Episode Transcript
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Speaker 1 (00:00):
Welcome to the hidden world of wealth, where secrets of
the affluent become accessible to you. You are listening to
Your Money Matters, the most provocative financial radio show on
the airwaves. You are about to start your educational journey
here on Your Money Matters with your host, Drew Prescott,
(00:22):
President of Prescott Private Wealth and Chartered Retirement Planning Counselor.
Drew will unlock the complexities of the financial landscape with straightforward,
powerful insights. Whether you're planning for retirement, managing in a state,
or looking to grow your wealth. Consider this your exclusive invitation.
Turn up the volume, lean in closer. Let's navigate the
(00:45):
hidden paths of prosperity together. Your financial enlightenment begins now.
Securities all produce a terror Financial Specialists LLC Member FENDRA
SIBC reservices offered through Setara Investment Advisors LLC. So TERA
firms are under separate ownership from any other named entity.
(01:06):
Four five to one sixth Street, Troy, New York one
two one eight zero.
Speaker 2 (01:26):
Welcome back, my friends, to another episode of Your Money Matters.
Welcome back, welcome back, and thank you for tuning in.
And I wanted to start the show off with that
beautiful song that rings in the new year every year. Now,
(01:48):
I've been on the side of that song where frankly,
I felt pretty bummed out, feeling like maybe the year
went bio awfully quick and I didn't hit some goals
and or just didn't feel like life was going the
direction that I planned for it to. And my goal
(02:08):
for you today is to help you get to a
place that when that song is played, you feel very
good about the moves that you've made, and you feel
encouraged and hopeful about the year to come. So I
want to share with you today some tax strategies for you.
I'm going to give you eight points to consider before
(02:30):
the end of the year here to help you maximize
savings under the twenty twenty four tax law. Because taxes,
they don't have to be terrifying. Okay, So that's my
goal today, and I promise this isn't going to be
a boring discussion about numbers and forms. Instead, we're diving
into something that could have a real impact on your life,
(02:53):
how to save money on your taxes. So, yes, you
heard that right, Whether you're employed, employed, retired, or just
trying to make those hard earned dollars stretch a little
bit further. Here are some simple moves you can make
to reduce your tax burden. And the best part that
these strategies are entirely legal and they're easier than you
(03:16):
might think. But first, let's address the elephant in the
room for a second. A lot of people feel overwhelmed
when it comes to taxes, and hey, I get that
the rules seem to change every year, and the forms, well,
let's just say that they're not exactly light reading. But
here's the thing. With a little planning and some expert guidance,
(03:41):
taxes can become less of a chore and really more
of an opportunity for you. And in today's episode, we're
breaking down eight year end tax moves that you can
make right now to save yourself a bundle come April,
and we're gonna sprinkle in some real life stories of
people just like you who use these strategies to their
(04:02):
advantage and have had a little fun along the way.
So grab your favorite beverage, let's settle in, and we'll
get you started to learn how to keep more of
your hard earned money where it belongs, and that's in
your pocket. So first point here, we've covered some of
these last week, but a good refresher, which is maximize
(04:26):
your retirement contributions. So let's dig deeper into why maximizing
your retirement contributions is such a powerful tax saving strategy.
At first glances might sound like just standard advice save
for retirement and your lower your taxes. But let me
break down just how much of an impact this can
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have not only on your taxes this year, but also
on your long term financial future. So here's how it works.
The mechanics of tax savings. When you can try tribute
to a traditional four oh one K or an IRA,
the money comes out of your paycheck or your bank
(05:07):
account before taxes are calculated. This means that your taxable
income is lower and the amount that you owe in
taxes is reduced. It's essentially a win win. You're saving
for your future and you're reducing your tax bill at
the same time. So, for example, if you're in the
twenty four percent federal tax bracket and you contribute the
(05:28):
maximum of twenty three thousand dollars into your four toh
one K, you're saving fifty five hundred and twenty dollars
in federal taxes and in state income taxes. If applicable,
the impact can be even greater. So why the two
thousand and twenty four limits matter. Well, for the two
(05:51):
thousand and twenty four tax year, the four to one
K contribution limit has increased to twenty three thousand, with
an additional seventy five five hundred dollars if you're over
the age of fifty, So that means individuals fifty years
old and older can contribute up to thirty thousand, five hundred.
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For iras, the limit is seven thousand, with an additional
fifteen hundred if you're over five or over fifty, so
that's a total of eight thousand, five hundred. But here's
a kicker. If your employer offers a match on your
four oh one K contributions, that's free money and it
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gets added to your retirement account. So not taking advantage
of this is like walking past one hundred dollars bill
on the sidewalk and just refusing to pick it up.
So make sure that you're taking advantage of these retirement plans. Now,
what self employed individuals can do is if you're self employed,
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the stakes are even higher. Now you have access to
special retirement accounts like a SEP IRA and solo four
oh one ks, which allow you to contribute up to
twenty five percent of your income or a total of
sixty six thousand dollars, whichever is less. So imagine the
tax savings on that. Well, let me share a story
(07:17):
about Jake and Olivia. They're a corporate power couple and
our power couple from here. They made a small adjustment
and it had such a huge impact. So before maxing
out their four oh one K contributions, Jake was only
contributing ten thousand dollars annually and Olivia was contributing twelve thousand.
(07:40):
So they thought that they were doing well. But their
CPA ran the numbers and showed them how much money
they were leaving on the table. And when they increased
their contributions to twenty three thousand each, two things happened. One,
they dropped into a lower tax bracket and number two,
they slack their taxable income by forty six thousand dollars,
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which saved them eleven thousand in federal taxes alone. So
Olivia summed it up perfectly. She said, it felt like
a double win. We were saving for retirement and we're
also keeping more of our paycheck so make sure that
you're sitting down with the right professionals and looking at
these numbers for yourself. Now, how does it play out
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over time? Let's talk about the long term impact. Those
extra contributions are not just saving you money in today's taxes,
but they're also compounding over time. So if Jake and
Olivia each contributed an additional ten thousand annually from over
the next twenty years, I should say, let's assume they
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had a seven percent annual return, that means that they'll
have an extra four hundred and twenty six thousand dollars
save for retirement. That's almost a half a million dollars.
So that's just from taking advanceage of their retirement accounts. Now,
let's consider a roth Ira conversion as well. Now let's
(09:08):
get into the nitty gritty of this roth Ira conversion.
And one of the smartest moves that you can make
if you're looking to maximize your financial flexibility and retirement
is this strategy. And it's especially relevant right now because
today's historically low rates are set to expire in twenty
(09:28):
twenty five. So the basics of a wroth conversion ARST
follows a roth Ira conversion. It involves taking money from
a traditional ira which you haven't paid taxes on yet,
and you're moving it into a roth ira where withdrawals
are tax free and retirement. So the catch, okay, here's
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the catch. You pay taxes on the amount that you convert. Now,
so you might ask yourself, so why would anybody voluntarily
pay taxes today? Two words tax free growth, and once
your money is in a roth ira, it grows tax
free and then you'll never pay taxes on it again,
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not on the principle, not on the earnings, and not
on the withdrawals. So timing here is everything with a
roth conversion.
Speaker 1 (10:24):
Now.
Speaker 2 (10:24):
Right now, tax rates are low, and I should say
lower than they've been in decades, and thanks to the
Tax Cuts and Jobs Act of twenty and seventeen, that's
why we're in this position. But those rates are scheduled
to increase in twenty twenty six unless Congress acts to
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extend them. So, for example, if you're currently in the
twenty two percent tax bracket, you could move fifty thousand
from your traditional ira to a wroth and pay eleven
and ten taxes. But if you wait until tax rates
go up, and you're in a twenty five percent bracket,
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that same conversion would cost you twelve thousand, five hundred,
which is an additional fifteen hundred and taxes. So how
do you avoid the tax bracket creep. Well, one of
the biggest pitfalls of a ROTH conversion is accidentally pushing
yourself into a higher tax bracket. So let's say that
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you're in a twenty two percent bracket and you convert
fifty thousand. That extra income could push you into the
twenty four percent bracket, and that's going to negate some
of these benefits. So a smart way to avoid this
is to spread your conversion out over several years and
converting just enough each year to stay within your current
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tax bracket. Now, let's talk about the strategic grand parent.
We'll call her Margie. She's a retired teacher and this
is a perfect example of how using this strategy effectively
can be beneficial. So, with two hundred thousand in her
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traditional IRA, she wanted to leave her grandchild a tax
free inheritance, so her financial planner suggested converting twenty thousand
per year into a ROTH IRA over the next five years.
So here's how Margie made it work. Number one she
kept an eye on her tax bracket, and by converting
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twenty thousand per year, she stayed within her twelve percent
tax bracket, paying just twenty four hundred in taxes annually. Also,
she used cash to pay the taxes. So instead of
using funds from her IRA to pay the conversion taxes,
Margie used savings and this ensured that the full twenty
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thousand went into her wroth ira, which maximized its growth potential.
And the third thing she did was she involved her grandchildren.
