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How to Handle Tough Conversations with Grace: Lessons from Crucial Conversations

Preface: “As much as others may need to change, or we may want them to change, the only person we can continually inspire, prod, and shape—with any degree of success—is the person in the mirror.” ― Kerry Patterson, Crucial Conversations Tools for Talking When Stakes Are High

How to Handle Tough Conversations with Grace: Lessons from Crucial Conversations

Have you ever walked away from a tough conversation wishing it had gone differently—wishing you’d said something better, or maybe said nothing at all?

We’ve all been there.

That’s why Crucial Conversations: Tools for Talking When Stakes Are High by Kerry Patterson, Joseph Grenny, Ron McMillan, and Al Switzler is such a timeless guide. It’s not about fancy communication theory—it’s about what to do when the stakes are high, emotions are intense, and the outcome really matters.

Whether it’s giving feedback at work, confronting a loved one, or resolving conflict with a friend, these are the moments that can either strengthen or strain relationships.

Defining a Crucial Conversation

A crucial conversation happens when stakes are high, opinions differ, and emotions run strong.

It might be a performance review, a family disagreement, or a tough decision between friends.

In those moments, most of us fall into one of two traps:

      • We go silent, avoiding the topic to keep the peace.

      • Or we go aggressive, pushing our point so hard that we shut others down.

Neither path works. The authors offer a third option—dialogue.

“Dialogue is the free flow of meaning between two or more people.”

When people feel safe enough to share honestly, understanding deepens, and solutions become wiser.

Core Skills for Navigating Difficult Conversations

1. Start with Heart

Before speaking, pause and ask:

“What do I really want—for me, for them, and for this relationship?”

When we focus on genuine goals rather than ego or emotion, our words carry calmness and respect. This shift often changes the entire tone of the conversation.

2. Learn to Look

Strong communicators watch for signs that the conversation is slipping.

Are people shutting down? Getting defensive? Are you?

Recognizing these cues early lets you pause, reset, and restore safety before things spiral.

3. Make It Safe

People open up only when they feel respected and understood.

If safety is lost, stop addressing the issue and repair the relationship first. Sometimes that means apologizing; other times it means clarifying intentions through “Contrasting”:

“I’m not trying to criticize you—I just want to understand what happened.”

A moment of empathy can reopen the entire discussion.

4. Master Your Stories

We don’t react to facts—we react to the stories we tell ourselves about them.

When someone interrupts, we might think, They don’t respect me. That story fuels anger.

The book challenges readers to separate facts from assumptions. Ask yourself:

      • What actually happened?

      • What story am I adding to it?

      • What else could be true?

It’s amazing how much calmer we become when we stop assuming the worst.

5. STATE Your Path

When it’s your turn to share your perspective, use the STATE model:

      • Share your facts

      • Tell your story

      • Ask for others’ views

      • Talk tentatively

      • Encourage testing

This approach balances confidence and humility. You express yourself clearly while showing you’re open to learning.

6. Explore Others’ Paths

Real communication goes both ways.

To keep the conversation open, you need to make space for others to talk too. The AMPP skills help with this:

      • Ask questions
      • Mirror their emotions (reflect what you see)
      • Paraphrase what they’re saying
      • Prime them if they’re quiet (take a guess at what they might be thinking)

When people sense you genuinely care about their perspective, they’re more likely to lower their guard and speak openly.

“When we stay curious instead of defensive, conversations stop being battles and start becoming bridges.”

7. Move to Action

Even the best conversations fall apart if they end without clear next steps.

The authors emphasize defining:

      • What will be done

      • Who will do it

      • By when, and

      • How you’ll follow up

Dialogue builds understanding; action builds results.

And as they note, participation doesn’t always equal consensus—what matters is that everyone’s voice has been heard.

Applying These Ideas Beyond Work

While many people read Crucial Conversations for professional growth, its principles are universal.

These tools help in marriages, friendships, and parenting just as much as in meetings and performance reviews.

Improving how we communicate takes practice. The authors suggest starting small:

“Pick one relationship or recurring conversation where you want to improve, and focus on one skill.”

Over time, you’ll notice yourself reacting less, listening more, and creating safer, more meaningful dialogue in every area of life.

Final Thoughts

Crucial Conversations reminds us that difficult discussions aren’t something to fear—they’re opportunities to grow, to connect, and to strengthen trust.

When we replace defensiveness with curiosity and courage, even the hardest talks can become turning points for better relationships.

So next time you feel your pulse quicken before a hard talk, take a breath and remember:

Start with heart. Listen with humility. Speak with respect.

You might be surprised at how much can change—with just one good conversation.

Understanding Reasonable Compensation for S-Corporations (Made Simple)

Preface: “Chase the vision, not the money; the money will end up following you.”  –Tony Hsieh

Understanding Reasonable Compensation for S-Corporations (Made Simple)

If you own an S-Corporation or plan to, there’s one important rule you need to know about: reasonable compensation. It might sound like a technical tax term, but it really just means: Are you paying yourself a fair salary for the work you do?

Why It’s a Big Deal

S-Corporations are special kinds of businesses where the company’s profits “pass through” to the owner’s personal tax return. This setup helps avoid some business taxes—but it also comes with IRS rules.

If you work in your S-Corp (not just own it), the IRS says you’re an employee, not just an owner. That means you have to take a real paycheck (with payroll taxes), not just profits or “distributions.” Why? Because wages get taxed differently from profits. And if the IRS sees that you’re only taking profits and no paycheck, they might hit you with taxes, penalties, and interest.

What Counts as “Reasonable”?

