mary beth franklin

Mary Beth Franklin is a contributing editor for InvestmentNews and is a nationally recognized expert in Social Security claiming strategies.  Formerly a Capitol Hill reporter at United Press International and retirement and tax editor at Kiplinger Personal Finance, Mary Beth has been working in the finance industry for years.  She frequently speaks and writes about current research on [...]


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 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
March 26, 2017

Intro: What you need to know about the current Social Security claiming rules. How to curb taxes in retirement. And what Donald Trump’s tax return reveals. This is Your Money Your Wealth.

Today on Your Money Your Wealth, Social Security expert Mary Beth Franklin explains the current claiming rules and how they might have changed your retirement plans. Joe and Big Al offer tips for managing taxes in retirement and answer emails on rollovers, Roth IRAs, 401(k)s, debt, and building a stock portfolio. And finally, from sole proprietorships to real estate; alternative minimum tax to capital gains and losses, the fellas analyze the tax return of one Donald J. Trump. Here are Joe Anderson, CFP and Big Al Clopine,CPA.


Webinar SS Newsletter Recording Imageb

:39 – Life insurance, St. Patrick’s Day, and how much does Joe know about Social Security?

JA: You know what, Al, I got some life insurance.

AC: Yeah, what just for your heirs? (laughs)

JA: Yes. Just in case. (laughs)

AC: Just in case you get some heirs?

JA: I dunno. We’ll see.

AC: While you’re young and healthy?

JA: Yes. I think it’s important for people to purchase life insurance.

AC: Yes I agree with you. I’ve got some myself. Two policies.

JA: You kind of feel a little relieved afterwards. It’s kind of sunk cost. Hopefully. Hopefully, it is. Term policy. But you know, going through that interview process, I wonder how many people actually tell the truth?

AC: Well they did ask do you jump out of a plane, hot air balloon, that kind of stuff? Race cars?

JA: Oh yes. Race cars, moving violations. Never. (laughs) Ever.

AC: Do you ever drink?

JA: Yeah, “Do you drink alcohol?”

AC: One beer a week.

JA: I was like, alcohol? I don’t even know what that means! She’s like, well when’s the last time you drank alcohol? And I was like, well I had a beer on Sunday.” Then she kinda looked at me. I felt bad! I meant Saturday?

AC: Super preferred is out. (laughs)

JA: She’s like, well how many did you have? I was like, well it was Sunday. I don’t know probably just 30. No, probably two beers, I was watching basketball.

AC: She didn’t ask you about Saturday.

JA: No she didn’t. Thank God not Friday or Saturday. (laughs) St. Patty’s Day!

AC: You know, Joe, consumers are expected to spend about $5.3 billion on St. Patty’s Day.

JA: $5.3 billion on what?

AC: $35 per person for corned beef, beer, green apparel and other purchases. But there’s an unexpected bill that will happen to many. The emergency dental visits jump 77% the day after St. Patty’s Day.

JA: Dental visits?

AC: Yes. You know why?

JA: Why, corned beef is too hard?

AC: (laughs) Because the visits often stem from drunken clumsiness and fights. So yeah I hope you guys didn’t have to go to the dentist.

JA: Exactly. You know Alan, my uncle, he had a bout of cancer.

AC: That’s too bad.

JA: Cancer survivor, though. And so, you know, going through that you have a period of life where you’re kind of digging in a little bit deeper, kinda find purpose and meaning of what your life might be.

AC: Yeah I suppose you kind of have a whole new outlook. And you know you maybe savor whatever you’ve got left.

JA: Yeah that mortality kind of stigma. So what he did is he wanted to go through the family tree to kind of see where the linkages with our family. So for years we thought on my mom’s side we’re 100% Norwegian. But guess what, we have about, I think there’s a quarter Irish.

AC: Oh you got some Irish. Wow, I got some Irish in me too.

JA: That explains everything.

AC: That’s why you got a green tie.

JA: Yes exactly. And then I was going to say something else….

AC: Slipped your mind? Well, I’ve got some real content to do, which is Social Security.

JA: You don’t want to talk about green beer? Getting in fights?

AC: Well, fortunately, I’m not at the dental office because I didn’t get into a fight and I didn’t trip and I was not clumsy from my drunkenness.

JA: Usually if the knees start kind of… I shut it down. I don’t think I’ve ever been to the stage where, whooaaa!

AC: You can always just hit Uber on your phone, and there you go, all set.

JA: If I’m still out in public if I feel that way.

AC: Yeah it’s funny I was talking to Ryan yesterday on the phone and we were talking about drinking. (laughs)

JA: That’s what you do with your son. (laughs)

AC: Good conversation. My 24-year-old son, how many beers did you have last week? (laughs)

JA: Did you give him a medical exam?

AC: No but I mean… I don’t know why it came up, but we were talking about hangovers and he said yeah they’re awful. Really, I had a few in college, not tons, but a few, and you get to where it’s just it’s not even worth it. You don’t even want to do it the night before because you know how bad you’re going to feel the next day.

JA: Yeah and age doesn’t help that.

AC: But I did have one relapse in my 40s. It was awful. And that was the last time. It was early 40’s. And now I’m late 50’s, so I’ve been clean for 15, 16 years without a hangover.

JA: Oh man. Well, let’s talk a little bit about Social Security. We have is Social Security webinar coming up. You have a quiz for me because I’m getting prepared for this webinar.

AC: Yeah, you’re going to be teaching it and, gosh, we have a lot of people that have already signed up. How do they sign up?

JA: I dunno.

Announcer: Ahem. YourMoneyYourWealth.com – they can register for tomorrow’s Social Security webinar at YourMoneyYourWealth.com. Please continue, Al.

AC: These are actually generally pretty simple, and I think you’ll do pretty well on this. So the first question is true or false: you can increase your monthly Social Security benefits by delaying receiving benefits until age 67.

JA: Sure, yeah. You’ll get an 8% delayed retirement credit from your full retirement age to 70.

AC: That’s exactly right. And so full retirement age this year is, what, 66 years two months? And so after that, if you do this on an annual basis, you have an 8% increase each and every year.

JA: You know what though, Al. You can still increase your overall Social Security benefit on top of the 8% delayed retirement credit which I think a lot of people don’t get.

AC: That is true, why don’t you explain how?

JA: Because if you continue to work, they take a look at 35 years of work history to come up with your PIA, your primary insurance amount. And so if I’m continuing to work past my full retirement age, even if, let’s say I’m already collecting my benefit, but I’m still working and I’m putting into the system. So what they do is they’ll look at that year of wages, and if it was higher than any other of the 35 years that I did before, they’ll just replace that year with another. They’ll drop off the lower one. So they recalculate it. And then I would get an increase in my overall benefit. So the longer you work, as well, even though you are collecting your benefit, that’s going to increase. Let’s say I work until 75 and still putting into FICA. You don’t stop putting into the system but your benefit potentially would increase, because it depends on your top 35 years of wages. But I would imagine if you’re still working later in life, those wages are probably a little bit higher than they were when you were 20 or 25.