Margie told her grandchildren about her plan and turning it
into a teachable moment about financial responsibility. And now they're
excited about savings, she said. Now they're excited as excited
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about savings as she is. So by the time that
Margie's done with her five year plan, she'll have moved
one hundred thousand into a roth ira. And let's assume
a six percent annual growth rate. That means that that
money could grow to one hundred and seventy nine thousand
over ten years. And now it will all be tax
free for her grandchildren. And now, when I share this
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story with you, don't think that this is just for retirees,
because you don't have to be retired to benefit from
a wroth conversion. In fact, it's a great move for
younger workers who expect to be in a higher tax
bracket later in life. So imagine being in your twenty
your thirties converting ten thousand dollars to a roth ira
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today while you're in a lower tax bracket. Now that
ten thousand could grow to fifty thousand or more by
the time that you retire, and you would never owe
taxes on it. And one of the beautiful things about
this is this hidden benefit behind it, which is that
there's no required minimum distributions. So the advantage of the
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roth ira is that it doesn't come with a required
minimum distribution. So traditional ira they require you to start
drawing money and paying taxes on it at age seventy three.
Now with a wroth ira, you can let your money
sit and grow for as long as you want, and
it gives you control over that retirement income. So here's
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here's a quick exercise to see if a wroth conversion
might make sense for you. One, add up your taxable
income for the year, Two determine your current tax bracket,
and then three calculate how much you can convert without
moving into the next tax bracket. And if you're unsure
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about how to do this, talk to a CPA or
financial planner and they'll help you run those numbers and
create a conversion plan that works for you. So let's
take a closer look at another strategy here. I'm gonna
call this the bunching strategy, which is a tax savings
move that works like a charm for those who hover
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close to the standard deduction threshold. So if you're unfamiliar
with bunching, it's really essential that it's essentially a way,
I should say to make itemized deductions work in your
favor simply by concentrating deductible expenses into a single tax year.
So by strategically grouping expenses like medical bills, charitable contributions,
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or property taxes, you can push your deductions above the
standard deduction threshold and reap the rewards. Now, the standard
deduction for twenty twenty four is twenty seven thousand, seven
hundred for a married couple that's filing jointly, thirteen eight
fifty for single filers, and twenty thousand, eight hundred for
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heads of households. So if you're itemized deductions like medical expenses,
mortgage interest, and charitable donations. Don't exceed these amounts, you
will not get any benefit from itemizing, and this is
where bunching comes in. So bunching involves combining multiple years
worth of deductible expenses into a tax year. For example,
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instead of making steady charitable donations of five thousand every year,
you could donate ten thousand this year and skip donating
next year. And this allows you to claim a deduction
for ten thousand this year while still supporting your favorite
charity over time. Also, medical expenses can be deducted if
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they exceed ten percent of your justed gross income. For example,
if your AGI is one hundred thousand dollars, you'd need
to have medical expenses above ten thousand to qualify for
a deduction. Now, if your medical expenses are close to
that threshold, consider scheduling your elective procedures, dental work, or
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vision care within the same year to push your total
above the ten thousand or I'm sorry, the ten percent mark.
Now here's a here's a medical miracle for you. Okay,
a little story. Anthony, who was a freelance writer. He
used bunching to turn a financially stressful year into a
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tax savings opportunity. In twenty twenty four, Anthony had eight
thousand in planned medical expenses for elective surgery. He also
needed thirty five hundred in dental work, but he was
initially planning to delay it until twenty twenty five. Well,
Anthony's CPA advised him to bundle those expenses into the
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same year. So by scheduling his dental work in December,
he brought his total medical expenses to eleven thousand, five hundred,
and since his AGI was one hundred thousand, he met
the ten percent threshold and was able to deduct fifteen
hundred and medical expenses, and that saved him three hundred
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and sixty bucks in taxes at the twenty four percent
federal tax rate. So Anthony said, at first, I thought
I was just shuffling numbers around, but when I saw
how much I saved, it really made perfect sense to me.
Plus I got all of my medical stuff out of
the way in one year. Now there's additional expenses that
you can bunch. So here's a list of other expenses
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that you might want to consider bunching. You can do
property taxes, prepay next year's property taxes in December. If
you're under the salt cap charitable contributions, you can double
up one year and then skip the next and state
income taxes. If you make an estimated tax payment, try
making your January payment in December instead. And the key
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is to work with a professional here who can help
you identify opportunities to bunch deductions while staying within the
IRS rules. Now, let me share another another thought with
you here, which is charitable contributions. So don't just give
(19:44):
you want to plan it now. Charitable giving is about
It's really about more than just being generous. It's also
one of the most rewarding ways to reduce your tax bill.
But to maximize the tex benefits of your donation, you
will need a strategy. So let's dig deeper into how
(20:07):
you can make these charitable contributions work harder for you. Now,
the standard deduction barrier, as we mentioned earlier, the standard
deduction in twenty twenty four is twenty seven thousand, seven
hundred for married couples that are filing jointly. For a
single filer, it's thirteen eight hundred and fifty, and for
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the head of households it's twenty thousand, eight hundred. So
if your total itemized deductions, including charitable deductions, I'm sorry,
charitable donations, if they don't exceed these amounts, you won't
get any tax benefit from your giving. Okay, I think
a lot of people don't understand that, so this is important. Now,
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if your charitable donations don't exceed the standard deduction on
their own, you can combine them with with other deductions
like medical expenses or property taxes to supprest to us
surpass the threshold, or you can use the bunching strategy
for your donations. So always have a plan, and it's
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important that you're giving with a plan as well. Now, Barbara,
a client, is a lifelong supporter of her local animal shelter,
and she used to donate five thousand every year, but
her CBA her CPA pointed out that her total itemized
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deductions were falling short of the twenty seven thousand, seven
hundred standard deduction for married couples, So, in other words,
her generosity really wasn't translating into any tax savings for her. Now,
this year, what Barbara decided to do was to bunch
your donations, so she gave ten thousand to the shelter
in twenty twenty four and plans to skip her twenty
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twenty five donation. Now, this brought her total itemized deductions
above the standard deduction, allowing her to claim the full
ten thousand dollars as a tax deduction. So Barbara felt
that it was a little strange at first to skip
a year of giving, but knowing that the shelter still
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got the same amount and she got a tax benefit,
it really made it an easy decision for her. Now,
some people may get hung up on that and think
that the charity thinks that you don't care as much.
Just tell them in advance you know what you're doing
and they'll understand it. You're not the only one that's
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doing this. So now something you might want to consider
as well as donating appreciated assets. So if you're invested
in stocks, mutual funds, or other assets that have really
appreciated in value, you can donate them directly to a
charity instead of selling them. And here's why this is
a smart move. Well, first, you will avoid capital gains taxes. Now,
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if you sold the assets, you'd owe taxes on the gains,
but by donating, you avoid this tax. Entirely. The second
thing to understand is that you get a deduction for
the full market value. So, for example, if you bought
a stock for two thousand dollars and now it's worth
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ten thousand, you can donate it and deduct the full
ten thousand dollars, so you can turn stock into a
savings for yourself. And so here's an example about a
fellow named Greg who was a tech worker, and he
bought shares of a startup for about one thousand dollars
years ago. In twenty twenty four, those shares were worth
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twenty five thousand dollars, but Greg didn't want to sell
them because of the capital gains taxes at heto, So
his CPA suggested donating the shares to a local educational nonprofit.
So by donating the stock, Greg avoided the fifty seven
one hundred and sixty dollars in capital gains taxes that
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he would have owed if he sold it assuming a
twenty four percent tax rate. Plus he got to deduct
the full twenty five thousand dollars on his tax return.
So Greg said it felt like a triple win, right.
He said, I supported a great cause that I cared
about I saved thousands and taxes and I still kept
(24:39):
my cash, so it was a win win win for him. Now,
also there are qualified charitable distributions, so if you're over
seventy and a half, you can make charitable contributions directly
from your IRA using a QCD or qualified charitable distribution.
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So what this does is this allows you to donate
up to one hundred thousand per year without counting the
distribution as taxable income. So for retirees who are who
are required to take their rmds, this is really a
fantastic way to fulfill that requirement while supporting a cause
(25:23):
that you actually care about. So the value here is
you're benefiting on many levels. And I've talked about this
next one quite a bit on the show, and I
want to dive into it again, which is the value
of donor advised funds. So if you're serious about giving,
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but you don't want to bunch donations every year, consider
setting up a donor advised fund. So here's how it works.
You make a large contribution to the fund in one year,
allowing you to take a big tax deduction, and then
the money grows tax free within the fund and you
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distribute the money to charities over time whenever it suits you,
and donor advised funds are ideal for people who want
to make big impacts now but still spread out their
giving over several years. And it really makes it personal
when you do this, because charitable giving is a deeply
(26:25):
personal decision. But with a little planning, you can make
sure that your generosity aligns with your financial goals. So
whether you're donating cash, stocks, or even real estate, there
are countless ways to make a difference in the world
while also reducing your tax burden. Now, let's turn our
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attention towards an area that you would want to look
at quickly. Here as all of these here or moves
that you're going to want to make quickly so that
you can benefit in April. And here's one here that
we've worked on with our clients as well throughout the
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year and particularly towards the end of the year. Sometimes
this is pretty difficult to pull off and maintain the
same same types of holdings in your portfolio, which is
harvesting your investments for losses. So nobody likes losing money
in the stock market, but if you're holding onto some
(27:30):
investments that didn't perform as expected. Well, there's a silver lining.