The IRS says reasonable compensation is the amount you would pay someone else to do your job in your business. So, if you’re doing full-time management, your pay should match what someone in that role would normally earn.

Here are some things the IRS looks at when deciding if your pay is reasonable:

      • What kind of work you do
      • How much time you spend working
      • Your skills and experience
      • What you pay other employees
      • What similar jobs pay at other businesses
      • How much profit your business makes

The idea is to make sure your salary isn’t too low (to avoid taxes) or too high (which could hurt your business financially).

Why Getting This Right Matters

If you underpay yourself, the IRS might say some of your profits should’ve been wages. That means:

      • You could owe back payroll taxes
      • You could face penalties and interest
      • You might even risk your S-Corp status

On the flip side, paying yourself too much means your business pays more employment tax than necessary.

So, What’s the Right Salary?

It depends on what you actually do for the business. For example:

      • If you work 40 hours a week and run day-to-day operations, you should get a market-rate salary.
      • If you only help out once in a while or offer advice, a smaller salary might make sense.

The goal is to find a fair balance that matches your role and how similar businesses pay.

How a CPA Can Help You

Getting reasonable compensation right can be tricky. That’s why it helps to work with a CPA They can:

      • Look at your role and what you do day to day
      • Compare what others in similar roles earn
      • Review your current pay and business profits
      • Help you figure out benefits and taxes
      • Keep records in case the IRS ever asks questions

Final Thoughts

Paying yourself fairly from an S-Corporation isn’t just about following the rules—it’s smart business. It helps you avoid IRS problems, pay the right taxes, and keep your business strong.

History of the Retirement Plan, Part V

Preface: “But a careful look at the historical record shows that the promise of American life came to be identified with social mobility only when more hopeful interpretations of opportunity had begun to fade, that the concept of social mobility embodies a fairly recent and sadly impoverished understanding of the ‘American Dream,’ and that its ascendancy, in our own time, measures the recession of the dream and not its fulfillment.” – Christopher Lasch, The Revolt of the Elites

History of the Retirement Plan, Part V

This is the fifth and final post in a series on the subject of retirement plans. The first four parts can be found here, here, here, and here. In this series, we have:

      • Briefly reviewed the history of government-defined retirement models in the United States,
      • Introduced the tax-deferred model, and
      • Explained the difference between Qualified plans and Individual Retirement Accounts (IRAs),
      • Discussed limits to deductibility of retirement contributions, and also
      • Tax treatment of non-deductible contributions, and introduced:
      • The Roth model, and even:
      • Roth conversions.

Why Retirement Accounts?

Now that you are more familiar with the variety of government-defined schemes that exist to help you save for retirement, you might also consider that you don’t actually need any special government-endorsed type of plan in order to accomplish this.

Any brokerage or savings account can be used to save for retirement. You can also invest in real estate or closely held businesses, anything that will retain its value or grow over time. Some people who are more worried about governmental collapse than about inflation will even withdraw all their money in cash or use it to buy gold and put it all in a safe. You can even put money in a cookie jar or hide it under the floorboards, although we don’t recommend this. As long as you can live within your means and not run through all of your savings before you retire, you have in some way saved for retirement.

And while these simpler and more direct savings methods don’t come with any special tax advantages, they also do not carry any of the restrictions and potential penalties to be found with specially designated retirement accounts.

Why Retirement Accounts Now?

At this point we might also ask why it was only in the 20th century that the government came to be so intimately involved in how we save for retirement, first with Social Security in 1935, and then in 1974 with ERISA and its later modifications.

One reason is that before the 20th century, people did not so often outlive their working years, and so “retirement” was not as much of an issue. Another is that, before the Industrial Revolution, more people tended to live in larger, multi-generational family units and had more children. Such a family structure was in effect a sort of retirement plan.

People were also more likely to own their own land, small businesses, and farms, what Karl Marx would call their “means of production.” These means, together with the families as mentioned earlier, likely meant that you might not see any drop in earnings just because you could no longer work.

In his book The Revolt of the Elites, Christopher Lasch suggests that some type of idealized self-sustaining middle-class existence such as this typified what was thought of as the “American Dream” during the first century and a half of American life and thought. Even if it was not attained or even attainable by most, it had still seemed realistic enough to endure as an ideal.

It was the movement of Americans to the cities and company towns in the late 19th century to seek wage employment that gave rise to the widespread indigent elderly population in the early 20th century, which grew to unbearable dimensions during the Great Depression and eventually led to the Social Security Act.

And it was at this time, according to Lasch, that the ideal of the yeoman farmer or craftsman faded to be replaced by the present-day association of the “American Dream” with a life of ease and plenty or even Cinderella-like rags-to-riches stories.

Lasch suggests the original purpose of American education was not “social mobility” as we conceive it now, but a strengthening of existing families and communities through both business and personal growth.

While the Social Security Act helped to alleviate the material suffering of those who could no longer work, it did not restore their status as members of an ownership class. Social Security did not owe its inspiration to earlier American ideals, but to European statist models pioneered in the 19th century by the Prussian philosopher G.W.F. Hegel and implemented in the German Empire by Kaiser Wilhelm III.

In the mid-20th century, this model was partially privatized as many employers and labor unions promised their workers pensions upon retirement. But by the second half of the century, it was clear that these promises were no better than the solvency of the employer or the political favors that labor muscle could leverage.

With ERISA, we have begun to come full circle, regaining control over our own “means of production” even if for many of us, this is only in the form of fractional ownership of publicly traded companies and government-issued debt. We can at least decide how we want to allocate our share of capital and can even vote by proxy in shareholder meetings. We at last regain the prospect of being middle-class again, not only in the sense of being middle-income, but of being masters of a fate, which, even if not high and majestic, is not subject to the whims and political fortunes of our betters.

