Profitable Painter Podcast
Profitable Painter Podcast is a rich resource for anyone interested in starting, running, and scaling a professional painting business, offering valuable insights, strategies, and interviews with industry leaders. Through case studies and in-depth discussions, we deliver a vivid picture of the painting industry, with a disclaimer that any financial or tax information is general and not a substitute for professional advice.
Profitable Painter Podcast
Good, Better, Best Tax Strategies for Painters
Unlock the secrets to smarter tax planning with insights from Daniel, founder of Bookkeeping for Painters, and Richard, our advising director. Understanding tax strategies might just be your ticket to financial growth. Discover how tax deferral isn't just about postponing payments—it's a pathway to reinvestment and future financial success. From income deferral and expense acceleration to maximizing retirement plans and using 1031 exchanges in real estate, we break down how these strategies harness the time value of money to boost your financial potential.
But that's not all! Explore innovative tax reduction tactics, such as maximizing deductions, choosing between itemizing and standard deductions, and even creative methods like income splitting and the gift and lease back technique. Learn how to leverage tax-efficient investing through HSAs and Roth IRAs without delaying your tax responsibilities. We also illuminate the power of tax credits, like the child tax credit, in reducing your tax burden. Our conversation highlights the importance of strategic planning and consulting with knowledgeable tax planners to craft personalized tax plans. Engage with us and share your tax journey on our Facebook page, "Grow Your Painting Business.
This is Daniel, the founder of Bookkeeping for Painters.
Speaker 2:And this is Richard, the advising director. How's it going, Daniel?
Speaker 1:It's going well, I can't complain. It's middle of January. It's super busy for us right now. I mean this is prime time for accounting firms, so we are busy, but it's going well, bring out a lot of new folks and delivering value, so enjoying it.
Speaker 2:Awesome. Yeah, it's definitely the time of year where people start to think about 2024 is over. How are we going to make 2025 even better? And it's never too early in the year to kind of start thinking about your tax situation. And are there things that I can do to pay less tax than I did previously? I thought we could have a good time to talk about the different types of tax strategies and how each one works and how some are better than others.
Speaker 2:I know you know, generally we kind of think about like well, aren't all tax strategies created equal? The answer is actually no. They can be very different and their benefits can be very different. However, they do tend to fall in like one of three categories. So I kind of think of it as, like you know, good, better or best. You know, any tax strategy that saves you money and aligns with, like, your values is good, but if you can kind of emphasize the ones that move the needle even more, that's a great place to start. So, you know, just kind of jumping into it.
Speaker 2:We've got tax deferral, that I would consider to be good. We have tax reduction, which I think is even better, and then we've got the gold standard tax credits, which I think are best. So when we're talking about tax deferral, this is the one that kind of gets a bad rap. Sometimes there's a little bit of misunderstanding around how this works and if it even is beneficial at all. But that's basically postponing your taxes to a later date. To put an analogy on it, it's kicking the can down the road. It does not remove the taxes, but it does delay you from having to pay them, and that can be a benefit. It's not being irresponsible to kick the can down the road. I kind of like the analogy more of like planting a tree you plant it now, you monitor it and then you have benefits later on. So some examples of tax deferral One that we've talked about a lot on our podcast is income deferral, and that is where, if you're a cash basis taxpayer, you might wait until next year to collect on some of your invoices for work that's been done in November or December and that way you don't have to recognize that income and pay taxes on that money until the following year.
Speaker 2:That's deferring those taxes. Side of that is expense acceleration, where again in December, you're looking at what are you planning on buying in January and February and seeing if you can't make those purchases now, before the year is over, and get that tax break now, and then you would pay the taxes on that income the following year. You're pulling it forward. Another one that folks are familiar with is 401k and traditional IRA retirement accounts. We're taking money that would normally be taxed, we're putting it away for the future. We're getting a tax break on that money. It's going to grow and then we'll pay the taxes on it when we pull it out in retirement.
Speaker 2:So the first strategy defers taxes for maybe 12 months. This strategy delays taxes until we're at least 59 and a half, possibly even older. You might even be able to keep it deferred until you're 72 when required minimum distributions kick in, and we'll kind of mention that later on. You know another type of deferral strategy has to do with holding assets long term. So if you've got stocks that have appreciated and grown, you know that you don't have to pay taxes on that appreciation until you go to sell it. So depending on your investment strategy, you might hold on to those stocks for a while and then not have to pay taxes until you sell.
