SALT, 538s, and the Truth About Tax Brackets

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised we do speak with an honest tongue and may not be safe for work.

Jarrod Bridgeman:
Hello and welcome to the Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey Hires, my normal cohort, is not here today. He is in the Boston area. He's going to, along with some of his team members, he's heading to the Yankee Dental Congress out there, which is exciting for us, but right now in Indiana, it's negative degrees, and I hear in the Northeast this weekend, there may be another snow front coming.

Brodie Hough:
Oh, wonderful. I haven't seen that yet.

Jarrod Bridgeman:
Yeah, so I hope that you come out okay there. So instead, today I brought some amazing guests. You've heard from them before. We've got Kevin Rhoton, who is a MBA and a CPA, and we've got Brodie Hough. He's a CPA, as well. Good, thanks, guys, for coming. I don't know why I said good, but screw it. I'm going to leave it in there. Guys, welcome.

Kevin Rhoton:
Thanks for having us. Appreciate it.

Jarrod Bridgeman:
Kevin.

Kevin Rhoton:
What's up?

Jarrod Bridgeman:
It's always awesome to see your friendly face. I'm so glad you made it out of the snow-pocalypse. We're able to get to work.

Kevin Rhoton:
Oh, yeah.

Jarrod Bridgeman:
Because we can't do anything without you.

Kevin Rhoton:
It's like I get to use my snowblower about once a year.

Jarrod Bridgeman:
Yeah.

Kevin Rhoton:
Sometimes never.

Jarrod Bridgeman:
The weather's been so crazy here. I'm sure the rest of you and listening can attest to that, as well. On Christmas, it was like 64 degrees here in Indiana.

Brodie Hough:
Yeah, oh, yeah.

Kevin Rhoton:
Literally.

Jarrod Bridgeman:
Guys, as usual, you're our tax experts here, and we're going to be talking about our tax seasons, much like the seasons of the year. They come, they go, but they're always here, right? You always got to deal with taxes at some point.

Brodie Hough:
Yeah, it's always here.

Jarrod Bridgeman:
Yes.

Brodie Hough:
It's always coming.

Jarrod Bridgeman:
It's always something to think about. I got to prep. Okay, do I have to wear winter clothes? Do I need to get ready for spring? Do I need to plant the seeds for the future?

Kevin Rhoton:
There you go, whoa.

Jarrod Bridgeman:
Spring, dude, I have got something here. This is a new talking point.

Kevin Rhoton:
You got connections here. We get that. Death, taxes, and Jarrod, the three things you can count on.

Jarrod Bridgeman:
That's right.

Brodie Hough:
There you go.

Jarrod Bridgeman:
That's right. You know what? I walk down the street, people are like, "Look at that handsome young fella. He's somebody you can count on." No one's ever said any of those words to me. That's okay. But today, we're going to cover the 2025 filing and then things to watch out for throughout 2026. So to start off with, I know that the 2026 filing season starts to open on January 26th, correct?

Kevin Rhoton:
Yeah. With the big snowfall came, IRS is starting to accept tax returns. So people are getting their taxes done, and we're actually starting in on prepping. We have year-end financials reconciled.

Jarrod Bridgeman:
Right.

Kevin Rhoton:
Getting those and getting into business tax prep.

Jarrod Bridgeman:
So, guys, when people start getting onto prepping their taxes for the year, what are some of the issues or red flags that commonly pop up that you see out there?

Brodie Hough:
Oftentimes, practice owners will come to us, especially. I bet quite a few will come to Casey this week and talk about things that are being uncovered as their tax preparer is getting their taxes together. Sometimes they get blindsided with things, things that they missed in the prior year in 2025, just a lot of missed opportunities.

Jarrod Bridgeman:
And sometimes, if they finally missed it in 2025, it's sometimes a sign that you may have missed it in previous years, too.

Kevin Rhoton:
In '24 and '23, yeah.

Jarrod Bridgeman:
Right, right, right.

