Tax Takedown

Taxes are often overlooked in a financial plan, delivering a sucker punch that could cost you tens of thousands of dollars. Are you wrestling with your taxes and getting body slammed – do you even know if you are? Ignore tax strategies and you are losing money that could compound over a number of years to help you enjoy the lifestyle you want in retirement. With today’s show, you’ve got Joe Anderson, CFP®, and Big Al Clopine, CPA, the undisputed champions of the Tax Takedown, in your corner!

Tax Takedown

• Basic Training
• Game On
• Win With Giving

Important Points:

• • 0:00 – Intro
  • 1:42 – Tax Takedown
  • 2:21 – Tax Deadlines
  • 3:10 – Standard Deduction
  • 4:05 – Tax Brackets
  • 5:24 – Contribution Limits
  • 6:15 – Income Limits
  • 7:52 – Download Guide: Tax Takedown
  • 8:51 – True/False: In 2022 a single taxpayer making $100K will be taxed at 24% tax rate
  • 9:23 – Marginal vs. Effective Tax Rate
  • 10:59 – Catch-up Contributions
  • 12:30 – 2026 Projected Tax Rates
  • 13:16 – Asset Location
  • 14:47 – Roth Conversion
  • 16:00 – Capital Gains
  • 16:25 – Download Guide: Tax Takedown
  • 17:25 – True/False: You use QCD for RMDs so you don’t have to pay taxes on the RMDs
  • 18:18 – Qualified Charitable Distributions
  • 19:34 – Bunching Deductions
  • 20:00 – Donor Advised Fund
  • 21:00 – Ask the Experts: I need to buy updated computer equipment and software for my business. For tax purposes, is it better to buy it all in one year or spread out the costs over several years?
  • 21:47 – Ask the Experts: As a part-time worker do I qualify for my company’s retirement plan?
  • 21:54 – Pure Takeaway
  • 22:36 – Download Guide: Tax Takedown

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Transcript: 

Joe: Taxes can take you down. Do you know the moves to take out taxes? The show is called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. I’m with the big man of course, Big Al Clopine. Big Al and I are going to get in the ring today to teach you how to take down taxes. Take a look. 1.7 trillion. Uncle Sam is beating us up, right? 1.7 trillion of individual taxpayers’ is going to the big man here. Let’s reverse this. Let’s take more money back of course legally to do all the things that you can do to take down taxes. That’s today’s financial focus. [drums playing] [bell rings] now we’re in the wrestling match with taxes. People are overpaying taxes, and the reason for that, 46% of people want to get a refund, so they’re giving extra to the IRS, interest-free loan, waiting to get a tax refund because they’re so afraid that taxes are going to take them out. There’s a lot of things that you can do. Let’s bring in the big man to bring us through some basic training on taxes, and then we’re going to get in the ring to take them down.

Al: Income tax is my favorite subject, or actually, better yet, how to reduce income taxes is my favorite subject, so today, we’re going to start with basic training, some things you have to know for 2022, 2023 to lower your taxes. Then we’re gonna get into the game, the boxing match, right? What can we do against Uncle Sam to reduce that tax? And then finally, there are some giving–some charitable strategies that are pretty cool that you probably should know about. So, Joe, taxes–what a better subject?

Joe: Let’s start with the basics, Big Al. Tuesday, April 18, is the filing deadline.

Al: Probably fell on Saturday, so yeah, we get a couple extra days to file our return this year, or if you can’t make it, you just file an extension. It gives you another 6 months, and for some people in certain counties that were hit by rainstorms and other disasters, you can actually file this year until May 15, so just be aware of that.

Joe: Yeah, California, Alabama, Georgia, you get until May to file the overall taxes, so if you file the extension, just make sure that you pay your taxes if you do owe, but hopefully after this show, right, you’re going to do some things to reduce that tax burden. All right. Basic training to understand taxes is that you have gross income, and then you have to take some subtractions here such as the standard deduction, right? So the tax cuts and jobs act that was passed a few years ago really tried to simplify the overall tax code and pushed everyone more or less to do the standard deduction because they basically doubled the deduction. They’re increasing it even more for 2023 tax year, so for a single filer, they increased it almost $1,000, almost $2,000 for married, and then head of household $1,400, so that’s the standard deduction, or some of you might also itemize.

