Will the changes to tax brackets, deductions, exemptions, the alternative minimum tax, estate tax, individual taxes, small business taxes, corporate taxes and expenses in Donald Trump’s “Unified Framework For Fixing Our Broken Tax Code” proposal provide more jobs, fairer taxes, and bigger paychecks as promised? Plus, Important Steps to Take in the Last 10 Years Before Retiring, and the financial dangers of fly-fishing with the wrong beer in retirement.

Show Notes

(01:05) Tax Reform: Brackets, Deductions, and Exemptions
(10:42) Tax Reform: Alternative Minimum Tax
(20:15) Trump Tax Reform: Estate Tax, Individuals, and S-Corporations
(29:48) Trump Tax Reform: Small Businesses, C-Corporations, and Expenses
(38:41) Big Al’s List: 10 Important Steps to Take in the Last 10 Years Before Retiring
(48:39) Big Al’s List, Continued

Transcript

“The goals are tax relief for middle-class families, the simplicity of postcard tax filing for the vast majority of Americans, tax relief for businesses, especially small businesses, ending incentives to ship jobs, capital and tax revenue overseas, and broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes.”

Those are the goals laid out by the Trump Administration in the Unified Framework For Fixing Our Broken Tax Code. Today on Your Money, Your Wealth, Joe and Big Al go through the 9 page, large type, generously spaced document with a fine-toothed comb to find out if the proposed changes to brackets, deductions, exemptions, the alternative minimum tax, estate tax, individual and corporate taxes and expenses will provide more jobs, fairer taxes, and bigger paychecks as promised. The fellas also discuss Important Steps to Take in the Last 10 Years Before Retiring, and the financial dangers of fly-fishing with the wrong beer in retirement. Now, here are Joe Anderson, CFP and Big Al Clopine, CPA.

01:05 – Tax Reform: Brackets, Deductions, and Exemptions

JA: Got a lot of information to cover in a short period of time. I know that you all are just chomping at the bit to get into tax reform, so no better time than the present…

AC: (laughs) You think our listeners really want to hear about it?

JA: …to discuss “Unified Framework for Fixing Our Broken Tax Code.” More jobs, fairer taxes, bigger paychecks. Look at the tagline by Washington!

AC: (laughs) I like it, it’s a nice little logo too, kind of an aqua flag…

JA: I bet they spent time on the logo and this tagline than they did writing this stuff.

AC: Well, I’ll say the operative word here is “framework” or “concept.” This is not exactly a tax plan. It’s an idea how the tax plan might be. In case you haven’t seen it, Donald Trump announced this tax reform, “United Framework for Fixing Our Broken Tax Code.” It’s nine pages. It’s fairly large type and there’s a lot of blank spaces. But it’s very interesting, there’s a lot of different directions that we can tell that our government would like to go. I guess what they’re saying is goals, this is on page 3, so we don’t really get into the meat until page 3 of 9. (laughs) The goals are tax relief for middle class families, the simplicity of postcard tax filing for the vast majority of Americans, tax relief for businesses, especially small businesses, ending incentives to ship jobs, capital and tax revenue overseas, and broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes. So, Joe, that all sounds pretty good.

JA: Yep sure does. So let’s kind of see if there’s any meat in here.

AC: Alright. The meat really starts on page four.

JA: We’ll just go line by line here, Al, it will take us about 10 minutes.

AC: (laughs) Won’t take too long. So the tax rates: first of all there’s a zero tax bracket, and that’s for married taxpayers filing jointly that make $24,000 or less.

JA: Would that include the standard deduction?

AC: Yeah, that is the standard deduction.

JA: Exactly. So is it really a zero tax bracket?

AC: Not really. if you define that as a zero tax bracket, we already have a zero tax bracket.

JA: So what the $24,000 for married and $12,000 for single, so that’s what they’re saying is the zero tax bracket. But that’s not on taxable income. Because that’s after your deductions, exemptions – or, well, there’s no more exemptions.

AC: Well, that is your deduction.

JA: Exactly. So if I have $24,000 of income, and then I get a $24,000 standard deduction, that would zero me out.

AC: Yes. Because your taxable income is zero. So you’re right Joe. It’s not really a zero bracket. But let me explain what’s really going on, is the standard deduction. You probably know that you can take a standard deduction, or you can take an itemized deduction. You get to pick the higher of the two, and itemized deductions are mortgage interest and property taxes, state taxes, charity, things like that. Or, you can take a standard deduction, which is, I think for a married couple, is around $12,000 or $13,000 and for single it’s half of that. So let’s just round it to $12,000 and $6,000, it’s a little bit more, but you get the idea. So what they’re saying is, let’s basically double that standard deduction, we’ll make it $24,000 for married couples instead of a little over $12,000. And let’s make the single $12,000 standard deduction instead of a little bit over $6,000. Unfortunately, though, they take away exemptions. So in other words, right now we get a little bit over $4,000 per person for exemptions. So a married couple would get two exemptions, so just in round numbers Joe, that’s $8,000 there. And the standard deduction is roughly $12,000. So a married couple with no tax deductions at all, under current law, pays no tax at $20,000. So it’s it’s actually not that big a change over what we currently have. But that’s kind of how it’s being advertised. And so you can sort of read between the lines here. Those that have lots of kids are going to be likely hurt by this because there are no exemptions anymore.

JA: Right, so let’s see if you had four kids. That’s $4,000 per kid.

AC: Yes, $16,000 of deductions gone.

JA: Plus your $12,000 standard. So then you would lose.

AC: Yeah, you would lose. And in a lot of cases, our listeners are itemizing their deductions, and so the higher standard doesn’t really help them, doesn’t really affect them. They have already got a big mortgage payment, they’re paying high state taxes, a lot of charity. And their itemized deductions are 30, 40, $50,000 or more. So a higher standard is meaningless. All of a sudden we just lost exemptions. That’s number one, Joe, number two is that the three tax brackets would be 12%, 25%, and 35%. And that’s actually consistent with what’s being mentioned over the last year, I would say, so no real surprises there. The lowest two brackets are 10% and 15%. So those would kind of merge together and become 12.