AC: I think that’s a lot of cases that’s right. You take a higher earning year and drop off a lower earning year and you get more benefits. So that’s true. Second true false: children can receive Social Security benefits.

JA: Sure yeah. If you have a father or mother that is collecting Social Security and if there is a minor child.

AC: Yeah. Children under age 18 can receive Social Security benefits if their parent or guardian is receiving benefits. They can also collect survivor benefits in the event of a parent’s passing.

JA: Trump’s kid, you think he’s collecting?

AC: It’s possible. (laughs)

JA: What’s his name, little Bonner? Donner?

AC: Oh, I knew it. I can’t think of at the top of my head. Anyway, here’s three: when a person claims Social Security benefits, it causes their spouse or ex-spouse’s Social Security benefits to be reduced.

JA: A lot of people wish that on the ex-spouse. (laughs)

AC: I’m gonna claim, I’m gonna max that out so my ex is gonna get a pay cut.

JA: Or I’m going to collect my ex-spouses benefit just to reduce it. Ah, no. It has no effect it’s just a simple different calculation. That’s just a calculation.

AC: That’s right. Spouses also benefits do not cause the primary earner benefits to be reduced. And interestingly enough, if you’ve been married and divorced four times, and to each of those prior spouses you’ve been married ten years, they can all claim your benefits. So it’s pretty interesting how that can work.

JA: Yeah you have to be married at least for 10 years though and not remarried to collect on one of the ex- spouses.

AC: That’s right. Here’s the next one: government workers do not pay into Social Security.

JA: Government workers, well depends on the classification of the government worker.

AC: It does, but let’s call it federal workers.

JA: Sure. Yeah, they definitely do. If it’s civil service retirement or federal, FERS and SERS, Yeah, they put into Social Security.

AC: So the answer is false because the question was government workers did not pay into Social Security. False. They do. In fact, since 1983 all new government employees, including members of Congress, have been paying into Social Security and are eligible for full benefits. A divorced spouse can collect benefits on an ex-spouse’s record, even if the former spouse has not claimed benefits.

JA: No. On the spousal benefit?

AC: On an ex-spouses.

JA: OK well let’s say if I’m still claiming the spousal benefit, it’s an ex-spouse… yes, they would be able… Let me see, that’s a good one.

AC: It is, it’s a little tricky. I had to think about that myself.

JA: Because if I’m married, it’s a spousal benefit, then that other spouse needs to be claiming or filed for benefits and then suspend those benefits. If it’s an ex-spouse I’m going to say no, that person does not need to be claiming and that’s a guess.

AC: Yeah you are correct. So the answer is true. Divorced spouses do not have to wait for their former spouse to claim benefits, but they do have to wait until they turn 62.

JA: Yes they do.

AC: So all right, you’re five for five. You can collect two full checks at the same time, a spouse a benefit and a benefit based upon your own work record.

JA: Yes, but it only comes into one check. That’s where it gets a little bit confusing because, let’s say if I claim my benefit. For instance, if I claim, let’s say, my own benefit at 62 but my spousal benefit is higher than my own benefit, and then when my spouse turns full retirement age and claims their benefit, mine would then revert to the spousal. But how it actually works behind the scenes at the Social Security administration is that you still get your benefit and then they just add on top of that the spousal benefit. So the spousal benefit won’t be reduced per se, because you switched to the spousal benefit at, let’s say, your full retirement age, even though you claim your benefit at 62 but your benefit would still be reduced so it would be a reduced benefit.

AC: Your explanation was correct. Your answer to the question was wrong because it said you can collect two full checks at the same time. The answer is false. But you said that. You can get the benefits, but it’s only on one check.

JA: It’s one check! You’re not getting two checks!

AC: So listen to the question: you can collect two checks at the same time. False. An annual cost of living adjustment is guaranteed.

JA: An annual – no.

AC: Absolutely not. Cost of living adjustments are based on inflation. We’ve had several years where there’s been no increase at all. Foreign citizens cannot collect Social Security benefits.

JA: Foreign citizens. No, that is false.

AC: That is false. Foreign citizen, as long as they have 40 quarters or 10 years of service, then they can collect benefits. If I keep working while collecting benefits, my income will be subject to payroll tax.

JA: Yes. Well, hold on. Your earnings will be subject to payroll. So yeah.

AC: Yeah that’s right. That’s correct. And the last one, this one I had to think about for a second. A couple… you’ll know this right away. A couple must be married for at least 10 years before a person can collect spousal benefits on their partner’s record.

JA: If they’re married?

AC: A couple must be married for at least 10 years before a person can collect spousal benefits on their partner’s record. So they’re still married.

JA: No. That’s only on an ex-spouse.

AC: That’s right. It’s only an ex-spouse.

JA: For newly married, I think it’s a year.

AC: Exactly. Newly married couples have to wait one year before they become eligible for spousal benefits. I will give you 10 out of 10.

JA: All right, thanks buddy.

Social Security is likely to be an important part of your retirement, and as you just heard, it gets complicated! To learn how to maximize your Social Security benefits under the new rules, sign up for our free Social Security webinar happening tomorrow, Tuesday, March 28 at 10:30 a.m. Pacific Time. Go to YourMoneyYourWealth.com to register, then log on to the free webinar tomorrow!  Joe will teach you about claiming strategies, how to calculate your benefits, what benefits are available and how they’re taxed. That’s the free Social Security webinar, tomorrow Tuesday, March 28 at 10:30 a.m. Pacific. Register at YourMoneyYourWealth.com.

Now we step back in time, back to Halloween 2015, when the government was running out of money, back to when they changed the Social Security claiming rules, back to when Joe and Big Al looked to nationally recognized Social Security expert Mary Beth Franklin for guidance.

13:40 – Interview with Social Security expert Mary Beth Franklin (October 2015)

JA: We got Mary Beth on the line.

AC: Yeah, pretty big changes this week with Social Security.

JA: Huge changes. So as soon as I found the word, I had to get everyone in the office tracking down Mary Beth and we found her. Because in the United States, when it comes to Social Security, this is the person that you need to talk to. So Mary Beth thanks so much for joining us today.

MBF: Well I think it’s very appropriate that Halloween has come early to a lot of retirees because when they hear this news they’re going to be scared.

JA: (laughs) Well let’s dive in Mary Beth, so tell us what happened, what are the changes, what the heck is going on?

MBF: Well you probably know that there’s been some big legislation in Congress this past week to keep the government from running out of money. That’s a laudable goal. It’s important legislation to pass through quickly. The only problem was there were a lot of sneaky things in it that no one knew about. Some of the good things for retirees are the Medicare premium increase for 2016 is not going to be as bad as we thought. The other good news is disability benefits will not run out next year. In the middle of a presidential election season. But the bad news, is the tradeoff was, Congress decided to change some very important claiming rules for future beneficiaries.