Al: Yeah, and that’s right. As a little review, you always get to either itemize or take the standard deduction, the higher of the two. So to itemize means you get to deduct some of your taxes, your mortgage payments, your charity, right? Many of you are going to use the standard deduction, so realize that these numbers–so single, close to $14,000. So we get this question all the time. My son, my daughter, made $10,000. Do they need to file? Probably not because it’s under that standard deduction, so they don’t even have to file unless they have a w-2, where they had withholding. You want to file to get the money back, right? Or they’re self-employed. You would still have to file at any income level.

Joe: You know, we had a large inflation year this year, and so, yes, it kind of hurts our piggy banks, you know, because we’re paying a lot more for goods and services, but there is a silver lining. If you take a look at how they broadened the overall tax brackets, this could be a really cool year for some of you to do some more advanced tax planning. So such as the 24% tax bracket. This thing is a huge bracket, right? This 24% bracket is going to go to 28% here in the next couple of years, but if you look at the increases that they gave us to broaden that bracket out even more–so if you’re looking at Roth conversions, adding income, you know, if you have stock options and things like that, you know, the 24% rate is still a fairly low rate given history, and so that bracket is even that much larger.

Al: Yeah, and these are good numbers to think about. So 182,000 or 364,000 because if you go over that–and remember, this is taxable income after your standard deduction, after your itemized deductions–but if you go above that, then you’re at 32%. That becomes your new marginal rate. So if you can keep into the 24% bracket or lower, you’ll be much happier with your taxes.

Joe: All right. So then let’s get into retirement contributions. So if I’m looking at the standard 401(k) plans, right, they increased that, gave us another 2,000. So $22,500 is the maximum contribution limit that you can do. So our catch-up, if you’re over 50, that also increased by another $1,000, so $7,500 there. So we’re able to put a lot more money in pre-tax if you want into these retirement plans to drive that taxable income down to pay less tax on your overall income. Basic contribution-defined limits is 66,000, so they increased that by another 5 grand, and then simple and simple plans, right? Another 1,500 and 500.

Al: Yah. In other words, we can get a lot more money into retirement accounts, and when you think of the defined-contribution plan, basic limit, so that’s a 401(k), 403(b), things like that, right? And so you can put in the 22,500, and if you’re over 50, another 7,500. That’s 30,000. Your employer hopefully does some kind of match. You get extra there, and some plans allow you to put after-tax money into that 401(k) or 403(b), whatever it may be, and if you can do that, do it if you’ve got the resources because then you can take that money and convert it to a Roth IRA.

Joe: If you want to put in an after-tax contribution into a Roth and have all those dollars grow 100% tax-free, that’s pretty ideal. So you take the taxman totally out of the picture, and all that future growth you’ll never pay tax on again. A lot of people don’t qualify to do a direct contribution because of their AGI. Their income is a little too high. However, we’re increasing those limits, as well. For a single taxpayer, if you make more than $150,000 of adjusted gross, then you phase out of the Roth IRA, but if you make less, you can make a contribution, a direct contribution. If you’re married, that number is close to $230,000–228,000 to be exact. So $9,000 as they increase the phase-outs, $14,000 for married couples. So more and more people are qualifying for a direct contribution to a Roth IRA. This is an IRA. Most of you now might have a Roth 401(k). There is no income limits for a Roth 401(k). So you tell me why we even have income limits for Roth IRAs where there’s no income limit for a Roth 401(k)?

Al: Yeah, I have no idea, so–but that’s our current rules as it stands. So Roth IRA, if you qualify to put money in, you got money for a Roth, go ahead and do it, right? Get the money into a Roth. It grows tax-free. Now, there are certain limitations. Like, you can’t pull out any income or growth until 59.5 or 5 years, whichever is longer, but you can always pull out your principal in case of emergency, in other words your contribution. Anyway, that is such a good thing, Joe, a Roth IRA if people qualify.