JA: Yeah. What they’re doing in is that, if you look at the current tax code today, you got 10%, 15%, 25%, 28%, 30%, 35% and then 39.6. So the first bracket would be 12, so that’s just taking 10 and 15 and kind of merging those together to call it 12.

AC: Yeah. And of course, we don’t know exactly where those brackets will be. But what was announced roughly a year ago was maybe consistent with the 15% bracket today, which for married couples about $75,000 of taxable income. That’s actually what Trump came up with a year ago. And then this 25% bracket would replace what is currently 25 and 28. So those would be 25, and then the next bracket is 35%, would replace what is 33, 35 and 39.6. So highest rate was, or is 39.6. This new proposal says 35. So it actually goes down.

JA: So rounding, 40% goes to 35. So if I’m making over $400,000 a year, $450,000 as a married couple, I’m paying any dollar over that is 40%. Now it would be dropped to 35%.

AC: However, and I’ll get into this a little bit more in a second, but state taxes are not allowable under this tax plan, and for people that live in California, which is a high state tax state, I guess, poor way to say that, but that’s what it is. And I’ve already done the math, Joe, if you’re in the highest brackets in California, you’re paying 13.3% tax, and you’re paying 39.6% federal. By the time you figure out the tax benefit on the federal return, for that state tax deduction. It’s a little over 5%. So in fact, someone that’s in California that gets this lower 35% rate, well they lose about a 5.5% deduction, so their tax rate actually goes up to about 40.5% from 39.6. Those are round numbers, it’s not exact, but you get the idea. And so, if you live in Nevada, there is no state tax, so it doesn’t matter whether you can deduct your state taxes or not. So in other words, certain states are going to be more favored than others, based upon that.

JA: Sure. Florida.

AC: Yes. Which is a tax-free state. So that’s the tax rates. There’s an enhanced child care credit, which is not unsimilar to what we have, $1,000 per kid. But they’re saying the first $1,000 of the credit will be refundable. Actually, they are saying, then there’s a second component of $500 per child, that’s a little bit higher, that part would be nonrefundable. So the alternative minimum tax, that would go away. That is repealed. And that actually would help a lot of people in California, because I would say, the alternative minimum tax is one of those strange tax systems where it’s an alternative way of computing taxes, and you’re supposed to calculate your taxes both ways, and pay the higher the two. And what we find is, for most people, once your income gets around $200,000, give or take, that’s about when you start hitting alternative minimum tax, and that continues, depending upon whether you’re single or married, anywhere between say $450,000 and $650,000, in California, anyway. Then what happens is, the regular tax system is more expensive, and so you flip back into the regular system. But there is a zone of people in California, roughly $200,000 to let’s call it $650,000 of income where they would be benefitted by this change.

So now you might be wondering how this complete tax code overhaul might affect you, and we haven’t even gotten into individual and corporate taxes, estate tax, and all the rest. Start end of year tax planning now to help you not just this year, but for the rest of your life. Call Pure Financial Advisors at 888-994-6257 and make an appointment for a personalized tax reduction analysis. That’s 888-994-6257. Don’t wait until the last minute – find out how your current tax strategy may be changing before the end of 2017 – which is just weeks away – and what you can do to keep up. Get a forward-looking, personalized tax reduction analysis at no cost or obligation to you. Call Pure Financial at 888-994-6257. 888-994-6257.

10:42 – Tax Reform: Alternative Minimum Tax

JA: Talking tax reform. If you’ve been paying attention here, our President kinda came up with an outline of some tax reform coming up here, so we kind of went through a couple of the different basics. Just finished up with alt-min, that would be repealed. And alternative minimum tax came about, what, in the 1950s or so?

AC: Right. From my memory, although it seems like when I study that, different people have different opinions, but give or take somewhere around the 1950s, and the whole idea was so that the top 500, 1,000 to 2,000 wealthiest families, would at least pay some tax because they were loading up on deductions.

JA: The 70s and 80s were all about all these crazy tax credits and things like that because the tax rate back in the 50s was what, 50%, 70%?

AC: Correct it was 70% before Ronald Reagan came into office, and then it was brought down to 50%. And then now we’re at 39.6%, thinking it’s the highest ever. But going back into history, it wasn’t that long ago, the tax rates were almost double.

JA: Seven zero, 70. So with that high tax rate, then people were starting to get creative on their tax return and started coming up with all sorts of different types of deductions, huge deductions, and credits.

AC: Is that yuge? Or huge?

JA: Yuge. HUGE.

AC: Huge. The California version of the word. Okay. (laughs)

JA: Minnesota.

AC: Anyway. You’re right. And so Alternative Minimum Tax came around because they said, “we’re going to have an alternative system for computing taxes, and it’s really only designed for the wealthiest people.”

JA: But let’s talk about this for a second, because everyone was like, “Oh man, I’m in alternative minimum tax. Oh, I’m paying out of my nose because I’m in alt-min.” But what alternative minimum tax really is, is a flat tax, in a sense. It starts at 26% then it goes to 28 depending on your income. But then there’s add backs, or take backs, or whatever how you want to call it, you can’t deduct a lot of the deductions that you’re able to take now. That’s exactly where we’re going. Because they’re taking away a lot of these deductions that we’re used to. That is lowering our overall tax bill, to say let’s increase the standard deduction, let’s get rid of exemptions, and then let’s get rid of a lot of the deductions, such as medical expenses, state taxes, unreimbursed business expenses. Maybe they put a cap on the mortgage deduction. So if you hate alt-min, I don’t know. Now we have the reform, it should be super alt-min.

AC: But the good news is, we don’t have to compute taxes twice. And I think that’s a lot of what people didn’t like. Because there are two different systems.

JA: Oh, Turbo Tax did it for most, or their CPA did. Who’s doing it by hand?

AC: Well sure. However, when it comes to planning, it’s like, “well, let’s see, do I prepay my state tax? Am I going to hit alt-min or not? If I if I am in alt-min, I don’t want to prepay my state tax.”