AC: So were you were you surprised, Mary Beth, at this?

MBF: I think the word is gob smacked. I have covered Congress for 30 years, and I have never seen anything like this, where something that is so significant to Americans who have paid FICA taxes throughout their careers, and at least felt they had some control over when they could claim their Social Security benefits, and to maximize those benefits. This came out of nowhere. They will not take away benefits from people who are already claiming. But there was a whole lot of confusion earlier in the week, because the way the legislation was written originally, it meant that at that six month deadline affectively around May 1st this would apply to everybody, even people who had already claimed, which meant checks to their wives and husbands and kids would have stopped. Well luckily, before the House passed the rule, someone rewrote it to basically say if you’ve already done this, don’t worry. Everybody can keep collecting benefits. It’s only people who try to file and suspend after the deadline, which is roughly May 1st 2016, family members will no longer be able to collect on benefits. So no one who is currently collecting a benefit will lose it. But the rules will change going forward.

AC: Mary Beth, I had just read something from Larry Kotlikoff and he was talking about that four-year benefit for a spouse could be as much as $50,000. And so that’s what’s going away?

MBF: Well no that’s a separate piece. We haven’t gotten to that yet.

AC: Oh, OK. Well, educate us.

MBF: The first part applies to file and suspend, and basically the law is saying, if you are currently 66 or will be 66 by roughly May 1st next year, you can still file and suspend under the old rules. That’s the first part. The second part has to do with filing for spousal benefits only. So if you’re 62 or older by the end of this year, by December 31st, 2015, you still have the right, when you turn 66, to collect a spousal benefit only. If you’re younger than 62 by the end of this year, you don’t have that option. When you claim Social Security, they will pay you whatever benefit you are entitled to. And if you’re entitled to two, you’ll only get the higher the two, and the other one goes away. So if, when I get to my full retirement age of 66, and my own retirement benefit is higher than my benefit as a spouse, they’re only going to pay me my own retirement benefit, and I will never get to collect the spousal benefit.

JA: Significant changes in Social Security when it comes to claiming strategies, that is going to affect most of us, if you’re not 62 years of age, if you’re 62 years of age or older, you still have a little bit of a window. Mary Beth let’s clarify some things here because of course, it sounds like I don’t know what the hell I’m talking about.

AC: Which is true. (laughs)

MBF: Okay, to recap, if you are currently 66, or you turn 66 within the next six months, you will still be able to file and suspend your Social Security benefits, so you can trigger a benefit for your spouse or minor dependent child, while your benefits keep growing. After that deadline, which is roughly May 1st – and I’m saying roughly because it’s 180 days after the President signs the bill, and he hasn’t signed the bill yet. After that May 1 deadline, you will no longer be able to file and suspend for the purpose of triggering a benefit for your family. The only way your family could collect on your record, after May 1st, is for you to actually claim a benefit. That’s a huge change. The other big change is, if you want to collect only your spousal benefits, while you’re on benefits keep growing, now that’s something that you have to wait until 66 to do, you are only going to be allowed to do that in the future, if you are currently 62 or older. If you don’t turn 62 by the end of this year, then you lose this option.

JA: Let’s talk dollars. How much do you think that would cost a retiree? And when they snuck this in, what I’ve heard is that it’s favoring the wealthy. But in your experience, Mary Beth, wouldn’t you imagine that it helps everyone? It doesn’t necessarily mean if your benefit’s higher or lower, I mean, if I have a lower benefit, wouldn’t that help me even more, because I can get more benefit from the overall Social Security system?

MBF: I think this has helped a lot of middle class families, where you have two spouses that are working. The criticism that it’s only for the wealthy is the fact that because you’re delaying collecting your own benefit, you’re foregoing some cash right now. So by definition, you either need to have income from a job, or income from investments that you can afford to delay. I think it’s a bad rap to say only rich people took advantage of this. The real fact is this was a devil’s market. The senior groups really wanted to hold down the Medicare premium increase next year. That was their primary consideration. They got that in this bill. They were also worried that people on disability would have a benefit cut next year if the disability trust fund ran out of money. They fixed that in the bill too. The tradeoff was they “closed the aggressive loopholes” that upper income retirees were taking advantage of. I think a whole lot of people had already factored these claiming strategies into their retirement income plan, and it’s going to make a huge difference for middle income families of a secure retirement. There is a couple of things I want to point out that have not changed, and this is very important. if you postpone collecting your benefits beyond your full retirement age, up until age 70, you will still be able to earn an extra 8% a year. That has not changed. The difference is, your family can’t collect on your benefits while you delay. You actually have to collect. The other thing that has not changed, which is very important, if you are a surviving spouse, because your husband or wife died, you are entitled to a survivor benefit. And if you have worked, you will also have a retirement benefit on your own record. Those surviving spouses will still have the choice of whether to collect a retirement benefit first, and a survivor benefit later, or vice versa, depending what will create a bigger benefit for them. Those surviving spouses and surviving ex-spouses who were married at least 10 years, and divorced and currently single, still have the right to choose between a retirement and a survivor benefit, and switch to the other later. This is where I have a real problem with it, not that it was changed. I thoroughly expected at some point down the road, Congress was going to change this. What I object to, is they changed it without warning.

AC: Yeah, absolutely, usually we get a lot more warning, but now here it’s like there’s a deadline at year end a deadline roughly around May 1st. How do you plan for that?

MBF: Exactly. So it has blown up a lot of retirement income plans.

JA: What other recourses do you think this is going to happen? I would imagine now people are going to claim their benefits as soon as they can get them, without even considering delaying, because they might think, “Well Congress changed this, they’ll do it again.” With that type of mindset, as you know Mary Beth, is that’s probably the wrong decision that people are going to make because of this I think.

MBF: I agree completely. I think this is going to strike fear in the hearts of people who are not yet retired. And think of how many years we have talked people off the ledge, saying, “no don’t take it at 62. Wait till you turn 66 and get the full benefit, and when the earnings cap goes away, and you may be able to use some claiming strategies to increase your lifetime benefits.” And a lot of those people said, “I don’t trust the government, I’m going to take it at 62.” And I always told them, “Don’t be crazy, you’ll have plenty of warning, and you’ll have plenty of time to adjust your plan.” Well, I have egg all over my face, because I don’t think anybody was more surprised than I was.

JA: Let’s switch gears a little bit. When it comes to the Medicare premium. So this is the crux of everything, of why they got this passed, is that they didn’t want to increase the Medicare premium. I guess because there was no COLA this year, or next year, 2016, on their Social Security benefits, they were going to increase the Medicare premium, but there are some bylaws and things. Can you clear the air on that as well?

