Planning For Financial Freedom

End of Year Tax Tips with Catherine Roe, CPA

December 13, 2021 Will Nunn, CFP® Season 1 Episode 2
Planning For Financial Freedom
End of Year Tax Tips with Catherine Roe, CPA
Show Notes Transcript

In this episode of Planning for Financial Freedom with Will Nunn, CFP® ; Will interviews Catherine Roe, CPA of Cowart Roe CPA LLC where we ask Catherine all things end of year tax prep and tax planning. 

Unknown:

Welcome to planning for financial freedom with will Nunn CFP, where we discuss all things personal and financial freedom.

William Nunn:

Hi, everybody, thank you so much for joining us again for another episode of planning for financial freedom. Today I have with me our esteemed guests, Katherine row of cohort, Rose CPA. She's the owner of that firm here in New Orleans and has been a CPA for several years, she's going to talk with us today about things that we could do for end of your tax tips to cross that off our to do list and make us more financially free and time free going into the end of the year. So, Katherine, what are you seeing what should be what should people be paying attention to, towards the end of the year on their taxes?

Catherine Roe, CPA:

For individuals, there are a lot of different different items that we can look at, as far as tax planning for year end. One would be charitable contributions, you can always increase your giving up to the very last day of the year, to be able to increase that itemized deduction. On another note, thinking more towards the itemized deductions, you can actually bundle contributions. And this is a technique that was kind of more brought out after the 2018 tax changes, where the standard deductions have been increased so much up until 2025, that the average giving may not put you at the level where your itemized deductions are high enough to be able to get you that extra boost over the standard deduction. So one idea that a lot of people are following is they're doing their contributions for the current year. But they might also plan out what they want those contributions to be for the next year. And then go ahead and pay them at the end of the current year, because individuals are cash basis. So it's when you make the payment that you get the deduction. So by including deductions for a couple years, all in the same year, you can increase that deduction, and maybe get the advantage of itemizing, and that first year. And then the next year, just plan to take the standard deduction.

William Nunn:

So this is more for people that might have a variable income, you know, if somebody is in sales, and they're they're commissioned based, or they're just not straight w two salary, you know, this would be more for those folks.

Catherine Roe, CPA:

Right? Honestly, it could be for anybody. Oh, wow. Okay, yeah. So even let's say your your income is pretty consistent, let's say your W two income, your incomes always going to be relatively the same, you're expecting your adjusted gross income to be consistent. The key here is the itemized deductions, and how much the standard deduction is. And it was just really the the tax changes, because at least up until 2025, we know that we have that higher standard deduction. So it's playing with that, to kind of make that work in your favor.

William Nunn:

And I hate to ask people to speculate on things legislatively, especially with the political picture we have now. But are there any signs any rumblings of those new standard deductions, which were basically doubled, from 12 to 24,000, respectively, for married filing joint for those sticking around? Or is the talk that hey, the government just needs money? Don't count on this, you know, how are you doing the planning with your clients?

Catherine Roe, CPA:

I would say that if the current and future administration's stay on the same track that they're on, I would expect those tax changes to not be renewed.

William Nunn:

Interesting. Okay. So a lot there to unpack. What else should folks be paying attention to? On the individual side, you know, private individuals, what can they do within their own control to check off some boxes for the end of year tax list?

Catherine Roe, CPA:

Well, one thing that people can do if you have student loans, and a typical year where there's interest being being accrued, you can pay more to your loans and deduct that interest, then that's a direct reduction of your adjusted gross income. So that's it. The line? Yes, yes. Okay.

William Nunn:

And for those for those who are not really familiar with above the line below the line, could you briefly explain that to the uninitiated.

Catherine Roe, CPA:

So above the line deduction will directly reduce your income before the taxes calculated. The only thing better than an above the line deduction is a tax credit, which that amount directly reduces the tax. So the higher that number is, the better. But above the line deductions, those can add up, and to really reduce the income and save a lot of tax two

William Nunn:

very, very powerful tools, those above the line deductions. So what else can people focus on? I know you're in the investment world, we talk a lot about tax loss harvesting, and things like that, I get a little carried away when I explained it, I think you, you might do a little bit better job.