JA: Because I can’t write it off.

AC: If I’m not in alt-min, I do want to prepay it. And so, it just made tax planning a lot more difficult. And the confusion of who’s in alt-min and who’s not, and people that had irregular income, some years they were in al-min, some years they weren’t. If you and your spouse are salaried and let’s just say you make $250,000 or $300,000, you’re in California, you probably are in alt-min. And so you have to realize that you’re kind of in that system, and you have to do that planning, at least from what we call a marginal basis. But the alt-min, yes, certainly state taxes, property taxes, miscellaneous itemized deductions, are not allowable. And that was part of the original reason in the 50s. Well, you can’t get all these crazy deductions and take them off your taxes, and so there was this alternative way of doing it. What makes it insidious though, is that there’s this alternative minimum tax exemption, which it’s good it’s there because it gives you an additional deduction for nothing. Kind of like a standard deduction, except that the more your income is, the more that phases out. And that takes that flat 26 and 28% rate, and it adds another 6 or 7% to that rate because every dollar you add of income, you’re also losing a deduction at the same time. So it’s not really 28. It’s actually really 35% when you’re in alt-min.

JA: (sigh) Didja get that?

AC: Yes. Clear as mud. So moving on, and page 5 of 9 of our new tax code.

JA: (laughs) It’s better than six feet tall, eh?

AC: (laughs) That’s true. We can go through this in a half an hour. Itemized deductions, in order to simplify the tax code, the framework eliminates most itemized deductions but retains tax incentives for home mortgage interest and charitable contributions. So reading between the lines, they haven’t really said, but what would not be included is medical deductions or taxes. Currently, you can deduct state taxes and property taxes, and DMV fees, things like that. What’s also not included would be casualty losses, a lot of people don’t have that. But a lot of people do have miscellaneous itemized deductions, those would be investment expenses, or tax prep expenses, or a reimbursed job expenses. Those would be gone too. And the biggest fight right now, the biggest complaint, is the state and local taxes, because in high tax states, as we just talked about the last segment, that’s a big number. In California, the ability to deduct your state taxes against your federal taxes can save you over 5% in federal income taxes when you’re in the highest brackets. So that’s a big deal. You lower the tax rate from 39.6% to 35%. But then you lose the state tax, you’re actually back where you started, and then some – even in a little bit higher bracket.

JA: Right. So there’s going to be these zones, where some zones are going to benefit from it. Other zones are going to get hurt by it in a large way. So you have to understand when it comes to tax planning. Let’s say if this passes, and then we have to consider, is it going to be retroactive? So there’s a lot of planning that needs to be done now until the end of the year, to figure out, if I’m going back from the beginning of the year to this new framework, where am I going to fall? What do I need to do here? So this is going to be interesting.

AC: Well it is, and we’re going to have to see what happens. I will make one more comment about state and local taxes, and that is Gary Cohn, who’s one of the Big Six that put this tax reform concept or outline together. He said on Friday morning that state and local taxes is not necessarily off the table. It could be potentially negotiated back in. So we’ll see.

JA: I don’t even know what does the other side want? Do they want to have the state and local taxes?

AC: Well it depends upon the senators and House of Representatives in particular states. Everyone in California wants that deduction because it’s such a high state tax. In Nevada, they could care less. In fact, they would rather have that deduction going away because then other people are going to pay more of the federal burden. (laughs)

JA: Yeah right. Or maybe people will move to those states.

AC: Yeah right. Yeah exactly. Let’s see another one, Joe is the framework contains benefits that encourage work, higher education, retirement security, a committee is encouraged to simplify these benefits, improve their efficiency and effectiveness. Tax reform will aim to maintain or raise the planned participation of workers and resources available for retirement. So that’s fairly vague but I guess that’s good news because we’ve been hearing, the last two or three years, that they’re going to clamp down on retirement plans. And they still may, but maybe make all retirement plans Roth. Or maybe they stop you from being able to contribute to a retirement plan when you have X number of dollars. Or at a certain income level, you can’t take a deduction, all kinds of things have been thrown out there.

JA: Yeah, I guess we’ll stay tuned for that.

AC: Yes. We’ll have to see about that. But Joe you are right. This really is going to be kind of an interesting year, depending upon what happens over the next few months, and I would say that tax planning this year is probably more important than almost any year in recent time.

JA: This reminds me of the fiscal cliff in a sense.

AC: Yeah I was just going to say, the fiscal cliff would have been the other time, that was 2012 and 2013, where we were going to have a whole new tax law.

JA: Yeah because the Bush tax cuts were due to expire and then we had the federal deficit, are we gonna shut down the government?

Even the proposed changes are changing quickly as Trump tax reform gets closer to becoming a reality. As Joe just said, I guess we’ll have to stay tuned to find out what’s in store, but don’t be caught unaware – find out how tax reform might affect you. Start end of year tax planning now to help you not just this year, but for the rest of your life. Call Pure Financial Advisors at 888-994-6257 and make an appointment for a personalized tax reduction analysis. That’s 888-994-6257. Find out how your current tax strategy may be changing, and what you can do to keep up. Get a forward-looking, personalized tax reduction analysis at no cost or obligation to you. Call Pure Financial at 888-994-6257. 888-994-6257.

20:15 – Trump Tax Reform: Estate Tax, Individuals, and S-Corporations

JA: We’re talking about more jobs, fairer taxes, bigger paychecks.

AC: Yeah. Tax reform. The United framework was announced by the President on Wednesday for fixing our broken code. It’s a nine-page document here. And I will stress the fact that this is not exactly a tax act or bill. This is a framework for discussion. So it’s not like it’s going to be passed tomorrow or anytime soon, but it could be passed retroactively, for this year even, so when it does happen if it happens, so we’ll see. One more thing I want to mention about individuals is the estate tax, which is the so-called death tax when you pass away, certain taxes go to the government before they go to your heirs, beneficiaries. That would that would be repealed. In other words, that would completely disappear. And honestly, that won’t affect a lot of people, because right now, as the current law stands, almost $5.5 million of your assets go to the next generation tax-free, and if you’re married, it’s $11 million. So we’re really only talking about those single people that have estates over $5.5 million, married couples who have estates more than $11 million, that’s where this would be impacted.

