There are aspects of your retirement planning that you can’t control, but are you controlling the controllable – like your taxes in retirement? The White House estimates that our collective individual income tax will add up to $2.3 trillion this year! How much of that will you be paying? Learn from Joe Anderson, CFP®, and Big Al Clopine, CPA, the 10 tax-cutting moves to make now – so you can send less of your money to the IRS.
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Tax-Cutting Moves:
- 2023 Tax Deductions & Tax Brackets
- Contribution Limits
- Top 10 Tax-Cutting Moves
Important Points:
- 00:00 – Intro
- 01:54 – Tax Overview
- 04:06 – 2023 Tax Deductions
- 05:38 – 2023 Tax Brackets
- 07:34 – 2023 Retirement Contribution Limits
- 08:36 – Move 1: Max-Out Retirement Contributions
- 08:50 – Move 2: Solo 401(k) for Self-Employed
- 09:17 – Top 10 Tax Tips – FREE Guide
- 07:40 – True/False: Enrolling in a Health Savings Account (HSA) can reduce your 2023 taxes. [True]
- 10:30 – Move 3: HSA
- 11:19 – Move 4: Tax Loss Harvesting
- 13:10 – Move 5: Tax Gain Harvesting
- 14:23 – Move 6: Roth Conversion
- 15:56 – Move 7: Backdoor Roth
- 16:47 – Move 8: Donor-Advised Fund
- 17:06 – Top 10 Tax Tips – FREE Guide
- 17:46 – True/False: Tax credits are generally more valuable than tax deductions. [True]
- 18:24 – Move 9: Take Advantage of Tax Credits
- 18:38 – Move 10: Net Unrealized Appreciation (NUA)
- 19:30 – Ask Joe & Al: What happens if I don’t pay my taxes on time? – Lenny, Nevada
- 22:28 – Pure Takeaway
- 22:54 – Top 10 Tax Tips – FREE Guide
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Transcript:
Joe: In your overall retirement strategy, there’s things that you can control, and there’s things that you cannot control. Are you controlling the controllable? Stick around and find out what I’m talking about. The show’s called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors, and I’m with my partner, Big Al Clopine.
Al: How you doing?
Joe: Good. How are you, Big Al?
Al: Doing great.
Joe: Hey, we’re talking about things that you can control, and one of the biggest levers when you’re in retirement, it’s taxes. Are you controlling the amount of money that you pay in tax? Let’s take a look. It doesn’t seem like it. American people estimated individual income taxes in 2023 is $2,300,000,000,000. $2,300,000,000,000. That we talk about billions and trillions. Yes, it’s a big number, but let me put it in perspective. Let’s say you had a $1,000,000,000. You had $1,000,000,000 bills, right? Those dollar bills laid out could go around the earth 4 times. That’s how big of $1,000,000,000 is. Now, let’s go to $1,000,000,000,000. You lay out those dollar bills. It’s going to go to the sun. We’re talking $2,000,000,000,000 in taxes and we’re going to make it back. That’s what we’re talking about in regards to how much money that we’re paying in taxes. Let’s see if we can figure out some strategies to put some of those dollars back into your pockets versus Uncle Sam. That’s today’s financial focus. All right, let’s take a look. All sorts of different types of taxes, property tax, vehicle tax, and sales tax. The biggest is of course ordinary income tax. The average American is paying $533,000 in taxes, in total taxes over their lifetime. Is there a way that you could put some of those dollars in your pocket? I think you can, but let’s bring in Big Al to show us the way.
Al: All right. Tax tips today. How to save on taxes. It’s important. We’re all spending more than $500,000 in taxes over a lifetime. Some of us are spending a lot more. How do you spend less in taxes? Well, that’s what we’re going to talk about on this show. So we’ll kind of start with some of the basics, right? Deductions, brackets, credits, things like that. Then we’ll get into contribution limits for things you can deduct, like pension plans and donations, things of that sort. And then we’re gonna get into a little bit more sophisticated tax cutting moves that you can use any time, any year, throughout the year, year-end, whatever it may be. These are ways to significantly save your taxes. And Joe, this is a show that is near and dear to my heart because it’s taxes.
Joe: Yeah. Being a CPA, you know, a lot of the strategies that we’re talking about today you can use in any other year. So if you watch this show 3 years from now, you can still use it. But let’s say we’re in 2023, April 15th, 2024. So April 15th is the day when taxes are due. You can file an extension, October. So when you look at people filing an extension, Al, do you think these are more subject to audit, or would you say that people that file in April are more subject to audit?
