In this episode Josh Nelson CFP® and Jeremy Busch CFP® discuss tax insights, covering income, expenses, capital gains, retirement, charity, HSAs, business deductions, RMDs, estate planning, and stock options. This overview of strategies may help to reduce your tax burden before year-end. Topics covered in this podcast and the transcript include:
Ten thousand hours
Balance Sheet and Cash Flow Statements
Tax Rules on Gains and Losses
Tax Deductions
Rules and Limits on Tax-deferred Accounts
Charitable Giving
Medical Savings Accounts
Timing on Business Deductions
Required Minimum Distribution
Estate Planning
Closing and How to Contact WFA
To view the webinar on YouTube click the link below
https://www.youtube.com/watch?v=eGDi1tPNpJk
Instagram: https://www.instagram.com/keystonefin/
Twitter: https://twitter.com/Keystone_Fin?advisorid=33004651
Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com
https://www.keystonefinancial.com/team/macy-chapman
In this episode Josh Nelson CFP® and Jeremy Busch CFP® discuss tax insights, covering income, expenses, capital gains, retirement, charity, HSAs, business deductions, RMDs, estate planning, and stock options. This overview of strategies may help to reduce your tax burden before year-end. Topics covered in this podcast and the transcript include:
Ten thousand hours
Balance Sheet and Cash Flow Statements
Tax Rules on Gains and Losses
Tax Deductions
Rules and Limits on Tax-deferred Accounts
Charitable Giving
Medical Savings Accounts
Timing on Business Deductions
Required Minimum Distribution
Estate Planning
Closing and How to Contact WFA
To view the webinar on YouTube click the link below
https://www.youtube.com/watch?v=eGDi1tPNpJk
Instagram: https://www.instagram.com/keystonefin/
Twitter: https://twitter.com/Keystone_Fin?advisorid=33004651
Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com
https://www.keystonefinancial.com/team/macy-chapman
Wiser Financial Advisor – Year End Tax Planning Strategies 2023
Hi everyone, welcome to the Wiser Financial Advisor show with Josh Nelson, where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, founder and CEO of Keystone Financial Services. Let the financial fun begin!
Ten thousand hours
Josh: Welcome to the Keystone Financial Studios. This is Josh Nelson here with Jeremy Bush. We are Certified Financial Planners, which means we know a lot of financial stuff. We've had a lot of experience; we've passed a lot of difficult exams. Jim Collins, in his book Good to Great talked about expertise and how it takes about 10,000 hours to master anything, and for most people that takes about 10 years if you really work at it. And it just so happens that we have that experience; we have those 10,000 hours in. So you can learn from us, not only from our own knowledge, but also from the many client situations that we have run across.
The topic that we're covering today applies to everybody, so it doesn't matter how much income you've got or don't have. Everybody is going to have some level of tax planning that they're gonna need to be doing.
Jeremy: There are so many different things attached to your financial planning and how it all works out over time that we have to look at. Today, we're going to do a lot of focusing on losses, credits, things of that nature. But that’s just one area of many that we like to look at when we do your financial planning.
Josh: Those of you listening to the Wiser Financial Advisor podcast, this is a resource that we're able to send out to you, so feel free to ask us for a PDF copy. You can e-mail us directly at communications@kedystonefinancial.com.
We endeavor to make the complex simple. Well, this is a complex world financially. Not only because it's designed that way, but also because it changes constantly. The rules change almost every year, right? They change as far as what you can do and what you can't do. So it's something that you really have to keep up on. Which brings us to the disclaimer, written by some really smart attorneys. Basically, everything we're talking about today is just our thoughts. These are our opinions. We are not tax advisors. So you need to talk to your own tax advisor to get an authority. Because although we spend a lot of time doing tax planning with clients, it's a topic that impacts everybody and whether your focus is on retirement planning or employee benefits, your investment taxes are gonna fit into that and affect your situation. I think we bring up a lot of good things to consider at year end.
Balance Sheet and Cash Flow Statements
Josh: When we're meeting with clients and prospective clients, we go through and put together financial statements. One of those would be the balance sheet. The other one would be the cash flow statement. Jeremy will describe those.
Jeremy: So your basic balance sheet is really just assets and liabilities. It's a snapshot in time. It's a Where am I today statement, and it's usually pretty easy to pull together because you can look at statements and say, “This is the value of this account at this time.”