So there's tax loss harvesting that you can use, which
is a powerful strategy, and it really allows you to
turn those losses into savings on your tax bill. So
think of it as as the lemonade that you make
from the lemons that life throws at you. Here's how
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it works. When you sell investments that have declined in value,
you can use those losses to offset gains from the
other investments that performed well. Now, this is particularly useful
if you're holding on to some winners that you'd like
to sell but don't want to face a hefty capital
gains tax bill. So here's here's a breakdown of the
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key rules. Here. You can offset capital gains dollar for
dollars with capital losses. So if your losses exceed your gains,
you can deduct up to three thousand dollars of those
losses against other types of income like your salary. So
if you have more than three thousand in losses, the
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access can be carried forward to future years. Now, the
beauty of this strategy is that it can provide savings
regardless of your tax bracket. So if you're in the
twenty four percent federal tax bracket. For example, deducting three
thousand of investment losses could save you an additional seven
hundred and twenty dollars in federal tax is a loan,
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and then when you add state taxes then the savings
can climb even higher. Now, timing is everything here, So
to take advantage of tax loss harvesting, you need to
act before December thirty first, because this is a calendar
year strategy, so any loss is harvested after that date
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won't help you until the next year. Now, something that
you have to watch out for here is wash sale rules,
and the IRS has a rule that's called the wash
sale rule, so which prevents you from claiming a tax
loss if you buy back the same or substantially identical
(29:43):
investment within thirty days of selling it. So, in other words,
if you sell a stock to harvest the loss, don't
repurchase it until at least thirty one days later, otherwise
you will not be able to claim the deduction. So
let me share a story about a savvy investor that
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I met. His name was Marcus. He was a real
estate agent and he had a knack for investing. He
found himself in a bind this year because he had
fifteen thousand in capital gains from selling some high performing stocks,
but also eight thousand in losses from a failed cryptocurrency venture.
(30:25):
So rather than hold onto the crypto investment, Marcus decided
to sell it and harvest the loss. So here's how
it worked out. Marcus used the eight thousand dollars loss
to offset part of his fifteen thousand gains. Now that
left him with a seven thousand dollars taxable gain, so
at a twenty percent capital gains tax rate, this saved
(30:49):
him sixteen hundred dollars. Now, he still had two thousand
in unused losses, which he carried forward to offset gains
in the future. But Marcus didn't stop here. He also
used the proceeds from the sale of his crypto investment
to purchase a different asset in the same sector, avoiding
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the wash sale rule while staying invested in a similar market.
So he summed it up perfectly by saying, I felt
like I got a do over. I really turned a
bad investment into a quality one, and now I have
extra cash to invest in something smarter. So you may
be asking yourself who should use this strategy? Well, tax
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loss harvesting is particularly beneficial for investors with significant gains
from other assets that they've sold this year, and those
who expect to be in a higher tax bracket in
the future, and additionally, anyone that's looking to rebounce their
portfolio while minimizing the tax impact. So even if you
have significant gains this year, harvesting losses can still be
(31:59):
valuable because you can carry those losses forward indefinitely. So
if you're just tuning in, you're listening to your money matters.
I'm your host, Drew Prescott. You can get a hold
of me at Prescott Private Wealth five one eight two
zero three one nine eight three Prescott PW dot com.
(32:19):
And again, this is Drew Prescott, chartered retirement planning counselor
and a credited wealth management advisor here at Prescott Private Wealth.
And again, thank you for tuning in. And uh, for
those of you who do not know, I record this
show actually on Saturday. So I'm sitting here in my
(32:42):
office and it it's really pretty. Actually, it's the way
the snow is coming down at very very much like
a snow globe, and it looks like just enough to
look pretty but not get not get too messy and
not to screw up the travel. But you know, we've
(33:03):
got this next week, Christmas is coming up, and there's
just so much that competes for our attention during this time.
I hope that you've got all your shopping done. I
hope that there's peace in your home and that you're
enjoying each other's company. Now, like I said at the
(33:24):
beginning of the show, my goal here for you today
is to give you some actionable items that you can
put in place today before the end of the year
to help you in April. And if you do this,
you are going to feel incredibly accomplished at tax time.
(33:48):
And I want to share a couple more ideas here
for you, and one of them is about five to
nine plans. But before we do that, for those of
you who are just getting here, let me give you
an overview of what we've discussed this point up to
(34:10):
this point. Okay, so we started off this morning talking
about we've got eight eight opportunities for you to take
advantage of the twenty twenty four tax code. The first
we spent time on talking about maxing out your contributions
(34:33):
into your retirement plans. Now, these shows are always available
on WGY and you can go in and pull this.
If you didn't hear the beginning of the show, feel
free to grab it later on so you want to
maximize your contributions. And we told the story about Jake
and Olivia, a power couple that did a great job
(34:54):
listening to their CPA and taking full advantage of this.
We also talked about considering a roth Ira conversion and
how that could potentially benefit you, and then we moved
on to the bunching strategy, which is a way for
you to get beyond your standard deductions for twenty twenty
(35:17):
four by taking itemized deductions from medical expenses, mortgage interests,
charitable donations, and having the ability to help you get
above that ten percent number of medical expenses on your
AGI and other other things that you can pay to
(35:41):
reduce your taxable burden in the calendar year. Also, we
talked about charitable contributions and how you can have a
smarter plan in place and have a little bit more
control over what you're doing there and maybe have even
more of an impactful donation towards these charities. Then we
(36:03):
talked about harvesting your investments for losses. We gave some
examples there and talked about the savvy investor Marcus and
how he saved some money by using this strategy. Now,
I want to get into five to nine plans. Now,
(36:25):
something that I want to share with you about these
five to nine plans. These are wonderful tools. My experience
is that when you set these up, make sure that
you don't just poop poo with them and push them
(36:45):
off in the background. Maybe you're somebody that doesn't come
in for your annual reviews, or you just don't slow
down to review your plans and you've got some money
sitting in your five to nine. Don't just write the
check to pay for your child's education. Make sure that
you're using this money because this is what you saved
it for. So if you have kids or grandchildren and
(37:10):
you're saving for their educational expenses, this is probably one
of your top priorities. But did you know that it's
also a fantastic way to save on taxes? Now, a
five to nine plan offers multiple benefits from tax free
growth to potential state tax deductions. So I'm going to
break this down for you. So first, what is a
(37:33):
five to nine plan, Well, five to two nine plan
is a tax advantage savings account which is designed specifically
for educational expenses. Now, the money can that you contribute
it grows tax free, and the withdrawals are also tax
free if they're used for qualified educational expenses like tuition, books,
(37:55):
and even room and board. So here's what you need
to know. For twoenty twenty four. You can use up
to ten thousand dollars per year to pay for K
through twelve tuition and there's no annual contribution limit, but
contributions are subject to federal gift tax rules up to
(38:18):
seventeen thousand per year per donor if gift tax free,
sorry per donor, which is gift tax free in twenty
twenty four, So grandparents can contribute, and that also makes
it a great multi generational savings tool. So why open
(38:43):
a five to nine plan now? Well, starting or adding
to a five to nine plan before the end of
the year can help you maximize your state tax benefits. Now,
many states offer a tax deduction or a credit for
contributions to a five to nine plan. So, for example,
if you live in a state with a five percent
(39:06):
income tax and you contribute ten thousand to a five
to nine plan, you could save five hundred dollars on
your state taxes. So even if your state doesn't offer
a deduction, the federal tax advantages of tax free growth
and withdrawals they still make this a worthwhile investment. So
(39:28):
let me give you a story about some grandparents here
that I know, Tom and Carroll. They're a retired couple
and Tom and Carroll wanted to help their granddaughter Lily
with her private school tuition. So after talking to their
financial advisor, they opened a five to nine plan and
they contributed ten thousand dollars in twenty twenty four. So
(39:51):
here's what happened. Number One, they got an immediate state
tax savings because their state offers a five percent tax
deduction for the five to nine contributions, so Tom and
Carroll saved five hundred on their state taxes. Number two,
there was the tax free growth component. Now, the ten
thousand that they contributed is now growing tax free. So
(40:16):
by the time that Lily heads to college in five years,
that money could grow to twelve thousand and seven sixty
four if we assume a five percent annual return. Now
a third piece to this is the flexibility if Lily
doesn't need all of the funds for college. Tom and
Carroll can transfer the remaining balance to another grandchild or
(40:39):
even use it for themselves for future education. So Tom said,
you know, I really wish that I had done this sooner.
It feels great to help Lily and then have the
additional value of saving on taxes is another like it's
like finding a toy inside of a cracker jack box.
(41:00):
I thought that was a great way to sum that up. Now,
what can a five to nine plan be used for?
Because that's always the biggest question, and five to nine
plans they're really at this point now they're incredibly versatile
because qualified expenses now include tuition and fees for kindergarten
through twelfth grade or college room and board if the
(41:25):
student is enrolled at least halftime, textbooks and supplies, computers
and internet access, and student loan repayments up to ten
thousand dollars. Now. The K through twelve education advantage here
is that many people don't realize that the five to
nine plans are not just for college any longer. You
(41:48):
can use up to ten thousand per year for private
K through twelve tuition. So this makes them really a
great option for parents and grandparents looking to support younger students.