Speaker 2:The way we do this type of thing in real estate is with a 1031 exchange, and that's where you sell a piece of property and, as long as you follow the rules and buy another piece of property that's very similar to the one you just sold, you don't have to pay those capital gains tax. You're deferring them, and you can keep doing this until eventually you sell the property and you don't buy a new one. So those are just some examples of tax deferral. There are other ones, but why would we even bother with this right? Why kick the can? Well, it has to do with, like, there's this economic concept of the time value of money, and that's just a, you know, a geeky way of saying that money you receive today is more valuable than the same amount of money received in the future, and the reason for that is because money is an asset that can be deployed to earn you more money.
Speaker 2:So if you have to choose between giving your cash to the IRS now or keeping your cash, letting it go to work for you for a while, and then giving it to the IRS, there's benefit in being able to keep your cash for longer. Some of the ways that you might be able to leverage that is, you could reinvest that cash back into your business and grow your business before having to pay those taxes. Maybe you put it into a retirement account. We know that there are maximum amounts that we can contribute to IRAs 401ks each year and if we don't hit that maximum in a year, that opportunity is gone forever. So if we need to defer some taxes to have enough cash so that we can max out our IRA, that could be worth doing that so that we don't lose out on that opportunity. Or just very simply, maybe we take that cash and we put it into a high yield savings account. I'll hold on to it, I'll collect some interest on it and then I'll give it to Uncle Sam. That's something that we do a lot with our tax planning, where we understand what the estimated payments are going to be and we talk about what is the minimum that has to be paid versus what the actual tax liability is going to be, and so our clients are able to decide do I want to pay everything to the IRS now, or do I want to just pay the minimum, hold back the remainder in a high-yield savings account and then pay it only when I have to, usually on April 15th of the following year?
Speaker 2:Now just some not downsides, but things to be careful about when you are deferring taxes to the future. We don't know what the tax rates are going to be in the future. We've seen tax rates come down with the Tax Cuts and Jobs Act and there was a lot of you know political will right now to keep those tax rates low. But could Congress change the tax rates to a higher bracket in the future? Well, anything's possible, so that is a risk that you take. Additionally, you might be earning more income in the future than you are now, and if that's the case, you could be in a higher tax bracket. So we want to take that into consideration.
Speaker 2:And then, when it comes to our 401ks and traditional IRAs, we mentioned deferring taxes until you're 72. Well, that's when those required minimum distributions or the dreaded RMD kicks in and the government forces you to take that money out and pay the taxes on it. So just be prepared for that. What's your tax bracket going to be at 72? Are you living in a state with an income tax? Or maybe you're retired and you're in Florida or Texas where there is no state tax tax? Or maybe you're retired and you're in Florida or Texas where there is no state tax. Or perhaps, if you're very wealthy, you can avoid taxes on those RMDs by donating that money to charity. There's tax planning opportunities there, but we just want to be aware that eventually we will have to pay the piper. So just have a plan in place for when that happens the piper. So just have a plan in place for when that happens.
Speaker 2:So, moving on to our silver metal here, or better, this is reducing taxes, and I think this is what most people think of when they think of tax strategies, and this is exactly what it sounds like. This means reducing the amount of taxable income or lowering your effective tax rate. So we're not kicking the can down the road anymore. Now we're actually bringing our tax liability down. This is mostly done through tax deductions and exclusions. So some examples of that Well, you're a business owner If you're listening to this podcast, you're probably a business owner. You're very familiar with IRC section 162 that you can exclude from your income expenses that are necessary and ordinary for your business. So we want to maximize our business deductions. We want to track that mileage, keep those receipts, have good records and books so that we're not leaving any tax deductions on the table. Another way we can find deductions is in either itemizing versus standard deduction. When it comes to our personal tax return, this has gotten a little bit more difficult in recent years, but if you have a very high mortgage interest expense or you make large donations to charity or maybe you have very high medical bills, it might make more sense for you to itemize your deductions versus the standard deduction. So you'd want to have your tax professional run that both ways to see which is going to be more advantageous.
Speaker 2:Another way to reduce tax is through tax-efficient investing. So one of my favorite things is the HSA, the health savings account. You can put up to $8,300 in. Actually it's higher now I think it's $8,500 for 2025. You can put that in for your family. That money goes in tax free and it grows tax free. So that's not a deferral, that's an actual reduction of your tax, reduction of your tax. An HSA is kind of similar to a Roth IRA, except a Roth is very long-term. We're not taking money out of a Roth until we retire, but when we do take it, that money is going to be completely tax-free the growth and the interest on that.