Cash flow tends to look more along the lines of income and expenses and then project out into the future, a what is the plan right now statement; this is what we're thinking. These can change on a whim; they can change all the time, sometimes a lot. That's why we call it financial planning as opposed to a financial plan. The days of getting a three ring binder full of your financial plan are pretty much dead and gone.
Josh: That’s because it’s a moving target. It's funny, though. Back in the day, if you wanted a financial plan, you would go to a financial planner and pay them a bunch of money and they would produce a bunch of paper, and then they'd look at that paper with you. But soon it wouldn’t be relevant anymore. Because the market changed and Congress made changes, and you changed jobs or decided to retire early or whatever. Then the information became irrelevant very quickly. It's an evolving story because it's your story. It's your situation and you are reacting to the financial world and those many things changing around you. So those are the things we spend a lot of time on with people.
As you're reviewing the end of the year and trying to figure out, “Well, how do I wrap my arms around this as far as figuring out what are some things I might be able to do or not do toward the end of the year?” When reviewing those sources of income, you’ll be looking at where you got income throughout the year, whether it be from dividends, your job, or maybe you're self-employed. You’ll look at whatever sources of income you've got, and you’ll compile the expenses and then optimize your taxes.
Tax Rules on Gains and Losses
Especially if you have really high taxable income, sometimes there are opportunities to defer the taxes on that. For example, let's say that we were thinking about selling stock, and you had very high taxable income this year and we’re already into December. Well, maybe you wait until January to sell that stock, so that you don't create more taxable income this year. Or maybe you have the opportunity to defer other income like 401K contributions. We'll get into that.
Sometimes we'll take losses on purpose. We call that tax loss harvesting. That's where we get involved with clients looking at these things in your basket of assets, liabilities, income and expenses. There are different tools to handle them, and sometimes we have the ability to defer or to accelerate income and expenses. We want to take a look at those things.
Jeremy: And then, capital gains and capital losses is one that just about everybody hits at some point. There is a capital gain or loss anytime you sell something inside of a taxable account. That includes if you're doing stock options at work. You get a capital gain, capital loss. They do net against each other. So like Josh is saying, this is one we look at every year. Depending on what's happening in the market, loss harvesting can or cannot be a thing; it just depends on where it goes. Last year we did a lot of loss harvesting because the market was down so we could save some people money on their taxes. This year, who knows? We're in the middle of October as of this recording, and we'll see where it ends up between now and then.
Josh: Yeah, it’s been a tale of two markets. During 2021, basically everything went up. It was really hard not to make money that year. 2022 was just the opposite. Obviously, we can't control that. But sometimes there are ways you can take advantage of what’s happening.
Jeremy: Absolutely, no matter if it’s up or down.
Josh: And it may not even be investments in an account we’re looking at. It could be real estate. You could have capital gains or losses from selling real estate. It could be other types of assets. Maybe physical gold or other assets that don't show up in a traditional broker. So it's important to understand the rules. And as far as that netting effect period, you can carry those net losses forward until they're used up. But the net loss you can take right now is $3000 per year. So, let's say that somebody you know sold a bunch of stock and had a bunch of other stock. Some was a gain, some was a loss that ended up at $6000. You can only use $3000 of it this year and then carry the other $3000 for the next year.
Jeremy: So, gains and losses net out throughout the year, but what Josh is talking about is $3000 a year against ordinary income. So if you had $20,000 in capital gains and $20,000 in capital losses for the year, no matter whether short term or long term, that would be a net of zero. You would have no capital gains or losses for the year. When the losses are higher than the gains, you get $3000 per year. If you have a bigger than $3000 capital loss net last year, you can carry some of that forward to this year and use it against your ordinary income up to $3000.
Josh: Keep in mind too, the holding period of long term versus short term, long term meaning you need to hold for over 365 days on an asset to have the long term capital gains taxation rate, which is a substantially lower rate than the short term rate for people, because that short term rate is your ordinary income bracket. So, don't make the mistake where people end up selling something one day short. We have seen that. Let's say you bought a stock this year that just skyrocketed, and you ended up selling it in under that 365 days. Your tax rate could very well double from what it would have been if you had just waited until after that year. So just be aware of the rules and how those work. We spend a lot of time on that.