Al: Great question, and without a great answer. Because there’s different trains of thought. Some people think you get the returns early, the IRS gets the quota, they’re not going to audit you as much when you extend. You know, that’s probably a more pervasive thought. But other people think that extended returns tend to be more complicated, they might get audited more. Who knows? But here’s something you should know.
Anyone can extend their tax return. It’s no big deal, but you cannot extend your tax payment. If you owe taxes on April 15th, you’ve got to make that payment or that estimated payment with your extension. You’ll file the return later, but you’ve got to make that payment in April.
2023 Tax Deductions and Tax Brackets
Joe: A couple of things that you need to consider when you’re looking at taxes is that you have a standard deduction, you have your gross income, and you can deduct certain things, right, to get to a taxable income, and that’s actually what you’re taxed on. So you have the standard deduction, or you can itemize. The tax law changed a few years ago to increase the overall standard deduction to make doing our taxes a little bit easier, so you don’t have to look at, did I have medical expenses, what did I pay in tax, what is my mortgage interest, things like that. So let’s increase the overall standard deduction and here’s what the deductions are for 2023. So single or married filing separately, it’s around $14,000. So you can take $14,000 right off the top to get to your taxable income. Married filing jointly is around $30,000. Head of household, it’s $20,800. So looking at these standard deductions is important to figure out, hey, if I’m giving a lot to charity, I’m probably not going to fill out the standard. I might itemize, but you need to know what your standard deduction is to figure out what strategy you want to use from an itemized standpoint.
Al: Yeah, I think that’s right. And so it is really the higher the two, itemized deductions or standard deduction, whichever is higher is the one that you get to take. Now there’s less itemized deductions, but if you have a lot of mortgage interests and a lot of charity and/or a lot of charity, then you may itemize, that may be better. Here’s another way to think about this too. So $14,000 was roughly the itemized deduction- I mean, the standard deduction for single. If you make less than that and you’re single, you probably don’t owe any tax. You probably don’t even have to file unless you have self-employment income.
Joe: Looking at the overall tax brackets, right now, we have a 10%, 12%, 22%, 24% and 32% and there’s a few, more 36%. But these brackets are going up in a few years. So it’s understanding where you fall. There’s something that’s called a marginal rate and there’s something that’s called an effective rate. And Al, I think people get a little bit confused because if I’m in the 22% tax bracket, let’s say I file a joint return and that number is $89,000 to $190,000. So let’s say I make $100,000, so I’m in the 22% tax bracket, but 100% of that $100,000 is not taxed at 22%.
Just the amount from $89,451 to $100,000 is taxed at that 22%.
Al: Yeah. I’m glad you brought that up because that’s, that’s confusing for a lot of people. A lot of people think that if they go $1 into the next bracket their whole rate changes, but that’s not true. You get the 10% rate, you get the 12% rate, 22% rate, and so on. So if you just barely get into the next bracket, then you’ll just pay that higher tax on that barely amount that you got there.
Joe: Yeah. And looking at 2026, the 10% stays the same. 12% is gonna go back to 15%, 22% go back to 25%, 24% goes to 28%. That should be a 5. So when you’re looking at tax planning over the next couple of years, understanding where you fall on this bracket is going to be very important. Because it’s going to decide do I want to increase income to take advantage of these lower rates because they’re going up or am I in a pretty high bracket where I want to reduce my income by creating other deductions? So going to these tables and figuring out where you fall is going to determine what type of tax strategy is important for you.
Contribution Limits
Al: Yeah, no question. Let’s talk a few tax strategies. So one is your 401(k)s, your IRAs. So how much can you put in, at least for 2023? You can put in $22,500, and that’s from your employer. $7500 is the catch up if you’re 50 and older, so actually $30,000 total. For an IRA it’s $6500, if you’re over 50, then it’s $7500. In terms of 401(k)s you got to do that by year-end. In terms of IRAs, you can do it by April 15th of the following year.
Joe: Yeah, so if I’m looking at Roth versus traditional, it’s going to depend on what my tax bracket is. Or you might do a combination of both. So going back to this chart here, it’s looking at, hey, maybe I’m in the 22% tax bracket by a few thousand dollars. Well, I could put a few thousand dollars in the pre-tax component of my 401(k) plan and then switch everything back to Roth. So then I’m only really paying 12% taxes on that Roth IRA contribution. So understanding again, brackets is going to determine just kind of a simple approach to how you’re saving into your overall 401(k) plans. Some people go into Roth when they’re in a really high tax bracket. Does that make sense? Maybe it does, maybe it doesn’t, or they’re going pre-tax and they’re in a pretty low tax bracket. So understanding again, what bracket you’re in is going to look at just really basic type of planning.