Speaker 2:Another way to reduce taxes and this is one that doesn't get talked about as much, but it's a really cool strategy has to do with income splitting, and this is where you take your income that would normally be taxed at your higher rate income that would normally be taxed at your higher rate and you transfer it to a family member who has a lower tax bracket. So you might do this by hiring your kids to work in your business and now you're paying them. If they're making less than $14,000 a year, they're going to pay zero federal tax. If you live in a state with an income tax, that threshold might be a little bit lower, so just keep an eye on that. But if you're in a 35% tax bracket and you're shifting that to your children at close to zero, there's some serious savings there. Another way you might shift income is through a gift and lease back strategy. You have to have the right circumstances for this, but it's basically where you would gift an asset to someone who has a lower tax bracket and then you would lease that asset in your business so that the income is going to your family member in the low tax bracket instead of being in your higher tax bracket. So that could be a way too.
Speaker 2:Just some tips on this. We want to keep good records. That's tip number one. If you know, if we ever get, we're going to be required to substantiate all of these deductions, so make sure that we have the receipts and the bookkeeping to back these up. We want to maybe think about am I missing any deductions? Am I getting my home office deduction if I'm running my business out of my home? Am I getting the full auto deduction because I'm tracking my mileage and I understand the difference between actual expenses and the standard deduction and I'm taking the right one? You know we really want to kind of tailor these strategies towards our financial goals. So conversation to have with your tax professional for sure, am I getting all my deductions or am I maybe leaving some of these tax breaks on the table? So that's reducing taxes. That's our better of the three.
Speaker 2:Now let's talk about the gold standard, and this is by far the best.
Speaker 2:This is tax credits.
Speaker 2:This is where the government reduces your tax dollar for dollar, and in some cases they will actually pay you through tax credits.
Speaker 2:We have what we call refundable and non-refundable credits.
Speaker 2:So a refundable credit is where, if you reduce your taxes to zero and you still have tax credit on your return, the IRS will send you a check. Non-refundable credits will reduce your tax down to zero, but once it gets there, anything that's not used kind of disappears, so they won't be sending you a refund. Some examples of tax credits one of the most popular ones is the child tax credit. That's worth $2,000 for children who are under 17, who you provide support for and live in your home for at least six months out of the year. I'm going to say, for simplicity's sake, I'm going to say that's a refundable credit because you can get that $2,000 sent back to you if you don't have enough tax to absorb it. Technically speaking, they break it out into different areas, but it's okay to think about it, you know, simply as being refundable. I just don't want to get any comments. You know that that, uh, technically, child tax credit's not refundable yeah, people are gonna be pissed if you say that yeah, only the accountants.
Speaker 2:Um, yeah, the people getting the money are cool with it yeah, child tax credit is one of my favorite ones.
Speaker 1:I mean, that's, I got four kids at this point and just trying to rack up those credits. You know, that's the main motivation of having all these kids there's. There's a country I can't remember. I was trying to look it up real quick. They actually, if you have, like I think it's four or five kids, you basically you don't have to pay taxes anymore. It's like once you get to that level of that many kids, you're like you don't have to pay taxes anymore. It's like once you get to that level of that many kids, you're like you don't even have to uh, worry about taxes. So so I'm crossing my favorite fingers that uh, that's where the us starts moving yeah, well, I think is that the brady bunch bill where um you have to um, yeah, you know.
Speaker 2:We've seen that the child tax credit increase. It was a thousand dollars. The Tax Cuts and Jobs Act upped it to two thousand. We saw it temporarily increased during COVID all the way as high as thirty six hundred, and there has been some. Now it has gone back down to two thousand. There has been some. Now it has gone back down to $2,000. There has been some, you know, talk about moving it back up to $3,000 or $3,600 on a permanent basis. Those bills have not yet passed Congress, so we'll have to see. Maybe it will become even more valuable.
Speaker 2:You know, another credit that kind of gets missed sometimes are education credits, and so you know, when your children turn 17, you don't get the full $2,000 anymore, but if they're going to college, they could qualify for the American Opportunity Credit or the Lifetime Learning Credit, and these are different credits that both apply to, you know, educational expenses and they can both be used. So the American Opportunity Credit is usually the better of the two, so we want to hit that one first. That can only be used for four years, though, and once that's used up, we might be looking at the lifetime learning credit or the tuition interest deduction, which is not a tax credit, it's a deduction that falls into the second category, but if it's available, you want to take that too. One that's been popular is energy credits for like solar panels and energy efficient home improvements. Even folks who do not want to put solar panels on their own home have been able to, you know, invest in solar property and benefit from these credits. That's kind of a high end strategy. There are funds that will help you do that, but the government will basically help you pay for about 30% of the cost of putting solar panels on your roof. That one's been around for a little while. It might not last forever. So if you're interested in going green with solar, I would go ahead and act on that sooner rather than later.
