ABOUT HOSTS

Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

What comes to mind when you think of your taxes? Do you feel pain in your stomach? Financial professionals Joe Anderson and Alan Clopine want to empower you to maximize your return by using strategic tax planning. They take a look at the changes in tax law and give you some tools and strategies to help you keep more of the money that you make.

Important Points:
(0:00) –Intro

(1:19) –Financial Focus

(2:43) – New Deadlines

(3:46) – Taxable Income Example

(5:46) –New Deductions

(7:29) –New Retirement Account Limits

(8:51) –New Gift Tax & Estate Exclusions

(11:16) – Individual Strategies

(13:30) – Donor Advised Fund

(14:35) – Tax Tools

(17:30) – Asset Location

(20:00) –Business Strategies

(21:20) – Business Retirement Plans

(22:53) –Real Estate Investor Strategies

(24:20) – Pure Takeaway

Make sure to subscribe to our channel for more helpful tips and the latest episodes of “Your Money, Your Wealth.”

Transcript: 

Joe: It’s that time again, folks. It’s tax season. Do you know what’s new? Do you know what’s changed? Do you know what strategies that you should implement to make sure that you reduce your tax bill? Stick around and we will show you on this episode of “your money, your wealth.”  Welcome. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. And of course, I’m with Alan Clopine. He’s a CPA. He’s gonna break things down for us because taxes sometimes give us a little anxiety. It gets complicated, and it’s like, oh, my gosh, I don’t want to give more to the IRS than I absolutely have to, because look at this big number, folks. $1.7 trillion is what we’re going to pay Uncle Sam this year. Do you know what piece of the pie that you have in this number? Let’s reduce it as much as we can. That’s today’s financial focus. Let’s break it down. A lot of taxes. We’ve got ordinary income taxes, property taxes, auto taxes, sales taxes, everything in between, right? Here’s the pie. The biggest part of what we pay to taxes is ordinary, ordinary income taxes on your paycheck. This is also probably the biggest area where you can reduce that overall number. Let’s figure out how we do it. Let’s bring in the big man, Big Al Clopine.

Al: So income tax planning. What can we do? How can we save taxes? Well, first of all, let’s start with what’s new for this year, 2021-2022. We’re in the 2021 filing season, so we want to spend some time talking about that as well. And then also, maybe even more importantly, looking forward, what can you do, what strategies are available to reduce taxes in the future? And, Joe, we talk about this a lot, that at this point, tax filing season, there’s not a lot you can do once the year’s over. There are a few things, and we’ll talk about them, but most of what you need to do has to happen during the tax year.

Joe: Well, I think we get this all the time is it’s April or it’s February, you know, and then they’re doing their taxes and they’re like, “gosh, man, I paid so much money in tax. What can I do? How can I reduce it?” well, you should have done this before, right? So start planning right now to understand what you need to do, because tax planning is not just a singular moment in time, it’s a constant throughout the year. There are things that you can juggle, there’s things that you can shift. But let’s start with what’s new, Big Al.

Al: Yeah. Well, first of all, let’s start with the basics, like when do you file your tax return? This year it’s actually April 18 because of holidays and weekends and so forth. But two years ago it was July 15 because of covid. And last year it was May 15, so we’re back to that April 15 timeframe. Now, you can also request a 6-month extension, pull it all the way out till October 15.

Joe: So if we look, what’s new? There’s a couple of different things we want to look at in regards to the standard deduction because we get a cost of living or inflation bumper here. There are some minor changes within the overall tax brackets, but these are going to change drastically in the next few years. So there’s some planning opportunities here. IRA contribution limits. So how much money can you contribute to your overall retirement accounts? So IRA, Roth. And then we could get into the gifting. Let’s break things down, Al, because there’s several different brackets, right? There’s a 10% bracket, there’s a 12% bracket, a 22, 24, and so on and so forth. So when you look at your income and you say, hey, you know, I made $50,000, and if I’m single, well, that means I’m in the 22% tax bracket, so I pay 22% on 50 grand? The answer’s absolutely not. How it works is that you have to first look at your taxable income. So the bottom page of the 1040, the front page, just look at that bottom line. That shows you your taxable income. In this instance, 50,000 is my taxable income. So I look here, the first 9,950 of the 50,000 is taxed at 10%. Then the remaining here, ok, so we have another–from 9,950 to 40,000 roughly is gonna be taxed at 12. And then the remaining 10,000 roughly is gonna be taxed at 22. So it’s stair steps. So if you’re in the 22% tax bracket, just know you’ve got to fill up the 10–some of it’s gonna be taxed at 10, 12, and then 22. Because you’re here, you’re not–everything is not taxed at that rate.