Whither Retirement Accounts?

A society of small claims wealth-holders, especially those who hold income-producing assets that they understand and can beneficially manage, is qualitatively very different than a society of pensioned, socially secured wage earners.

The former is not only a society of free citizens who cannot be intimidated by a government or an oligopoly that can threaten to withhold subsidies. It is also a society of true stakeholders in the country itself who are bound to make more responsible decisions about their collective future. These will not tend to be the kind of people who will sell their freedoms and their legacy at the ballot box for promises of free beer, as Edmund Burke has warned. It is also a society where knowledge and skill can be acquired piecemeal in the Jeffersonian sense, without credentials and without the pretensions of an expert class, to be brought to bear directly on the development of what is effectively each individual’s portion of the national wealth to manage with his own unique talents.

If we consider family ownership of publicly traded stock as a rough measure of small-scale ownership of the national wealth, there is a case to be made that we are already now in this new kind of ownership society. According to the Federal Reserve, in 2022:

      • 58% of U.S. families (about 72 million families) held stock.
      • 21% of U.S. families (about 26 million families) directly held stock.

Yet in reality, most of this “privately” owned stock is in fact owned through funds concentrated in a very small group of very large fund companies. Of course, the fund companies do not own the funds, the individual account holders do, many of them through retirement accounts. Unfortunately, many owners of retirement accounts do not take much interest or an active role in managing their ownership positions.

If we consider fund control of equity Exchange Traded Funds (ETFs) as a rough measure of fund control of individually owned wealth, we might wonder to what extent individual account holders can meaningfully be said to own anything. How many even see themselves as “owners”? According to U.S. News & World Report, in 2024 74% of the Equity ETF Market is controlled by just three fund companies: Vanguard, BlackRock, and State Street Corp.

How strange this situation would seem to Thomas Jefferson. We might explain it to him thus: Most Americans still own their farms and trades, as it were. However, they are afraid to set foot on their own land or to touch their own work tools. They believe that only a gentry class of experts are qualified to do these things on their behalf.

Those of us who are lucky enough to still own farms and small businesses that we materially participate in and understand enough to pass them and the knowledge to run them on to our children, can still partake in the American Dream as Christopher Lasch describes. For the rest of us, it will be incumbent not only to save income earned from our chosen professions and invest it, but to take an active interest in our investments and be able to understand them well enough to pass them and the knowledge to manage them on to our children.

Understanding IRS Schedule A Itemized Deductions Under the OBBB Act

Preface: “The precise point at which a tax deduction becomes a ‘loophole’ or a tax incentive becomes a ‘subsidy for special interests’ is one of the great mysteries of politics.” – John Sununu

Understanding IRS Schedule A Itemized Deductions Under the OBBB Act

When filing taxes, taxpayers can choose between the standard deduction or itemized deductions on IRS Schedule A. The One Big Beautiful Bill (OBBB) Act, signed into law in 2025, made several important updates that impact itemized deductions for individuals. Below is a breakdown of the key changes and how they may affect your tax return.

State and Local Tax (SALT) Deduction Limit

      • From 2025 through 2029, the SALT deduction limit increases to $40,000 ($20,000 if married filing separately).
      • In 2025, the limit starts at $40,000 ($20,000 separate). It rises slightly each year by 1% until 2029.
      • However, the benefit phases out for high-income taxpayers:
        • If your modified adjusted gross income (AGI) exceeds $500,000 ($250,000 if separate), your deduction limit is reduced.
        • The reduction equals 30% of the excess income above the threshold, with at least a $10,000 ($5,000 if separate) reduction.
      • After 2029, the limit returns to $10,000 ($5,000 if separate) in 2030.

Home Mortgage Interest Deduction

      • The home mortgage interest deduction rules from the Tax Cuts and Jobs Act (TCJA) are made permanent.
      • You can deduct interest on up to $750,000 of acquisition debt ($375,000 if married filing separately).
      • The suspension of interest deductions on home equity debt also remains permanent.

Car Loan Interest Deduction

      • Typically, personal loan interest is not deductible.
      • Under the OBBB Act, for 2025–2028, you can deduct up to $10,000 per year of interest on loans for U.S.-assembled passenger vehicles.
      • The deduction phases out for taxpayers with AGI over $100,000 ($200,000 for joint filers).
      • Important: This deduction applies even if you don’t itemize.

Charitable Contribution Deductions

      • Starting in 2026, non-itemizers can deduct up to $1,000 ($2,000 for joint filers) of cash charitable contributions.
      • For those who itemize, a new 0.5% floor applies: your allowable deduction is reduced by 0.5% of your contribution base.
      • Example: If your contribution base is $100,000, $500 would be subtracted from your allowable deduction.

Personal Casualty and Theft Loss Deduction

      • Under the OBBB Act, the rules limiting deductions to federally declared disasters are made permanent.
      • The law expands this to include state-declared disasters such as floods, fires, or explosions recognized by a governor.
      • Losses tied to qualified disasters between 2019 and September 2025 are also covered.

Gambling Losses

      • Gambling losses can only offset gambling winnings.
      • The OBBB Act introduces a new restriction: starting after 2025, only 90% of wagering losses are deductible, and this deduction is limited to the amount of gains.
      • Example: If you win $10,000 and have $12,000 in losses, you can deduct only $9,000.

Moving Expenses

      • The TCJA suspended most moving expense deductions, and the OBBB Act makes this permanent.
      • Only active-duty military members and intelligence community employees (and their families) qualify for moving expense deductions or reimbursements.