Speaker 2:And then another popular one is the earned income tax credit, and this applies specifically to low and moderate income workers. It's basically an incentive to have W-2 wages even though you're a lower income earner, even though you're a lower income earner, and the amount of the credit you get as a reward for working increases depending on your family size. So that's a nice thing to help kind of pull people out of poverty who are working and trying to do what they can. It's also a very abused credit, so just be careful that you really do apply. Did you qualify for that? So I mean, tax credits are super powerful, right, we call them the gold standard because they are a dollar for dollar reduction of your tax. A $1,000 tax credit is $1,000 in your pocket, whereas a $1,000 tax deduction would be whatever your marginal rate is. So, say, 22% times 1,000, so about $220 in your pocket. So when discussing these things, kind of understand what the numbers mean and how it actually is going to affect your bank account.
Speaker 2:To affect your bank account, tax credits are also a very powerful way for, you know, society to incentivize behaviors that somebody feels is important. You know, at some point we decided that we need to have more citizens in this country. We want people to have children, to have more citizens in this country. We want people to have children, and so we incentivize that behavior with child tax credit. You know, some politicians believe that we need to have more solar panels or electric vehicles, and so they're incentivizing those behaviors with tax credits.
Speaker 2:And if those types of things align with your values and goals, then you should take advantage of those credits. However, if it does not make sense for you to say buy an electric vehicle, then you shouldn't worry about it, you shouldn't feel guilty about not doing it. The credit is there for those who can benefit from it. Uh, but I guess my point with this is, you know, don't let the tax tail wag the dog. Do what's right for your business and what aligns with your values. Uh, and if there's a credit to be had, great, and if not, that's okay too.
Speaker 1:So, and if you uh it's, the country is hungry, so I had to look it up if you have four more babies in hungary, you have, you'll pay no income tax for life. So that's my, uh, that's my new quest to move to hungary, my kids and not pay taxes for life. So you could always do that. That's one bold tax strategy that just solves it all.
Speaker 2:Yeah, as long as you don't have any US source income, right.
Speaker 1:Yeah, you have to renounce your US citizenship.
Speaker 2:Yeah. Now, if that aligns with your values and goals, Daniel, I think you should do that. Yeah, I'm just kidding. No, I'm just kidding. No, I'm just kidding. Um interesting. So it's four kids in hungary, no taxes yeah, four.
Speaker 1:If you have four more babies hungry, you don't pay taxes for life. Apparently all these european countries in japan they're not having kids anymore and they're just basically societies are going to start collapsing over there because they're not having any kids.
Speaker 2:Well, I think that's a really powerful example of how governments will use taxes to incentivize behavior. I know I've mentioned it before. We think about taxes are necessary to fund the government. In a way they are, but I think, more importantly, taxes are used to incentivize behavior. So just kind of understand why some of these decisions are being made and then you can make the decisions that are good for you. So we discussed three different tax strategy types Tax deferral, which is good, especially if you have a long-term plan. Tax reduction, which is even better because you're getting immediate benefits making those taxes disappear. And then tax credits, which is the best, because now the government is paying you.
Speaker 2:Understanding how these different types of strategies work will allow you to craft a plan that meets your goals. It will allow you to better utilize these strategies if you understand how they're going to help you, and it will kind of allow you to prioritize which ones you want to implement first, will kind of allow you to prioritize which ones you want to implement first. So, that being said, I definitely suggest that you consult with a tax planner who really understands these things and knows not just like the three categories, but also all the tax strategies that fit into these categories. You know we pull from a repertoire of over 75 different tax strategies when we're working with our clients, trying to find which ones are really going to give them the most benefit and which ones fit into their goals and lifestyle. So having that conversation with your tax professional is really important.
Speaker 2:If you have any questions or if you'd like to suggest tax strategies that work really well for you, we would love to get your feedback. You can go to our Facebook page. It's called Grow, your Painting Business, and we would love to hear what you have to say. But otherwise, you know I appreciate everybody listening to this episode. I hope you find lots of tax breaks for 2025 and we will see you on the next episode.