Al: So the tip here is to max out your contributions. Whether you do a pre-tax and get the tax deduction or post-tax, like a Roth IRA, depends upon your tax bracket and your own circumstances, but take advantage of those plans. Also, take advantage of the match.
Joe: And if you are self-employed, you can do a solo 401(k). A lot of small business owners doesn’t understand or know that this plan actually exists. So if I’m a sole proprietor. And I’ve- a lot of you have a SEP plan, but there is the solo 401(k) plan where it’s a 401(k) plan where you have the same deferrals and it could be dollar for dollar versus a percentage of your overall profits. So 401(k) plan contributions or solo 401(k) plan contributions if you’re a business owner. If you need help with any of this, you can go to our website, YourMoneyYourWealth.com. Click on that special offer this week. It’s our Top 10 Tax Tips. Go to YourMoneyYourWealth.com. Click on that special offer. We gotta take a break. We’ll be back in just a second.
Joe: Hey, welcome back to the show show’s called Your Money, Your Wealth®, Joe Anderson, Big Al, talking Tax Tips. Go to our website, YourMoneyYourWealth.com. Click on the special offer this week. It’s our Top 10 Tax Tips. Top 10 Tax Tips. Say that 10 times real quick. Let’s see how you did on the True/False question.
Top 10 Tax-Cutting Moves
Al: Enrolling in a health savings account, HSA, can reduce your 2023 taxes. True or false? Well, that is true. HSA Plan, health savings account type of plan, it’s when you have a high deductible health insurance plan. You can put money into this special account, a little over $3000 individual, $6000 for a couple, a little bit more if you’re over 50 or 55, I should say. But that’s a tax deduction. It comes right out of your income. And the money can grow tax-free, and as long as you use it for medical purposes, you never pay tax on that.
Joe: Yeah, there’s an FSA, which I think a lot of people are familiar with. And there’s an HSA. So HSA is a health savings account. FSA is a flexible spending account. Let’s talk about an HSA real quick. So you can max this thing out. You reduce your taxes. So you get a tax deduction. right? You contribute via payroll deduction and then it goes into an investment. The investment can continue to grow. But the best part about this is that that money comes out 100% tax-free. So you get the triple whammy here. You get a deduction, it grows tax-deferred, and when you pull it out 100% tax-free if you qualify with a distribution.
Al: Even better than a Roth IRA, in that sense, as long as it’s used for medical, you get a tax deduction unlike a Roth, and it’s still tax-free as long as you use it for medical purposes.
Joe: Alright, let’s go to tax loss harvesting. So this is for individuals that have securities in a brokerage account, not a retirement account. So the markets have been pretty volatile over the last few years, and they will continue to be volatile in the next several years. So understanding this is key because if I have dollars that are in a taxable account, and if that grows, so let’s say you buy a stock for $10, it grows to $20, and you sell that stock over- as long as you hold it over a year, you’re subject to a capital gain tax on that $10 of growth. Okay, so how can you reduce that overall taxes? Well, maybe every investment that you have in your portfolio didn’t grow by that much. Maybe some of the investments that you have had gone down by that much. Well, if you sell those investments at a loss, that loss will offset this gain dollar for dollar.
Al: Yeah, that’s such a good strategy. And here’s a tip for you as well. Don’t just sell enough losses to cover your gains. Sell more losses because first of all, you can take $3000 extra against ordinary income. And then if you have still more losses, which is a good thing in terms of taxes, right, then you can carry those over and use them in future years against future gains.
Joe: Yeah, looking at the overall market, it goes up and it goes down, right? So it’s not like you buy really bad investments to get a tax deduction. What we’re telling you is that really good investments sometimes are volatile. And sometimes those investments go down. So if I have a mutual fund, ABC, and it goes down a little bit. I can sell that mutual fund, right, because it’s down in value, I get a tax break. But I don’t want to sell and go into cash. I want to sell and buy something similar. I still want to be in the overall market. So then I sell ABC fund and buy XYZ. XYZ goes up, so I still participate in the market growth when the market recovered. But what I did is I utilized that loss. Another interesting thing is that there’s something that’s called tax gain harvesting, Big Al.