JA: With that, you’ve got to be careful, because there’s one line, Alan. Death and generation-skipping tax in this reform framework. It says, “the framework repeals the death tax and generation-skipping tax.” That’s all we know. What about the step up in basis rules?

AC: That’s actually the most important thing here.

JA: Right. Because let’s say you get rid of the death tax. But what happens to the step up in basis? So what step up in basis means at death is that, let’s say that you inherit mom’s house. She bought it for $20,000, and then now it’s worth $200,000. She passes away, you inherit that house. In today’s law, there’s a step up in basis, and what that means is that that $20,000, what she paid for, now your cost basis, or tax basis, is close to $200,000. The fair market value of the date death. So if you wanted to sell the home the next day or whatever, you wouldn’t pay any tax, because your tax basis is the fair market value. Even though mom bought it for $20,000, If they get rid of the estate tax, they could get rid of this step up in basis.

AC: Yeah they might. And the reason why that whole thing is there is so that you wouldn’t pay taxes twice. Because it used to be, Joe, that the exemption was $600,000. If you had more than $600,000 of assets, anything above that would be taxed at the estate tax level, which was a graduated schedule that worked all the way up to 55%. And so now we have a schedule where you have to be over $5.5 million, roughly, per person, and the tax is 40%. So it doesn’t really affect most people, but what does affect virtually everybody, anyone that has any kind of assets outside of retirement is that step up rule. And again, the reason the step up rule is there is so that people didn’t pay double taxes on estate taxes. But now, since so few people pay estate taxes, the step up in basis is a huge thing for virtually everybody. Now Donald Trump actually has said, during his campaign, right towards the end of his campaign, right before the election, that he’s thinking about having a $10 million step up. We’ll have to see. In other words, there’s no estate tax, and we’ll take $10.5 million of your assets, and we’ll step that up. Anything over that wouldn’t be stepped up. And so you think, well, if that were to be, then again, it doesn’t really affect most people, but let’s say you’ve got $100 million outside of retirement.

JA: That’s your net worth. Big Al’s net worth. (laughs) The Big Wallet on Big Al.

AC: Yes. That’s my future. Soon as I go national. We need to go national, Joe, then you and I will have that problem. I don’t think so.

JA: Got it. Ol’ Big Al and Joel. They’ll send the check to the wrong person. (laughs)

AC: Yeah right. (laughs) If you’ve been listening to our show, everyone gets my name right. Big Al. Joe is often Joel, or… (laughs)

JA: Steve. (laughs) Doesn’t matter. The other guy.

AC: Big Al and Bob. (laughs) Anyway, so let’s just say someone has $100 million outside of retirement, and step up in basis would be nice to have, but under this new law, there’s no estate tax, so maybe there’s no step up. So what happens is, instead of the next generation paying the 40% estate tax, they would pay the capital gains tax upon the sale of that business, which currently is 20%. And then there’s the 3.8% Medicare surtax for Obamacare. So it could be 23.8% plus state tax. So it’s a lower tax, plus the most important thing, Joe, is that the kids would not be forced to sell property or businesses because the tax would only be incurred when they actually sold it, not when they first inherited it.

JA: You know, there’s nothing on here on capital gains taxes.

AC: No. There’s nothing. So I guess we’ll assume there’s no change in them and capital gains taxes really do have a 0% rate, a legitimate rate for married couples, it’s taxable income up to $75,000, for single, it’s about $37,500. In other words, if your taxable income is below those thresholds and you have capital gains, your tax rate really is zero. And then there’s a 15% rate above that. And by the time you get to the maximum tax rate, you’re over $400,000 single or married, it’s $400,000 and change, single, it’s close to $500,000 for married, then the tax rate is 20% for capital gains. So yeah, you’re right. There’s no mention of that whatsoever. But anyway, that’s individuals. The individual tax code is now from pages 3 to 6… Well, 3 is the goal. So it’s really 4 to 6 – it’s three pages. I do like the simplicity.

Corporations, Joe, a lot of big changes there. Tax rate structure for small businesses, which often are called flow-through or pass-through type businesses, like if there’s an S-corporation, or a partnership, or an LLC. What happens is, any corporate or partnership profit flows through to the partners. And what they’re saying is that that tax rate would be capped at a 25% rate.

JA: So that’s huge for a lot of small businesses. And so if you’re a profitable small business, you pay yourself a salary of let’s say, I don’t know, a couple of hundred thousand dollars, but maybe you have a million dollars of profits. So then that profit flows through to you. You don’t have to pay payroll tax on that, so there’s a tax saving there, but it’s still taxed at your ordinary income rate. So if you’re a profitable business, you pay yourself $200,000, and then you’ve got another million dollars of flow through. Well, then that million dollars added. So you’re still in the 39.6% or 40% tax rate, federally, and depending on what state you live in, you got to pay the state tax on top of that. What this is suggesting and saying is, whatever flow through that goes through, we’re going to cap that at 25%. So in that example, instead of paying your ordinary income rate the highest rate of 40%, 39.6%, that would be dropped to 25%.

AC: Right. And I guess, if you look at under the new law if the tax the highest tax rate is 35% and your s-corp profit would be 20, 25%, you’d have a 10% savings. So on that million dollars of profit, you’d save $100,000 in tax. Now, this is from The Wall Street Journal, and they were talking about this exact issue. So they had some inside scoop. So here’s what they say about that issue: “for more than a year, Republicans have been floating alternatives for defining the line between wage and business income. They’re talking about pass-through income because basically, everyone would pay themselves a dollar in wages, and the rest is profits. So they’re saying they haven’t settled on anything, of course. But one option would be to assume that 70% of pass-through income is taxable as wages, and 30% at the lower business rate. So we’ll have to see. Alternatively, Treasury Secretary Steve… Mnunchin?