Joe: Yeah, absolutely. Take a look. If you need more help with this, of course we got a guide for you this week. It’s the “takedown tax guide.” go to our website, yourmoneyyourwealth.com, click on that special offer this week. If you want to take down taxes, get the guide. Yourmoneyyourwealth.com. Click on that special offer and start taking down the taxman. All right. We got to take a break. When we get back, it’s game on, folks. Let’s see how we do.

Joe: Hey. Welcome back to the program. The show is called Your Money, Your Wealth®. Joe Anderson and Big Al. We’re taking down taxes today, folks. Go to our website yourmoneyyourwealth.com, click on that special offer. It’s our “takedown tax guide,” right? Uncle Sam might be giving you a little sucker punch, right? You got to jive a little bit and take him down. Go to our website, yourmoneyyourwealth.com and start taking down the taxman. Hey. Let’s see how you did on that true-false question.

Al: True or false? Well, it is true if you’re a single taxpayer, $100,000 of taxable income, you’re in a 24% marginal rate, which means some of your income is taxed at 24%, but, Joe, not necessarily all of it.

Joe: Yeah. This is where it gets a little bit confusing, right? Because if I take a look–if I have $100,000 taxable income, and I say, all right, well, I’m in the 24% tax bracket because if I look at the IRS it will say income between $89,076 and $170,000, your income will be taxed at 24%, but this is a marginal rate, right? Because taxes stairstep, right? You get the standard deduction, and then you’ve got a 10% and a 12%, 22%, and 24% and so on and so forth here, right? So some of that is going to be taxed at each of those rates. So in this case, how much of the $100,000 is actually taxed at 24%? Right. It’s almost $11,000.

Al: Yeah, that’s right, Joe, and I think it’s important to even repeat this. It’s like some people think they get into the next bracket, and they’re paying that bracket on all of their taxes. No. If you’re a dollar over the limit in terms of the brackets, that $1.00 will be taxed at 24%, but the rest of it is taxed at the lower rates.

Joe: So if you would do the math and say, all right, well, what is my effective rate, right? So your effective rate is really what the taxes that you’re paying is roughly 18%. So even though I’m in a 24% marginal bracket, my effective tax rate is a lot less than that.

Al: Now we’ve got some increases in the amount you can put into 401(k), both the base amount and if you’re over 50, and then in a couple of years, if you’re over 60, you even get to put more in. So, Joe, if you if you’ve got nothing at age 57, there’s opportunities to put a lot into your 401(k).

Joe: Yeah. Just going back to here, too. Let’s say $100,000. I need to reduce my income, let’s say, by $11,000–I’m rounding here–to get me out of the 24% tax bracket. Ok. Well, here. The IRS increased the 401(k) contribution limits, so if I put in $11,000 into 401(k) plan, I get out of that 24% tax bracket, right? So that’s why the 401(k) plan plus catch-ups, you know, help people out quite a bit from a tax perspective depending on where you fall. So here, if I look at now the catch-up provisions plus the 22.5 of a 401(k) straight contribution from 58 to 59, right, someone could put in $60,000 over that time period, but then here, 62–in 2025, from 60 to 62, that catch-up jumps to 10 grand, and then it goes back to 7,500. So if I look at here, someone has zero, like al said, right, from 58 to 68–so they’ve got a 10-year time period–they could put in over $300,000 of a contribution pre-tax into that 401(k) plan, or they could do after-tax if they have a Roth provision and get $300,000 roughly into a Roth.

Al: Yeah, and, Joe, that’s without any kind of growth, right, so you put the money in the market, hopefully it grows over that 10 years. So this is important, though. If you’re in your 50s or 60s or 40s, whatever it may be, and you’re behind. So there’s opportunities for you to get a lot more money into the 401(k)s, 403(b)s, whatever they may be so that you’re in a much better position.

Joe: Looking here. 2026 federal tax rates. This is where the law states today. So you want to find out what tax bracket that you’re in because in 2026, most of these rates go up, right? So we talked about that 24% tax bracket and how large that is, but the 24% is going to 28%, right? The 22% is going to 25%. The 12% tax bracket is going to 15%, right? So this is kind of that sweet spot area where most people fall. So just understand kind of where you fall because it might make sense to add income versus taking that tax deduction because eventually down the road I might be paying more taxes in the future.