Kevin Rhoton:
Yeah. So yeah, this is when those things, and unfortunately, a lot of them, we're now in '26, and you just missed out on it. And so yeah, we wanted to-

Jarrod Bridgeman:
There are some things we've got a window. But if you don't have any of it, it's hard to go back.

Brodie Hough:
100%.

Jarrod Bridgeman:
As you guys know, I'm the layman here. I don't own my own business. I'm just a regular employee here, so my taxes tend to be relatively simple.

Brodie Hough:
Ordinary, bland.

Jarrod Bridgeman:
Ordinary bland. The things I would use to describe Brodie's outfits is his closet.

Brodie Hough:
That's probably fair, I guess. It's okay.

Jarrod Bridgeman:
But you guys are here to help me and help practice owners out there understand more of this world because it can get, in my opinion, confusing in terms of like, "Okay, I need this form to match this form to get on this form to get to this form." And things, I feel like, are in constant state of change, almost from year to year, depending on the state, depending on federal policies and stuff like that.

Kevin Rhoton:
Oh, yeah.

Jarrod Bridgeman:
What are some common tax season misconceptions out there? Stuff that you think that a dentist just is not understanding in the right way, or has been told one thing, and it's not really that.

Kevin Rhoton:
Yeah, I think one of them to mainly hit on is the tax bracket and how that whole tax bracket structure within the IRS works. So a lot of people misunderstand it. Basically, I'll get into detail, but basically, when they think they hit a new tax bracket, they think, boom, all of a sudden, I'm getting taxed. I'm going from 12% to 24%. The way our system is set up, you're going to get taxed higher at those higher dollar amounts, which makes sense.

So ultimately, the way I like to describe this is, it's almost like buckets, to start out, give a plain imagery here. That first bucket, which is 10%, which is your first, depending on how you file, it can be anywhere from 12,000 to 24,000. I don't need to get into all those details, but ultimately, that first 10% bracket, your money that goes into that bucket only gets taxed at 10%.

Jarrod Bridgeman:
Okay. So let's say you've hit enough brackets, you're on bracket level four, let's say, for example. Your first stage, or bucket number one, that amount of money is only getting taxed at stage one taxes, 10%.

Brodie Hough:
Correct.

Jarrod Bridgeman:
The next level up, which is like almost at 12,000, roughly, the money starting at that point is taxed at the higher rate.

Brodie Hough:
Correct.

Jarrod Bridgeman:
Your first 10 grand or so, whatever, is still being taxed at the lower percentage.

Brodie Hough:
Yeah. To make it easy, and these numbers aren't accurate, but just to throw some simplified numbers out there, let's say you're filing first $10,000 you earn are taxed at 10%. That's not the actual number, again, but just to make it simplified, that first $10,000 you earn gets put in a bucket, they take 10% of that. So they're taking $1,000 out of that bucket. Then they do not touch that bucket again, even if you earned over that $10,000, and then you hit the 12% bucket, and that's another $10,000. So your next $10,000. So $10,001 to $20,000 in total income will be taxed.

Jarrod Bridgeman:
And it keeps rolling in progressively.

Brodie Hough:
So every time you go up a bracket, you're not just automatically boom, all your income is taxed at the higher bracket.

Jarrod Bridgeman:
Right. So if you're making 300K, not all 300K's getting taxed at the same amount.

Brodie Hough:
Right, and I think that's a misconception with a lot of people is, "Oh, I got to make sure it's worth buying that vehicle, buying that big piece of equipment. Whatever it is, it's worth buying because I'm going to stay under that tax." I'm right at that line. If I get another additional $50,000, whatever it is, just throwing a number out there, deduction, it's staying in that lower bracket. "Oh, that's saving me thousands and thousands of dollars in taxes savings." Yes, it's giving you some tax savings, but it's not as big as some people want to portray it as, especially that car salesman that likes to come up in December to all the businesses and all that.

Jarrod Bridgeman:
Listen, you want to save some money? Spend some money.

Kevin Rhoton:
Yeah, exactly.