However, you don’t ever want to make decisions just because of taxes. Investment reasons should come first and tax reasons second. We have seen a lot of cases where people will defer gains and defer gains and defer gains, and accumulate one company stock just because they're afraid to pay the taxes. And of course something happens eventually, because it will happen to every company. The stock plummets all of a sudden and then people wish they could have gone back and paid those taxes and realized the gains from selling sooner.
Tax Deductions
Jeremy: And then, of course, retirement contributions can directly affect you as far as what kind of things you count as deductions. Your 401K is low hanging fruit. Contributing to your 401K, if it's pre-tax, might fit into your situation. Most 401Ks now offer Roth IRAs as well, and depending on what percentage you're paying in, that will directly affect what you pay in taxes as it goes along.
Josh: Yeah, and the differential there too is huge because you're electing when you choose whether to do a traditional IRA or Roth. We get that question a lot, on which one to pick. There's no right or wrong answer there because we can't predict the future as far as what is gonna happen to tax rates after this year. All we know is what they're going to be this year. And Congress could even change that if they wanted to by the end of the year. You're making a bet on whether your tax rates are going to be higher now or later. Most people now are saying tax rates will go up to pay $31 trillion of debt and underfunded Social Security, Medicare and so forth. Tax rates are probably going up in the future so the person that does the Roth IRA is making the conscious decision to forego the tax benefit now and down the road they'll get these tax free distributions. Going with the traditional IRA is taking the tax advantage today.
You actually could do both contributions. You could split the difference because you don't know what's going to happen with the tax rate. Either one of those is fine. Sometimes you might not have a 401K, or you might have a 403B or something else through your employer. If you're in the government, you have the Thrift Savings Plan. There are all these different things, but the bottom line is that you probably have both a Roth and a Traditional option.
Jeremy: It depends on who you work for. Do you work for a municipality? With a lot of the nonprofits like school districts, you can contribute to a 403B, a great opportunity to plow away a lot of tax-free money.
Rules and Limits on Tax-deferred Accounts
Jeremy: Keep in mind that there are contribution limits and they're always moving. For instance, this year, 2023, if you're under 50, you can put up to $22,500 into your 401K. If you're over 50, you can put an additional $7500 in there as a catch-up contribution. IRAs were at $6500 this year under age 50 and an additional $1000 catch-up. But those have income limits, depending on how you file taxes and if you file single or head of household or if you’re married filing jointly. If you make too much income, the IRA contributions might very well be phased out. Traditional IRA contributions and Roth IRA contribution phase-out limits are not the same. It's really important to check and to know this stuff or just ask the question. We can answer what those contribution limits are. There can be penalties if you contribute to a Roth IRA but you make too much income. That's what we call a first world problem, but that doesn't mean that you need to pay penalties just because you don’t know the rules.
Josh: As you can tell, there are a lot of gotchas. So you can ask us a lot of these questions. And the answers will depend on your situation.
Jeremy: You can do most IRA contributions up to April 1st of the next year for this year's taxes. So you can still make IRA contributions up until April 1, 2024 for the current year. Regarding 401K stuff, we're in the middle of October right now. So what you've put into your 401K is mostly set at this point.
Josh: One thing to note too is if you're self-employed, there's a whole other world. We could do a whole presentation on retirement plans for self-employed individuals. So if you're in that situation; say you're a contract worker or you’ve got your own business, there are special plans for you and they can be really good. You have your own special version of that stuff that will probably allow you to do a lot more than if you work for a company.
Charitable Giving
Jeremy: Moving on to charitable giving. This is a good one, especially if you're already in the habit of giving and you have specific charities in mind. This would be any kind of 501C3 organization. Charitable giving can be done a number of different ways, but they all have some tax implications. This is one of the changes with the tax code. With the last big tax update, you are either claiming the standard deduction, or if you want to do charitable deductions, you itemize. Sometimes you give to a charity but you're still going to take the standard deduction, and so you don't really get the benefit tax-wise. This year, the standard deduction if you're married filing jointly is at $28,700, which is a great thing. Ninety percent plus of people now take the standard deduction, which makes taxes a lot easier.
So charitable giving could be one where if you find yourself in a really high income earning year it might make sense to contribute a bunch more and take advantage of that kind of help tax-wise. You could dole it out through things like donor advised funds. If you have a lot of stock with a really low basis and you don't want to realize the capital gains but you would like to still give to charity, there are ways of giving where you don't have to realize the capital gains on it but you still get the charitable deduction.