Al: Yeah, that’s such a good point, Joe, because so many people come to us and they say, “I don’t want to make another dollar because I’ll be taxed at a much higher bracket.” well, yes, you’re taxed at a higher bracket for that dollar. For that dollar only. You still get the benefit of the lower bracket. So that’s a very important thing to know. And people say, “well, I don’t even want a bonus because I’m gonna have to pay more taxes.” no, that’s not true. If you go to a higher bracket, it’s just that extra amount that gets taxed at a higher rate.

Joe: So when you look at taxable income, how you get to tax bill, you take your gross income minus some deductions. A lot of us file the standard deduction. You have itemized deductions and the standard deduction. But the jobs act that was passed a few years ago really increased the standard deduction, so most of us just file the standard. So we have a few minor increases here.

Al: We do. And so, yeah, so there’s itemized deductions, which, of course, are things like your mortgage interest, your property taxes, contributions, things of that sort. You always want to look at those, and if they’re greater than your standard deduction, you take that, but if it’s not, then you take that standard deduction. So they increased a little bit. Between single and married we went up, you know, a few hundred dollars on both of them. Now, this is contrasted to what it was a few years ago where it used to be about half of that. So a lot more people itemized their deductions earlier. Nowadays, most people use that standard deduction.

Joe: So then we’re looking at the tax brackets. So again, the 12% tax bracket, then there’s the 22 and the 24. We’re just showing you a couple here. Is that–what I want to point out is the 24% tax bracket for a single tax filer, taxable income, it was 164, it’s going to 170,000. That’s a pretty big gap that we’ve seen. 170,000 is the top of that bracket. Before, you would reach that 25% tax bracket at a lot lower number.

Al: A lot lower number, exactly right. So what that means, then, and we’ll get into this, is there’s some opportunities to maybe rearrange some of your retirement accounts, maybe into a tax-free Roth environment because the tax rates are lower right now than they have been, Joe.

Joe: Yeah, and then if I look at for married people, it’s $340,000 is the top of the 24% tax bracket. With this type of income, in 2026 when the tax style reverts back, you’re probably in the 28% tax bracket or you could almost fall into alternative minimum tax. So for a lot of you, it’s a really good opportunity, looking at these low tax rates, that you can start maneuvering your money in such a way that you could take advantage of low rates, and then as rates increase in the future, right, you’ve already kind of hedged your bet. You pay the tax at a lot lower rate. When you’re looking at IRA contributions and 401(k), not huge changes. $1,000 for your 401(k) and 403(b)s, things like that. If I’m looking at catchup revisions, zero. They didn’t give us any catchup. So for those of you that are 50 and over, it’s still $6,500. And then if I’m looking at SIMPLE plans, basically they stayed the same, and even the defining contribution limits. Very, very minor changes happened this year in our overall retirement system.

Al: Yeah, no question. And that’s important because right now we’re early in 2022. If you’re not maximizing out your 401(k), 403(b), take a look at that right now. It’s early in the year, you can make a difference for 2022. If you wait till November, December, there’s not much time to make a change.

Joe: For those of you that want to make a Roth IRA contribution, well, there’s limitations in regards to adjusted gross income. So for single taxpayer, if you make more than $144,000 of modified adjusted gross, you cannot put money into a Roth IRA directly. For married people, it’s $214,000. Again, there’s the backdoor Roth that we could talk about that you could put a non-deductible IRA and then convert it if you are higher than these income limits. So Roth IRAs, 144,000. 214,000 for you to be eligible to make that Roth IRA contribution.

Al: Yeah. Also want to talk a little bit about estate tax. So right now there’s a $12 million estate tax exemption per person. So meaning if you pass away, the first $12 million of your assets go to your kids tax-free or your beneficiaries or whoever it may be. Also related to that are gift taxes. And so, this year you can give $16,000 away to each person, could be anybody, related or not. If you’re married, you could give 16,000 times two, 32,000. If they’re married, you double up again. That’s what you can give without having to file a gift tax return for 2022.

Joe: Then, Al, kind of break this down. This is above my pay grade.

Al: Ha ha ha! Just a few other minor changes. For 2022, you can no longer deduct that $300 charity amount above the line because they allowed that for 2020 and 2021. A few minor changes to the child credit, education credit. The bigger one is in California. If you’re a California resident and you have a business, you can actually pay for that state tax through the business and get a tax deduction, avoiding that $10,000 limitation in the itemized deductions.