Catherine Roe, CPA:

So I know that that's a very big tool in the financial world. On our end, the key here is that you can deduct in any year, up to 3000 of the losses that you receive from those realized sales. And that will directly reduce any gains that you have for other sales, that loss deduction, the amount of losses that you have, it does carry over. But you can only take 3000 In any given year. But it's important to note that you do have the carryover, because that can allow what you can play with in the future as well. But as far as what should be sold, and all that, leave that to the real professionals there.

William Nunn:

Well, we appreciate that. Certainly in tax tax planning in everyday investment portfolios has become much, much more prevalent, in fact, their entire investment, asset managers that are just surrounded by tax efficiency, that's their whole end game. So of course, this is getting a lot of attention, especially with the political environment of taxes might be going up for people who make over $400,000. Although that legislation seems to be waxing and waning, depending on what day it is, I think every time I look at my phone to scroll and get the news, it's different. But how much can people carry forward every year? Can they carry a full 3000 followers? Like the view, you sell for $10,000? Loss today? You get three today, obviously? And then what do you carry forward?

Catherine Roe, CPA:

I accumulates over time, the losses? Yeah. And you and you all obviously net your short term and your your long term, right? Yes, against each other because they're taxed differently. Yeah. And it's very important to use a really good software, because the software is going to calculate what you what you're taking, and really pull it forward into the next year.

William Nunn:

So what are some signs of a good software versus a bad software? Because we have a number of folks that we talked to every day who have very simple returns that probably should just be using software? So what are some of the signs of bad software and good software that

Catherine Roe, CPA:

you've seen? I would say that if someone just has a W two, and they don't have much of anything else, and it's relatively simple, that using either TurboTax or h&r block is okay. But I would say beyond that, it still is good to have a tax professional. Because anything else it can get a little crazy. I've seen a lot of more complex returns, through h&r block and some of the others that yeah, it's just a little messy. And it's like, why did it allow this to go here?

William Nunn:

Oh, boy, what's, what's the horror story? What's the worst one you've seen?

Catherine Roe, CPA:

So one deduction that the 2018 tax reform did away with was some of the miscellaneous itemized deductions, employee unreimbursed expenses. So this is anything that you could come up with, out of the blue out of pocket that you would have paid for your job, any job, and you can put it there. I had somebody who had maybe 35,000 and a prior year just there. And when I asked if they could tell me what that was, because I was trying to plan for current year and if they had something then we needed to look for an include wanted to do that. But no, they didn't remember what it was, and had no idea Oh boy, that was a massive probably overestimated deduction.

William Nunn:

Yikes. Well, hopefully it ended well for that individual or individuals. And yeah, the I guess you do have to be careful, the the devil often shows up in the details of these tax reforms. So with that said, I, I hate to do this to you, because it's such a hot topic and such a moving target. But, you know, obviously, there's a lot of proposed tax changes, and it keeps changing by the day, kind of take us from where we started on all this to where we are now?

Catherine Roe, CPA:

Well, I know that there's been a lot of changes, especially with everything COVID related, and some things are deductible for one day. And then the next day, they're not. As far as the tax reform goes, that stuff stayed pretty consistent. The only key there is what we're playing with right now, the rates, what's allowed, is only good through 2025. And we can't expect it to go further. Okay,

William Nunn:

so when we're, it's important for people to know when they're doing their planning town on it, reverting back to the old rules, because nothing is set in stone, nothing's guaranteeing that state Yeah, 26 and beyond.

Catherine Roe, CPA:

And if there's something that's really working, based on the current legislation, I would use up as much as I could right now. Anything a lot more coming to my few years? Well, if you're not quite at a place where you can itemize, maybe back off on some of the expenses, that would be itemized deductions and take advantage of the higher standard deduction. That would be one method. Yeah, that's really probably the best thing. Okay, well, some people can do, unfortunately, it do send devises people from participating in the economy and, but from a tax planning standpoint, to reduce tax, that's the best thing to do.

William Nunn:

That's awesome. Any final thoughts before we jump over to the small business side,

Catherine Roe, CPA:

one other thing, retirement accounts, maxing out on a lot of those contributions, not only does it help you in the future, because you now have money in your retirement account, but it's a great way to reduce your income directly. And which accounts you use, and how much you can deduct depends on a lot of factors. I could throw out some numbers here. But the reality is, even those, those Max limits can be actually a lot lower, depending on your income threshold. So I don't want to throw that out there. I'm gonna leave it at Ask your tax professional, how much you can deduct, because there's a lot of play in there and you can play with, do I have this much income? What can I do? The good thing is, these Contributions can be made up until the filing deadline for your tax return and applied to the prior year. So you can wait until the end of the year and know exactly what your income is. And then figure out what you want to do. And contribute retroactively.