So if you're grandparent out there and you're helping your
children with the expenses of education. For your grandchild, let's
(42:11):
say they're going to Academy LaSalle CBA, any private school,
instead of gifting the money directly to them like that,
you could put it into a five to nine plan
with the child as a beneficiary and you'll get that
state deduction. Now that's a little it's not a huge number,
(42:34):
I know that, but it's a little something. And if
you look at this from the estate planning angle for grandparents,
like Tom Carroll that I just talked about, contributing to
a five to nine plan also offers an estate planning
benefit because the contributions to a five to nine plan
are considered completed gifts for tax purposes, So that means
(42:56):
that they reduce your taxable state So that twenty four
you can contribute up to seventeen thousand per beneficiary without
triggering any gift taxes. Now, if you want to contribute more,
you can use what we call the superfunding option, and
that allows you to contribute up to five years worth
(43:17):
of tax free contributions in a single year. So for
twenty twenty four. That means that you could deposit eighty
five thousand per beneficiary and they would consider that a
one time gift, but it's five years worth of giving
in a single year. So that's a pretty nice idea.
(43:38):
Now here's the thing with five two nine, it's really
a no brainer. And here's why opening or adding a
five to nine plan should definitely be on your year
end to do list. Because number one, you've got immediate
tax savings, so depending upon your state, you could qualify
for a tax deduction or credit. Two, you've got your
(43:59):
tax free growth because your contributions grow tax free, and
that makes them more powerful than a traditional savings account.
Three you've got flexibility as well, because funds can be
used for a wide range of educational expenses from kindergarten
through college and even student loans. So don't forget that part. Now,
(44:19):
let's move on to the seventh bullet point here, which
is take advantage of the twenty percent small business tax deduction.
So we're going to just shift gears here, go away
from the personal side into small business owners for a second,
freelance workers and really anybody that's running a side hustle
So if that's you, congratulations because you've got one of
(44:41):
the most powerful tax savings tools at your disposal, and
that's the Qualified Business Income Deduction. Now, this deduction introduced
as part of the Tax Cuts and Jobs Act. It
allows eligible business owners to deduct twenty percent of their
qualified business income from their taxable income. That's right, you
(45:07):
knock twenty percent of your taxable income simply by owning
and running a business. So how does QBDI deduction work. Well,
the Qualified Business Income Deduction applies to income earned from
pass through entities such as sole proprietorships, partnerships, s corporations,
(45:32):
and LLCs. So if you're a freelancer, an independent contract
or a small business owner, then there's a good chance
that you qualify for this deduction. So here's an example.
Imagine your business earned one hundred thousand in net income
in twenty and twenty four. The QBI deduction allows you
to exclude twenty thousand, which is twenty percent of one
(45:56):
hundred thousand, from your taxble income. So if you're in
a twenty four percent tax bracket, this could save you
forty eight hundred in federal taxes. Now here's the kicker.
The QBI deduction isn't unlimited. For twenty twenty four, the
deduction begins to phase out for individuals with taxable income
(46:17):
above three hundred and sixty four thoy two hundred for
married couples filing jointly, or one hundred and eighty two
one hundred for single filers. So if your income exceeds
these thresholds, you may still qualify for the deduction, but
additional rules and limitations apply. For example, certain service businesses
(46:40):
like lawyers and accountants, they have stricter limits. And if
you've got a side hustle, the QBI deduction could be
a game changer. Now many people start side gigs to
earn extra income and not realizing that they're now eligible
for powerful tax break. So let me share a story
(47:01):
with you about a lady named Sarah who was a
graphic designer. Well, she started a side hustle this year
and she started creating custom wedding invitations. She earned about
twelve thousand dollars from her side business and after subtracting
two thousand expenses, she had ten thousand in net income.
(47:21):
So here's how Sarah used the QBI deduction to her
advantage number one. She deducted twenty percent for ten thousand
net income, reducing her taxable income by two thousand dollars,
and at a twenty two percent federal tax rate, this
saved her four hundred and forty dollars in taxes. So
(47:41):
for Sarah, this was really quite motivational because she needed
to take her side hustle to the next level. And
she thought, I didn't even know how I qualified for
this deduction, but I'm using the savings to invest in
better equipment for my business, which is a great thing
for her, and it's a great thing for you if
you have a small business. So if you're self employed,
(48:03):
the QBI deduction is just one of the many tax
breaks that are available to you, and others include business expenses.
You can deduct the cost of equipment, office supplies, and
even your home office health insurance. If you pay for
your own health insurance, you can deduct the premiums and
then retirement contributions. As we discussed earlier, self employed individuals
(48:26):
can contribute to sep iras and SOLO four oh one ks,
reducing their taxable income while saving for retirement. So if
you're considering starting a business or side hustle. Now is
the perfect time. By launching it before the end of
twenty twenty four, you can take advantage of these deductions
on your next tax return. So to claim the QBI deduction,
(48:48):
you need to maintain detailed records of your income and expenses.
A good accounting system or tax software can help make
this process much easier for you. And then let's move
on to the last bit that I have here for you,
which is pre paying state and local taxes, so the
(49:10):
State and Local tax deduction or salt deduction. It's a
strategy that's especially important if you live in a high
tax state like New York. So, while while the ASSAULT
deduction is capped at ten thousand, pre paying certain taxes
before the end of the year can help you maximize
(49:30):
this benefit. So you want to understand the salt deduction,
and the salt deduction allows you to deduct state and
local taxes, including property taxes and either state income or
sales taxes from your federal taxable income. However, the Tax
Cuts in Jobs Act captis deduction at ten thousand starting
(49:52):
in twenty and eighteen, and that makes it less beneficial
for tax payers in these high tax states. For example,
if you paid eight thousand in property taxes and four
thousand in state income taxes, you can only deduct ten
thousand dollars total. So why pre payment works is that
(50:15):
if you haven't hit that ten thousand salt cap yet,
you can maximize the deduction by pre paying taxes for
next year before December thirty first of this year. So
the common options include prepaying mortgage taxes. I'm sorry, that's
not what I meant to say, prepaying your property taxes
(50:37):
for next year, and making your January state income tax
estimated payment in December. So this strategy can be particularly
useful if you expect your income and your tax liability
to increase next year. So let me try to give
you another story here. David and Emma, who are homeowners
(50:59):
in New York, which is a high tax state as
we all know, In twenty twenty four, they paid seven
thousand in property taxes and three thousand in state income taxes,
hitting the ten thousand salt cap. Now here's how they
used pre payment to their advantage. In December of twenty
(51:20):
twenty four, they prepaid six thousand in property taxes for
twenty twenty five, so this allowed them to claim the
full ten thousand salt deduction on their twenty twenty four
tax return, which saved them twenty four hundred at a
federal tax rate of twenty four percent. Now you know. Admittedly,
(51:43):
Emma said it felt weird paying next year's taxes early,
but when she saw how much they saved, she knew
that it was worth it. So who really benefits the
most from this strategy? Pre paying state and local taxes
especially beneficial for homeowners, high tax states like California, New York,
New Jersey, high income earners who pay significant state income taxes.
(52:07):
And there are some limitations to consider. While the strategy
can be effective, there are a few caveats to keep
in mind. One the salt cap, so if you've already
hit the ten thousand limit, prepaying won't provide additional benefits.
Number two AMT considerations, so if you're subject to Alternative
minimum Tax AMT, your salt deduction may be limited or disallowed.
(52:32):
So you want to consult with a tax professional and
determine whether the strategy actually makes sense for you. So
here's a pro tip for you. Combine with other strategies. Okay,
so for maximum impact, consider combining salt pre payment with
other strategies like the bunching method. For example, you could
bunch your charitable contributions and prepay your property taxes in
(52:55):
the same year to exceed the standard deduction. Now, both
MBI deduction and salt prepayments offer significant opportunities to reduce
your tax reliability, but they do require careful planning with
your accountant or your tax professional. So whether you're running
a small business or managing property taxes, understanding the rules
(53:17):
and the timing is key to maximizing your savings. So
by combining these strategies all these that we've discussed, like
retirement contributions, WROTH contributions, charitable giving, and creating a comprehensive
tax plan that keeps more money in your pocket, this
(53:38):
could be very beneficial. I want to send you off
with another bonus tip here as well, so I want
to go even further here some additional strategies that you
could look into. Health savings accounts HSA is contributing to
your HSA for triple tax benefit, tax deductible contributions, tax
free growth, and tax free withdrawals for your medical expenses.
(53:59):
And gifting reduce your taxable estate by gifting up to
seventeen thousand per person in the calendar year of twenty
twenty four. So we know taxes are inevitable, but overpaying
is optional. By taking these eight steps and maybe a
few bonus moves, you could keep more of your hard
(54:22):
earned money. So if you want a detailed guide to
everything that we discussed today, call us at five one
eight two zero three one nine eight three or email
me Drew at PRESCOTTPW dot com. And remember, the best
tax strategy is the one that starts today, not in April.
So I want to say thank you so much for listening.
(54:42):
I hope you found this incredibly valuable and have a
merry Christmas, enjoy your family next week our last show
before the new year, and God bless you and your family.
And I hope you just have such a remarkable time
with your family, building memories, and that you can find
some reconciliation in any damaged relationships. Remember it doesn't being
(55:07):
a man doesn't mean not apologizing. Okay, It's a good
thing to apologize and find peace in your life. So
Merry Christmas and God bless
Welcome to the hidden world of wealth, where secrets of
the affluent become accessible to you. You are listening to
Your Money Matters, the most provocative financial radio show on
the airwaves. You are about to start your educational journey
here on Your Money Matters with your host, Drew Prescott,
(00:22):
President of Prescott Private Wealth and Chartered Retirement Planning Counselor.