MBF: Sure. Let me explain some basic stuff. Social Security benefits are paid to retirees. And in most cases, people who are enrolled in Medicare, their hospitalization, Medicare Part A, is free. Medicare Part B, which covers your doctors and outpatient visits, has a monthly premium. For 2015, most people pay about $105 a month. And that is deducted directly from your Social Security checks. Well because inflation has been so low, there will be no cost of living adjustment in Social Security benefits for 2016, The benefits will remain flat. There is a rule in the Social Security Act called the Hold Harmless Provision, that says, for most retirees your Social Security benefits cannot go down from one year to the next, just because your Medicare premiums went up. So by definition, if there is no increase in Social Security benefits, there will be no increase in your Medicare premiums. But that only applies to about 70% of retirees. The problem is Medicare costs have continued to go up. And by law, those Medicare Part B premiums must pay for about 25% of the cost. The Social Security and Medicare trustees estimated that Medicare premiums would have to go up by 52% next year to cover those costs. Now here is the problem. If you had 70% of the people who are protected by Hold Harmless, they’re not paying an increase. So the other is 30% of people would have to pay the whole increase. And it looked like the premium was going to go up from $105 a month this year, to about $155 a month next year. That’s about a $650 annual increase. People were really freaking out about that, we said we can’t let this happen, we have to protect retirees. Well they did a few fancy things to hold the increase down to about $120 next year. But in exchange for that, they did some other things, one of which is getting rid of the Social Security claiming strategy. So if you are enrolled in Medicare now, and have been receiving Social Security, and your income is under $85,000 if you’re single, or $170,000 if you’re married, you will continue to pay $105 a month next year. There are some people that will pay the higher amount. Those are people who are newly enrolled in Medicare next year. They’re going to pay about $120 a month. So people who are enrolled in Medicare, but not collecting Social Security. They’ll pay the higher amount. Those are people who have filed and suspended their benefits. Those are people who are enrolled in Medicare, but aren’t entitled to Social Security, because they might be public employees. And people whose income he’s above those levels, above $85,000 if single, or above $170,000 if they are married, are going to pay a lot more for Medicare next year.

JA: Great stuff. Mary Beth, thanks so much. That’s Mary Beth Franklin. Mary Beth, where can people get more information about this and follow you?

Well, I am at InvestmentNews.com. You can go to that web site and put my name, Mary Beth Franklin in the search box, and you’ll find everything I’ve written.

JA: All right thanks so much Mary Beth.

That was Social Security expert Mary Beth Franklin in October 2015, discussing the new Social Security claiming rules that are now in place and potentially affecting your Social Security strategy. If you’re still scratching your head, our Social Security webinar, happening tomorrow at 10:30am Pacific time, is just what you need. Go to YourMoneyYourWealth.com to register, then log on to the free Social Security webinar tomorrow!  Time now for…

27:36 – Big Al’s List — 10 Ways to Curb Taxes in Retirement

AC: All right, this is from Morningstar, this is a pretty good article. And I’ll tell you what, taxes are one of the biggest expenses we find people have in retirement. And I guess it depends who you read and what study you look at. Some people say housing is the biggest expense, but certainly taxes, housing and medical are the top three. And for some people, when they pay off their home, and maybe they live in California, Prop 13, they have low property taxes. It’s taxes. It’s income taxes that are the highest expense. So how do you reduce those tax bills in the future? And the first one is practice tax diversification in your accumulation years and Joe, what they’re getting at is, don’t just put every single dollar in your IRA, 401(k), get some money into a Roth IRA, a Roth 401(k). Have some money outside of your retirement account, because there’s different kinds of taxation in retirement. A Roth IRA is, of course, tax free. Any money that you pull out of that, whether it’s principal or income or growth. And your non-retirement accounts, well if you invest those for growth, and you sell it at a gain, then that gain is taxed at capital gain rates. That’s a lot cheaper than ordinary income tax rates, which is what retirement accounts are. When you take money out of retirement accounts, it’s all taxed at the highest of ordinary income rates.

JA: You know I was listening to another podcast/radio show from a very well-known advisor, and as soon as I probably talk about it a little bit, you’ll probably know who I’m talking about. I’m talking to Big Al, of course. (laughs) He states that you can’t look forward with taxes.

AC: You cannot? Really. Why is that?

JA: Because who knows what’s going to happen. So, total disbeliever in the Roth.

AC: Yes I know exactly who you’re talking about.

JA: He’s like, no, they can change the law. I don’t know. It’s all conspiracy theories with this person. I love the guy. Brilliant, sharp. Very successful. But there are just a few things…

AC: And most of what he says is spot on.

JA: Right. Except for this in my opinion. OK Al, let’s say you have money in a Roth IRA. That is growing 100% tax-free for you. Do you have a Roth IRA?

AC: I do.

JA: OK. So, now that money grows tax-free day. And then now you hit retirement and you start pulling money from the account, let’s say in 20 years. And then the tax laws change to a flat tax. Are you going to be, like, pissed off?

AC: I still got money in the Roth IRA that’s still tax-free.

JA: Still tax-free. Even though the rates go flat or a little bit lower. You might of, could have, potentially, you know, if you did the math and everything else, and said you know I really wish I would have paid tax on this.

AC: Right because then I could have got a bigger tax deduction way back when instead of what I save right now. And the problem with that kind of thinking…

JA: You already forgot about it. What did you have for lunch yesterday?

AC: Uhhhh…..

JA: See, you don’t even remember! It doesn’t matter. It’s in the past, who cares. It’s all tax-free.

AC: You are right. But you’re right, and so here’s the thing is, that whole analysis is on paper, which is, well, you want to save at a higher tax bracket. And we generally agree with that. But here’s the problem with taking that thinking to an extreme, is that presumes that the tax that you save, you will save it. And how many people actually save the money that they save in taxes? They spend it.

JA: Right. So like for an example, $10,000 in a retirement account, you’re in the 25% tax bracket, you save $2500. So are you taking that $2500 that you saved in tax, and then saving it?

AC: No, you’re going on another vacation!

JA: Yes! It’s gone! You save in your 401(k) plans, you pay your taxes, and you spent everything else. That’s usually what happens.

AC: In southern California, you bought a new surfboard. And a paddle board or something. Number two, Joe, is take advantage of the sweet spot. And this is really talking about new retirees. And this is if you’re, like, let’s say you retire at age 62, or 65, or 67. There’s a sweet spot between that age and 70 and a half. And what I mean by that is, at 70 and a half you have to take your required minimum distribution, so your income naturally goes up by definition, or could go up by definition. And if you’ve waited on your Social Security till age 70, like we recommend for many of you to do that, well then all of a sudden you’ve got that extra income as well. And so, at 62 you don’t necessarily have this income. You can be living off of your savings. You can be living the lifestyle you want to live, but have very low taxable income. And why not use that opportunity to do Roth conversions? Taking money out of the IRA, converting it to Roth IRA, you pay taxes at lower rates because you’re in lower brackets. And then all that future growth and income is tax free, keeping out of higher brackets later.

JA: Absolutely. I mean it just gives you choice, gives you control on the overall taxation of the retirement income that you have. And I think that’s key. What, 29% of the population has a Roth IRA. So 70% of you that are listening to this show, probably not THIS show, but 70% of the population don’t have a Roth IRA – it’s craziness to me. It’s tax-free income in retirement. Just put 5 grand in.