JA: Mnuchin. Don’t you know how to say his name yet?

AC: I keep saying it wrong. He says that certain service providers wouldn’t get the lower tax rate. He named accountants specifically!

JA: Wow! Big Al!

AC: He’s thinking about me! (laughs)

JA: But I think what he’s thinking about is, there is a thing called the qualified personal service corporation in a C corporation world. And there are eight professions that basically don’t get a lower graduated rate for a corporation, they have to go to the maximum rate right off the bat. And those eight professions are health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting. It doesn’t mention anything about financial advisors. Maybe we’re OK. We’ll have to see.

Sounds like tax reform could get hairy, for all of us. If you have a burning question about tax reform, or anything else financial, you can always call 888-994-6257 for your chance to talk to Joe and Big Al live during Your Money Your Wealth. That number again is 888-994-6257. 888-994-6257. Of course, you can always put your question in an email to info@purefinancial.com, or send it directly to Joe.Anderson@PureFinancial.com, or Alan.Clopine@PureFinancial.com. Ask Joe and Big Al all your money questions on Your Money, Your Wealth: 888-994-6257 or email info@purefinancial.com.

29:48 – Trump Tax Reform: Small Businesses, C-Corporations, and Expenses

JA: We’re getting into small businesses, we just talked about the pass-through. That dropping from ordinary income rates to a cap rate of 25%.

AC: Yeah. And then there are C-Corporations, which I would say, virtually all of the large corporations in our country are C-corporations and several smaller ones. Although you do tend to find that smaller businesses tend to be S-corporations, because it is slightly more tax favored, and the larger ones tend to be C-corporations, the framework reduces the corporate tax rate to 20%. Now, the highest rate right now for a large company is 35%, so that would be a gigantic tax deduction there. And I read in the last couple of days, a lot of concern by taxpayers over that. It sounds like, “you’re just helping the fat cats, the big companies, and this and that.” And I just want to inject one thing, that I don’t think a lot of people realize, and that is the corporate tax rate we have right now is totally unfair. It’s a 35% tax rate. But then the profits, when they’re given to the shareholders, their dividend – and dividends are taxed at either 15 or 20%.

JA: Or, if it’s not qualified, it’s taxed at ordinary income rate.

AC: Right. Exactly. But even in the best case, a 35% corporate rate and a 15% individual shareholder rate, the corporate tax rate now is 50% or 55% if you’re in a higher tax bracket. And that’s not fair, I don’t think. And I think the 20%, actually, is really logical because if you have a 20% C-corporate rate, and then the dividends come out and they’re taxed at 15, that’s 35%. That would be the same as the top rate. So I actually applaud that. And I think that’s good for companies, it’s good for business, it’s good for jobs. This one I think makes a ton of sense.

JA: And also, if you think of it as an individual that owns, let’s say, company stock. So if that corporate tax rate goes down. So what’s going to happen to their overall profitability, it’s probably going to go up. because they have more cash on hand to do different things. So if there’s more cash, that means that company is more profitable. If that company is more profitable, what do you think happens to the stock price? It goes up. So your 401(k) plans, your IRAs, your Roth IRAs, your stocks, your mutual funds, and everything else. if those companies are going up in profits, well then that means those stock prices should, with everything else being equal, should go up. I’m sure some economists will argue me, I’m just a Joe Schmo here. (laughs) I don’t know my head from my…

AC: But I’ll say something else that, to me, people get confused about this. They assume that all these corporate profits go to all the big fat cats.

JA: The big fat cats. Do you like that term? (laughs)

AC: Apparently, I’ve said it two or three times already. To a degree that’s true. However, the majority of U.S. corporations are owned by you and me, in our 401(k) plans. We’re getting dividends. That’s what dividends are. People are wondering what a dividend is all about. Well, that’s a company paying you your percentage of their profits. That’s what a dividend is. And virtually anybody that has a 401(k) or trust account outside of a retirement account, that is invested in anything other than cash and bonds, is part of the system. You’re getting corporate profits.

JA: Right. It’s a capitalistic system.

AC: Correct. Yeah. So anyway, I actually kind of like that one. It’s hard to know how much of this will actually pass, but another one, Joe, is expensing of capital investments. The framework allows businesses to immediately write off or expense the cost of new investments in depreciable assets other than structures, meaning buildings, made after September 27, 2017, for at least five years. In other words, they’re allowing any business to write off whatever equipment they buy in year one. This policy represents an unprecedented level of expensing with respect to duration, the scope of eligible assets, blah blah blah. Well, let me just say something there. I saw a guy on CNBC – seemed like a pretty intelligent guy. He’s talking about the tax code, and he said that one of the things that people haven’t talked about in this tax reform, is this provision. The expensing, how important this was for small businesses, and how this was going to add another roughly 2 points to our GDP over the next five years. And I’m just thinking to myself, ever since the Great Recession, the first year expensing provision has been $500,000. So we already have this. We already had it for 10 years. And we didn’t have that 2% for the last 10 years. And that kind of thing infuriates me because it’s just misinformation, and people don’t really know unless you’re a small business owner, you don’t really know that that was true.

JA: Right. I think a lot of it, on the individual side, is just political rhetoric. It’s just a shell game. It’s just shifting things around. Yes, it’s going to help some. It’s going to hurt others. But you’ve got to run the numbers yourself, to say here’s what I’m paying in tax now. Here’s what I’m going to be paying in tax with this new reform as an individual. I think on the corporate side, there are some significant changes when it comes to the flow through when it comes to the corporate tax rates, and things like that, that could make an impact either way. The others, well here let me show you that we’re simplifying everything, but I don’t know. Sometimes simple is not always better.

AC: Yeah, and this is my own opinion and bias, I guess, Joe. But but I would honestly say, being in taxes since 1982, that exact statement – simple is not always better. We live in a complex economic world, and when things are too simple, people work all kinds of games around it, very easy. Now, you might think how could you do that? And if you’re an employee, it might be difficult. But if you’re a business owner, or you own real estate or have certain kinds of investments, there are all kinds of things that you can do. And that’s exactly why we got all this complexity. These loopholes, there are a few stupid ones, I agree with that, but in general, what people are calling loopholes were things put in to try to stop abuses. And unfortunately, it’s layer after layer after layer. Now we have such a complex system, and I think virtually everyone, including myself, agrees we need a simpler system. There’s no question about it. But too simple is not necessarily the right answer. I’m agreeing with you.