Miscellaneous Itemized Deductions

      • The suspension of miscellaneous itemized deductions (like unreimbursed employee expenses) is now permanent.
      • Exception: Educator expenses are allowed above the line up to $300 (increasing with inflation). Starting after 2025, teachers can also itemize classroom expenses above this limit.

Phaseout of Itemized Deductions

      • A new overall limit applies to high-income taxpayers:
          • Itemized deductions are reduced by 2/37 of the lesser of:
            1. Total itemized deductions, or
            2. Taxable income above the 37% bracket threshold.
      • This applies after other limits (such as the SALT cap) are calculated.

Planning Note: Standard Deduction vs. Itemizing

      • The OBBB Act makes the standard deduction increase permanent:
        • $15,750 for single filers (2025)
        • $23,625 for heads of household
        • $31,500 for married filing jointly
      • The amounts adjust for inflation in future years.
      • You may still choose to itemize if your deductions (SALT, mortgage, charitable, etc.) are greater than the standard deduction.

Final Thoughts

The OBBB Act reshaped how taxpayers approach Schedule A deductions. For most, the higher standard deduction will remain the simpler choice. However, with changes such as the higher SALT cap, charitable deduction rules, and the new car loan interest deduction, some taxpayers may benefit from itemizing their deductions.

Careful planning is essential, especially for those near phase-out thresholds. Consider consulting a tax advisor to evaluate whether itemizing or taking the standard deduction will provide the best tax outcome under the new rules.

Book Report: This is Strategy: Make Better Plans by Seth Godin

Preface: “Strategy is the hard work of choosing what to do today to improve our tomorrow.” ― Seth Godin, This Is Strategy: Make Better Plans

Book Report: This is Strategy by Seth Godin

Introduction

Seth Godin is a well-known writer and thinker on marketing, leadership, and innovation. In his book This is Strategy: Make Better Plans, Godin explains how people and organizations can make smarter choices that lead to long-term success.

The book isn’t about complicated charts or formulas. Instead, it’s about changing how we think about planning, taking action, and growing in a world that is always changing. Godin’s main message is that success doesn’t come from working harder or faster. It comes from working smarter, asking better questions, and being willing to face discomfort.

The Problem with Default Thinking

Godin begins by pointing out a common problem: many people rush from task to task without making real progress. This leads to stress and burnout. The issue, he says, is that people often know what they want, but they don’t have a real strategy to get there.

Repeating the same actions over and over won’t work if the world has changed. Old methods may feel safe, but sticking to them is a trap. Strategy requires adapting to new realities.

Character as the Foundation of Strategy

One of Godin’s strongest points is the importance of character. He defines character as choosing your values over your instincts. In other words, strategy works best when it’s guided by values, even when those choices are hard.

For example, a strong leader doesn’t avoid tough conversations. They face them because those talks build trust and a stronger team. Godin believes that growth often comes from discomfort. Instead of running from it, he tells readers to seek it out because it helps us grow faster.

Learning Myths and Growth

Godin also challenges the popular idea of “learning styles.” He says people don’t really learn better in just one style—they simply have preferences that make them feel comfortable. Real growth comes when we move out of our comfort zones and try new ways to learn.

This lesson connects to strategy. Businesses can’t just stick to what’s familiar. A company that has always used one kind of marketing might need to explore new platforms or creative methods to grow.

Procrastination and Discomfort

Godin takes another common issue—procrastination—and reframes it. He argues that procrastination usually isn’t laziness. Instead, it’s avoiding the uncomfortable feelings tied to the task. Good strategists recognize this and face the discomfort rather than delay.

He quotes Ted Lasso: “If you’re comfortable, you’re doin’ it wrong.”

Tactics vs. Strategy

A key message in the book is the difference between tactics and strategy.

      • Tactics are small daily actions.
      • Strategy is the bigger picture—the “why” behind what you’re doing.

Without strategy, tactics are just busywork. Godin says many companies get caught up in tactics like running ads or chasing sales without answering bigger questions like:

      • Why are we doing this?
      • Where are we going?
      • Who are we serving?

Examples from the Book

      • Marketing a Product – Strategy is not about pushing out more ads. It’s about building trust and connection with customers. A loyal customer base is worth more than short-term sales.
      • Career Development – Strategy in your career may mean saying “no” to an easy job in order to grow skills in a harder one. Godin says we should look at our careers as a purposeful journey, not just a series of jobs.
      • Community Building – Strategy in a community is not about control. It’s about creating shared values and giving people a chance to be part of something bigger.

Practical Applications

Godin gives several ways to put his ideas into practice:

      1. Set Clear Values – Decide what matters most to you before making a plan.
      2. Seek Discomfort – Choose the option that helps you grow, even if it’s harder.
      3. Separate Tactics from Strategy – Ask yourself if your daily actions connect to your bigger plan.
      4. Test and Adapt – Strategies must change as situations change.
      5. Think Long-Term – Focus on sustainability and lasting impact, not just quick wins.

Key Lessons for Everyone

      • Growth Requires Change – Old methods won’t work forever.
      • Character Matters – Decisions guided by values build trust.
      • Comfort Can Hold You Back – Real growth happens in discomfort.
      • Keep It Simple – Strategy doesn’t need to be complicated, just clear.
      • Strategy Is for All – It’s not only for CEOs; anyone can use it in life or work.

Conclusion

Seth Godin’s This is Strategy is a powerful reminder that success isn’t about nonstop hustle. It’s about smart, values-based strategies that help us grow and make an impact.

For leaders, it’s a call to focus on long-term vision and culture instead of quick wins. For individuals, it’s encouragement to view life and career choices as part of a bigger picture.