AC: Yeah get it started.

JA: We’re in right in the thick of Big Al’s list.

AC: We are, we’re talking about 10 ways to curb taxes in retirement. Next one I want to discuss, number three on the list. This is written by Morningstar, a pretty good article by the way. It’s managing your withdrawal sequencing. And Joseph, what they’re getting into here is, the market doesn’t always go up in a straight line, sometimes it shoots up, sometimes it corrects, and you got to have a sense of where you’re going to be pulling money from for your lifestyle, depending upon what kind of market it is, and depending upon what kind of assets that you have in certain accounts. For example, if the market is shooting up and stocks are doing rather well, then you might want to create some of your income from the stocks because now you have a heavy allocation of stocks.  On the other hand, if the market is correcting, you don’t want to sell your stocks while they’re down. You want to be selling those safe positions that have held their value. And so you let the stocks recover and come back.

JA: How does that save you money in tax, though? What’s the list? Aren’t we talking about 10 ways to save money in taxes? (laughs)

AC: Yes. (laughs)

JA: Keep reading there, Bubba. (laughs)

AC: Well, that’s a good point. (laughs)

JA: Did you switch to another list while I wasn’t paying attention? (laughs)

AC: I guess you got me there. But that’s what it says.

JA: Well no, I think that’s a very good point. That’s how you would want to take a look at how you create your income.

AC: You’re looking at me like what are you talking about?!

JA: OK so where does this tax play come in. I don’t know I don’t get it. (laughs)

AC: Well here’s here’s the tax play Joseph. I’ll expand on what’s written here. Because each of these bullets, they have another article that supports each point.

JA: Oh you only kind of half-assed it. (laughs)

AC: I just got the summary. (laughs) So let me explain how this could save you taxes. So if you are then selling your stocks, well they’re higher then, they’ve gone up and you probably have gain on sale. First of all, that’s capital gain, if you got them in the right accounts, which is your non-retirement accounts. But secondly, if you’ve been tax loss harvesting, while the market is down, so there are times of correction, you actually sell positions, you buy similar positions so you’re still on the market, but you create tax losses. Then when you’re selling your stocks to create your income, in times when stocks are going up, you’ve got these losses to net against it, thereby saving some taxes.

JA: Wonderful.

AC: Do you buy that?

JA: I buy that.

AC: (laughs) Number four. Keep an eye on asset location.

JA: All right. I think those two could be combined. Because what asset location means, is that you want to locate assets such as stock, that’s an asset, versus bond, which is another asset, in different pools, locations, of how they’re taxed. So let’s say you have a retirement account, and you have a brokerage account. And you have $200,000 in your brokerage account, you have $200,000 in your retirement account. 50% of your assets are in a retirement account, 50% are in a brokerage account. Then you also want a 50/50 split of stocks versus bonds. And this is, of course, outside of your cash reserves. You potentially would like to hold your stocks in your brokerage account, and your bonds in your retirement account, because of the taxation.

AC: Yeah I think most people think you should do it the other way.

JA: Sure. And the reason for that, Alan, is that we’ve always been taught to defer our retirement accounts. Defer, defer, defer. Don’t touch it. So people don’t necessarily want to touch their retirement accounts. They’re thinking that that is for long term. So the IRAs are very long term, I’m not going to touch that. So I’m going to have more growth assets orientated in that particular account, and outside of my retirement accounts, well, I might have to have access to it, and things like that. No, that’s what your cash reserve is for. So make sure that you have plenty of cash reserves for opportunities, emergencies, everything else in between. And then everything that’s earmarked for your retirement should be allocated, stocks or asset classes that have higher expected returns should be in your non-retirement accounts, and then your more safe assets should be in your retirement accounts, because of the tax. Just think about it. If you have your stocks, let’s say in a retirement account, stocks over time have outperformed bonds, because there’s more risk to stocks than bonds. Because of that risk, you have a higher expected return, and then if I have this larger expected return in my retirement account, that’s going to be taxed at ordinary income rates, well wouldn’t you rather have that higher expected return in a brokerage account, where you now you’re taxed at capital gains rates? For most of you it’s going to be lower than your ordinary income rate. So you want to take advantage of the growth aspect of it, but also, on the downside, if you’re looking for higher expected return, you are going to take on more risk. We all know what risk means – it’s volatility. So when stocks go down, there’s an opportunity for you to sell that particular security, buy something similar, take that loss as a realized loss, put it on your tax return, that would be offset with any future gains. So it’s a double whammy, I guess, for lack of a better word. I benefit on the upside, because I get taxed at a capital gains but I can also benefit on the downside by creating capital losses that will offset any future gains down the road.

AC: I think this is one of the most important tax considerations for retirees is where they put their investments. And we’re not saying to take any ridiculous risk in any particular asset. Figure out the right mix of assets for you, but then you pluck certain asset classes, as you said, your asset classes with higher expected returns, which are generally stocks. You put those in your non-retirement accounts because of capital gains. You put your safer assets in your retirement accounts because that’s a bond. It’s going to create interest income, which is tax and ordinary income anyway, and you don’t necessarily want your highest growth in your retirement account. Now if you’ve got a Roth IRA, even better, because now you put your higher expected return asset classes in the Roth IRA, that all grows tax free, you put your safest stuff in the regular retirement account, and then kind of the medium, if you will, put whatever’s left in the middle. Put that in your non-retirement account. That’s a great way to do it. If you think about it year after year, you’ll get to keep more of what you’re making because you’ve been really intelligent about the taxes.

JA: Absolutely. You can tax loss harvest, tax gain harvest. Then you have an efficient distribution strategy, and then just to piggyback on what you were saying Al, before where you were talking about nothing to do with tax… your list has everything to do with tax. (laughs) Well now I could look at, my stocks are up, well do I sell those? OK, well if I’ve already had some losses, I can offset those gains with losses, create net income tax-free. Maybe pull a little bit from my retirement account, pay a little bit of ordinary income tax there, pull a little bit from my Roth IRA account, it’s 0% tax there. So now I have a little bit of choice and diversity when it comes to my income via taxes.

AC: Next one Joe is don’t rule out additional contributions – retirement contributions. We talk a lot about a regular IRA, Roth IRA, you can put in $5500 per year all the way till April 15th of the following year. And if you’re over 50, you add another $1000 – that’s $6500. When it’s a 401(k) account it’s $18,000 or $24,000 if you’re 50 and older. But then sometimes people forget – they retire and their spouse is still working. They can still set up their own spousal IRA or spousal Roth contribution, depending upon their age, depending upon income limitations. But that gets missed all the time.

JA: It’s a great idea to take a look at all of your options in regards to saving. No one’s ever complained that they’ve saved too much. So you probably will need it down the road. So just looking at then, where do you want to place those assets.