Joe: Hey, if you want to get caught up, go to yourmoneyyourwealth.com, click on that special offer. It’s our 2022 tax planning guide. Right, so all the numbers that we just kind of threw at you, go to our website, 2022 tax planning guide. This breaks everything down so you can see the income limits, the increases, the decreases, the changes in the overall tax code for this coming year. That’s not saying things are going to change. There’s a lot of things on the docket right now, so all of this could be irrelevant, and we’ll do another show in another couple of months to tell you all the new changes that will come down the pike sooner rather than later. But go to yourmoneyyourwealth.com, click on that special offer so you understand the planning that needs to be done right now. We’ve got to take a break. We’ll be back in just a second. The show is called Your Money, Your Wealth®.

Joe: Hey, welcome back to the show. Talking taxes today. Some new laws are potentially down the pipe. Let’s just get into the basics today. But before we do that, let’s see how you did on the true/false question.

Al: “The average tax refund is less than $3,500.” Joe, would that be true or false?

Joe: I have no clue.

Al: Well, turns out it’s actually 3,021. $3,000 and– 3,021. So it is less than $3,500. So file that away.

Joe: Let’s get into some information that you could potentially use. Looking at individuals, there’s not a ton of strategies to really reduce your overall tax bill each year, all right. You can maybe look at itemized deductions. So that is, you know, charity contributions. You can look at, you know, taxes that you’re paying, your mortgage interest, maybe healthcare costs, things like that. So there’s some opportunity there if you understand how that works. We’ll break that down. And then maximizing your retirement contributions in charitable. Let’s go to itemized deductions, al. What are some people can think about in regards to maybe bust–you know, pumping that up a little bit?

Al: Yeah, getting a better deduction. Because, Joe, as you know, the standard deduction is so much higher now than it was back in 2018, and it’s actually gonna go back to a lower deduction again in 2026 unless the law changes between now and then, which is likely. So we don’t know, but that’s what we have right now. But when it comes to itemized deductions, a lot of people are not itemizing because they don’t have enough to get over that standard deduction. One way to think about doing that is doing something with your charitable donations. So a lot of us give a few hundred dollars or a few thousand dollars each year and we don’t have enough to itemize. But what if we could do those all-in-one year? What if we could bunch them together? What if we make a whole bunch of contributions this year and don’t make any next year or the year after? Well, that helps you taxwise. You’d probably get over the standard deduction, be able to get some benefit. However, your charities then are gonna want the money, because once you give them 10, 20, 30,000 one year, they’ll want it the next year. A better way to do that, Joe, is to set up what’s called a donor advised fund.

Joe: Yeah, if I’m looking here at some charitable planning ideas that we have–bunching. So that’s just adding a little bit more. Bunching all–like, if you have to have a surgery and then you want to get your teeth fixed and everything else, you want to bunch all that up, too, right, because then that could increase your overall medical cost to get over the hump. Or your charitable contributions. So bunching is then using something called a donor advised fund. This is a really interesting tool that a lot of you should maybe start considering, if you give to charity, of course. So what this is, is that, A, you could give cash into the donor advised fund. It’s a fund that you set up. You could give stocks. So if you have appreciated stock and you don’t want to pay the tax on it, you can just put that into your overall fund. Or other types of assets can go into that fund. So this is kind of your private foundation, if you will. So you put a contribution in, $5,000, 10,000, whatever–$1.00, right. You put that into this overall fund, you get a tax deduction that year for your contribution to your fund. But the fund then is discretionary, you’re managing it, and you can dole out the money as you see fit to any qualifying charity. So if you want to bunch up your deductions, if you have a big tax year and you’re trying to create some deductions and you give to charity, this strategy might be really key for you.

Al: It’s phenomenal. And then, of course, as we mentioned, if you’re trying to bunch those charitable deductions to get some benefit, this is a great way to do it. It’s also really great, Joe, as you mentioned, is if you have a big income year, maybe you got a big bonus or you sold a property, you have a lot higher income, you need a deduction that year, you’re basically taking your charitable deductions in the future and bringing them into the current tax year when you actually need it.