In today’s world, where change is constant and distractions are everywhere, Godin’s advice is clear: strategy is more than a plan—it’s a way of living and leading.

History of the Retirement Plan, Part IV

Preface: “Some people shave before bathing.
         And about people who bathe before shaving they are scathing.
          While those who bathe before shaving,
          Well, they imply that those who shave before bathing are  misbehaving.”                – Ogden Nash

History of the Retirement Plan, Part IV

The following is the fourth in a series of blog posts on the subject of retirement plans. The first three installments can be found here, here, and here. In them we have:

    • Briefly reviewed the history of government-defined retirement models in the United States,
    • Introduced the tax-deferred model,
    • Explained the difference between Qualified plans and Individual Retirement Accounts (IRAs).
    • Discussed limits to deductibility of retirement contributions, and
    • Tax treatment of non-deductible contributions.
    • And introduced the Roth model.

In this fourth installment, we will conclude our discussion of Roth IRAs with a review of:

Roth Conversions

In the previous post in this series, we extolled the virtues of the Roth IRA and the advantages it offers account holders. In particular, it allows all money contributed to grow tax-free with no reporting requirement or tax due at any time. Given a sufficient time horizon, this advantage will more than compensate for the fact that contributions to Roth IRAs cannot be deducted from taxable income.

The Empire Strikes Back against Roth Account Holders

The government is aware of these rather unfair advantages that the Roth IRA gives to the taxpayer.  For this reason, they have placed limits on who can contribute to one. This is not a limit on deductibility of contributions, as exists with the traditional IRA, but a limit on the contribution itself.

For 2025, income limits are:

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The Roth Conversion

But have no fear. You can continue to contribute to your Roth no matter how high your AGI is. Yes. Really.

The way to do this legally is a provision, some would call it a loophole, known as a Roth conversion. A Roth conversion is really just a rollover, but one from a traditional to a Roth status.

Some people will tell you that a Roth conversion is taxable. They are mostly correct. Specifically, the pre-tax portion of a Roth conversion is taxable. This is true since going from pre-tax to after-tax by definition means that tax is being paid in the process. There is not a special tax that applies to Roth conversions. It is the same tax that you would pay on any qualified withdrawal of pre-tax money. This is because, as mentioned, a Roth account must always have an entirely after-tax status.

You must report the Roth conversion on Form 8606, where you will compute the taxable amount.

Example: You have a traditional IRA with $20,000 in it. All of it is pre-tax. You decide to convert it all into a Roth. You can do this, regardless of your AGI, and regardless of the fact that the annual contribution limit to a Roth in 2025 is $7,000. The only catch is that this conversion will be taxed at your marginal rate. If you are in the 22% tax bracket, you are looking at an additional $4,400 in income tax.

Example: As above, but $10,000 of your traditional IRA has an after-tax status. Your tax rate is the same as before, but since only the pre-tax amount is subject to tax, you owe only $2,200 on the conversion.

If the logic here sounds eerily similar to our discussion of Tax Treatment of Withdrawals from Mixed-Status IRAs in Part Two of this series, that is because it is essentially the same issue. Just as a withdrawal from a traditional IRA is taxed only on its pre-tax proportion, so too is a Roth conversion, and for the same reason. And the calculation of the pre-tax proportion is done on the same tax form, Form 8606.

Roth conversions are also subject to the same mistake people make where they assume they can avoid paying taxes by designating which monies to convert. When converting a traditional IRA, you must consider the total value of all traditional, SEP, and SIMPLE-IRAs (but not qualified plans).

Example: You have two traditional IRAs, each worth exactly $10,000. One is wholly pre-tax and the other is wholly after tax. You want to convert one of them to a Roth. “I will convert the after-tax one,” you think happily to yourself, “That way I will not owe any tax on the conversion.”

Unfortunately, that is not how the IRS is going to see things. They consider that you have a total IRA value of $20,000 with a total after-tax basis of $10,000. Therefore, exactly 50% ($10,000/ $20,000) of any withdrawal or conversion from either account is taxable. No more. No less.

Another piece of advice you will sometimes hear is to wait until after retirement to convert your IRA to a Roth because you will be in a lower tax bracket then. But consider that the longer you wait, the more your pre-tax earnings grow, which means more taxable income later, even if it is taxed at a lower rate. Converting earlier means all future growth will be after-tax, which means you will never pay tax on it no matter how much it grows. If you are planning on retiring next year and withdrawing all the money within say, five years, then it is worth waiting the year or two and doing the conversion after you retire. But if your time horizon to withdrawal is longer than that, it might be more advantageous to not postpone the conversion. Conversion also gets you out of the Required Minimum Distribution, since there is no RMD on Roths.

Unlike traditional IRA and Roth IRA contributions which have an annual limit, there is no limit to how much existing traditional money you can covert to a Roth in a single year. However, larger conversions of pre-tax money mean more taxable income. In some cases, a large conversion can even move you into a higher tax bracket for the year. For this reason, people sometimes stagger conversion of an IRA over a number of years. Luckily, there is no limit on the number of times you can do a conversion.

The Back-Door Roth Conversion

Some of you may be thinking: “My income is too high to contribute directly to a Roth IRA. I would love to convert money from a traditional IRA, but I don’t have a traditional IRA.”

You’re in luck. You don’t need to have a pre-existing traditional IRA. You can create a traditional IRA for the express purpose of contributing to it and immediately converting it. This is sometimes known as a “back-door Roth conversion.” That is not a technical term. There is no box for you to check when you open the account that says “back-door.” It is just an informal term used to mean that the traditional IRA was opened solely to convert future contributions to Roth status. You can contribute the limit to the traditional, up to $7,000 in 2025, immediately roll it over to a Roth, and it’s as if you contributed directly to the Roth, with the one key difference that it is not limited by your AGI.