Jarrod Bridgeman:
Thank you for that. Why do you think this misunderstanding is so common? And that's not just among practice owners. I think that's a misunderstanding, a misconception, in general, for people.

Brodie Hough:
Oh, 100%. I think most people I talk to, clients and non-clients, they're like, "Oh wow, I didn't know it worked like that."

Jarrod Bridgeman:
Right.

Brodie Hough:
I just think it's never really talked about, honestly, is the main reason. Before I even went to school and going into college and all that, I thought the same way. I was like, because that's the way everyone talks about it now, and that's just the understanding for most common folk is that it's just, yep, whatever bracket you're in, that's what you're taxed at, and that's not how it works.

Jarrod Bridgeman:
This is one of the few things where I wish that there had been some kind of-

Kevin Rhoton:
High school class?

Jarrod Bridgeman:
Tax class in high school or something.

Brodie Hough:
Yes, 100%.

Jarrod Bridgeman:
Or a better economics class, or whatever you want to call it.

Kevin Rhoton:
Just a simple finance class, I think, is one of the most... I've been that's a huge proponent for is that, that needs to be added. Who needs history?

Jarrod Bridgeman:
We're going to relive it anyways.

Kevin Rhoton:
And for the most part, I believe the income tax is really the only place where the progressive tax system is in play. Most of our tax, sales taxes, things like that is a straight percent on everything.

Jarrod Bridgeman:
True, yep. People are so used to the other things that are pretty standard.

Brodie Hough:
It's just a flat percentage. There's no...

Kevin Rhoton:
On everything.

Brodie Hough:
If, and, buts about it.

Jarrod Bridgeman:
Gotcha, gotcha.

Kevin Rhoton:
And every now and then we'll actually even see business owners being, not really wanting to push their productivity or expand the business or bring.

Brodie Hough:
100%, yeah.

Jarrod Bridgeman:
Oh, because they're afraid to hit it.

Kevin Rhoton:
I'm comfortable. I'm in a good spot. If I try to make more money, I'm going to have to pay more taxes. It's kind of funny.

Jarrod Bridgeman:
That makes sense with that misconception because it's like, oh, if I produced only a hundred more grand, I might hit this new bracket. Oh my God, I'm going to get all my money taxed at 24%, but that's not the case.

Brodie Hough:
And the way these brackets are set up is you have a gradual jump, and then there's a huge jump from 24% to 32%. And that's where a lot of our business owners are starting to fall. That's when your typical CPA is starting to look at it for those business owners that have the extra business income coming in and are just not W2 wages and all that, not your bland return like you and me, Jarrod.

Jarrod Bridgeman:
That's right. That's right.

Kevin Rhoton:
I know.

Jarrod Bridgeman:
I get that childcare credit, but other than that.

Kevin Rhoton:
Right, yeah.

Brodie Hough:
Oh, that's fancy. Now you're getting fancy. Okay.

Jarrod Bridgeman:
Yeah, you know what?

Brodie Hough:
Look at you. Look at you.

Jarrod Bridgeman:
Yeah, you know what? Listen, I do all my stuff, and then I show Kevin and be like, "What'd I do wrong?"

Brodie Hough:
That's another $500 to Kevin, too.

Jarrod Bridgeman:
Oh, gosh. Oh, boy, he's really got me wrapped around his finger. Let me ask, in terms of some of the 2025 filing changes, are there any things that have been catching dentists off guard?

Kevin Rhoton:
Yeah. One thing, and this is actually to their benefit, is the expansion of the state and local tax deduction.

Jarrod Bridgeman:
Is there a better way? Is there a way to shorten that?

Kevin Rhoton:
Salt.

Brodie Hough:
Salt.

Jarrod Bridgeman:
Salt.

Brodie Hough:
Nice.

Kevin Rhoton:
Yep. The salt deduction, that's how we'll address it going forward.

Jarrod Bridgeman:
The state and local taxes.