JA: We’re halfway home, Al, on your big list here, what do we got?

AC: We are – 10 ways to curb taxes in retirement. Next one is, know the rules on Social Security taxation. I betcha almost nobody knows what the rules are. And Social Security income – talking income now – which, in some cases, it’s tax-free. In other cases, you pay taxes on 50% of the income. And yet other cases, you pay taxes on 85% of the income. Now that’s not an 85% tax rate, it just means 85% of Social Security gets added to your income, and then you pay taxes on that.

JA: Right. I think an easier way to say this is 15% of your Social Security benefit is going to be federally tax-free.

AC: Yeah, at least. And in some cases, 50% of the benefit’s tax-free, in other cases 100% is tax-free. So it’s helpful to know those limits, and if you’re married filing jointly, if your provisional income is below $32,000, you don’t pay any taxes on Social Security and provisional income is half of Social Security, plus other income. I think they add municipal bond interest as well.

JA: Basically any type of income interest cash flow that you can possibly imagine that will come to you, except for return of basis of a particular stock, or Roth IRA distributions.

AC: And this is one of the reasons we talked so much about Roth IRAs, because if you are a person that was able to get a lot of your money into Roth IRA, and you can keep your provisional income, you’re married below this $32,000, then your Social Security is tax free. It’s fantastic. Now if it’s between $32,000 and $44,000, it’s 50%. 50% of it’s tax-free, 50% is taxable. And if it’s over $44,000 then you only have 15% tax-free.

JA: So what we look at is, let’s say that you’ve been a regular listener to this show over the last 10 years, and you’ve decided to maybe start taking some of the money that you have from a retirement account, and slowly converting it to a Roth, and making more Roth IRA contributions. So the majority of your nest egg, potentially, is in a Roth versus a standard retirement account. Now, if you could then say, I want to live off of $100,000 dollars a year, then let’s say you still have money in a retirement account, then you look at, I’m just going to pull a little bit from the retirement account. I’m going to collect my Social Security, and then every ounce of additional income is going to come from my Roth? I mean, we have clients that have accumulated a lot of money in Roth IRAs, and are living on a six figure income, with barely any taxation. Because it’s all coming from the Roth, it’s not taxed, and then they pushed out their Social Security to age 70. They got a large Social Security benefit, and they’re enjoying that tax free income from the Roth. Of course that was all hypothetical.

AC: Of course. Thank you for saying that from a compliance standpoint. (laughs)

JA: We don’t have clients that do that. We’ve heard that other clients somewhere might have that strategy, hypothetically, that I read somewhere.

AC: It’s very possible Joe. And also, here’s what happens when you are in these ranges, where you’re starting to get taxed on Social Security. Now it’s like you add a dollar of extra income, you’re in, generally, the 15% tax bracket. So you’re paying 15%. But wait a minute. All of a sudden now, the Social Security, those extra dollars, caused another 85 cents of Social Security to be taxable, so this might sound kind of weird, but you think you’re in a 15% bracket, but your effective rate is really 27.5% because you’re paying tax on that extra dollar, and all of a sudden more of your Social Security is taxable. And so many times, we’ll have people convert in the 25% bracket, and they’ll ultimately save more taxes in the future because they’re staying out of this higher weird bracket when it’s in the 15% bracket.

JA: Right. Because that Social Security, you got to understand provisional income, and how your income is going to be taxed, and how your Social Security is going to be taxed. Which is great, I think we’ve got to start somewhere. It’s like, well, how much assets do I need to accumulate? And then they just focus on a number. I need a million bucks. And then guess where that million dollars is?

AC: Yeah, it’s in their retirement account.

JA: And every last dollar and that comes out of there is taxed at ordinary income. So yes. Let’s get a million dollars or $500,000 or $250,000, whatever your number is, but then just be a little bit more strategic on how those assets are going to be accumulated over time. And then, if you’re closer to retirement, make sure that you have the right balance in different accounts, because long-term, it is going to save you, potentially, a lot of taxes. When do you need the money the most? When you’re retired, And if you can avoid or mitigate some of these taxes… I can’t think of a bad thing to say about that, my friend.

AC: That’s a good thing. By the way, if you’re single…

JA: Yes I am, thank you for the reminder.

AC: It’s the same thing for you for you. When you hit 70 and start to collect. (laughs)

JA: When I’m 70 I might find a spouse. (laughs)

AC: $25,000 , that’s the number that you can be under, provisional income, and pay no tax on your Social Security. $25,000 to $34,000 is where it’s 50% tax free, and over $34,000 it’s only 15% tax free. Our next item, Joe, is get the biggest bang for your deductions. And this is referring to the itemized deductions because the basic rule with taxes is, the IRS doesn’t let you deduct personal items, personal expenses, except for things that are on that itemized deductions schedule, like medical deductions if you’re over 10% of your adjusted gross income. Or if one of you, husband or wife, are over 65, it’s 7.5%. Mortgage interest, property taxes, state taxes, charitable contributions. So there’s a few things there, and a lot of times when people have paid off their mortgage, let’s say they’ve retired, they don’t have a lot of itemized deductions, and so they just take the standard deduction. And I know you’re going to love this concept, Joseph, but it’s a concept called bunching. It’s where you might take your property tax bill, and maybe you pay your April bill in December one year, to get some extra property taxes. Maybe do extra contributions, maybe you pay some extra medical in one year, so that you get over that standard deduction, and actually get some extra benefit. And the following year, of course, you’re a lot lower but you’ll just get the standard deduction. It can make a big difference. (laughs)

JA: Not even close to a big difference. It might save you 50 bucks. You know what? So on my way to the radio station here, I stopped and purchased an energy drink.

AC: OK. Which you normally do for a show. That’s one of the ways that you keep so energetic.

JA Yeah, and you know, some agua, water. And then, I got 50 cents off. And then the gentleman, I usually go to the same gas station. And he’s like, hey 50 cents off. And I was like, wow. And he’s like, yeah you really can’t buy much with 50 cents anymore, can you? I was like well I don’t drink soda pop, I don’t drink Coke. You know whatever. Well, there’s pop machine or something, can I put 50 cents in, get a can of Coke or something? He’s like, we sell pop, or cans, for $2! $2 for a can of soda! (laughs) And oh my god I feel old right now. I’m like two bucks?! The last time I think I drank a soda, I put 50 cents in a pop machine.

AC: That must have been a while ago.

JA: You don’t call them pop machines?

AC: No. That’s a that’s a Midwest term.

JA: You know what I’m referring to.

AC: Yes soda pop. Yeah, we call it soft drinks here in Southern California.

JA: Soft drinks is what you get at, like, McDonald’s. It’s not a can. It’s like, can I get a soft drink?

AC: Okay how about a can of soda. I would never go into a place and say I’d like a soda pop.

JA: Give me a pop.

AC: Couldn’t say it. It’s not cool enough for Southern Californians. Just FYI.


50:21 – Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com 

AC: You got some good questions this week, Joe?