Al: Yeah, and that’s what’s scheduled to happen right now. Rates revert back to what they were in 2017, and I think it’s important when you think about tax rates, when you think about Roth IRAs, when you think about retirement money, it’s like where do you have your money? And the way we think about it, there’s taxable money, tax-free, and tax-deferred.

Joe: Right. Your tax-deferred assets is what most people have, right? That’s your 401(k). I get a tax deduction going in, and then when I pull the money out, then that’s when I pay taxes. Well, what tax rate are you going to be in? Well, that’s why understanding effective rates, your marginal rates, where you kind of fall on the spectrum is going to determine kind of how your diversification from a tax perspective looks, right, because tax-free is pretty cool because you get an after–you don’t get a deduction going in, but all future growth grows 100% tax-free. So if I’m putting in $20,000 a year into my 401(k) plan, my Roth 401(k) plan, you know, over a 10-year time period, I’m going to have a huge sum of money up here that I’ll never, ever have to pay tax on. If I’m in a higher tax bracket, well, I might want to take advantage of this to push me into a lower bracket, right? But then I’m going to get taxed on here, but potentially I could be in a lower tax bracket, or you might want to have a combination of all 3 because then you have a lot more control when you start taking distributions from your overall savings really to control your taxes.

Al: And I think that’s so important. When it comes to retirement, right, you’ve saved the money that you’ve saved. If you have tax diversification and you can figure out where to pull the money from that you need to live off of with different pools, you can keep yourself in lower brackets. Very important.

Joe: We talked about Roth conversions, taking money from your retirement account and converting. So let’s say I’m in that 24% tax bracket again. I have 100 shares of xyz stock, and they’re trading at $100 a share. The market drops, ok? So now I still have those 100 shares, right, but now they’re trading at $80 a share versus $100, ok? So markets go up, markets go down, right? Over the long term, they trend up. When would be a good time for you to take money from your retirement account and convert it is here. Down markets, you want to get money out at a lower cost, and you can put them up here, and so all of that recovery will grow tax-free for you. This is getting a little bit more complex and a little bit more, you know, sophisticated in your strategy, but if you can do things like this, it’s really going to enhance your overall retirement.

Al: Well, there’s no question, and I also want to talk about taxable accounts or non-retirement accounts, if you will. So we’ve got an example that would show you if your income is, in this case, about $117,000 married, you get a standard deduction. You end up at the top of that 12% bracket. Now if it’s all ordinary income, you’ll pay about $10,000 of tax, but if it’s all capital gain income, in other words you had a stock that you sold at a gain held for more than a year, right? You sold that at a gain. Capital gains are taxed at 0% when you’re in the 12% bracket. So look at the difference. Ordinary income in this $89,000 income level, taxable income $10,000, ordinary income. Zero tax-free on the capital gains side.

Joe: We’re taking down taxes, Al. We’re taking them down. All right. We got to take a break. Go to our website, you know, get the guide. It’s taking down taxes day. Get our guide on yourmoneyyourwealth.com. Click on that special offer. You can download it right there in the comfort of your own home. We got to take another break. We’ll get back here and wrap things up. We’re gonna start winning with some giving.

Joe: Hey. Welcome back to the program. The show is called Your Money, Your Wealth®. Big Al is over there. I’m Joe Anderson. We’re taking down taxes today. [drums playing] [bell rings] right. We’re getting in the ring with Uncle Sam and trying to do the best we can to dodge and move and knock him out so we can get more of our hard-earned money back to us versus not doing any planning and giving it to uncle same Go to our website yourmoneyyourwealth.com, get our “takedown tax guide.” yourmoneyyourwealth.com. Click on that special offer. Let’s see how you did on that true-false.

Al: True or false? Well, a lot of acronyms. Let me translate that in English.

Joe: Ha ha ha!

Al: Ha! So you can use a qualified charitable distribution, right, for your required minimum distribution, right, and then you don’t have to pay taxes on that required minimum distribution. That’s absolutely true. So you can do the QCDs, qualified charitable distributions, directly from your IRA to charity when you’re 70.5, and it will also count on your required minimum distributions, which are either 72, 73, or 75, depending upon your age.

Joe: Heh. QCD on the RMD.