Joe: Yeah. When you look at real tax savings long term, this is where you can really move the needle, if you will. Roth conversion strategies. What is that? We’ve talked about that. The rates themselves, the ordinary income rates, have dropped considerably this year, the last couple of years, where historically they’ve been a lot higher. And especially the room that you have in these lower income gaps. Asset location, tax-loss harvesting. What the heck does all this mean? Well, let’s kind of break it down this way. You have assets in different pools of money. And each of these pools of money are taxed a little bit differently. So you have your tax-deferred assets. That’s your IRAs, your 401(k)s, your retirement accounts. You put dollars into the tax-deferred asset, you get a tax deduction today. But when you pull the money out in the future, that’s when you pay the tax. So I’m putting $10,000 in here each year, I get a tax deduction of a few thousand dollars. That $10,000 grows to 100,000. I pull the $100,000 out, and then that’s when I pay the tax on that 100,000. So all of that growth that’s sitting in this account is gonna be taxed at ordinary income rates. Tax-free. This is a pretty good one, right? You don’t get today’s tax deduction, though. When I put dollars into the tax-free pool such as a Roth IRA or maybe a municipal bond, I’m not receiving a tax deduction. There is no tax benefit today. But that might be ok because tax rates are relatively low. But now all future growth, that 10,000 goes in here, it grows to 100,000. I didn’t get the 2,000 or couple thousand dollar tax break today, but that 100,000 as I pull it out, what do I pay in tax? Nothing. Zero. 100% of the growth will be tax-free to me. Taxable. So this is another asset class–or not an asset class. But you are investing in asset classes here, a capital asset such as maybe real estate or you have a brokerage account, mutual fund, stocks. No tax deduction going in this account. But when you cash these out, you’re taxed at a lot lower rate, capital gains rate. So I have ordinary income. That’s the highest of rates. I have a cap gain rate, which is 15% for most of us. It could be zero, it could be a little bit higher. Or tax-free. So if I were to ask you right now where are the bulk of your investable assets? If you looked at your balance sheet, would they be here in your tax-deferred accounts, your 401(k) plans? Would they be in maybe a brokerage account? Or would it be in a Roth account? If I were to look, where do you think I would find most of the assets? What do you think, al?

Al: I would say tax-deferred.

Joe: Most of the liquid assets that you have is right here. It’s in a tax-deferred account. Which is great. You have saved money. What’s the downside of that? All of that money’s not yours. A big component of the dollars that you’ve saved, guess what, you’ve got to pay the IRS. So when we look at diversification from a tax perspective, we want to make sure that we have money in all 3 of these accounts, because if all of my money is sitting here–oops–if all of my money is sitting in this account and that’s all–I have very little flexibility in the overall taxes. That money continues to grow, which is great. But as that money continues to grow, what else is going to happen? I’m going to have to pay more tax because every dollar is taxable. So the point is really to move the needle on some of the taxes long term is being diversified. We’re in a relatively low tax environment today. We have huge numbers that you could get money out of this account at a relatively low rate. In the history of the tax code, this is one of the best opportunities that all of you should at least be considering or looking at is taking money from this tax-deferred account, paying a little bit of tax on it, and moving it here in the tax-free because here you’ll never ever pay taxes again. Ok. Tax-free for your life, your spouse’s life, the kids’ life. You can take tax man out of the picture by doing a little bit of tax planning. Hey, go to our website, yourmoneyourwealth.com, click on that special offer. It’s our tax planning guide this year. Right, learn the strategies to reduce your taxes significantly. Yourmoneyyourwealth.com, click on that special offer. We gotta take another break. We’ll be back in just a second.

Joe: Hey, welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson and Big Al Clopine breaking some tax strategies down for you. Let’s see how you did on the true/false question.

Al: “On average, the refund for a paper tax return takes longer to get compared to filing one electronically.” true or false. I’ll take that one. That is definitely true. So an electronically-filed return, you can usually get that refund in two to 3 weeks. Paper-filed return, meaning you mail it in, that’s probably more like 6 or 7 weeks. So try to do it electronically, you’ll get your refund that much more quickly.

Joe: Hey, we’ve talked a lot about individual tax planning. Let’s kind of switch gears a little bit and go on the business side. So for small business owners, there’s a few items that you should probably take a look at.

Al: Yeah, let’s take a look. So when you have a business, and this could be a C corporation, S corporation, LLC, there’s different kinds of retirement plan options, which I’ll go into momentarily. You may want to consider prepaying certain business expenses in December if you’re having a big income year. Those expenses, you prepay those, you can create deductions, you can lower your tax liability at least for that year. Investing in equipment. The IRS is very generous. You can buy equipment and write it off dollar for dollar. It’s called section 179. You can create deductions that way. And then finally, feeling generous for your employees? Give them year-end bonuses because that’s gonna create a tax deduction for you as well.