William Nunn:

Oh, awesome things to touch on, you know, charity, retirement accounts, student loans, and a normal year loss harvesting a big item that we had a lot of discussions about bundling contributions and things like that to donor advised funds, charities, etc. I know here in New Orleans, there are a plethora of charities that every Giving Tuesday come knocking. So all excellent, excellent strategies that everybody can employ to switching over to the small business side. If you're a small business owner, your tax picture is very different. I know it to some listeners out there, it may not seem very different, especially if you're a one person LLC or a single member LLC, as it's called, but you know, what could complicate your your situation there.

Catherine Roe, CPA:

So I'm going to start with talking about the specific small business items for single member and anyone who's taking their business deductions on their individual return. There are two, two deductions that you get on your personal return as a single member business owner, that you can't get otherwise. And these are the home office deduction and the personal use of vehicle. And the key thing here is these are for self employed only. If you have a W two position, they can't be applied to that. And that's a question that I've gotten a lot, especially as in recent years, a lot more More people are working remotely working from home, and having to incur a lot more expenses that oftentimes the employers aren't paying for. Unfortunately, as is, none of that can be deducted. But if you are self employed, you can take a deduction for the space that you use in your home exclusively for business. And that deduction is based on the square footage of that space to the rest of the entire living area. And it can be applied to either an IRS pre determined rate or to your actual expenses. And that can be whichever one is more in your favor. And that can be changed from year to year. So one year, the rates better another year, actual expenses are better, then take whichever one is better for you. These expenses, though, that can be used are pretty much anything to the general household that would apply to the space that's used like utilities, you got to have utilities, any maintenance anything general. Now if you had something like your bathroom renovation, obviously that's, that's a little different. That's a it's a nice thing to do. But but that would not those types of expenses wouldn't apply. Since they don't completely affect the business. IRS wouldn't like that too much. We don't want to start anything with the IRS here.

William Nunn:

Oh, boy. Yeah, you definitely don't want to do that. What else might be on the on the No, no list? Oh, man.

Catherine Roe, CPA:

Well, I did have somebody one time say that she had 15 ceiling fans for her business. 15 ceiling fans? Yes. Not just one. I could have gotten away with one like maybe it was in that room. But yeah, those folks lesson. I don't know what they're doing.

William Nunn:

Boy, that I have

Catherine Roe, CPA:

not kept up with that. Because I separated from that.

William Nunn:

So we understand, you know, if somebody I mean, look, unless you have a paint trying business. I mean, I'm not sure how you run that out of your house. But hey, I guess anything can make money. It's probably the only way. Right. So yeah, I know that a lot of people, they do have home offices now. And you touched on a really good point there. For example, I, I work from home, I'm very loud about that. And I of course took the bigger of the two spare bedrooms, not really for the 179. Or I'm sorry, for the home office deduction. Excuse me wrong one. But it certainly works out that way. Because one bedroom is so much bigger than the other. So personally, if you do have that you might want to you might want to take the bigger of the options.

Catherine Roe, CPA:

Well, it also gives you more space anyway, when you're working when you're sleeping. Yeah, who cares? Right?

William Nunn:

Yeah, exactly. I mean, maybe, maybe I should knock in the wall behind me. And just tennis court this thing. So ever seen somebody do that?

Catherine Roe, CPA:

I have not. But I do have someone who's considering converting their garage into a full Office? That would be a massive deduction. Hardcore, hardcore. Wow. Okay.

William Nunn:

And, you know, of course, we're all using Zoom. We're all using the internet and an increased rate. Now, if you work from home, is there anything there?

Catherine Roe, CPA:

So for as far as internet and phone goes for self employed, I have not been including that in the home office deduction. I have been just applying that as business expenses based on the percentage of business versus personal use. I believe that gets you a more direct deduction for those. And they're not really tied to the house. Speak. You need internet to work no matter what if you're working online, so the internet could be tied to the house, depending on what you do. But the phone these days, hardly anyone has a landline. And if you had a landline directly for the business, that would also just be business expense. Anyway. So yeah, as far as phone goes, yeah, just kind of been treating that separately from the home office, but those are definitely important to, to not forget at all. Great.