Josh: If the standard deduction is X amount depending on your filing status, look at the tax charges on that. Those are easily searchable. Then let's say that somebody is in the habit of giving $5000 a year in charitable contributions. That's great and that's really good of you. And hopefully you're benefiting some organization and helping people by doing that, but you're really not gaining a tax advantage because it's below that $28,700 deduction. So instead, if you’re planning over the next 10 years to give $5000 a year, that's $50,000. What if you took $50,000 and just threw it all in one year? You might say, “Yeah, but I don't like to give that way; I like $5000 a year.” Well, this allows you to have your cake and eat it too, because you could put $50,000 into the donor advised fund. If you got the money in there now, you get a $50,000 deduction this year, $50,000 instead of the $28,700 standard deduction. You could be divvying that money up because you're in control of how that's distributed to the charity. So, they're still gaining their $5000 a year; but you're going through the donor advised fund to do it.
Jeremy: And then it depends on whether you’re contributing real estate to this or old stock or cash. The tax code has different percentages that you can count for each of those, and so it's important to know that there are distinctions and different thresholds between them. There are plenty of ways to take advantage of it. You just have to know the proper ways to go.
Josh: Yeah, know the rules. For example, the carryover period. There's only a five year carry forward on it, so you want to be careful, because you could end up losing some of the tax advantages simply because you ran out of time. This comes down to how every individual is a little different. Which is what makes our job fun, because everybody's a different puzzle; every situation is different, and the rules are always changing.
That's why our 10,000 hours plus of experience comes in handy. And then, we're doing this every day, so you know that it's not just your stuff we're managing. We're managing other people, situations; we can be creative and work through your own planning.
Medical Savings Accounts
Jeremy: If we turn to Health Savings Accounts (HSAs) and Flexible Savings Accounts (FSAs), they also have specific rules for each, and they are not created equally. The more popular option nowadays is the HSA. In the current year you can do $7,750 as a family contribution to this. This one has an age 55 and older catch up. So if you're over 55, you can put an additional $1000 to an HSA. These are fantastic plans if you don't already have one.
You get a lot of tax benefit for contributing. No matter your income level, you can pretty much always contribute to an HSA as of now. They do have some rules as to who qualifies. You have to have a high deductible medical insurance.
You get the tax deduction so long as you use the money in the HSA for medical expenses. Now, if you have it long enough and you don't need to use it, once you get to 65 it's almost like another retirement account. So it’s pretty beneficial. As far as FSA's, they do have some benefits as well, but one thing that we don't like about FSA's is: they're not flexible. They're called flexible spending accounts, but they are not. Now, if you are anywhere near Medicare age, you want to be careful with your HSA contributions because there are some specific rules regarding that in the six months leading up to Medicare. It’s definitely worth talking to a financial professional about that if you're trying to maximize your HSA but you're getting near Medicare age.
Josh: Right. You get disqualified from contributing to an HSA after you hit Medicare age. The silver lining is that you can use it almost as a retirement account at that point, and we've got a lot of clients maxing out their HSA every year. They have no intention of using it for medical expenses as they go along. They're just accumulating it and they're going to use it for retirement income. Once you're 65, you can start pulling it out for non-medical expenses. It can just be used for whatever you want to spend that money on.
FSA is one we don't see as much anymore. Another version of that is the dependent care savings account. The reason they're so inflexible is the use it or lose it rule. You can’t carry over from year to year. For example, we had a client that was planning to get Lasik surgery. She had elected for her employer to max out her FSA so that when the expense came up, she would use the money to pay for the LASIK. Turns out she went for the consultation, and the doctor checked out her eye and said she wasn’t a candidate for Lasik. So then she was frantically going to Walgreens and just trying to buy stuff, anything that could qualify because otherwise you just lose the money right after December 31st. So you want to be careful with that.
We like HSAs a lot better. They're truly a flexible spending account. And you don't have to do an HSA through your employer; you can do that separately.