JA: Well we agree about something, Big Al.

AC: Look at that. Another one is interest expense for corporations might be partially limited. So companies that buy a lot of equipment on terms, they borrow for it, they may not get the write off all their interest. I don’t think that is going to pass. I think that’s going to be fought. Because there are certain businesses that require a lot of equipment, and all of a sudden you’re going to say you can’t write that stuff off? So yeah, we’ll have to see. And a few other things, there’s other business deductions and credits. They think the domestic manufacturers will not have their credit anymore, but maybe R&D, low-income housing might continue. Who knows. But again, this really is kind of a framework at this point, and I think, over the next few weeks or months, we’re going to learn more about the likelihood that this will pass. And if it passes, what it’s going to be, and will it be retroactive. Boy, Joe, I think this is the year to really pay attention to tax planning because so much is at stake here. And if some of this stuff is retroactive, and we’ve seen the government have a tendency to pass things right at year end, where you don’t have a lot of time to maneuver.

JA: Right. I remember we were counting down the days back in 2012. I was like, “it’s going to be on the 18th.” And then it happened maybe on the 23rd. Now we’ve got four days to figure this out.

AC: Right, 4 business days, because you can’t count Christmas, so yeah right. To me, this is the year the tax planning is really important.

Clearly, Joe and Big Al and the rest of the team at Pure Financial Advisors are gonna be slammed as we get closer and closer to the end of the year, so call 888-994-6257 now to schedule your end-of-year tax planning appointment. Don’t wait to find out how this total tax code overhaul might affect your tax strategy. Call 888-994-6257 now to make an appointment.

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 10 Important Steps To Take in the Last 10 Years Before Retiring

38:41 – Big Al’s List: 10 Important Steps to Take in the Last 10 Years Before Retiring

The Balance Article – The Final Countdown: Preparing for Retirement

JA: 10 steps to take before your 10 years of retirement? It’s a double list.

AC: (laughs) Yep, it’s a double. It’s 10 for 10. So these are decent, I think. Sometimes these are terrible. And you have to just kind of toss them. Although some of these you’ll say, “Oh, Al, come on.” But you just have to get through. So number one is: define your version of what ideal retirement looks like, and that’s what will you look forward to doing in retirement? Will you stop working completely? Do you plan to take a part-time job maybe start a business venture? There’s no one size fits all to these questions. Personalize your vision of retirement in a way that matches your values, life goals, carefully consider what your ideal retirement looks like. That seems so obvious. But it seems like so few people do that.

JA: No one does it.

AC: As you’ve said before, which I agree. They pick an age. I’m retiring at 62. I’m retiring at 65, and they don’t think about anything else. They don’t think about the finances. They don’t think about what they’re going to do with their time.

JA: Right. I think the time is even more important in some cases, you can have all the money in the world. But if you’re just sitting there bored as hell? I think a lot of times, this is on the softer side, and we usually don’t like to go down the softer side of finance. But more and more of you that are retiring, that haven’t really thought of what you were going to do, you’re losing your identity. it’s like, “oh my God, I didn’t know my identity was so ingrained in my occupation. I’m a corporate executive and I have power. And I have decision making, and I have deadlines, and I have responsibilities. And I have pressure,” and then you’re thinking how much that you hate that stress. And, “I can’t wait to retire. Oh my God,” you have a bad day and you’re like, “I’m over this.” Two weeks into retirement you’re like, “damn, I need that back.” So you start fighting with your spouse, calling up your kids, bossing them around.

AC: Right. You start fighting with your spouse. You start getting depressed, you start feeling like, “oh, I got this pain in my side.” Oh, you never thought about that before.

JA: Right, oh jeez, what’s this, what’s going on here? (laughs) Be careful who you hang out with. It’s like all of a sudden, if you’re a young retiree, you’re going play bingo with a bunch of 80-year-olds, you’re going to turn 80 very, very quickly. (laughs)

AC: (laughs) That’s a good point. The second one is run an initial budget plan for retirement, and this also seems kind of obvious. This doesn’t have to be as hard as it seems, it might just be a simple thing of how much are you spending right now, kind of take a look at your net pay. And if you’re not really saving anything outside of retirement, well your net pay is probably what you’re spending. And then it’s like, just give it some thought. Will there be any changes? Well maybe I’m going to drive a little bit less, so maybe I don’t have to buy suits for my job. But on the other hand, I might want to travel more and have more leisure activities, so kinda give that a little barometer. And I think most of you if you have the resources to do it, what we’ve seen is you want to at least keep up the same lifestyle. Many people want to spend more those first few years retirement.

JA: I had this discussion with an individual just last week. And he’s like, “man, I just don’t see me spending a lot of money in retirement. I really don’t.” And he’s a corporate exec type person. The couple’s in shape. They’re the type that are close to 70 but they look like they’re close to 50. Extremely active and everything else. And he’s like, “man, I think I’m going to spend a lot less money,” and I’m like, “well, what are you going to do in retirement?” And he’s like, “well, I never thought of it.” I’m like, “well, that’s the first step, buddy. Are you just going to sit at home and watch TV?” No. You’re going to probably want to travel, you probably want to get involved with different things, and guess what, you’re not working. So when you’re not working, we tend to spend money.

AC: Yes, we tend to spend more on Saturday and Sunday than the rest of the week.

JA: Right? I spend like five bucks Monday to Thursday. But Friday through Sunday, boom! $5,000. (laughs) It’s like what the heck am I doing here.

AC: (laughs) Right. And there are going to be some people, the accountants out there. that have all their records on Quicken or whatever, Mint.com.