Al: Yeah, no question. And that’s actually not used as much. But this is if you’re in the lower tax brackets, 10% bracket, 12% bracket, a little over $90,000 for a married couple, half of that for single. So if you’re below that, in terms of taxable income, you can actually harvest some gains and pay zero tax. That’s right. Zero tax up to the top of that bracket. So let’s say, let’s say you’re married. You got $80,000 of taxable income. You actually could sell $10,000 plus of gain, pay zero tax to get to the top of that 12% bracket. If you go above that, yeah, you’ll pay the capital gains rate, which is 15%. But it’s a great deal. If you want to take some gains off the table, rebalance, you need money for other purposes, you take the money without paying current tax.
Joe: Yeah, another strategy using that same thought is that you really enjoy the stock. So you could sell that stock and rebuy it.
All you’re doing is increasing your overall basis. So if you had a low basis and you have a really low tax year, you could sell that stock to the top of that 12% tax bracket, you pay no tax on it and you could go ahead and rebuy it. There’s no wash sale rule on the tax gain harvesting as there is on the tax loss harvesting.
Number 6- Roth conversions. Now what the heck is that? So Roth IRAs are an after-tax pool of money that you can invest in basically anything that you want. So mutual funds, stocks, bonds, cash, CDs, whatever. The difference between a Roth IRA and a traditional IRA, of course, is a Roth IRA grows 100% tax-free. So you can make contributions each year into this account. Another way to get money into a Roth is taking dollars from a tax-deferred, a retirement account, and converting it into a Roth IRA. You do have to pay tax on that conversion. So again, looking at your tax bracket. What bracket are you in will determine potentially your conversion strategy. So if I look and maybe I’m right in the middle of that 22% tax bracket, Well, it might make sense for me to fill up that 22% tax bracket. So that means I’m taking dollars from my retirement account and filling up that Roth bucket to the top of that 22%. I pay 22% in tax. But then all of these buckets here are going to grow forever tax-free for me.
Al: Yeah, it’s a good point. A lot of people miss this one. And so here you have to do a little calculations, right? So you need to take a look at what tax bracket you’ll be in retirement. Of course, if you’re in a much lower bracket in retirement, you don’t necessarily do a Roth conversion now. But let’s say you’ll be in the same or higher bracket. You really may want to do that conversion. You’re going to have to pay the tax anyway. You prepay it while you’re in a lower bracket. And by the way, tax brackets are lower. They’re supposed to go back up in 2026. So remember that.
Joe: If you do not qualify for a standard Roth IRA contribution, everyone can do a conversion, no matter what your adjusted gross income is or modified adjusted gross income, you can contribute to an IRA, right? So now I’m going to put money into my IRA account, right? Even if I’m fully funding a 401(k). If I make $1,000,000 a year, I can still open up an IRA. The only difference is I cannot take a tax deduction if my income is over certain thresholds. So depending on what year it is, you just want to understand what those thresholds are. So I’m going to contribute to the traditional IRA, I don’t get a tax deduction, so it’s an after-tax contribution, and then I’m going to convert it to my Roth. One of the things that you’ve got to look out for is that pro rata rule.
Al: Yeah, no question, that can be a great one for people, and that’s that $6500, or $7500 if you’re 50 and older. Finally, you know, we’re talking about adding more income to try to reposition your assets, how about creating deductions? Maybe you did a Roth conversion. Now you want a tax deduction. How about a donor advised fund? How about charity, donor advised fund? You put money into an account, right? It sits in that account and goes to charities of your choices in the year that you want to. But the year you put the money in, you get a tax deduction.
Joe: Hey, if you want help, you know where to go. YourMoneyYourWealth.com. Click on our Top 10 Tax Tips, Top 10 Tax Tips, YourMoneyYourWealth.com. Click on it, download it right there in the comfort of your own home and start saving money on some taxes. We got to take another break. We got a couple more tax tips for you. Then we’re going to reverse the show to you and answer some of your questions. The show’s called Your Money, Your Wealth® and we’ll be right back.
Joe: Hey, welcome back. The show’s called Your Money, Your Wealth®. My name’s Joe Anderson. I am with Alan Clopine. He’s a CPA. I’m a CERTIFIED FINANCIAL PLANNER™. Thanks for tuning in. Once again, go to YourMoneyYourWealth.com and click on our Tax Tips to start saving money on tax. But before we get into the last couple, let’s see how you did on that True/False.
Al: Tax credits are generally more valuable than tax deductions. True or false? Absolutely true. I’d much rather have a credit than a tax deduction. Why is that, Joe?