Joe: Yeah. These are things that you want to make sure you’re considering all year, right. It’s like where you at? You having a really good year, profits are pretty high? Then it’s like, ok, maybe we should buy this equipment that we’ve been, you know, pushing out for the last several years. Or hey, you know what, we haven’t given out bonuses and now we’re having a really good year. So things to start considering now instead of waiting until December to kind of pull the trigger on this stuff.

Al: Yeah, and Joe, when it comes to retirement plans, you do want to start thinking about that definitely right now, because the longer you have the retirement plan, the better you have even more time to fund it. So here’s kind of the order of what most businesses think about retirement plans. Maybe it’s just themselves and maybe a traditional IRA is good enough, right. But for many, that’s not enough. They want to put more away. So then they would go to a SEP IRA, simplified employer pension plan. Very simple, can be set up all the way until the following tax year. After that is a simple IRA. It’s not very simple, but you can put more away than a regular IRA, sometimes more or less than a sep, but just be aware of that. 401(k) would be kind of the next one you’d look at. There’s something called a safe harbor 401(k). If you have employees, you don’t have to have a super complicated one. There’s something called a solo 401(k) if you’re just an individual owner. Both of those are simpler than a full-on 401(k). Defined benefit plan is when a business has a lot of profits, and they want to put a lot of money away. There’s a lot of pros and cons of these plans, but, Joe, one of the best things is you can put a lot of money away all at one time.

Joe: Yeah, you can shelter several hundred thousand dollars in a defined benefit plan, but you’d have to be committed to sheltering several hundred thousand dollars a year to do that. So it works really well for some people, and it’s probably the worst plan for others. So make sure you just do–coordinate all of this stuff with your overall planning, right. Tax planning is a really key component of your overall financial picture, but it still needs to talk to everything else–when do you want to retire, what do your assets look like, what is your income, you know, what type of business that you’re in, are you in an employee, business owner, and so on and so forth. So making sure that you understand and flow all the way through this can really help you make the overall decisions. And then now Al’s favorite topic is real estate investors.

Al: Yeah, let’s talk about that. So if you’re a real estate investor–so there’s something called passive losses. So you need to understand how this works because there’s limitations on what you can deduct, there’s ways to deduct it. You can deduct up to $25,000 in losses as long as your income is below $100,000. There’s phaseouts after that. And if you can’t deduct it that way, if your income’s too high, you may look into being a real estate professional. It’s a categorization where the IRS says you can actually take your losses currently. There’s a lot of things you have to do to be able to qualify for that, but just be aware of that. For some people that need an even bigger tax deduction, when you buy a property, you might think of something called a cost segregation study, hiring a firm to come in and look at what you bought. It’s not just land and building, it’s personal property and other things that have quicker depreciation, which means quicker write-offs, which means less taxes to pay currently. And finally, 1031 exchange. If you’re ready to sell but don’t want to pay the tax on the sale, you can actually buy another property within certain specified timeframes and defer that tax.

Joe: All right, let’s switch gears. We have a couple of minutes left to go to ask the experts.

Al: This is Jennifer in Leucadia. “I’m an independent contractor. Since I received payment for some of my services in crypto currency, there is not a record of the payment. Do I have to pay taxes on the income?” uh, Jennifer, yes, you do. Whether you receive any kind of indication or not of income, you’re on the honor system. You do need to report it. Crypto is complex because what happens is when you get–not only when you get it, it’s income, but then when you spend it, it may have gone up in value and there’s additional tax reporting as well.

Joe: All right, lot of things we covered today. Kind of little rapid fire with a lot of different things in regards to your overall taxes, what’s changed, what’s new, what are some ideas and strategies that you need to take a look at. You know, I guess going to the basics, it’s just learning first what the heck is going on in the landscape of overall taxes and then making sure that you take a look at that and maximize everything you possibly can, such as your charitable deductions or contributions, your retirement contributions, and just being really smart with the overall strategy that you put together. Go to our website, yourmoneyyourwealth.com, click on that special offer. It’s our tax planning guide for 2022, folks. 2022. It’s brand new. Go to yourmoneyourwealth.com and click on that special offer. That’s it for us today. Big Al Clopine, great job. My name’s Joe Anderson. We’ll see you next week.

 

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.

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• 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.

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