As long as you don’t deduct your contribution to the traditional IRA from your taxable income, and there is no requirement that you must deduct it, the conversion is entirely non-taxable because the contributed amount is entirely after tax. Just make sure you document the conversion on Form 8606.

If you leave the money in the traditional IRA for long enough for it to earn any kind of interest or other earnings, the earnings portion will be taxable at the time of conversion.

Example: You open a traditional IRA and contribute $7,000 to it. You do not deduct any of this from your taxable income. The account earns $10 in interest. You convert the entire $7,010 to your Roth IRA.

Remember that the IRS considers your entire IRA value and your entire pre-tax basis. So in this case $10 of the conversion will be taxable at your marginal rate because that is 0.14% ($10/$7,010) of the $7,010 conversion.

Even if you convert only the $7,000 and leave $10 in the traditional IRA, $9.99 of the conversion will still be taxable at your marginal rate because that is 0.14% ($10/$7,010) of the $7,000 conversion.

So what happened to that missing one cent of taxable income? It remains with the traditional IRA. Another way to look at it is: we are partitioning out the $7,000 in after-tax basis so that 6990.01 is allocated to the conversion and $9.99 to the traditional IRA. So going forward, the traditional IRA as it continues to grow will have a $9.99 after-tax basis.

Bottom Line: the IRS will not allow you to avoid or decrease tax due on a conversion by choosing which part of the money you are converting.

Beware of Pre-Existing Traditional Accounts

When figuring the taxable proportion of a Roth conversion, the IRS requires that you consider the value of “all your traditional, traditional SEP, and traditional SIMPLE IRAs”. This makes the back-door conversion not a particularly good strategy for those with pre-existing IRA-type accounts.

Example: You open a traditional IRA and contribute $7,000 to it. You do not deduct any of this from your taxable income. You convert the entire $7,000 to your Roth IRA.

It turns out you had a SEP-IRA from a past job that is now worth $100,000, all pre-tax. So $6,542.06 your conversion will be taxable at your marginal rate because that is 93.46% ($100,000/$107,000) of the $7,000 conversion.

Note that this does not apply to Qualified plans, which can be ignored for purposes of Roth conversions.

If you have a pre-existing IRA with a large pre-tax component, you can increase the after-tax proportion each year by contributing after-tax amounts to it or to any other traditional IRA. However, any future earnings in these accounts will count towards the pre-tax component, because that is the nature of traditional IRAs.

See Part Two of this series for two possible strategies to directly decrease the pre-tax component of a traditional IRA. However, be forewarned that these strategies might not be applicable to all taxpayers.

OBBB Act: What the New Section 179 Expensing Limits Mean for Your Business

Preface: “I am indeed rich, since my income is superior to my expenses, and my expense is equal to my wishes.” – Edward Gibbon

OBBB Act: What the New Section 179 Expensing Limits Mean for Your Business

On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. Among many tax changes, one major update affects Section 179 expensing—a valuable tool for small and mid-sized businesses to write off equipment and property purchases.

What Is Section 179 Expensing?

Section 179 lets businesses deduct the cost of certain equipment, vehicles, and property right away, instead of depreciating it over many years. This makes it a powerful way to lower taxable income in the year you make a big investment.

Qualifying property generally includes:

    • New or used equipment
    • Business vehicles (with some limits, like SUVs)
    • Office furniture
    • Computers and software
    • Certain types of real property improvements

What Changed Under the OBBB Act?

Before the law, businesses could expense up to $1,250,000 in 2025, with deductions starting to phase out after $3,130,000 of total purchases.

The OBBB Act doubles those amounts starting in 2025:

    • New Section 179 Deduction Limit: $2.5 million
    • New Investment Cap: $4 million

These amounts will also be adjusted for inflation every year going forward.

The rules for SUVs didn’t change. For 2025, the maximum Section 179 deduction for an SUV is still $31,300.

Why This Matters

This change makes it much easier for businesses to deduct large investments. Whether you’re buying farm equipment, upgrading your factory machinery, or investing in technology, you may now expense the full cost up front.

Examples

Example 1 – A Small Business Upgrade
ABC Landscaping buys $150,000 of new trucks and mowers in 2025.

        • Before the law: Still fully deductible, because the old $1.25 million limit was plenty.
        • After the law: No change for them, but more room for growth if they expand further.

Example 2 – A Growing Manufacturer
XYZ Manufacturing spends $3.5 million on new machinery in 2025.

        • Before the law: They would have hit the $3.13 million investment cap, and their deduction would start phasing out.
        • After the law: With the new $4 million cap, they can deduct the entire $3.5 million under Section 179. This could save them over $700,000 in taxes (assuming a 20% tax rate).

Key Takeaway

The OBBB Act permanently raises Section 179 expensing limits, giving businesses greater ability to deduct equipment purchases up front. This is especially helpful for companies making multi-million-dollar investments.

Planning Note: If you’re considering large purchases of equipment or property, now is the time to plan ahead. The new limits make Section 179 one of the most powerful tax tools available for business growth.

New Tax Breaks Under the OBBB Act: Deductions for Tips and Overtime Pay

Preface: “Over deliver in all you do and soon you will be rewarded for the extra effort”. — Zig Ziglar

New Tax Breaks Under the OBBB Act: Deductions for Tips and Overtime Pay

On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. Among many tax changes, the Act introduces two new provisions designed to benefit employees in tip-based industries and those who regularly work overtime. Here’s what you need to know.