Kevin Rhoton:
Local tax. Yeah, state local tax deduction has been expanded by the recent tax bill. I'll try not to get into the weeds, but on the Schedule A itemized deductions, it was limited to $10,000. So, one, you'd have to qualify to take the itemized deductions, but then, when you did, you're only limited to taking $10,000 in those taxes. So there's other things we won't get into. We've talked about in other podcasts passed through NAD tax that helps with that, but what this new tax legislation does is expand that 10,000 to now 40,000 that you can take in state and local taxes. And for practice owners, dentists, that's really beneficial.

Brodie Hough:
That's huge.

Jarrod Bridgeman:
That basically quadrupled it.

Kevin Rhoton:
Yeah.

Brodie Hough:
Yeah, absolutely. And to add to what Kevin's saying, that state, that number, that total number is all you're withholding from your W2 for the state income tax if your state has that. Any personal property taxes, so when you got to get your car renewed for the year, all that jazz, property taxes, which those are going skyrocket for a lot of people around the country, all of that gets built into that number. So a lot of the people we're working with going 40 plus K, 50K, you're seeing some up to 60K.

Jarrod Bridgeman:
10,000 was hit very quickly.

Brodie Hough:
Yeah. Oh, yeah. 10,000 is hit within the first two months of their W2 wages or something like, in the first quarter. So then, everything after that, you're getting no benefit out of. And so that's what this jump up from 10 to 40K is a huge benefit, potentially, for a lot of owners.

Jarrod Bridgeman:
So really, this is just another pretty nice chunk added for owners of stuff like that.

Brodie Hough:
Yeah.

Kevin Rhoton:
Yeah.

Jarrod Bridgeman:
Very cool. Very cool. And obviously, if you have questions about that, if you're not working with us already, contact your CPA. And if they were like, "What? What are you talking about? " Okay, he might be time to move on. Are there any tax breaks that practice owners might be able to take advantage of?

Brodie Hough:
Oh, yeah. So I think another one to worth hitting on, it's brand new with, again, the One Big Beautiful Bill coming, it's actually starting this year in 2025, is the auto loan interest deduction, which I think that's been getting some more and more buzz recently, ultimately. So there is some criteria to this. So ultimately, if you do qualify, you can get up to $10,000 of loan interest on your auto loan deducted on your tax return.

Jarrod Bridgeman:
Okay.

Brodie Hough:
So that's pretty nice. Stipulations are, has to be a brand new car. That does not mean new to you. That means a brand new car, zero on the mileage meter there, coming off the dealership. So that's worth noting. Final assembly has to be done in the US. So there's many websites that you can look up. I know the IRS, when you're looking this stuff up, you can look up your VIN number, and it'll tell you if it was assembled.

Jarrod Bridgeman:
So it doesn't need to be 100% USA made.

Brodie Hough:
Correct.

Jarrod Bridgeman:
But as long as it was put together.

Brodie Hough:
It was put together here in the good old US of A. And then another piece of the-

Jarrod Bridgeman:
It's a party in the USA.

Brodie Hough:
Party in the USA.

Jarrod Bridgeman:
Oh, yeah.

Kevin Rhoton:
Great song, oh yeah.

Jarrod Bridgeman:
You love you some Miley.

Kevin Rhoton:
Sure, sure. We'll say yes, I guess.

Jarrod Bridgeman:
Thank you. I'll mark it in the book.

Brodie Hough:
And then some other stipulations, too, are that it must be a personal vehicle. So we can't have business owners trying to put this on the business books.

Jarrod Bridgeman:
Got it.

Brodie Hough:
That's when it gets disqualified, as well. And always it has to be as of 1/1/2025 or later. And this goes all the way through 2028, too. I didn't say that at the beginning, too, but up to $10,000 per year in loan interest deducted. So there is a phase-out period. So basically, if your income is over 200,000 if you're married or 100,000 if you're single, you start to phase out of that. It's not right away. It doesn't get cut off right away, but you do start to phase out. I don't want to get into all the details of that, but ultimately, pretty much any vehicle is allowed under this as long as it's new, as long as it's not like a semi-truck. It has to be under 14,000 pounds if you want to get technical, but that's like your buses and semi-trucks, so I don't think anyone's buying that anyway, for personal.