Timing on Business Deductions
Josh: Moving on to business deductions. At the end of the year, a lot of businesses from the smallest all the way up to Fortune 500 companies do things to control income and expenses and the timing of all that. At the end of the year, they're trying to accelerate expenses and get in as many as they can by the end of the year. Sometimes they'll even prepay things, pay ahead to take the deduction in that year. It depends on how they're doing their accounting, but most companies, especially smaller companies, are on a calendar year basis for accounting. From an income perspective, they're trying to kick income into the next year if possible. Record keeping requirements are really important. Receipts need to be kept at least three years. A safer option would be 7 years according to CPA's, as far as how long you should keep your tax returns and your other documents. And of course these days you can keep them electronically.
Jeremy: Many things that you can do tax-wise from a business owner standpoint will flow through to your personal income taxes as well.
Josh: You have to look at what type of business you are. There are different entities such as C Corp and S Corp and LLC, or partnerships. There are tax implications for all of those. The 2017 tax cuts and JOBS Act affects business income deductions. Many things from that are due to expire at the end of 2025, so we need to be aware that all the rules we're talking about may end up changing after that year—if Congress does nothing. If Congress doesn't extend some of these tax cuts and limits and things like that, a lot of these rules will change.
The whole point of the qualified business income deduction is if you qualify for it. And there are phase-outs here as well, if you go over certain income limits. For qualified amounts, there is up to a 20% income tax deduction on business income. I think the income limit is $372,000 for this year. Once you go over that limit for married filing jointly, that does phase out and you wouldn't be able to claim that at all. So truly, we're talking about smaller businesses. It depends on what industry you're in. Some industries are kind of exempt, or could have higher amounts, which is beyond the scope of what we can get into today. Just be aware that you may qualify for that.
Required Minimum Distribution
Jeremy: Now let’s consider Required Minimum Distribution or RMD, which applies to IRA accounts and 401Ks. This has moved over the last couple of years, and it's not really done moving. For a long time it was 70 1/2 years old. Last year, it changed to age 72. Then they said, “We should have just said 73.”
So the rule this year for 2023 is: if you turned 73 during this year, then this is your first year of required minimum distribution. In the next couple of years, that age will be steadily increasing to age 75. Alright, you've been hanging on to your Traditional IRA or your 401K money and you haven't used it, so the IRS wants to get their tax.
Josh: We hope you plan ahead. We want to make sure you don't get penalized because if you don't take out the RMD, it's a 25% penalty. Used to be a 50% penalty. And that's on top of the taxes.
Jeremy: The other tricky part of this is the new rules surrounding inherited IRAs. Inherited IRAs have their own rules on required minimum distributions and they're not exactly clear yet. It really is dependent on so many things. Please check with us, check with some financial professional because it's not worth paying the penalties.
Estate Planning
Josh: Turning to estate planning tax items. People hear that word “estate” and think it’s just for ultra-wealthy people. But the reality is, everybody has an estate even if you just have stuff, without investment accounts. Your stuff is something that somebody's gonna have to deal with if you're not here. At any rate, the estate tax could apply depending on your circumstances.
Of course, you want to talk to an attorney. You want to talk to a tax advisor. That's why it's important to have a whole team in place. We usually end up being quarterback on the team because we know where all the money is and we’re coordinating the entire plan. But we'll certainly pull those people into the mix, especially trust officers, CPAs, estate attorneys, other people.
Closing and How to Contact WFA
Tax strategies apply to stock, but for those of you who have employee benefits that revolve around stock options, restricted stock, any other types of benefits that would involve your company’s holdings or benefits. Those are always good to take a look at as we get to the end of the year. We're not going to go through each one of these specifically, but the timing is key if you have certain benefits that allow you to control the timing for when things are sold or received.
The alternative minimum tax doesn't affect a lot of people anymore. Sometimes it does if you have incentive stock options. So, if you're in a very high level position within your company, could be that you have those types of benefits. If you are subject to alternative minimum tax, you probably already know it. We can talk about how we can help you avoid that in the future.
Thank you for listening today. We appreciate your business and the trust that you put in our team. We care about our clients and we're very well qualified at that 10,000 hours of experience. We don't take lightly the fact that you put your confidence in us. So with that, we will sign off for today. We certainly appreciate any feedback you have. We can be reached at www.keystonefinancial.com or www.wiserfinancialadvisor.com .
Have a wonderful week and God bless.
The opinions voiced on the Wiser Financial Advisor show with host Josh Nelson are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.