Qualified Tips Deduction

What It Is

Starting in 2025 and continuing through 2028, employees can claim a special deduction for qualified tips. This applies to anyone working in an occupation that customarily and regularly received tips on or before December 31, 2024 (for example, restaurant servers, bartenders, and hotel staff).

How Much Can You Deduct?

    • You can deduct up to $25,000 per year in qualified tips.
    • The deduction begins to phase out if your modified adjusted gross income (AGI) is above:
      • $150,000 (single filers)
      • $300,000 (married filing jointly)
    • It phases out completely at:
      • $400,000 (single filers)
      • $550,000 (joint filers).
  • Key Requirements
    • Your Social Security number must appear on your tax return.
    • Married taxpayers must file a joint return to claim the deduction.
    • If you’re self-employed and receive tips, the deduction only applies if your gross receipts are greater than your related business deductions.

Reporting Tips

    • Employers will report qualified tips on your W-2.
    • If tips are not reported by your employer, you may need to use Form 4137 to report them.
    • For nonemployees, tips must be reported on Form 1099-NEC or Form 1099-K.

Important Caution

Even though you can deduct tips for income tax purposes, the amounts are still subject to Social Security and Medicare taxes (FICA) and may also be subject to unemployment taxes (FUTA) for employers.

Qualified Overtime Pay Deduction

What It Is

From 2025 through 2028, individuals can also deduct qualified overtime pay. This deduction benefits employees who regularly work more than 40 hours a week under the rules of the Fair Labor Standards Act (FLSA).

How Much Can You Deduct?

    • Up to $12,500 per year for single filers.
    • Up to $25,000 per year for joint filers.
    • Phase-outs begin when AGI exceeds:
      • $150,000 (single)
      • $300,000 (joint)
    • The deduction is completely phased out at:
      • $275,000 (single)
      • $550,000 (joint)

What Counts as Overtime Pay?

“Qualified overtime compensation” is overtime that must be paid under FLSA rules:

    • At least 1.5 times your regular pay rate.
    • Applies to non-exempt employees working over 40 hours in a week.
    • Your regular pay rate includes most types of pay, but certain payments are excluded.

Reporting Overtime Pay

    • Employers must include qualified overtime pay on your W-2.
    • Nonemployees must receive reporting on a 1099-NEC.
    • For overtime earned before January 1, 2026, the IRS allows “reasonable methods” to estimate and report.
  • Eligibility Rules
    • The deduction is not allowed unless your Social Security number appears on your return.
    • Married couples filing separately are not eligible.

Why This Matters

These new deductions under the OBBB Act can create meaningful tax savings for employees in industries with significant tips or overtime. However, the rules are detailed, with income phase-outs and specific reporting requirements.

Need Help?

If you think you may qualify for the new tips or overtime deductions, or if you’d like to estimate the potential savings, please contact our office. We’d be glad to help you plan ahead and make the most of these new opportunities.

History of the Retirement Plan, Part III

Preface: “Go Roth, young man!” –  paraphrasing Horace Greeley

History of the Retirement Plan, Part III

The following is the third in a series of blog posts on the subject of retirement plans. The first two installments can be found here and here. In them we have:

    • Briefly reviewed the history of government-defined retirement models in the United States,
    • Introduced the tax-deferred model,
    • Explained the difference between Qualified plans and Individual Retirement Accounts (IRAs).
    • Discussed limits to deductibility of retirement contributions, and also
    • Tax treatment of non-deductible contributions.

In this third installment, we introduce:

The Roth model

The Story so Far

We have already seen how the Employee Retirement Income Security Act (ERISA) of 1974 introduced the tax-deferred model of retirement savings, including two kinds of tax-deferred accounts: job-based Qualified plans and Individual Retirement Accounts (IRAs). Contributions to these accounts are generally tax-deductible. Withdrawals are then taxed as ordinary income when withdrawn after retirement age is reached.

We have also seen how the government got cold feet about allowing taxpayers to deduct the full amount of their IRA contributions. This led to a complex situation in which the tax status of money within an IRA has to be tracked so that a taxability percentage can be computed upon withdrawal.

Enter Roth

Perhaps because of the complexities of having to track IRAs that contain both pre- and after-tax money, or perhaps because the government realized that they kind of liked the idea of taxing money when it was contributed instead of having to wait until people retired, the Taxpayer Relief Act of 1997 included a proposal that had been submitted by Senators William Roth of Delaware and Bob Packwood of Oregon. Perhaps because Roth’s was the shorter name, this new kind of account came to be named after him and not after Senator Packwood.

The main innovation of the Roth IRA is that all contributions have to be included in taxable income in the year they are contributed. No amount may be excluded or deducted. As a result, all money in a Roth IRA has an after-tax status.

Once the Roth IRA came into existence, the older kind of IRA came to be known as a “traditional IRA”. The two types of IRA are often contrasted as one where you pay taxes now vs. one where you pay taxes later. But the difference between the two models is far greater than just the timing of taxation.

Would you believe me if I told you that earnings on Roth contributions are never taxed? Well, it’s true. Really. NEVER. EVER. Not only that, but you don’t even have to report them. Once after-tax money is contributed to a Roth, you can keep growing and investing it in a parallel universe where taxes don’t exist.

Here is a schematic view:

The Case for Roth

The previous post in this series made the point that unless your time remaining to retirement is very short, the value of your IRA by retirement will likely be more than twice the amount of your total contributions. Therefore, even if you cannot deduct your IRA contributions, it is still worth contributing and paying the “higher rate” now so you can get the “lower rate” on the withdrawal of the earnings. How much more so is this then true of Roth IRAs, where the “lower rate” paid on withdrawals is always zero.