Jarrod Bridgeman:
For personal use?

Kevin Rhoton:
Personal use. It's my personal bus.

Brodie Hough:
But it's nice little benefit there that-

Jarrod Bridgeman:
Could be easily missed.

Brodie Hough:
Yeah, and doesn't mean you need to go buy a new car, but if you are in the market to buy a new car.

Jarrod Bridgeman:
It's a nice little incentive.

Brodie Hough:
Or looking at a car. Yeah. You can look at this as a little extra tax savings on there, and you don't need to itemize for this deduction either. You can, if you are doing the standard deduction still, which that's getting to the nitty-gritty, too. So ultimately, it's there no matter what.

Jarrod Bridgeman:
Are there differences between the headline tax benefits and real-world tax savings?

Kevin Rhoton:
Definitely. While this is a good benefit, it needs to be within what your normal plans are.

Jarrod Bridgeman:
Right.

Kevin Rhoton:
Don't just go out and buy. Like we talk about with Section 179 or buying a piece of equipment for our practice owners. Don't just go out and do it. We actually do have a few clients that are in the market to upgrade. We've had a couple reach out to us thinking about upgrading their vehicle, and it's time. They've got quite a few years on theirs or miles or whatever. And like I said, don't let this be the reason you're going to get a new vehicle. It's an added benefit if you're going to do that already.

Brodie Hough:
Correct, right.

Jarrod Bridgeman:
If you don't need to spend the money, don't spend it.

Kevin Rhoton:
Correct. Yep.

Jarrod Bridgeman:
All right, guys, I'm sick and tired about talking about 2025. It's in the past. I'm over it. I'm the kind of guy that always looks forward. I never look back. You know what I mean? What's back behind there? Sadness. Disappointment.

Brodie Hough:
Nothing to remember or just try to learn from, I think.

Jarrod Bridgeman:
I blacked out most of the stuff in my life. It's fine. So let's look at 2026. Are there any kind of changes coming up that will be beneficial, potentially, for dentists?

Kevin Rhoton:
Absolutely. And this is not just for dentists, for anyone, but obviously, we'll be talking to our clients about this. We have quite a few that do a lot of charitable giving, and that's one item with 2026 that there will now be a deduction available for those that don't itemize. Used to be the charitable donations was if you take the standard deduction, you don't get any additional benefit from doing that for tax purposes.

Jarrod Bridgeman:
Right.

Kevin Rhoton:
If you do itemize, then some large limitations on that, but you could take your charitable donations. Well, now anyone can take that above-the-line deduction up to $1,000 for single filers and up to $2,000 for married couples. Now this will be for a year from now.

Jarrod Bridgeman:
2026.

Kevin Rhoton:
So when they do the 2026 tax returns.

Jarrod Bridgeman:
So it'll be any charitable donations taking place in 2026.

Kevin Rhoton:
In 2026.

Jarrod Bridgeman:
For the taxes that we'll be talking about next year.

Kevin Rhoton:
Right.

Jarrod Bridgeman:
Perfect.

Kevin Rhoton:
Exactly. But yeah, go ahead and start playing it. We like to use this time to, okay, let's start planning for this year so that-

Jarrod Bridgeman:
So with that 1,000 or 2,000 deduction there, because it's not really not itemized, what do you need to have to back that up?

Kevin Rhoton:
It is important, even really with any expenses, but make sure you are getting those letters, those receipts from those charitable organizations, just to back up those deductions, just to have in your back pocket. You don't have to provide them upfront to IRS, but if they do request backup information, you have that ready.

Jarrod Bridgeman:
With most things, just good record-keeping is pretty ideal.

Brodie Hough:
Absolutely.

Jarrod Bridgeman:
So just in case, you never know, in case you happen to be picked that year and they come knocking, are there any changes that affect dentists outside of the practice? Let's say maybe planning beyond the practice, in terms of family and long-term considerations.