Al: That’s a lot of–yeah, that’s kind of a mouthful.

Joe: Yeah. Sounds like a song. All right. QCD 70.5, right, up to $100,000. So instead of taking–some of you just take a distribution, right? Let’s say you’re over 70.5 or you’re taking your required distributions from your retirement account. You’re taking those distributions, paying tax on it, and then you’re potentially giving to charity, right? You could take that directly from the IRA, never hit your tax return. It goes directly to charity. So this might help someone, let’s say, if they’re kind of on the verge of IRMAA. So if they have to pay higher Medicare tax or things like that or net investment income tax or some other things that might increase your modified adjusted gross, you can take it directly, go to charity without passing go, right, so it doesn’t show up on your tax returns to avoid all these other maybe ancillary taxes.

Al: Well, and it’s an important strategy because if you think about it, if you’re retired and you don’t have a mortgage, it would be very hard to itemize your deductions, meaning that if you take the money out of the IRA, you’re going to pay taxes on it because you’re not going to be able to deduct those donations that you make from that money because you’re using the standard deduction. Here, you keep it off your return altogether. You’ll pay less tax.

Joe: Here’s your favorite– bunching.

Al: Yeah. I know you love that one, too, but we’ll go over it because it does help people, right? So if you’re right near being able to itemize versus not itemize, what you might do is instead of making your contributions the same thing each year, maybe you bunch them up. You bunch them all in one year, don’t make any of the next year. You bunch them up the following year, so at least every other year, you itemize your deductions.

Joe: The problem with that strategy, though, is the charities are looking for that donation every single year, right? There’s like, “wow! Big Al gave me a whole bunch of money. Can’t wait for next year,” and he’s like, “no, I was kidding. I was just bunching,” right? They don’t know what bunching means. They want cash, so here’s another better strategy. It’s the donor advised fund.

Al: Yeah, I actually like this one better. Ha! So if you’re in a higher income year, for example, or you just want to make sure that you can get some credit, get some deduction for your donations, you bunch them together using a donor advised fund, right? Which simply means it’s an account that you control, right, you invest it, and the year you put the money in or better yet put appreciated stock in because whatever the stock is worth, you’ll get a charitable donation, you don’t have to pay tax on the gain–the year you put that money in, you get a donation deduction, right, which is fantastic. Maybe you do 5 or 10 years of donations all at one time because you have a high-income year. You want to get that tax deduction in the year where it’s going to make a difference. Then over time, you get to decide what charities get what amounts from this donor advised fund. You’re in charge. You get to decide that.

Joe: Let’s switch gears. Let’s go to ask the experts.

Al: From Phil… Well, Phil, that’s a great question. So when you buy computer equipment, generally, you’d have to take that equipment. It’s what’s called a fixed asset, right? And you get to depreciate it over time. Computer equipment is typically depreciated over 3 or 5 years, depending upon how you think about computers. Most people do it over 5 years, or you can actually buy it and take the deduction all in one year. That’s a section 179 deduction. Whether you would do that or not is dependent upon your income. You have a low-income year, you probably wouldn’t do it. You might spread it over the 5 years, but you don’t necessarily have to buy equipment each and every year just to lower your taxes. You’ve got the depreciation or section 179.

Joe: All right. What did we learn? Basic training, right? We got to the basics of the overall tax return, effective rate versus marginal rate. We looked at the different tax brackets, right, where they’re going, where they’re at today, inflation, that they increased those overall brackets, inflation in regards to how much money that we can save. The secure act 2.0, right, gave us a little bit more in regards to matching, and then we talked tax strategies. So now that we have the basics down, game on. Let’s get in the ring. How do we take down taxes? We talked about several different strategies, and at the end we’re winning. We’re winning the game by looking at some giving strategies. If you want to wrap all this up in a bow, you know where to go. Go to yourmoneyourwealth.com, click on that special offer. It’s the takedown tax guide. Go to our website yourmoneyyourwealth.com, click on that special offer this week. If you want to take down taxes, get the guide. That’s it for us. Hopefully you enjoyed our show. For Big Al Clopine. I’m Joe Anderson, and we’ll see you next time.

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.

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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.