JA: I have no idea, I have not read them.

AC: And I haven’t seen them either. I guess our listeners know we haven’t actually read the questions beforehand, based upon our answers.

JA: Probably. And you know what I’ve got to apologize. I forget the gentleman’s name. He sent me like a 10 page email. It seemed like. On a defined benefit plan. I have the email. He’s asked me several questions in the past, I’ve been very prompt, but this last one – it was a busy week. I will definitely get back to you. OK. Here we go. And these are not from our listeners, this list of emails is from Advisor Insights Investopedia. Here’s the title of the email, Alan: “Should we roll over our 401(k), or pay off our mortgage with the funds? We have a 401(k) with a company that was bought out. It’s worth $186,000. We have other investment accounts that totaled $250,000. We have a rental house that we owe $150,000 at 3.65% for 25 years. Should we withdraw from our 401(k) and cash it out with a 10% penalty to pay off the house, or roll it over?

AC: Wow that’s a great question, and the answer is very simple. And I’m assuming there’s some reason you want to roll it over, maybe they left their job.

JA: Yeah it was bought out.

AC: Yeah, you roll it over. Because, first of all, if you if you pull the money out, you have to pay income taxes, and you have to pay penalties. And if they’re in California, you pay penalties to California as well. So it’s about a 50% tax. So if you want to pay off – what?

JA: $150,000 note, you need to pull out $300,000.

AC: Yeah you need to pull out $300,000.

JA: You only have $186,000. Don’t work.

AC: It’s hardly ever a good idea to take a lump sum out of a retirement account and pay all those taxes. Just to be debt free. And especially if you’re under 59 and a half with the penalties, I can’t think of a situation where you’d want to do that.

JA: This is very, very common though Alan. You look in a retirement account. Says $186,000, and automatically you assume that you have $186,000.

AC: Yeah, you think that it’s more than the mortgage, just pull it out.

JA: Pull it out. Well, I’ll pay a little bit of tax.

AC: Yeah, I’m sure there’ll be something.

JA: But no. This happened last year. I was teaching a class, Grossmont College. Guy comes up to me, he goes, Joe, I got this whole retirement thing mapped out. I was dragged here by my wife, kicking and screaming. I was like, well thank you very much.

AC: Like, “I don’t need to be here.”

JA: “I know all this.” And I was like, well thank you very much for sharing that with me. It’s really helping my confidence. (laughs) I have a very tough time with that. So I was like, how can I help you. He goes, I think I lost $350,000. I was like oh, I guess you don’t got this thing all wrapped up, do you? I didn’t say that, but I was like, tell me more, how did that happen? What are you talking about? I thought you had it wrapped up, you knew everything, and you were kicking and screaming?

AC: So he was listening to your talk, huh?

JA: I guess so. So this is what he did. He retired, has a $150,000 pension. He says he spends $40,000. I said, you know what, I can see why you think he got this thing wrapped up. That sounds pretty good. That math works. And he’s like, Joe, I saved, I’ve got a million dollars in my retirement account. I go, man, those are two really good things, I can see why you were kicking and screaming, coming here. And he goes, yeah I’m debt free. OK, three great things. And I go what’s the problem. He said well, to pay off the mortgage, I pull it out of my retirement account. $350,000 you pulled out of the retirement account to pay off a $350,000 mortgage. And now he’s realizing, and doing the math a little bit, at $350,000 ordinary income, plus a $150,000 pension. You’re at $500,000 of total income. And I said, do you have any money outside of retirement accounts? He’s like no. I’ve got like 50 grand. I was like, OK I can see why your wheels are turning here a little bit. So do the math, next year, $500,000 of income, he’s probably going to owe, what?

AC: A couple hundred thousand.

JA: Depends on his withholding on his pension.

AC: There’s a lot of things we don’t know. But let’s just say there are no withholdings. Just to make this a real simple thing. It could be $150,000 tax, it could be a couple of hundred thousand tax. I mean a lot of variables, and I’m including state of California, as well.

JA: So where is he going to come up with that $200,000 Al? He only has $50,000 that is out of his retirement account?

AC: Well he’s going to go back to his retirement account, and then it’s going to get taxed the following year. And he’s got no money to pay that tax, so he’s going to go back again the following year to pay that tax.

JA: Right. It’s just tax upon tax upon tax, blew ’em up. And so the advice was, go back to the bank, refinance your house, get the $350,000 back, and try to get it back into your retirement account, your IRA.

AC: Yeah, and you have to do that within 60 days. And if you don’t then you’re done.

JA: And if you took it out of a 401(k) you’re done. There’s no 60-day rollover in the 401(k). It’s only in an IRA, individual retirement account. So be careful with that. I mean, we’ve seen this time and time again where here’s my dream house. I got a million dollars in my retirement account. I don’t have anything else, I really want this. So I’m going to pull out another $400,000 to buy this million five house, and then all of a sudden your $500,000 is now, you got to pull out $750,000. OK. That was long winded.

How are my 401(k) taxes treated when I’m drawing from Social Security? My tax person told me I can take up to $11,500 from my 401(k) pretax dollars, and not pay taxes on the $11,500 amount. Is that true?

AC: That’s the question? OK. (laughs)

JA: Well what are your deductions, exclusions, exemptions first of all?

AC: Right now I’m going to assume it’s standard deduction, so the exemption amount is $4050 and the the standard deduction, I’m assuming he’s single, because then that would be $11,400. So that is a correct statement for 2017. If he had no other income, and he does a standard deduction, then that’s right. And a lot of people don’t realize that, because of the standard deduction, and the exemption, you can actually make a fair amount of money without having to pay any income tax whatsoever. So yes, I agree with that, as long as you’re single and don’t have other income. That was a quick one.

JA: Big brain on Big Al. Alright, how can I continue to build and earn off of an initial stock purchase? OK. Let’s see. I just received three to four shares of Proctor and Gamble stock. I want to build off that, but do not necessarily know where to start. How can I create a portfolio and get a return? I should have read it before I said it.

AC: Well, how can you create a portfolio. So let’s presume that you’re working, and we’re going to make some assumptions here, that you have an income, and that you can save some of that income. And so probably, because you’re asking a question like this, I’m going to assume you’re younger. I’m just making that assumption, Joe. So here’s the thing is, you want to pay yourself first, either it’s a company 401(k) or it’s an IRA, or maybe it’s money going directly to your savings account from your paycheck, if you can. You accumulate some money in one of these areas, and then you just start investing, and you’re investing in shares in Proctor and Gamble, which is a great company, but it’s not a very well diversified portfolio.

JA: They’ve got three or four shares, that’s a good start. (laughs)

AC: We would probably recommend, if you’re just starting out with the first few dollars, maybe you get a total stock market return index fund. So you have more diversification.

58:43 – Analyzing Donald Trump’s Tax Return

AC: Donald Trump’s return got released. Or allegedly got released.

JA: Yeah didn’t Rachel Maddow do some like reality TV?