William Nunn:

What are the what's the one big thing nobody's talking about when it comes to a single member LLC, or you know, sole proprietor or business owner working from home? Taxes? What's the big item no one's paying attention to right now.

Catherine Roe, CPA:

I'm not sure if there's anything really big. Unless there's something you're getting at?

William Nunn:

Nothing, nothing preconceived here. But you know, obviously you're a professional, you're talking with people every single day, about their taxes. In the financial planning world, the big thing that tends to creep up on people are long term care. And believe it or not cars, we don't think of those things, oh, we're just gonna buy a new car every eight years. But you know if that cars 40, or $60,000, that's a big purchase. So I didn't know if there was an equivalent item that could have a big impact people sometimes need to pay attention to and kind of wish it was talked about more,

Catherine Roe, CPA:

vehicles can be a little tricky. Typically, you need to really have in order to make it a full business expense, you need to have almost like 80%, or more business use on it. Or it's going to be something that on papers owned by the business, and you're required to have commercial insurance, which is a lot more on yet, when you go to do all the calculations for the expense. If it's been used more personal, you don't get the deduction for it. So it's in that case, if it's your personal vehicle, it's better to keep it your personal vehicle, and then just take a deduction for whatever part of it you use for business. And that's calculated based on mileage either way. So keeping track of the mileage is key, I usually tell people to track the business mileage and at the beginning of each year, take a picture of the odometer, and we can figure out the rest.

William Nunn:

Got it? I didn't know if it did you have any favorite software apps to help people with that?

Catherine Roe, CPA:

There's this one app that I actually use personally, it's called stride, STR IDE. And they have other things in there different things to track. But the the one that I find most useful is the mileage. And you can you hit go on the button on the app, when you drive somewhere, and then you hit stop. When you get there. The only problem is, I find it very difficult to remember. either start or stop it. But if you're using QuickBooks, QuickBooks recently, they've gotten better with their their app too. So you can actually do the same thing in their app.

William Nunn:

Oh, cool. I didn't realize that. I know, back in the day, I was using mileage IQ.

Catherine Roe, CPA:

That's another one that a lot of a lot of folks use. The one I mentioned is completely free. So I don't know about mileage IQ. I think that might be a paid service. Is that great?

William Nunn:

It's like 14 or 15 a month, it was kind of expensive. But of course, I also wrote off the cost of the app.

Catherine Roe, CPA:

Right? Yeah, that would be 100% deduction.

William Nunn:

When I worked at a large bank, I had a big territory, it was about a 40 or 50 mile wingspan across eight bank branches. And this was before the the tax reform, our tax cuts and Jobs Act. And you could take mileage and gas and certain expenses for unreimbursed expenses with your job, and actually generated about a $4,000 rebate for me at the end of the year, because I just drove so much. I was putting about 10,000 business miles on my car every

Catherine Roe, CPA:

year. Which not bad

William Nunn:

to think about it was crazy as a W two employee. And if somebody is in that situation now obviously they're not getting that, as we we talked about.

Catherine Roe, CPA:

Yeah, and they call that the most audited line item and the tax return the unreimbursed. Anything unreimbursed

William Nunn:

Oh, of course, yes. And obviously my I don't do my own books, that's just kind of a bad policy. Do you kind of make your own meals there? But, you know, I would have to have several conversations and have all the logs for the thing that sticks out for me the most would be having to have the logs for both business and personal

Catherine Roe, CPA:

trips. Yeah. So when you're Yeah, went on from the employees side. Yeah, you have to do that. That's tough. Yeah. Everything

William Nunn:

right, even those even that that trip to your special watering hole after dinner, showed up on there, and it's like, oh, I want to explain now. And so and for people in our neck of the woods in New Orleans, you know exactly what that means. And if you don't well, the economy has reopened. So get back to it. Catherine, what else is what else is on the the topic of discussion when you talk to small business owners about about taxes at the end of the year? I know that for a lot of us were cash basis and some people may choose to go to accrual basis. Are there any items that Well,