JA: Yeah but they’re not retired, they’re still working in they’re planning on this fantasy that they’re going to spend a lot less money because, well… What activities? You don’t even know what passion you’re going to be involved with because you’re going to find different passions because you’re going to have a lot more time to figure out different things. So you might fall in love with, I don’t know, fly fishing, and then next thing you’re going around the world to fly fish.

AC: Yeah you’re flying up to Alaska and right staying in lodges. You’ve got the draft beer up there, it’s right out of the micro-brewery, and they don’t charge three bucks for a beer. It’s 14. (laughs)

JA: Yeah, I can’t bring my cooler of Natural Light? (laughs)

AC: You’ll be laughed off the river. (laughs) Even the bears would laugh at you for that.

JA: Hamm’s. (laughs)

AC: Three and four are kind of related. One is, see if your retirement savings will be enough, and four is: estimate how much guaranteed income you will get from Social Security, pensions and the like. So you start with, what do I want to spend? And you may have no idea. So just figure out what you’re spending right now. And I’d say, more people than not, that we talk to, have no idea. So just look at your net pay, and then multiply that by the number of paychecks, that’s usually a decent starting point. Now if you’re one of those that saves a lot of your net pay, awesome, then you’re spending less. But I would say most people that we talked to, it’s that net pay. That’s a pretty good approximation of what they’re spending. And then let’s look at the other side. Let’s look at the income side. So I’d spend $100,000. What do you know? I thought it was only spending $36,000. How many times have we heard that? How much are you spending? $3,000 a month. And then we go through their income, and their net pay is $100,000. Where’s the rest going? “I don’t know.” (laughs)

JA: “Well, that’s a good question. What do you think, honey? Where’s it going?” “I don’t know, you tell me!” “We don’t live lavishly, Al.”

AC: Blank stares. And that’s the most overused term we’ve ever heard.

JA: “We don’t live lavishly.” Yes, you do.

AC: We hear that when people really do spend $36,000 a year, we hear that when they spend $100,000 a year. I’ve heard that when someone spends $300,000 or $500,000 a year. “Joe, Al, you don’t understand, we don’t spend lavishly.”

JA: Right. No, not spending lavishly is the guy we talked to last week, what, he saved 90% of his income. That dude’s not living lavishly. (laughs)

AC: No, he’s living very frugally, I would say. But anyway, the computation is relatively simple. $100,000 is what you want to spend or what you’re spending now. So that’s a good starting point. And then it’s like Social Security is and pensions are $60,000. Just to make this math easy. So you still need another $40,000 from somewhere. So you take a look at, OK, $40,000. Multiply that by 25. That’s a million bucks, that’s what you need to have saved to make this thing work. And there are a million variations, Joe, and I don’t want to over oversimplify this because there’s a lot more to it, but at least you do that quick calculation, you’ll be in the right ballpark whether you can even retire or not.

JA: Right. And that’s kind of the first step.

AC: Or maybe you go the other way, maybe you say, “I only got $500,000.” Well, multiply that by 4%. “That’s $20,000. My fixed income $60,000, I can spend $20,000 from my portfolio. Is that enough?” And if it is, cool, you can go and retire. But do consider the differences. Because, a lot of times, people retire before 65, and they forget about health insurance. Because Medicare happens at 65, so they’re going to have some kind of insurance, and the whole leisure part like we just talked about, a lot of things are are are omitted in this quick plan.

JA: Right. They’re looking at, “OK well this is what we’re spending here. Well, we’re not going to spend that, we’re going to cut this, we’re going to cut that.” But they’re not adding anything to that list. They are just cutting them, thinking, “oh, well we can spend significantly less in retirement.” Well OK. Well yeah, if you want to live that lifestyle, then go for it. This is your life. This is your retirement. These are your goals. But we’re just here to say, here are some mistakes that people made along the way. All of a sudden they did get in retirement, they were spending a lot more than they ever thought they would, because they have more time. They found more hobbies, they found more passions, in that they were really really dedicated to. I met an individual, he retired at 58. And he had like $700,000 in his retirement account, retired at 58, and now he is 63. The seven hundy? Gonzo. Gone.

AC: All the way, gone. In five years.

JA: Zero. Yes. And he’s like, “yeah, I guess I probably retired a little earlier than I should have.” Ya think?! (laughs) He’s like, “Do I go back?” His wife is a lot younger. She’s still working. She makes a good income.

AC: But somehow he still went all through his. Boy, when she retires. Game over.

JA: That’s like – divorce. (laughs)

There is a lot to consider in the 10 years before you retire, and we don’t just mean your fly fishing budget. If you or someone you know is turning 65, it’s time to start navigating the Medicare maze so you can choose the right plan for you, at the right cost. The Understanding Medicare Video Series, featuring Certified Financial Planners Joe Anderson and Jason Thomas, is available free, on demand, from the Learning Center at YourMoneyYourWealth.com. Learn the basics of Medicare, how to Bridge the Gap to Medicare, and 11 Common Medicare Mistakes to Avoid. While you’re there, check out white papers, articles, webinars, and all the other educational video clips on just about every personal finance topic you can imagine. Access it all in the Learning Center at YourMoneyYourWealth.com.

48:39 – Big Al’s List, Continued

JA: We’re in big Al’s list, we’re in the thick of it.

AC: Yeah we are, 10 important steps to take in the last 10 years before retiring. We’re kinda talking number five. Where would you like to live during retirement? That’s an interesting one, Joe. It seems that almost everyone we ask wants to stay in their home. 80, 90%. But that’s not necessarily the best answer, because maybe you got a lot of equity in your home, and maybe you don’t have a lot of other assets, and if you want to have any kind of retirement lifestyle, maybe you want to consider downsizing, or maybe there is another state or city, where your kids and grandkids are living. So you just want to sort of give those things some thoughts.

JA: Absolutely. It’s figuring out where do you want to live? Do you want to stay at home? But can you afford to stay in your home? Do you want to utilize your equity? What other assets do you have? What is your fixed income sources? Because think about it, now you’re 65 years old, and you want to get up and move to a totally different state, let’s say. Maybe your social circles are right around you. Then you’ve got to build new friends at 65?