Drew will unlock the complexities of the financial landscape with straightforward,
powerful insights. Whether you're planning for retirement, managing in a state,
or looking to grow your wealth. Consider this your exclusive invitation.
Turn up the volume, lean in closer. Let's navigate the
(00:45):
hidden paths of prosperity together. Your financial enlightenment begins now.
Securities all produce a terror Financial Specialists LLC Member FENDRA
SIBC reservices offered through Setara Investment Advisors LLC. So TERA
firms are under separate ownership from any other named entity.
(01:06):
Four five to one sixth Street, Troy, New York one
two one eight zero.
Speaker 2 (01:26):
Welcome back, my friends, to another episode of Your Money Matters.
Welcome back, welcome back, and thank you for tuning in.
And I wanted to start the show off with that
beautiful song that rings in the new year every year. Now,
(01:48):
I've been on the side of that song where frankly,
I felt pretty bummed out, feeling like maybe the year
went bio awfully quick and I didn't hit some goals
and or just didn't feel like life was going the
direction that I planned for it to. And my goal
(02:08):
for you today is to help you get to a
place that when that song is played, you feel very
good about the moves that you've made, and you feel
encouraged and hopeful about the year to come. So I
want to share with you today some tax strategies for you.
I'm going to give you eight points to consider before
(02:30):
the end of the year here to help you maximize
savings under the twenty twenty four tax law. Because taxes,
they don't have to be terrifying. Okay, So that's my
goal today, and I promise this isn't going to be
a boring discussion about numbers and forms. Instead, we're diving
into something that could have a real impact on your life,
(02:53):
how to save money on your taxes. So, yes, you
heard that right, Whether you're employed, employed, retired, or just
trying to make those hard earned dollars stretch a little
bit further. Here are some simple moves you can make
to reduce your tax burden. And the best part that
these strategies are entirely legal and they're easier than you
(03:16):
might think. But first, let's address the elephant in the
room for a second. A lot of people feel overwhelmed
when it comes to taxes, and hey, I get that
the rules seem to change every year, and the forms, well,
let's just say that they're not exactly light reading. But
here's the thing. With a little planning and some expert guidance,
(03:41):
taxes can become less of a chore and really more
of an opportunity for you. And in today's episode, we're
breaking down eight year end tax moves that you can
make right now to save yourself a bundle come April,
and we're gonna sprinkle in some real life stories of
people just like you who use these strategies to their
(04:02):
advantage and have had a little fun along the way.
So grab your favorite beverage, let's settle in, and we'll
get you started to learn how to keep more of
your hard earned money where it belongs, and that's in
your pocket. So first point here, we've covered some of
these last week, but a good refresher, which is maximize
(04:26):
your retirement contributions. So let's dig deeper into why maximizing
your retirement contributions is such a powerful tax saving strategy.
At first glances might sound like just standard advice save
for retirement and your lower your taxes. But let me
break down just how much of an impact this can
(04:46):
have not only on your taxes this year, but also
on your long term financial future. So here's how it works.
The mechanics of tax savings. When you can try tribute
to a traditional four oh one K or an IRA,
the money comes out of your paycheck or your bank
(05:07):
account before taxes are calculated. This means that your taxable
income is lower and the amount that you owe in
taxes is reduced. It's essentially a win win. You're saving
for your future and you're reducing your tax bill at
the same time. So, for example, if you're in the
twenty four percent federal tax bracket and you contribute the
(05:28):
maximum of twenty three thousand dollars into your four toh
one K, you're saving fifty five hundred and twenty dollars
in federal taxes and in state income taxes. If applicable,
the impact can be even greater. So why the two
thousand and twenty four limits matter. Well, for the two
(05:51):
thousand and twenty four tax year, the four to one
K contribution limit has increased to twenty three thousand, with
an additional seventy five five hundred dollars if you're over
the age of fifty, So that means individuals fifty years
old and older can contribute up to thirty thousand, five hundred.
(06:11):
For iras, the limit is seven thousand, with an additional
fifteen hundred if you're over five or over fifty, so
that's a total of eight thousand, five hundred. But here's
a kicker. If your employer offers a match on your
four oh one K contributions, that's free money and it
(06:33):
gets added to your retirement account. So not taking advantage
of this is like walking past one hundred dollars bill
on the sidewalk and just refusing to pick it up.
So make sure that you're taking advantage of these retirement plans. Now,
what self employed individuals can do is if you're self employed,
(06:54):
the stakes are even higher. Now you have access to
special retirement accounts like a SEP IRA and solo four
oh one ks, which allow you to contribute up to
twenty five percent of your income or a total of
sixty six thousand dollars, whichever is less. So imagine the
tax savings on that. Well, let me share a story
(07:17):
about Jake and Olivia. They're a corporate power couple and
our power couple from here. They made a small adjustment
and it had such a huge impact. So before maxing
out their four oh one K contributions, Jake was only
contributing ten thousand dollars annually and Olivia was contributing twelve thousand.
(07:40):
So they thought that they were doing well. But their
CPA ran the numbers and showed them how much money
they were leaving on the table. And when they increased
their contributions to twenty three thousand each, two things happened. One,
they dropped into a lower tax bracket and number two,
they slack their taxable income by forty six thousand dollars,
(08:04):
which saved them eleven thousand in federal taxes alone. So
Olivia summed it up perfectly. She said, it felt like
a double win. We were saving for retirement and we're
also keeping more of our paycheck so make sure that
you're sitting down with the right professionals and looking at
these numbers for yourself. Now, how does it play out
(08:25):
over time? Let's talk about the long term impact. Those
extra contributions are not just saving you money in today's taxes,
but they're also compounding over time. So if Jake and
Olivia each contributed an additional ten thousand annually from over
the next twenty years, I should say, let's assume they
(08:47):
had a seven percent annual return, that means that they'll
have an extra four hundred and twenty six thousand dollars
save for retirement. That's almost a half a million dollars.
So that's just from taking advanceage of their retirement accounts. Now,
let's consider a roth Ira conversion as well. Now let's
(09:08):
get into the nitty gritty of this roth Ira conversion.
And one of the smartest moves that you can make
if you're looking to maximize your financial flexibility and retirement
is this strategy. And it's especially relevant right now because
today's historically low rates are set to expire in twenty
(09:28):
twenty five. So the basics of a wroth conversion ARST
follows a roth Ira conversion. It involves taking money from
a traditional ira which you haven't paid taxes on yet,
and you're moving it into a roth ira where withdrawals
are tax free and retirement. So the catch, okay, here's
(09:51):
the catch. You pay taxes on the amount that you convert. Now,
so you might ask yourself, so why would anybody voluntarily
pay taxes today? Two words tax free growth, and once
your money is in a roth ira, it grows tax
free and then you'll never pay taxes on it again,
(10:13):
not on the principle, not on the earnings, and not
on the withdrawals. So timing here is everything with a
roth conversion.
Speaker 1 (10:24):
Now.
Speaker 2 (10:24):
Right now, tax rates are low, and I should say
lower than they've been in decades, and thanks to the
Tax Cuts and Jobs Act of twenty and seventeen, that's
why we're in this position. But those rates are scheduled
to increase in twenty twenty six unless Congress acts to
(10:46):
extend them. So, for example, if you're currently in the
twenty two percent tax bracket, you could move fifty thousand
from your traditional ira to a wroth and pay eleven
and ten taxes. But if you wait until tax rates
go up, and you're in a twenty five percent bracket,
(11:08):
that same conversion would cost you twelve thousand, five hundred,
which is an additional fifteen hundred and taxes. So how
do you avoid the tax bracket creep. Well, one of
the biggest pitfalls of a ROTH conversion is accidentally pushing
yourself into a higher tax bracket. So let's say that
(11:31):
you're in a twenty two percent bracket and you convert
fifty thousand. That extra income could push you into the
twenty four percent bracket, and that's going to negate some
of these benefits. So a smart way to avoid this
is to spread your conversion out over several years and
converting just enough each year to stay within your current
(11:53):
tax bracket. Now, let's talk about the strategic grand parent.
We'll call her Margie. She's a retired teacher and this
is a perfect example of how using this strategy effectively
can be beneficial. So, with two hundred thousand in her
(12:13):
traditional IRA, she wanted to leave her grandchild a tax
free inheritance, so her financial planner suggested converting twenty thousand
per year into a ROTH IRA over the next five years.
So here's how Margie made it work. Number one she
kept an eye on her tax bracket, and by converting
(12:35):
twenty thousand per year, she stayed within her twelve percent
tax bracket, paying just twenty four hundred in taxes annually. Also,
she used cash to pay the taxes. So instead of
using funds from her IRA to pay the conversion taxes,
Margie used savings and this ensured that the full twenty
(12:57):
thousand went into her wroth ira, which maximized its growth potential.
And the third thing she did was she involved her grandchildren.