Brodie Hough:
Oh, yeah. One of the other main points that came out of the One Big Beautiful Bill was what got keyed as Trump accounts for kids that are going to be born, well, born between 2025 and 2028. Ultimately, just to hit on that real quick, that is an extra benefit, and it is worth going for, at least for any citizen, US citizen born between 2025 and 2028, the federal government will give $1,000 contribution tax-free to that account. Ultimately, what this Trump account is, technically, it's a 538 account if you want to get technical. And I think that's why most people call it a Trump account because a 538 account doesn't sound as sexy overall.

Jarrod Bridgeman:
"Yo, bro, how's your 538?"

Brodie Hough:
Ultimately, what this account does is it almost works similar to what a 529 college account does. A lot of people will recognize that and understand it. Same concept, different delivery, I guess, is the way to put that overall. Ultimately, on top of the $1,000 federal contribution, you can contribute up to $5,000 personally for each account. You can only have one account per kid, and ultimately, when they turn 18, that turns into a traditional IRA account.

Jarrod Bridgeman:
And you can add to this Trump account on top?

Brodie Hough:
Correct.

Jarrod Bridgeman:
Got it.

Brodie Hough:
So ultimately, you can keep adding to this until they're 18. They're phrasing it as and trying to sell it as if your kid's working when they're younger, and they can throw it into this, and this is going to be invested, and it's going to start earning money, and then it's going to be thrown into a traditional IRA account. And the perk of doing this this way and using this account instead of throwing it into a typical IRA account or investment account is any money personally given up to that $5,000 each year is technically going to be tax-free. And the fact that when you take it out of that traditional IRA, normally, when you take that out, it is taxed. That initial part given of that 5,000 each year will not be taxed.

Jarrod Bridgeman:
Oh, interesting.

Brodie Hough:
Now, any earnings on the account will be, when you pull that out, are going to get taxed. So that's one stipulation there that's worth noting. And then also-

Jarrod Bridgeman:
But the dollar-for-dollar amount you put in?

Brodie Hough:
Correct. Practices, businesses can also contribute to this account, employers can contribute to this account. That is one stipulation. They can also contribute up to 5,000 per year. Those are going to be taxed.

Kevin Rhoton:
Probably, to wrap this one up is the advice that we would have is go ahead and take advantage of that $1,000 bonus contribution from the federal government, but don't just automatically start contributing to it. There's a lot of other vehicles, maybe, and I think it's a very specialized personal situation that what's the best avenue? Should I contribute to this further? Should I use something like an UTMA or even a taxable investment account? There's so many things, especially with our practice owners, that we advise on. But yeah, take advantage of the free stuff and then do an in-depth analysis with your financial planner.

Jarrod Bridgeman:
How should dentists use this tax season as more than just a filing obligation?

Kevin Rhoton:
If you are sitting down with your tax preparer or on the phone with them, and you see a lot of these, "Oh, we missed that." It's too late to take advantage of that. If you ask them about some of these things, or if you're thinking, "Oh, I wish I'd known that before year-end so I could take advantage of it," then I think it's worth the effort to start talking with your financial planner, or better yet, check in with us. Warning signs that your current level of service is subpar for what you need.

Jarrod Bridgeman:
Yeah. Guys, thank you so much for stopping by. Folks, if you want to learn more about Four Quadrants, if you want to learn more about taxes and planning and all that kind of stuff, we're going to be in cities all over the country this year. In fact, next week we are going to be in Arkansas. We're going to be in Rogers and Little Rock. After that, we're going to be in Birmingham and Fair Hope, Alabama. We're going to Bozeman, Montana. Kevin, Brodie, thank you so much for stopping by.

Folks, visit fourquadrantsadvisory.com. We got our events up there. We've got forms; if you want to fill it out and have someone call and chat with you about your practice, please feel free to. Guys, again, thank you so much.

Kevin Rhoton:
Thank you.

Brodie Hough:
Thank you, Jarrod. I appreciate it.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why, year after year, they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.