Catherine Roe, CPA:

the first thing that I believe needs to be clarified is exactly what those terms mean, I will try to explain that in a minute. Which is difficult because those are so in depth, different items that can be a little difficult to comprehend for anybody. Okay? So cash basis, that's the easy one, okay. So when you pay for something, or someone pays you, that's when you record it, you get your income, when the customer gives you the money, you get your expense when you pay your expense, essentially. Now accrual is you're taking these expenses and income, and you're putting them in different places. So they're probably not gonna line up with the cash, the income, you're gonna record it when you earn it. So when you've done the work, not necessarily when the customer pays you, and your expense, you're going to record it, when in the period that that expense is for whether you paid for them or not. So it's, it's a little tricky. So the key here is, if you're thinking of, at the end of the year, one method would be to go and buy a lot of things, the business doc up on inventory, office supplies, I'm just trying to think of all different kinds of things that I've had folks stock up on. That only works if your cash basis. So in the in the calendar year, you go out and buy a bunch of stuff, this is only is only going to help you in the current year, if your cash basis. If you're a cruel, and say you go and stockpile on inventory, you don't get to recognize that expense, until it's an actual expense, it could be in a future period. So it's very important to keep track of the difference and consult with an accounting advisor on how to best make that work. But that's one method. Another one is investing in fixed assets, like equipment, furniture, or any kind of major improvements. You can make all these purchases at the end of the year, as long as it's before year end. And you can take section 179 deduction through your tax return that will allow you to expense it in that current year for tax purposes. Now, for accounting purposes, typically, these large capital expenditures are depreciated and the expenses taken over a time period, a period of years. for accounting purposes, you might still keep that. But for tax purposes, you can get the deduction then. And if you had a really say you had a really high income year, and your goal was to get that down for taxes, then you're going to want to take the deduction, sometimes it may not be worth it, it might be actually in your interest to continue to spread that out. But otherwise, you can definitely, definitely take that.

William Nunn:

That's all good things to know. And so when we when we talk about fixed assets, and plant property and equipment, you know, in the accounting world called PP, and E, obviously, that has its own depreciation table, things like that things like real estate. But what if you're a service business? For example, you know, you and I, we provide a service. I mean, other than computer, internet and software, there's, there's not a whole bunch of stuff that goes into our business. So is there anything special that those folks who earn their living by providing a service need to pay attention to? Well,

Catherine Roe, CPA:

as far as fixed assets go, one thing that you may or may not have thought of would be all of your anything that you have in your office, all your furniture and everything? A lot of people don't think about that, because sometimes it's just a room that they converted in their home, but you can actually contribute those items to your business and then get a deduction for them. At that point. They're owned by the business, though. But But yeah, I would say that maybe 80% of my fixed assets are all computer equipment. So definitely, definitely understand that one. But yeah, honestly, the whole stockpiling is usually easier for product based businesses. There isn't too much on the service side that you can do. But so maybe if you have software that you'd be using at a future year, and your cash basis, you can pay that ahead of time. But you also kind of have to consider that you're taking that deduction from the future period to so There's always a balancing that get to kind of figure out at what point is it worth it. And sometimes it's not worth it to stock up on expenses. Sometimes it can be better to keep the expense in the, in the future year, go one thing that would definitely determine that, if you can kind of forecast what the income you expect to have in the next year is and compare the tax rates. It could be at the next year as higher tax rates, you might want to make sure that you don't stockpile that you do keep your expenses in the next year. So it's not just thinking about the current year, but at the end of the current year, you definitely know what the rates are expected to be for the next year and can kind of plan that way too.

William Nunn:

Anything else on the business owner side that you're seeing a lot of is there, I'll ask what's the big thing everybody's not talking about?

Catherine Roe, CPA:

I think that's really, that's really it. It's a it's a lot, though, to kind of determine all of that, I guess, if there was anything really big, it would probably be COVID related. And that's very difficult. And I would not recommend anybody try and figure out that on their own. Things are constantly changing. One thing that I recently found out through an actual group chat that I have with two other CPAs we're like all little CPA buddies, and we constantly talk all day long. My friend sent a message out saying, hey, the Louisiana State Street grants, those or she said they're not taxable, in one instance, for one taxing entity. And and I said, but they lied to me. He said, Well, when you filed the returns back in July, they were were taxable, and now they've changed their minds.