Margie told her grandchildren about her plan and turning it
into a teachable moment about financial responsibility. And now they're
excited about savings, she said. Now they're excited as excited
(13:20):
about savings as she is. So by the time that
Margie's done with her five year plan, she'll have moved
one hundred thousand into a roth ira. And let's assume
a six percent annual growth rate. That means that that
money could grow to one hundred and seventy nine thousand
over ten years. And now it will all be tax
free for her grandchildren. And now, when I share this
(13:44):
story with you, don't think that this is just for retirees,
because you don't have to be retired to benefit from
a wroth conversion. In fact, it's a great move for
younger workers who expect to be in a higher tax
bracket later in life. So imagine being in your twenty
your thirties converting ten thousand dollars to a roth ira
(14:04):
today while you're in a lower tax bracket. Now that
ten thousand could grow to fifty thousand or more by
the time that you retire, and you would never owe
taxes on it. And one of the beautiful things about
this is this hidden benefit behind it, which is that
there's no required minimum distributions. So the advantage of the
(14:25):
roth ira is that it doesn't come with a required
minimum distribution. So traditional ira they require you to start
drawing money and paying taxes on it at age seventy three.
Now with a wroth ira, you can let your money
sit and grow for as long as you want, and
it gives you control over that retirement income. So here's
(14:48):
here's a quick exercise to see if a wroth conversion
might make sense for you. One, add up your taxable
income for the year, Two determine your current tax bracket,
and then three calculate how much you can convert without
moving into the next tax bracket. And if you're unsure
(15:09):
about how to do this, talk to a CPA or
financial planner and they'll help you run those numbers and
create a conversion plan that works for you. So let's
take a closer look at another strategy here. I'm gonna
call this the bunching strategy, which is a tax savings
move that works like a charm for those who hover
(15:32):
close to the standard deduction threshold. So if you're unfamiliar
with bunching, it's really essential that it's essentially a way,
I should say to make itemized deductions work in your
favor simply by concentrating deductible expenses into a single tax year.
So by strategically grouping expenses like medical bills, charitable contributions,
(15:57):
or property taxes, you can push your deductions above the
standard deduction threshold and reap the rewards. Now, the standard
deduction for twenty twenty four is twenty seven thousand, seven
hundred for a married couple that's filing jointly, thirteen eight
fifty for single filers, and twenty thousand, eight hundred for
(16:20):
heads of households. So if you're itemized deductions like medical expenses,
mortgage interest, and charitable donations. Don't exceed these amounts, you
will not get any benefit from itemizing, and this is
where bunching comes in. So bunching involves combining multiple years
worth of deductible expenses into a tax year. For example,
(16:44):
instead of making steady charitable donations of five thousand every year,
you could donate ten thousand this year and skip donating
next year. And this allows you to claim a deduction
for ten thousand this year while still supporting your favorite
charity over time. Also, medical expenses can be deducted if
(17:08):
they exceed ten percent of your justed gross income. For example,
if your AGI is one hundred thousand dollars, you'd need
to have medical expenses above ten thousand to qualify for
a deduction. Now, if your medical expenses are close to
that threshold, consider scheduling your elective procedures, dental work, or
(17:30):
vision care within the same year to push your total
above the ten thousand or I'm sorry, the ten percent mark.
Now here's a here's a medical miracle for you. Okay,
a little story. Anthony, who was a freelance writer. He
used bunching to turn a financially stressful year into a
(17:52):
tax savings opportunity. In twenty twenty four, Anthony had eight
thousand in planned medical expenses for elective surgery. He also
needed thirty five hundred in dental work, but he was
initially planning to delay it until twenty twenty five. Well,
Anthony's CPA advised him to bundle those expenses into the
(18:14):
same year. So by scheduling his dental work in December,
he brought his total medical expenses to eleven thousand, five hundred,
and since his AGI was one hundred thousand, he met
the ten percent threshold and was able to deduct fifteen
hundred and medical expenses, and that saved him three hundred
(18:35):
and sixty bucks in taxes at the twenty four percent
federal tax rate. So Anthony said, at first, I thought
I was just shuffling numbers around, but when I saw
how much I saved, it really made perfect sense to me.
Plus I got all of my medical stuff out of
the way in one year. Now there's additional expenses that
you can bunch. So here's a list of other expenses
(18:58):
that you might want to consider bunching. You can do
property taxes, prepay next year's property taxes in December. If
you're under the salt cap charitable contributions, you can double
up one year and then skip the next and state
income taxes. If you make an estimated tax payment, try
making your January payment in December instead. And the key
(19:22):
is to work with a professional here who can help
you identify opportunities to bunch deductions while staying within the
IRS rules. Now, let me share another another thought with
you here, which is charitable contributions. So don't just give
(19:44):
you want to plan it now. Charitable giving is about
It's really about more than just being generous. It's also
one of the most rewarding ways to reduce your tax bill.
But to maximize the tex benefits of your donation, you
will need a strategy. So let's dig deeper into how
(20:07):
you can make these charitable contributions work harder for you. Now,
the standard deduction barrier, as we mentioned earlier, the standard
deduction in twenty twenty four is twenty seven thousand, seven
hundred for married couples that are filing jointly. For a
single filer, it's thirteen eight hundred and fifty, and for
(20:29):
the head of households it's twenty thousand, eight hundred. So
if your total itemized deductions, including charitable deductions, I'm sorry,
charitable donations, if they don't exceed these amounts, you won't
get any tax benefit from your giving. Okay, I think
a lot of people don't understand that, so this is important. Now,
(20:51):
if your charitable donations don't exceed the standard deduction on
their own, you can combine them with with other deductions
like medical expenses or property taxes to supprest to us
surpass the threshold, or you can use the bunching strategy
for your donations. So always have a plan, and it's
(21:16):
important that you're giving with a plan as well. Now, Barbara,
a client, is a lifelong supporter of her local animal shelter,
and she used to donate five thousand every year, but
her CBA her CPA pointed out that her total itemized
(21:40):
deductions were falling short of the twenty seven thousand, seven
hundred standard deduction for married couples, So, in other words,
her generosity really wasn't translating into any tax savings for her. Now,
this year, what Barbara decided to do was to bunch
your donations, so she gave ten thousand to the shelter
in twenty twenty four and plans to skip her twenty
(22:05):
twenty five donation. Now, this brought her total itemized deductions
above the standard deduction, allowing her to claim the full
ten thousand dollars as a tax deduction. So Barbara felt
that it was a little strange at first to skip
a year of giving, but knowing that the shelter still
(22:25):
got the same amount and she got a tax benefit,
it really made it an easy decision for her. Now,
some people may get hung up on that and think
that the charity thinks that you don't care as much.
Just tell them in advance you know what you're doing
and they'll understand it. You're not the only one that's
(22:45):
doing this. So now something you might want to consider
as well as donating appreciated assets. So if you're invested
in stocks, mutual funds, or other assets that have really
appreciated in value, you can donate them directly to a
charity instead of selling them. And here's why this is
a smart move. Well, first, you will avoid capital gains taxes. Now,
(23:11):
if you sold the assets, you'd owe taxes on the gains,
but by donating, you avoid this tax. Entirely. The second
thing to understand is that you get a deduction for
the full market value. So, for example, if you bought
a stock for two thousand dollars and now it's worth
(23:32):
ten thousand, you can donate it and deduct the full
ten thousand dollars, so you can turn stock into a
savings for yourself. And so here's an example about a
fellow named Greg who was a tech worker, and he
bought shares of a startup for about one thousand dollars
years ago. In twenty twenty four, those shares were worth
(23:56):
twenty five thousand dollars, but Greg didn't want to sell
them because of the capital gains taxes at heto, So
his CPA suggested donating the shares to a local educational nonprofit.
So by donating the stock, Greg avoided the fifty seven
one hundred and sixty dollars in capital gains taxes that
(24:17):
he would have owed if he sold it assuming a
twenty four percent tax rate. Plus he got to deduct
the full twenty five thousand dollars on his tax return.
So Greg said it felt like a triple win, right.
He said, I supported a great cause that I cared
about I saved thousands and taxes and I still kept
(24:39):
my cash, so it was a win win win for him. Now,
also there are qualified charitable distributions, so if you're over
seventy and a half, you can make charitable contributions directly
from your IRA using a QCD or qualified charitable distribution.
(25:02):
So what this does is this allows you to donate
up to one hundred thousand per year without counting the
distribution as taxable income. So for retirees who are who
are required to take their rmds, this is really a
fantastic way to fulfill that requirement while supporting a cause
(25:23):
that you actually care about. So the value here is
you're benefiting on many levels. And I've talked about this
next one quite a bit on the show, and I
want to dive into it again, which is the value
of donor advised funds. So if you're serious about giving,
(25:44):
but you don't want to bunch donations every year, consider
setting up a donor advised fund. So here's how it works.
You make a large contribution to the fund in one year,
allowing you to take a big tax deduction, and then
the money grows tax free within the fund and you
(26:05):
distribute the money to charities over time whenever it suits you,
and donor advised funds are ideal for people who want
to make big impacts now but still spread out their
giving over several years. And it really makes it personal
when you do this, because charitable giving is a deeply
(26:25):
personal decision. But with a little planning, you can make
sure that your generosity aligns with your financial goals. So
whether you're donating cash, stocks, or even real estate, there
are countless ways to make a difference in the world
while also reducing your tax burden. Now, let's turn our
(26:48):
attention towards an area that you would want to look
at quickly. Here as all of these here or moves
that you're going to want to make quickly so that
you can benefit in April. And here's one here that
we've worked on with our clients as well throughout the
(27:09):
year and particularly towards the end of the year. Sometimes
this is pretty difficult to pull off and maintain the
same same types of holdings in your portfolio, which is
harvesting your investments for losses. So nobody likes losing money
in the stock market, but if you're holding onto some
(27:30):
investments that didn't perform as expected. Well, there's a silver lining.