AC: Yeah it somehow got leaked to a reporter that she knew.

JA: She had like a special or something?

AC: Yeah I don’t know. It’s kind of interesting, though, I don’t know if this is a valid return or not. But I’ll tell you what it says. It showed about $150 million of income. Not bad. And that’s about $10 million in interest and dividends. I’m rounding.

JA: In interest and dividends?

AC: Uh huh. About about about $40 plus million in business income on Schedule C. That’s interesting, that someone at this income level would have $40 million of income on a schedule C, sole proprietorship. Typically, you see that in S-corporations, LLCs. Let’s see, capital gains of $32 million, and rental real estate and business income of $67 million. Now here’s the catch though, is there was a $100 million net operating loss. So, the adjusted gross income was about $50 million. And itemized deductions, $17 million, taxable income was $31 million. Interestingly enough the income tax was only $5 million. And the reason it’s so low is because all of that was taxed at capital gain rates. But here’s the kicker Joe, is the alternative minimum tax was $31 million. And so if you add that with the regular tax, according to this return, $36 million of tax was paid on $31 million of taxable income. Therefore more than 100% tax rate. But it depends on what you compare the taxes to. Some people compare the tax of $38 million to $150 million they say that’s a 25% bracket. I mean there’s all kinds of ways you can compute this.

JA: So 31 million was the Alt Min, plus another $5 million of ordinary. $36 million total tax paid. And then you have, taxable income was what? $31 million.

AC: So you’re paying more than 100% tax rate if you compare the tax, and then there is self-employment tax of about $2 million. So really, there’s about $38 million of tax.

JA: So do you think there’s a reason why he wants to get rid of the alternative minimum tax?

AC: I’m thinking because that otherwise that $31 million wouldn’t be there.

JA: Yeah it would’ve just been $5 mill, on $150 million total income.

AC: Yeah that seems like a better deal, right?

JA: So what’s interesting, how you can kind of dissect a tax return here too, is let’s say he’s got $10 million of interest dividends. Do you think that’s more interest?

AC: It’s almost all interest. Well, this was 2005. So we already kind of did the math. I did this in tax class.

JA: What’d you use, 2%?

AC: No we used 4% because this was back in 2005. And I think we got like $200 million.

JA: $200 million in cash accounts?

AC: Yeah $230 million, something like that.

JA: And then you got capital gains of $35 million. So that’s a little bit more challenging, depending on what he’s holding.

AC: Yeah that you can’t really tell. Business income was about $110 million between his sole proprietorships and his real estate.

JA: But if you’re worth $50 billion. What does he say he’s worth?

AC: I don’t know, two, three, four, billion.

JA: $50 billion is Warren Buffett or something?

AC: Yeah that’s Warren Buffett.

JA: He’s not there yet?

AC: I don’t think so. (laughs)

JA: Just wait till his books come out.

AC: But then but then it’s like, first of all, how could some4one pay only $5 million in income taxes, because it’s all at capital gain rates, that’s easy to answer. How could someone like this have 31 million in alternative minimum tax? And the reason is because, first of all he lives in the state of New York, according to this return, which we already knew. And New York has high state taxes, which are not deductible, not allowable for alternative minimum tax purposes, number one. Number two is he owns, presumably, a lot of real estate, and real estate, the depreciation schedules, in some cases for alternative minimum tax purposes, allow less depreciation than  regular tax purposes, so you get a much bigger deduction, potentially, for regular tax purposes – particularly back in 2005. Now nowadays, it’s a little bit more in sync with each other. But if he had properties he bought in the 80s and 90s, during that timeframe, there was more difference between regular and alt min depreciation. And so you could see why he would want to eliminate alternative minimum tax, as a lot of tax payers that make a lot of money, because these Alt Min taxes, they sort of came around to catch the wealthy from at least paying some taxes.

JA: Well they came out in the 1950s when billionaires didn’t pay any tax. So this was this could have been- well this is 2005, we’re talking the 50’s. Because they had all those crazy tax shelters, and then this is before the passive loss rules, and gains, and the PIGs and the PALs, and all that other this stuff that I learned in college a couple of years ago.

AC: And it stuck, huh?

JA: It did. Passive income, passive losses. Offset.

AC: One other interesting thing about the return, at the top of the return it says, “check here if you or your spouse filing jointly want three dollars to go into the presidential election campaign.”

JA: He said no.

AC: He said yes! But Melania said no. She wasn’t into it.

JA: She didn’t like presidents at that time. (laughs)

AC: Apparently not. (laughs)

JA: Well alright. We got political. Let’s do it. Well, we talk taxes. We dissected a tax return. And I think most of our listeners caught about maybe 4% of what you said.

AC: I would agree with you.

JA: Alt min, and what?

AC: I know, it’s just noise. I get it. But if you’re interested…

JA: But it sounds like you’ve got a big brain, Big Al. (laughs)

AC: You can tell if that’s the reason why a lot of the politicians in the country for that matter wanted his tax returns, because you can tell a lot about a person with the tax return. Now we only have two pages, and it’s probably hundreds of pages long.

JA: It’s probably a pretty thick return.

AC: I’m guessing. (laughs)

JA: What would you charge him, if you were doing taxes back in the day?

AC: This return, if I had to do this one? Well just for the personal, not even all the corporations. I would have to hire an army of people, but just the personal return, I don’t know, $100,000? $200,000? Half a million? I have no idea. I gotta see the whole turn. It’s big. It’s yuuuge. (laughs)

JA: Yuge! Do you think H&R Block did it? Charged him $250?

AC: Let’s, see, oh it’s black out there. I can’t see who did it. And the Social Security numbers are blacked out. But we do know that Melania kept her own name. She’s not Trump. She’s K-n-a-y-s. How do you pronounce that?

JA: Alright, well that’s it for us today! I have no idea brother. (laughs) OK. Hopefully you enjoyed the show. We ran out of time. The show went fast. Hopefully it went fast for you. Want to think Mary Beth for sticking – we just kind of plugged her in, it was a little repeat. If you didn’t know that. But we’ll be back next week. Very excited about next week because I’m sure we’re going to have a lot more fun stuff to talk about. For Big Al Clopine, I’m Joe Anderson. Go Gators. March Madness is upon us. I will see you next week.


Outro: So, to recap today’s show: Tax diversification and knowing the Social Security taxation rules can help curb taxes in retirement, but does looking at how you create retirement income save taxes? It was a stretch, but Big Al made it work for us. Donald Trump’s 2005 tax return leads us to believe he paid more than a 100% tax rate, depending on your calculations. I’m still confused. 

Special thanks to our guest, Mary Beth Franklin, for explaining the current Social Security claiming rules – register for tomorrow’s free Social Security webinar at YourMoneyYourWealth.com to learn more.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

Your Money Your Wealth Opening song, Motown Gold by Karl James Pestka, is licensed under a  Creative Commons Attribution 3.0 Unported License.