Let’s consider a conservative example of someone who contributes $1,000 a year for 30 years at a growth rate of 7% a year. This is a conservative assumption since between 1995-2025 the S&P 500 has averaged better than 10% a year. But even at 7%, you would more than triple your money with an ending balance of $101,073 after 30 years of contributing $1,000 per year.

Let’s assume a taxpayer who is in the 22% tax bracket while working and in the 10% tax bracket during retirement.

If this were a taxable account, your contributions would be made from after-tax money, corresponding to $6,600 ($1000 x 30 x 22%) in income tax paid on 30 years of contributions. In addition to this, tax would be due on the earnings that grew in the account each year. Taxed at your marginal rate, this would total $15,636.07 (($101,073 – $30,000) x 22%) paid as it is earned. In reality, tax on earnings might be slightly less because some of it would likely be eligible for the lower rate on qualified dividends and long-term capital gains.

If the account were a traditional IRA with no deductions taken, you would have paid the same $6,600 on contributions as with the taxable account. The earnings, however, would be taxed at the lower rate as they’re withdrawn during retirement: a total of $7,107.30 (($101,073 – $30,000) x 10%).

If the account were a traditional IRA with all possible deductions, the only tax paid would be on withdrawals during retirement: a total of $10,107.30 ($101,073 x 10%).

If this were a Roth IRA, you would pay nothing on earnings and nothing at withdrawal. The only tax involved would be that same $6,600 you paid on income that you used to make the contributions over 30 years.

Here is a graphic view:

Of course, the numbers here are arbitrary, but the dynamics should be clear. As your time horizon is longer and your annual contributions and percent growth are larger, these differences become more pronounced.

If you expect to retire into poverty to the extent that you will never be subject to tax on withdrawals from your IRA, then by all means open a traditional IRA so you can at least deduct some of your contributions. But if you expect to have taxable income in retirement, and especially if you can begin saving early in life, you are almost certainly better off with a Roth. And you are almost certainly better off contributing the maximum allowed to your Roth each year.

In the spirit of manifest destiny and the Homestead Act of 1862, we might even say: “Go Roth, young man, and grow up with your tax-free earnings!”

When considering the annual limit on contributions to IRAs, note that contributions to Roth IRAs are included for this purpose. You may contribute to any number of traditional and Roth IRA accounts in the same year, but total contributions may not exceed the annual limit, which is $7,000 in 2025 for taxpayers under 50.

Another advantage of the Roth is that because there is no tax after you retire, there is no required minimum distribution either.

The Roth Legacy

Not everyone will be won over by the mathematical arguments that favor the Roth IRA over the tax-deferred “traditional” IRA. But consider that since the introduction of Roth in 1997, its influence has only been growing, while “traditional” becomes more of a circumscribed concept.

Newer types of tax-advantaged savings vehicles such as 529 college plans, first introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), work according to the Roth model. Contributions are not deductible, but earnings are never taxed if the money is used for qualified purposes. This is essentially a Roth-type plan. The only difference is that the qualified purpose of a 529 account is education, not retirement. The only reason no one talks about a “Roth 529” is that there is no such thing as non-Roth 529.

Even Qualified plans available through employers are showing up in Roth variations. Many companies now offer a Roth 401(k). As you can imagine, this is just like a “traditional” 401(k) except that the contribution is not excluded from taxable income and the earnings are tax-free if not withdrawn before retirement.

Even state-employers are getting in on the Roth model and offering Roth-type Qualified plans for state employees. The general term for these is “Roth-designated accounts”. A “Roth-designated” portion of an account will work just like the non-Roth part except that the contributions are not excluded from taxable income and the earnings are tax-free if used for qualified purposes.

Rollovers and conversions between all these types of accounts should follow the same general principles as for more well-established types of account. There is as of yet not a lot of documentation on every possible type of rollover or conversion.

In the next post in this series, we will review conversions from traditional IRAs to Roth IRAs (“Roth conversions”).

New Tax Option for Selling Farmland Under the OBBB Act

Preface: “Agriculture is our wisest pursuit, because it will in the end contribute most to real wealth, good morals, and happiness.” – Thomas Jefferson

New Tax Option for Selling Farmland Under the OBBB Act

On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. Among its many changes, the OBBB Act includes a new tax break for farmers and landowners: if you sell qualified farmland to a qualified farmer, you can now choose to spread your tax payments over four years instead of paying the full amount all at once.

What This Means

If you qualify, you can pay the taxes from the sale in four equal annual installments—making it easier to manage cash flow after selling your farmland. This applies to sales or exchanges that happen in tax years starting after July 4, 2025.

How It Works

    1. You make an election on your tax return for the year you sell the land.
    2. The installment option only applies to the part of your tax bill related to the gain from the sale.
    3. The first payment is due on the normal due date of your return for that year (no extensions).
    4. The other three payments are due on the regular tax return due dates for the next three years.

What Counts as “Qualified Farmland”

The land must:

    • Be located in the United States.
    • Have been used by you for farming—or leased by you to a farmer—for almost all of the last 10 years before the sale.
    • Come with a legal agreement that it will stay as farmland for at least 10 years after the sale.
    • Tip: This election must be made when you file your return for the year of the sale—if you miss it, you can’t go back and choose it later. If you’re thinking about selling farmland, talk with your tax advisor well before the sale to see if you qualify and to plan ahead.

Who is a “Qualified Farmer”

  • The buyer must be an individual who is actively engaged in farming.

Selling farmland can lead to a large tax bill in one year for farming land owners. This new legislation lets you spread out that tax cost, giving you more flexibility to reinvest, save, or manage your cash flows.