So there's tax loss harvesting that you can use, which
is a powerful strategy, and it really allows you to
turn those losses into savings on your tax bill. So
think of it as as the lemonade that you make
from the lemons that life throws at you. Here's how
(27:53):
it works. When you sell investments that have declined in value,
you can use those losses to offset gains from the
other investments that performed well. Now, this is particularly useful
if you're holding on to some winners that you'd like
to sell but don't want to face a hefty capital
gains tax bill. So here's here's a breakdown of the
(28:17):
key rules. Here. You can offset capital gains dollar for
dollars with capital losses. So if your losses exceed your gains,
you can deduct up to three thousand dollars of those
losses against other types of income like your salary. So
if you have more than three thousand in losses, the
(28:38):
access can be carried forward to future years. Now, the
beauty of this strategy is that it can provide savings
regardless of your tax bracket. So if you're in the
twenty four percent federal tax bracket. For example, deducting three
thousand of investment losses could save you an additional seven
hundred and twenty dollars in federal tax is a loan,
(29:01):
and then when you add state taxes then the savings
can climb even higher. Now, timing is everything here, So
to take advantage of tax loss harvesting, you need to
act before December thirty first, because this is a calendar
year strategy, so any loss is harvested after that date
(29:21):
won't help you until the next year. Now, something that
you have to watch out for here is wash sale rules,
and the IRS has a rule that's called the wash
sale rule, so which prevents you from claiming a tax
loss if you buy back the same or substantially identical
(29:43):
investment within thirty days of selling it. So, in other words,
if you sell a stock to harvest the loss, don't
repurchase it until at least thirty one days later, otherwise
you will not be able to claim the deduction. So
let me share a story about a savvy investor that
(30:05):
I met. His name was Marcus. He was a real
estate agent and he had a knack for investing. He
found himself in a bind this year because he had
fifteen thousand in capital gains from selling some high performing stocks,
but also eight thousand in losses from a failed cryptocurrency venture.
(30:25):
So rather than hold onto the crypto investment, Marcus decided
to sell it and harvest the loss. So here's how
it worked out. Marcus used the eight thousand dollars loss
to offset part of his fifteen thousand gains. Now that
left him with a seven thousand dollars taxable gain, so
at a twenty percent capital gains tax rate, this saved
(30:49):
him sixteen hundred dollars. Now, he still had two thousand
in unused losses, which he carried forward to offset gains
in the future. But Marcus didn't stop here. He also
used the proceeds from the sale of his crypto investment
to purchase a different asset in the same sector, avoiding
(31:12):
the wash sale rule while staying invested in a similar market.
So he summed it up perfectly by saying, I felt
like I got a do over. I really turned a
bad investment into a quality one, and now I have
extra cash to invest in something smarter. So you may
be asking yourself who should use this strategy? Well, tax
(31:34):
loss harvesting is particularly beneficial for investors with significant gains
from other assets that they've sold this year, and those
who expect to be in a higher tax bracket in
the future, and additionally, anyone that's looking to rebounce their
portfolio while minimizing the tax impact. So even if you
have significant gains this year, harvesting losses can still be
(31:59):
valuable because you can carry those losses forward indefinitely. So
if you're just tuning in, you're listening to your money matters.
I'm your host, Drew Prescott. You can get a hold
of me at Prescott Private Wealth five one eight two
zero three one nine eight three Prescott PW dot com.
(32:19):
And again, this is Drew Prescott, chartered retirement planning counselor
and a credited wealth management advisor here at Prescott Private Wealth.
And again, thank you for tuning in. And uh, for
those of you who do not know, I record this
show actually on Saturday. So I'm sitting here in my
(32:42):
office and it it's really pretty. Actually, it's the way
the snow is coming down at very very much like
a snow globe, and it looks like just enough to
look pretty but not get not get too messy and
not to screw up the travel. But you know, we've
(33:03):
got this next week, Christmas is coming up, and there's
just so much that competes for our attention during this time.
I hope that you've got all your shopping done. I
hope that there's peace in your home and that you're
enjoying each other's company. Now, like I said at the
(33:24):
beginning of the show, my goal here for you today
is to give you some actionable items that you can
put in place today before the end of the year
to help you in April. And if you do this,
you are going to feel incredibly accomplished at tax time.
(33:48):
And I want to share a couple more ideas here
for you, and one of them is about five to
nine plans. But before we do that, for those of
you who are just getting here, let me give you
an overview of what we've discussed this point up to
(34:10):
this point. Okay, so we started off this morning talking
about we've got eight eight opportunities for you to take
advantage of the twenty twenty four tax code. The first
we spent time on talking about maxing out your contributions
(34:33):
into your retirement plans. Now, these shows are always available
on WGY and you can go in and pull this.
If you didn't hear the beginning of the show, feel
free to grab it later on so you want to
maximize your contributions. And we told the story about Jake
and Olivia, a power couple that did a great job
(34:54):
listening to their CPA and taking full advantage of this.
We also talked about considering a roth Ira conversion and
how that could potentially benefit you, and then we moved
on to the bunching strategy, which is a way for
you to get beyond your standard deductions for twenty twenty
(35:17):
four by taking itemized deductions from medical expenses, mortgage interests,
charitable donations, and having the ability to help you get
above that ten percent number of medical expenses on your
AGI and other other things that you can pay to
(35:41):
reduce your taxable burden in the calendar year. Also, we
talked about charitable contributions and how you can have a
smarter plan in place and have a little bit more
control over what you're doing there and maybe have even
more of an impactful donation towards these charities. Then we
(36:03):
talked about harvesting your investments for losses. We gave some
examples there and talked about the savvy investor Marcus and
how he saved some money by using this strategy. Now,
I want to get into five to nine plans. Now,
(36:25):
something that I want to share with you about these
five to nine plans. These are wonderful tools. My experience
is that when you set these up, make sure that
you don't just poop poo with them and push them
(36:45):
off in the background. Maybe you're somebody that doesn't come
in for your annual reviews, or you just don't slow
down to review your plans and you've got some money
sitting in your five to nine. Don't just write the
check to pay for your child's education. Make sure that
you're using this money because this is what you saved
it for. So if you have kids or grandchildren and
(37:10):
you're saving for their educational expenses, this is probably one
of your top priorities. But did you know that it's
also a fantastic way to save on taxes? Now, a
five to nine plan offers multiple benefits from tax free
growth to potential state tax deductions. So I'm going to
break this down for you. So first, what is a
(37:33):
five to nine plan, Well, five to two nine plan
is a tax advantage savings account which is designed specifically
for educational expenses. Now, the money can that you contribute
it grows tax free, and the withdrawals are also tax
free if they're used for qualified educational expenses like tuition, books,
(37:55):
and even room and board. So here's what you need
to know. For twoenty twenty four. You can use up
to ten thousand dollars per year to pay for K
through twelve tuition and there's no annual contribution limit, but
contributions are subject to federal gift tax rules up to
(38:18):
seventeen thousand per year per donor if gift tax free,
sorry per donor, which is gift tax free in twenty
twenty four, So grandparents can contribute, and that also makes
it a great multi generational savings tool. So why open
(38:43):
a five to nine plan now? Well, starting or adding
to a five to nine plan before the end of
the year can help you maximize your state tax benefits. Now,
many states offer a tax deduction or a credit for
contributions to a five to nine plan. So, for example,
if you live in a state with a five percent
(39:06):
income tax and you contribute ten thousand to a five
to nine plan, you could save five hundred dollars on
your state taxes. So even if your state doesn't offer
a deduction, the federal tax advantages of tax free growth
and withdrawals they still make this a worthwhile investment. So
(39:28):
let me give you a story about some grandparents here
that I know, Tom and Carroll. They're a retired couple
and Tom and Carroll wanted to help their granddaughter Lily
with her private school tuition. So after talking to their
financial advisor, they opened a five to nine plan and
they contributed ten thousand dollars in twenty twenty four. So
(39:51):
here's what happened. Number One, they got an immediate state
tax savings because their state offers a five percent tax
deduction for the five to nine contributions, so Tom and
Carroll saved five hundred on their state taxes. Number two,
there was the tax free growth component. Now, the ten
thousand that they contributed is now growing tax free. So
(40:16):
by the time that Lily heads to college in five years,
that money could grow to twelve thousand and seven sixty
four if we assume a five percent annual return. Now
a third piece to this is the flexibility if Lily
doesn't need all of the funds for college. Tom and
Carroll can transfer the remaining balance to another grandchild or
(40:39):
even use it for themselves for future education. So Tom said,
you know, I really wish that I had done this sooner.
It feels great to help Lily and then have the
additional value of saving on taxes is another like it's
like finding a toy inside of a cracker jack box.
(41:00):
I thought that was a great way to sum that up. Now,
what can a five to nine plan be used for?
Because that's always the biggest question, and five to nine
plans they're really at this point now they're incredibly versatile
because qualified expenses now include tuition and fees for kindergarten
through twelfth grade or college room and board if the
(41:25):
student is enrolled at least halftime, textbooks and supplies, computers
and internet access, and student loan repayments up to ten
thousand dollars. Now. The K through twelve education advantage here
is that many people don't realize that the five to
nine plans are not just for college any longer. You
(41:48):
can use up to ten thousand per year for private
K through twelve tuition. So this makes them really a
great option for parents and grandparents looking to support younger students.