AC: And I think that’s why most people decide to stay put. And CNBC, they quoted a study from Merrill Lynch about retirees, and those that actually want to stay within their region, or whether those that want to move. And the highest percentage of people that want to stay in their locale was from the South Atlantic. Florida, Georgia, the Carolinas. 80% of people want to stay put. And the second most is the Pacific. California, Oregon, and Washington. I guess that kind of makes sense, those are kind of retirement areas, coastal. And the third is the mountain states, which also include Arizona, Nevada, Utah, Colorado.

JA: People didn’t want to stay in Texas?

AC: Texas, that’s 58%. And you know the least, by the way, the northeast. Only 49%.

JA: Well yeah, everyone from New York moves to Florida. Everyone from Minnesota moves to Arizona.

AC: Yeah that’s a fairly low one too is the heartland, which includes Minnesota, that’s only 55% want to stay put, and then go just a little bit further east. The Great Lakes area, only 50% want to stay put. Gettin’ a little tired of that cold weather, I think. Our next one on our list, number six is to review your health insurance coverage options. Boy that is a big miss, I would say, in a lot of cases for those that retire younger than 65. Now you got to figure out how you’re going to cover your health insurance. Maybe if your spouse is still working, and if they have the spousal coverage on their retirement plan, that could be a great way to go. But if that’s not true, you might want to look at COBRA, or maybe you want to look at the individual policy, but you’re going to have to have something between now and age 65.

JA: Right, you’ve got to add another $20,000 a year.

AC: Right, depending on what kind of insurance you go for. And if you go for one of those cheap policies, great. But if you have some ailments, then it’s going to be more expensive.

JA: You blow your retirement just on healthcare.

AC: Right exactly. So that’s a big one. The seventh one is: determine if it makes sense to pay off your mortgage. And everyone seems to want to pay off their mortgage, Joe, and I’m all for that, as long as it makes financial sense. But here’s the mistake we see people making, is they devote 100% of their extra income to pay off the mortgage, and they retire with a house free and clear, but they’ve got no other resources. And so they’re house rich, cash poor and they’re living on Social Security.

JA: I met with this couple, hypothetically, that want to retire in 15 years. They got a rental in Southern California, property values, I don’t know, in the high fives. And there’s a fairly largeable. Large mortgage on it. And so their goal was, “well, we want to rapidly pay this mortgage off, so we have additional cash flow in retirement.” And I said, “I think you’re looking at this wrong because that property is $600,000 let’s say. You’re getting $2,500 in rents. The cap rate on that, if it’s paid off, still stinks.” It’s low, and they’re feeding it. And then they’re going to feed it more. And it’s like you got 15 years and you got really good income. So then it’s looking at leverage. Hold it for growth versus income, and then sell it and buy a place in Tennessee, or Texas, or Florida, or Minnesota or whatever, where the market values are a lot lower than a beach home, a beach condo in Del Mar. It doesn’t make any sense because let’s say $600,000. Let’s say they have a $300,000 note. So if they get 5% on that home. So how much is that appreciation, Al?

AC: $30,000

JA: $30,000. But – so that rate of return is 5%, $30,000. But they only have $300,000 of equity. So their rate of return on net equity is double that, 10%. You’ve got 15 years growth is probably what you want, not necessarily income, but it works the other way too. If their property drops 5%, you’re negative. But if you have a 15-year timeframe, you can weather all those cycles, I believe. Would you agree with that?

AC: I do agree with that. And I think that’s a common misconception of those that own properties in more expensive locales like Southern California, for example, San Diego in particular, is most of the money made in these properties, except for maybe some small apartments, is appreciation. It’s not cash flow. Now if you happen to live in Texas or Arizona, then totally different. Get that thing paid off. That’s a cash cow. Your cap rate is probably 10%. So why not. But in California, it’s a little bit different rules here.

JA: I think if you think of the real estate gurus, they want cash flow. They would never buy a property in San Diego, in a sense, because it’s not going to cash flow well.

AC: Yeah if you ever noticed that the real estate gurus, they don’t live in California. They live in Arizona. They live in Texas. They live in Tennessee.

JA: They’re buying places in obscure places that really cash flow.

AC: Couple more items Joe. Number eight. And this I think is super important. Decide if your current asset allocation matches your current risk tolerance and time horizon. And we see fairly big mistakes here. On the one hand, we’ll see people that want to get rid of all risk, because they think, “I’m retired now, I can’t afford to lose the money,” not realizing that their timeframe might be 20 years, 25 years, even 30 years, because we’re living longer. So in order to keep ahead and have some inflation protection, you’re going to have to have some money in the market. Then, on the other hand, we see people that do just the opposite. They want to stay all in, not realizing when the market takes big dips, and you’re pulling money out for your retirement, you’ll never recover. So there’s a balance. And it’s funny how we do see those two extremes even for retirees. And the last one is: consider redefining your retirement when you go through the first eight or nine. In other words, it doesn’t really quite pencil out. OK. Well, that’s OK. So maybe you work part-time in retirement, or maybe you’ll spend less, or maybe you’ll downsize your home, or maybe you’ll get a reverse mortgage, or whatever. Just be creative. Don’t give up. There is a solution here.

Hope you enjoyed the show. For Big Al Clopine, I’m Joe Anderson, show’s called Your Money, Your Wealth.

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So, to recap today’s show: It remains to be seen if President Donald Trump’s tax reform will fix our broken tax code and provide more jobs, fairer taxes, and bigger paychecks. Call 888-994-6257 to schedule a free personalized tax reduction analysis. There are plenty of things to consider in the 10 years before you retire, like whether or not you should pay off the mortgage, where you want to live, and your health insurance options, but an important one is making sure you can afford the lifestyle you’re expecting before you pull the plug on the job. Even so, you can always go back to work. And largeable: is that like bigly?

Subscribe to this podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, if you have a burning money question for Joe and Big Al to answer on Your Money, Your Wealth email info@purefinancial.com or call 888-994-6257! Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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