William Nunn:

And what happens to those people? Do they have to go back and refile?

Catherine Roe, CPA:

Same thing with the unemployment? The federal unemployment, at first, when you started off the year to file for the last year, everything was taxable. And then what was it like February or March? They they said it wasn't, but tax returns had already been filed. The only thing you can do at that point is a men or you know, either those situations. Wow. Yeah.

William Nunn:

Okay, so legislatively a very moving target all the time.

Catherine Roe, CPA:

And that, in the past two years have been the first time that I have ever seen where legislation has changed. A current in progress, tax filing season, typically changes, changes that are always made or made for for future dates. as of this date, this is how things you're going to be treated. This is the first time the COVID stuff, the first time I've ever seen, it's, we've been doing this, we're changing this right now. Go back and change everything.

William Nunn:

And of course, sometimes the effective date is the date that the IRS gives guidance. And it's not even the date it's finalized, is the date that it gives any kind of guidance, which could be months before, right. So we've, I know, we've seen that this year, and it can be not deadly, but surprising. I'll say that. Yeah. Are there any any other things that small business owners that you find, probably need to pay a little bit more attention to? I know, we on the personal side, we've talked about a lot. I know for us in our practice, we get a lot of enquiries about the solo 401k and versus the SEP IRA and all that kind of stuff. What else are the things that that you'd want people to know or want people to pay attention to, in order to check this off their to do list and give themselves some more financial freedom of mind and time going into the holidays?

Catherine Roe, CPA:

As far as retirement accounts go? For self employed, there used to be a time where 401 K's were outrageous. And the administrative fees were so wild that it made it kind of unrealistic to go that option. Now nowadays, I wouldn't tell anybody one way or another between 401k Or set necessarily.

William Nunn:

Oh, wow. They've come in that much. Yeah, of course. I remember in the beginning of my business. I've been doing this about a decade. It was just kind of defaulted to Sep Yeah, somebody had a big enterprise. But I'm seeing more and more individual or solo 401 K's. So that doesn't surprise me.

Catherine Roe, CPA:

Yeah. And then I looked into it recently and yeah, I really didn't look very difficult set up. I decided against it. Personally, I went with a set. But I wouldn't I wouldn't advise one way or the other. They both To be pretty good. The key is to make sure that you've got a really good financial advisor in your court to help you through it all, but wouldn't do it, do it on your own.

William Nunn:

That's kind of a tricky thing to navigate on your own. I mean, that's like trying to date the 1245 or 1250 stuff on your own. It's ill advised, and, you know, if you can do it great, you're a special person, that's for sure. So, no, and I'm seeing a lot of steps still. And we're seeing more and more people, I guess I should say, crossover to the solo side, because they can bounce between the Roth 401k and the traditional, they can get those two, depending on and,

Catherine Roe, CPA:

and this isn't necessarily a current tax savings tip. But the Roth IRA is great. And the important thing about that is anything you put into it is already after tax, so in the future, you won't have to pay tax on it. So if you're expecting tax rates to increase all into the future, then you might want to have already paid the tax now, and then not have to worry about paying the tax later. Got it? All right. So yeah, I'm a Roth pusher.

William Nunn:

Most most CPAs I know are Roth pushers. You know, we keep hearing the chant of rates are never going to be this low rates are never going to be this low. And then what happened in 2018, they got lower. So Catherine, other anything else, any other items, business personal, any other things that people need to pay attention to? To get this off their list and go enjoy the holidays?

Catherine Roe, CPA:

I think that's just about it. All right.

William Nunn:

Well, thank you so much for coming on and talking with us today for planning for financial freedom, and we hope to have you on again soon. And yeah, let's let's talk again, because I know financial freedom is very, very accounting based. And from what I can tell as if you have the system set up, if you have things in place, you can create a lot of time freedom for yourself. So we definitely look forward to having you back on to talk about whatever it is you feel like people need to

Catherine Roe, CPA:

hear. Yeah, absolutely. Thanks for having me.

William Nunn:

All right. Thank you, Catherine.

Unknown:

Thanks for listening. So planning for financial freedom. We hope you enjoyed the show. If you did, please rate us on Apple podcast. It helps others find the show. Keep in mind any topics we discussed today. Were not prepared with any one person situation in mind and is not financial tax or investment advice in any way.