Joe: A tax credit is dollar for dollar right off of the tax bill. If I owe $10,000 in taxes, if I have $1000 tax credit, well, the amount of money that I owe to the IRS is $9000. A tax deduction is just going to be a reduction of that taxable income. So if I have a $1000 deduction, it’s going to depend on what tax bracket I’m in. If I’m in that 22% tax bracket, well that’s a $220 saving, 22% of that $1000. So there’s all sorts of different types of tax credits that people can qualify for. Let’s get into those.
Al: Yeah, and I think a lot of people know about deductions, but not so much as talked about with credit. So, one you may know about already is the foreign income tax credit. Right, which is if you have foreign income and you pay taxes to another country, you get a credit. But there’s probably ones that you may not know of. Not all of these apply to everybody, but just very quickly, earned income credit, that’s when you have a salary, you have a child, but your income is at a low enough level, you get a credit. That can be actually a really good one. Child and learning credit, that has to do with you have a kid under 17, couple thousand dollars depending upon your income level. Education credits are available. How about clean energy? Electric car credits, as well as savers credits. The Solar credit is still 30% of what you pay. So that’s a big deal without a cap. So it could be a lot of dollars. The electric car credit is up to $7500 depending upon your income level.
Joe: And last but not least, net unrealized appreciation. Now that’s a mouthful. What the heck is that? For all of you, let’s say Microsoft employees or Costco, something to that effect, a large company, usually you can purchase your company stock inside your 401(k) plan. A lot of companies used to match the company stock in their 401(k) plan. So let’s say you have Microsoft. I’m an employee of Microsoft. I have Microsoft stock inside my 401(k). What you can do, because if I take a distribution outside of that retirement account, the IRS looks at that as a 401(k) distribution, you’re going to be taxed at ordinary income rates. But there’s something that’s called NUA or NUA, or Net Unrealized Depreciation, where I can take this company’s stock out, I can move it out, I can transfer this into a brokerage account. But what the IRS is gonna look at is what is my cost basis on this stock. So if I’ve been an employee for an organization for quite some time, I could have fairly low cost basis. Again, maybe the basis on the stock is $1, and the stock price today is worth $10. So I have $9 of what is called this net unrealized appreciation of that stock because it’s still sitting in the 401(k). I moved the stock out. I paid tax on that $1. The stock then goes into that brokerage account. When I sell that stock, it’s going to be tax treated as long term capital gains. So I’m only going to pay ordinary income tax on whatever the basis is. If I kept it in the 401(k), sold the stock in the 401(k), took a distribution, I’m going to pay ordinary income tax. For a lot of people, it’s going to be a lot higher than a capital gains tax.
Al: Yeah, I think this is such an important strategy. It doesn’t apply to everybody, but if it does apply to you, it’s a big deal. Because to get capital gains taxes, compared to ordinary income taxes, are about half as much. So you definitely want to take advantage of it, if you can.
Joe: Alright, let’s flip the show to you. Let’s answer some of your questions this week.
Al: What happens if I don’t pay my taxes on time? This is from Lenny in Nevada. Huh? Lenny in Nevada.
Joe: Lenny, you’re going to jail.
Al: What are you doing in Nevada?
Joe: Gotta pay those taxes on time anyway.
Al: Anyway, what happens if you don’t? Well, the most important thing I would tell you is you still want to file your return. If you don’t file your return, that can be considered a criminal act. So you’d rather not go that route. File your return. Generally, if you can pay that tax within a year, the IRS will let you have a payment plan. There’s a form right on the return that they’ll generally accept. If it’s more than a year, you’re going to need to do something called a payment plan or even an offer and compromise. It gets a little more complicated, but yeah, make sure you file your return and if you owe a little or a lot, you might want to get some help on what’s going to be the best strategy for you.
Joe: All right, we talked about Top 10 Tax Tips today. You know, understanding the bracket is probably the most important thing to start with. What tax bracket am I in? Do I want to increase income? Do I want to decrease it? Do I want a tax credit? Do I want a deduction? What are contribution limits for overall retirement plans? There’s all sorts of different things that you can do. Hopefully we shed some light for all of you to save money in taxes, not only today, but if you do this right, you combine a couple different strategies that you could save a lot of money in the future as well. You know where to go, YourMoneyYourWealth.com, click on that special offer. It is our Top 10 Tax Tips, YourMoneyYourWealth.com, our Top 10 Tax Tips. We’ll see you next time folks.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
