and investing in a bunch of townhouses where your capital's competing with a bunch of like institutional and professional real estate investors' capital? Or if you go set up a second dental practice in an area that really needs the services in a place where you are protected from competition by state law, right? The barrier to entry is massively higher, and the competition is way lower, both in the capital that would invest in a dental practice in a place that needs it, but also in the ability to actually serve that area and provide the services and hire the team and to provide the skillset that's needed to maintain that area. So ROI for this person was much higher. If they would just open a second location, and they can write a lot of that off, right? You buy the building, you depreciate the building according to the corporate real estate depreciation schedule. You see if you can create any kind of like additional depreciation opportunities while you're driving between your practices with your car. I mean, you have additional income, so maybe you don't have a defined benefit plan. Maybe you set one up. You could do all kinds of stuff to drastically lower your taxable income while also dramatically accelerating your wealth growth. So my point in that is, a lot of people make all kinds of wrong decisions about business. I don't know a ton about business, but I know enough to be dangerous. I have obviously run multiple businesses through the SLP family of companies for several years, have gotten those businesses to like mid seven figures revenue fairly consistently. And so I've learned a lot from that. And one of the things that I'll say is being a business owner is very difficult, is very emotionally taxing. You have to be really careful about what your goals are, why you're doing it, what's the point of it. Are you getting into it because you want to make money? Are you getting into it because you want to have a good lifestyle? Are you getting it because you want flexibility? But I will say this, what I do and what a pizza owner does and what a clothing store owner in a college town does is way riskier than you starting your own business. They could pass this GOP bill and cap borrowing or something, or there could be a bad recession. And there's no guarantee that a single consulting business lasts for 30 years or something. There's a very high probability that any medical practice does. And a lot of times I ask people, what do you think the percent chance of failure is for the average dental, medical, vet practice, whatever. And they usually tell me, well, maybe like 40% of them fail. That's what the typical answer is. The real answer is about something like single digit percent of these practices fail. Usually it's because they set up in Northern New Jersey in a strip mall with eight other dental practices next door that all have to accept the worst PPOs imaginable because they can't afford to not accept them. And then they go bankrupt because the cost of the area is really high, the cost of labor is really high, and they're under tons of revenue pressure. So when practices fail, it's generally something like that. But the vast majority of them succeed and make their owners a lot wealthier because you're earning a much higher percent of collections than if you're just an employee. So I want to pitch you, listening to this, unless you're going for PSLF, or unless you're absolutely in love with being an employee, with a passion that's only been matched by Rose loving Jack and the Titanic, or Jack loving Rose, I don't remember. Whoever had the bigger romance or something. Unless you're that in love with your job, I don't know, I'm being weird now, right? Dad jokes. Unless you're that in love with your job, you should at least consider 1099 work or business owner work if this bill passes because the marginal rates will be so high. So something to think about. Another thing to think about too is wanting to create investments that are tax and IDR sensitive. So we have IDR sensitive portfolios that we've designed through SLP Wealth. What those are designed to do is put more of your growth stocks and more of your US stocks in your taxable brokerage account because the yields are lower. And then we put more of your international, more of your value stocks in retirement where the tax deferred gains and not taxing the dividends is very valuable. And by doing that, the overall allocation in the portfolio can be controlled for what you're targeting. But what you do is you create a much better tax situation by generating less taxable income in the place where it's taxed every year in the brokerage account and putting the tax inefficient assets in the retirement accounts. And that actually saves a non-negligible number of basis points. That's like 0.01% is one basis point. So you could save, I think, maybe something in the, I don't know, like 0.1 to 0.9%, something below 1% for sure. I don't think that you would save that much by allocating, like I mean that much. I don't think you'd save like 2% of the portfolio in taxes by like doing perfect allocation that way in your accounts. But you would save something significant. And if this bill passes, the hit that people will take is really significant in terms of the loss of performance that you'll incur in any kind of taxable account at all. So think about if you have a 63% tax rate because you're in New York, whatever, and you put your money in a 4% bank account and a savings account, you think that's good. Well, if you're losing 2 thirds of your income to taxes, you're only netting