So if you're grandparent out there and you're helping your
children with the expenses of education. For your grandchild, let's
(42:11):
say they're going to Academy LaSalle CBA, any private school,
instead of gifting the money directly to them like that,
you could put it into a five to nine plan
with the child as a beneficiary and you'll get that
state deduction. Now that's a little it's not a huge number,
(42:34):
I know that, but it's a little something. And if
you look at this from the estate planning angle for grandparents,
like Tom Carroll that I just talked about, contributing to
a five to nine plan also offers an estate planning
benefit because the contributions to a five to nine plan
are considered completed gifts for tax purposes, So that means
(42:56):
that they reduce your taxable state So that twenty four
you can contribute up to seventeen thousand per beneficiary without
triggering any gift taxes. Now, if you want to contribute more,
you can use what we call the superfunding option, and
that allows you to contribute up to five years worth
(43:17):
of tax free contributions in a single year. So for
twenty twenty four. That means that you could deposit eighty
five thousand per beneficiary and they would consider that a
one time gift, but it's five years worth of giving
in a single year. So that's a pretty nice idea.
(43:38):
Now here's the thing with five two nine, it's really
a no brainer. And here's why opening or adding a
five to nine plan should definitely be on your year
end to do list. Because number one, you've got immediate
tax savings, so depending upon your state, you could qualify
for a tax deduction or credit. Two, you've got your
(43:59):
tax free growth because your contributions grow tax free, and
that makes them more powerful than a traditional savings account.
Three you've got flexibility as well, because funds can be
used for a wide range of educational expenses from kindergarten
through college and even student loans. So don't forget that part. Now,
(44:19):
let's move on to the seventh bullet point here, which
is take advantage of the twenty percent small business tax deduction.
So we're going to just shift gears here, go away
from the personal side into small business owners for a second,
freelance workers and really anybody that's running a side hustle
So if that's you, congratulations because you've got one of
(44:41):
the most powerful tax savings tools at your disposal, and
that's the Qualified Business Income Deduction. Now, this deduction introduced
as part of the Tax Cuts and Jobs Act. It
allows eligible business owners to deduct twenty percent of their
qualified business income from their taxable income. That's right, you
(45:07):
knock twenty percent of your taxable income simply by owning
and running a business. So how does QBDI deduction work. Well,
the Qualified Business Income Deduction applies to income earned from
pass through entities such as sole proprietorships, partnerships, s corporations,
(45:32):
and LLCs. So if you're a freelancer, an independent contract
or a small business owner, then there's a good chance
that you qualify for this deduction. So here's an example.
Imagine your business earned one hundred thousand in net income
in twenty and twenty four. The QBI deduction allows you
to exclude twenty thousand, which is twenty percent of one
(45:56):
hundred thousand, from your taxble income. So if you're in
a twenty four percent tax bracket, this could save you
forty eight hundred in federal taxes. Now here's the kicker.
The QBI deduction isn't unlimited. For twenty twenty four, the
deduction begins to phase out for individuals with taxable income
(46:17):
above three hundred and sixty four thoy two hundred for
married couples filing jointly, or one hundred and eighty two
one hundred for single filers. So if your income exceeds
these thresholds, you may still qualify for the deduction, but
additional rules and limitations apply. For example, certain service businesses
(46:40):
like lawyers and accountants, they have stricter limits. And if
you've got a side hustle, the QBI deduction could be
a game changer. Now many people start side gigs to
earn extra income and not realizing that they're now eligible
for powerful tax break. So let me share a story
(47:01):
with you about a lady named Sarah who was a
graphic designer. Well, she started a side hustle this year
and she started creating custom wedding invitations. She earned about
twelve thousand dollars from her side business and after subtracting
two thousand expenses, she had ten thousand in net income.
(47:21):
So here's how Sarah used the QBI deduction to her
advantage number one. She deducted twenty percent for ten thousand
net income, reducing her taxable income by two thousand dollars,
and at a twenty two percent federal tax rate, this
saved her four hundred and forty dollars in taxes. So
(47:41):
for Sarah, this was really quite motivational because she needed
to take her side hustle to the next level. And
she thought, I didn't even know how I qualified for
this deduction, but I'm using the savings to invest in
better equipment for my business, which is a great thing
for her, and it's a great thing for you if
you have a small business. So if you're self employed,
(48:03):
the QBI deduction is just one of the many tax
breaks that are available to you, and others include business expenses.
You can deduct the cost of equipment, office supplies, and
even your home office health insurance. If you pay for
your own health insurance, you can deduct the premiums and
then retirement contributions. As we discussed earlier, self employed individuals
(48:26):
can contribute to sep iras and SOLO four oh one ks,
reducing their taxable income while saving for retirement. So if
you're considering starting a business or side hustle. Now is
the perfect time. By launching it before the end of
twenty twenty four, you can take advantage of these deductions
on your next tax return. So to claim the QBI deduction,
(48:48):
you need to maintain detailed records of your income and expenses.
A good accounting system or tax software can help make
this process much easier for you. And then let's move
on to the last bit that I have here for you,
which is pre paying state and local taxes, so the
(49:10):
State and Local tax deduction or salt deduction. It's a
strategy that's especially important if you live in a high
tax state like New York. So, while while the ASSAULT
deduction is capped at ten thousand, pre paying certain taxes
before the end of the year can help you maximize
(49:30):
this benefit. So you want to understand the salt deduction,
and the salt deduction allows you to deduct state and
local taxes, including property taxes and either state income or
sales taxes from your federal taxable income. However, the Tax
Cuts in Jobs Act captis deduction at ten thousand starting
(49:52):
in twenty and eighteen, and that makes it less beneficial
for tax payers in these high tax states. For example,
if you paid eight thousand in property taxes and four
thousand in state income taxes, you can only deduct ten
thousand dollars total. So why pre payment works is that
(50:15):
if you haven't hit that ten thousand salt cap yet,
you can maximize the deduction by pre paying taxes for
next year before December thirty first of this year. So
the common options include prepaying mortgage taxes. I'm sorry, that's
not what I meant to say, prepaying your property taxes
(50:37):
for next year, and making your January state income tax
estimated payment in December. So this strategy can be particularly
useful if you expect your income and your tax liability
to increase next year. So let me try to give
you another story here. David and Emma, who are homeowners
(50:59):
in New York, which is a high tax state as
we all know, In twenty twenty four, they paid seven
thousand in property taxes and three thousand in state income taxes,
hitting the ten thousand salt cap. Now here's how they
used pre payment to their advantage. In December of twenty
(51:20):
twenty four, they prepaid six thousand in property taxes for
twenty twenty five, so this allowed them to claim the
full ten thousand salt deduction on their twenty twenty four
tax return, which saved them twenty four hundred at a
federal tax rate of twenty four percent. Now you know. Admittedly,
(51:43):
Emma said it felt weird paying next year's taxes early,
but when she saw how much they saved, she knew
that it was worth it. So who really benefits the
most from this strategy? Pre paying state and local taxes
especially beneficial for homeowners, high tax states like California, New York,
New Jersey, high income earners who pay significant state income taxes.
(52:07):
And there are some limitations to consider. While the strategy
can be effective, there are a few caveats to keep
in mind. One the salt cap, so if you've already
hit the ten thousand limit, prepaying won't provide additional benefits.
Number two AMT considerations, so if you're subject to Alternative
minimum Tax AMT, your salt deduction may be limited or disallowed.
(52:32):
So you want to consult with a tax professional and
determine whether the strategy actually makes sense for you. So
here's a pro tip for you. Combine with other strategies. Okay,
so for maximum impact, consider combining salt pre payment with
other strategies like the bunching method. For example, you could
bunch your charitable contributions and prepay your property taxes in
(52:55):
the same year to exceed the standard deduction. Now, both
MBI deduction and salt prepayments offer significant opportunities to reduce
your tax reliability, but they do require careful planning with
your accountant or your tax professional. So whether you're running
a small business or managing property taxes, understanding the rules
(53:17):
and the timing is key to maximizing your savings. So
by combining these strategies all these that we've discussed, like
retirement contributions, WROTH contributions, charitable giving, and creating a comprehensive
tax plan that keeps more money in your pocket, this
(53:38):
could be very beneficial. I want to send you off
with another bonus tip here as well, so I want
to go even further here some additional strategies that you
could look into. Health savings accounts HSA is contributing to
your HSA for triple tax benefit, tax deductible contributions, tax
free growth, and tax free withdrawals for your medical expenses.
(53:59):
And gifting reduce your taxable estate by gifting up to
seventeen thousand per person in the calendar year of twenty
twenty four. So we know taxes are inevitable, but overpaying
is optional. By taking these eight steps and maybe a
few bonus moves, you could keep more of your hard
(54:22):
earned money. So if you want a detailed guide to
everything that we discussed today, call us at five one
eight two zero three one nine eight three or email
me Drew at PRESCOTTPW dot com. And remember, the best
tax strategy is the one that starts today, not in April.
So I want to say thank you so much for listening.
(54:42):
I hope you found this incredibly valuable and have a
merry Christmas, enjoy your family next week our last show
before the new year, and God bless you and your family.
And I hope you just have such a remarkable time
with your family, building memories, and that you can find
some reconciliation in any damaged relationships. Remember it doesn't being
(55:07):
a man doesn't mean not apologizing. Okay, It's a good
thing to apologize and find peace in your life. So
Merry Christmas and God bless
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