like 1.5% off the top of my head, I think, right? So like 1.5, is that something to get excited about? Well, what if you could put your money in a New York municipal money market fund that yielded three, for example? That would be twice as much interest yield. So this is the kind of stuff that people will have to think through if this bill passes to make their entire finances reflective of the reality that they are going to lose a huge 50 to 60% amount of their income, in most cases, to their student loan and tax payments. Which means that if the AGI is the thing you need to get low, everybody's gonna need to become an expert on lowering AGI. And I will say that one of the reasons we started a tax business, one of the reasons we launched a wealth planning business, I don't want to pretend like I'm a saint. Part of the reason was because I wanted to hedge against student loans going away, poof, during the Biden administration. I felt like, huh, maybe we should have another business in case this whole thing just goes away so I don't have to go be a stand-up comedian or something where I'd fail really badly at that. At least it has something to do, right? So that was one of the reasons. But also, frankly, one of the reasons too was just how impactful I thought it could be to get financial planning, tax planning crafted specifically for this avatar that listens to our podcast, the professional with six figures of student loans, right? And if this bill passes, the needs that that group is gonna have are going to be even more pronounced. And because they are capping student loans at 150K, if they pass this bill, the audience that has this problem is actually going to essentially mature over time and get smaller and smaller as people get forgiveness and things like that. So that's kind of cool because we're not a massive company, we're a decent-sized company, but we're a small business. And so we can continue helping you on this journey of wealth growth over time until you're done with your loans and hopefully carry you beyond that. Because one of the things I talk about with our team with SLP Wealth is we're existing for current and former borrowers. We wanna be here for folks once they've reached forgiveness to show you, hey, what can come next? Because before I was doing student loan planner stuff, I was a super weird 25-year-old that was early retired traveling to 40 countries and I was super into the fire movement and my first blog was all about fire and financial independence, retire early, and how everybody should take a sabbatical and retire earlier than they ever dreamed that they could and live the ideal life that they wanted to live. And then I met my wife who had this super structured path ahead of her with six figures of debt and I fell in love with her. And it's like, well, I wanna try to help her live the same lifestyle one day, but oh my gosh, she's got a lot of obstacles in her path. All this education she invested, all this debt, all this desire to achieve a certain level of success in someone's career. So there's all these things. I was like, oh, wow. Started student loan planner and now I get to help people like my wife live their ideal dream lives and not be punched in the mouth with this crazy high tax rate that people are gonna be suffering from if the bill passes. So a couple kind of updates. I don't know if we're gonna have that many spots available for tax clients this year. Just to be transparent, it is very difficult to hire someone that would meet the quality standards that we have for tax services. And so we're doing our best. If we can find somebody for tax, we'll announce that to first our wealth clients and then if we're having any space at all, we'd announce it to probably our consult clients next and then the broad email list if we have space. If we do, we'll probably try to announce it sometime in the mid-summer or early fall if we do have space. But we do have space for financial planning and specifically student loan aware financial planning and it is, in many cases, profession specific. Not in all cases, you know, we don't have expertise in every profession, but we have a lot of expertise on most professions that have student loans in particular. So if you wanted to try out financial planning at some point, you could do slpwealth.com slash book and that'll get you a discount if you use that link and then of course if you just want a student loan consult only and that's all you want, studentloanplanner.com slash book. Hope you think about what this means if this bill passes, you know, how do you reduce your taxable income? You know that your 2025 tax returns are gonna be scrutinized for calculating your IBR payment, so really look at your pre-tax retirement contributions and at least bump those up a lot if you possibly can and if you are making, you know, more than 200,000 a year, you definitely need to be thinking about your tax brackets and, you know, where things are going in terms of, you know, taxable savings accounts, tax-free money markets, you know, things like that. So if we can help, love to help, slpwealth.com slash book or if you want less help with just a student loan consult, studentloanplanner.com slash book and I probably should say SLP Wealth is a registered investment advisor with headquarters in Durham, North Carolina and thank you all for listening and until next time, I hope you have a great week. Thank you for listening to the Student Loan Planner podcast. Are you on the free Student Loan Planner email list? 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