November 16, 2023 • 55 mins
Welcome to The Complete Wealth Management's podcast, where tax experts and Certified Financial Planners Dave Alison, Conrad Levesque and David Roth unpack "21 Strategic Year-End Tax Moves" for to help build your wealth. Join us as we navigate key actions to optimize your tax situation before the year concludes.
👉 Maximize retirement contributions, seize Roth IRA opportunities, and leverage triple tax benefits with HSA contributions.
👉 Explore opportunities like the Mega Backdoor Roth and strategic stock sales.
👉 Consider charitable giving optimization and explore tax-efficient gifting.
👉 Ensure property tax deductions, cost segregation for property owners, and explore Qualified Opportunity Zones.
👉 Fine-tune your withholdings, evaluate stock options, and review paycheck withholdings.
Whether it's tax loss harvesting, maximizing 529 plans, or prepaying property taxes, we've got you covered.
Tune in for a concise guide to make the most of your financial resources before year-end!
For more episodes of our podcast, visit:
https://www.alisonwealth.com/podcast or find us on your favorite podcast player here: https://completewealthmanagement.buzzsprout.com/share
To learn more about Alison Wealth Management, please visit our website at: https://alisonwealth.com
The information provided in this presentation is not intended to be individual investment advice or legal advice. The information provided is for informational and training purposes only.
Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.
Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.
All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
What's going on, conrad?
Speaker 2 (00:04):
Living the dream.
Yeah, you know it's a nicedreary day here in Georgia and I
got a child that doesn't wantto sleep through the night, so
it's everything is wonderful inmy world.
Speaker 1 (00:16):
How many hours did you get?
You guys were just on vacation,weren't you?
Or did I see on Facebook youwere up in the mountains.
Speaker 2 (00:22):
Yeah, we actually took Chelsea and I always
celebrate our anniversary and weeloped during COVID.
We go up there every year tothe same orchard and we actually
took pictures of Caroline thisyear.
Awesome time, great weather,always a good time in Blue Ridge
, Georgia.
If you haven't, have you everbeen to Blue Ridge?
Speaker 1 (00:40):
I haven't, but you know I was looking.
I think we were only like twoand a half hours from each other
because I was in Linville,north Carolina.
Yeah, up in the Blue RidgeMountains, kind of outside of
Asheville, which was, it wasgorgeous.
All the leaves were changingUh-huh.
We were just warm, 75 duringthe day, a brisk 40 at night
(01:01):
time.
Oh, yeah.
I think we were too far fromeach other.
Speaker 2 (01:04):
Yeah, no, it was a great time.
We enjoyed it.
Of course, it was the firsttime we went with Caroline, so
we're learning how to do allthis as new parents.
And you know, nobody ever toldme that it would be this hard to
travel with a six month old.
Speaker 1 (01:18):
So we took our eight month old to Cali or to Italy
and we started traveling withAvery when she was, I think, six
or eight weeks old.
So really, yeah, our kidsalways grew up as travelers.
Yeah, it kind of core value,we're all about it.
So you know what, if you're notsleeping at home, why not sleep
while you're out traveling?
(01:39):
That's right.
Speaker 4 (01:40):
That's right it could be worse.
Speaker 1 (01:42):
David was at home with sick kids, so oh man.
Speaker 4 (01:45):
Yeah, she's going to the doctor today.
She's had a fever for like fourdays now and they're like she
should come in and see so.
Speaker 1 (01:53):
So the joys of where we're all at in the phase of
life, with that bringing homesickness.
Well, let's go out and getthings kicked off.
We got an awesome episode today.
It's hard to believe we are inthe home stretch of 2023, almost
mid-November here.
So we're going to go out andget this episode kicked off with
21 strategic tax moves that youshould consider before the end
(02:18):
of the year, because, as we allknow, if the clock strikes
midnight, it is use it or loseit when it comes to a lot of
these strategies.
And so let's go ahead and we'regoing to get rolling here, all
right.
So in this episode, we're goingto be talking about 21 strategic
(02:38):
tax moves, and I can't think ofanyone better to be joining me
today than, of course, mycolleagues David Roth and Conrad
, two tax experts in their ownright.
Conrad, of course, a CPA, david, an enrolled agent admitted to
practice before the IRS.
And so let's go ahead and let'sjust start brainstorming here.
Of course, 21 strategies.
(02:59):
We could make this episode fourhours long, but of course, none
of our viewers would stay onwith us that long.
So we're going to kind of rapidfire through some of these
things and just go kind of in anorder of some things that we
think are quite simple, thingsthat almost everybody should be
doing.
And I think kind of the nobrainer one right out of the
gate is just double check andmake sure you're maxing out
(03:21):
those retirement accountcontributions, take advantage of
those tax benefits.
And I'll kind of kick off onthis one that when we talk to
clients about this number one isif you have the discretionary
savings ability and you're stillworking, make sure you are
maxing out those 401ks.
If you're in a lower taxbracket maybe you don't have a
(03:44):
very high household income,you're in that 12% or 22% or
maybe even 24% it might beprudent to look at maxing out
your Roth 401k.
And then, if you're in thosehigh tax brackets 32, 35, 37% it
might be more prudent to deferthat income while you're in
(04:06):
these high tax rates and go tothe traditional 401k.
But I mean, david and Conrad,how many times do we see that
when we're doing taxes forpeople and we get their pay
stubs or their W-2s, we find outthat, hey, they just didn't
quite hit the maximum and therecould have been more benefits
that they could have partaken inthroughout the year had they
(04:27):
just kind of focused and checkedthis off the list before
December 31st.
Speaker 4 (04:32):
Yeah, it happens all the time.
You could see it in the W-2where it shows the 401k
contributions and it's November,right now, and now is really
the ideal time, or really thelast time, to check it, because
you might only have a couplemore pay periods to get that in.
So you really want to look atthis right now.
Make sure they're maxed out soyou can get it in, because this
(04:53):
is one of those situations thatif you do not get it in by the
end of the year, you can't maxit out.
Speaker 1 (05:00):
Now, the only exception to that, conrad.
Touch on this because I knowyou have a lot of business owner
clients.
It's a market you really dealwith all day long.
Business owners if they own thebusiness, they get a little
grace period, don't they?
Speaker 2 (05:11):
Absolutely, and depending on the plan that you
have set up.
You know you really, as abusiness owner, typically have,
under a lot of structures, up toApril 15th or the filing due
date, right, and that's a verykey part of this for folks in
California.
You actually just got extendeda little bit further and so we
have a lot of extensions intothe next year.
I call it next year's money fortoday's benefit, right, it's a
(05:35):
cash flow game that we play, butyou ultimately can get to the
end of the year and say you know, what did I actually make for
my business?
You should know that throughoutthe year anyway, but I digress
on that.
But really, once you get to theend of the year, you'll have an
idea of what you've made.
So low-key contributions can bemade based on that amount.
For you know, schedule C filersCovers will still be based on
(05:57):
your W2 wages, but you stillhave timing of these things that
you get to utilize as abusiness owner, so it's a great
opportunity for them.
I'm going to actually doubledown on this and say, especially
if you're a W2 employee, don'tjust look at only your 401k,
look at your full benefitspackage, right, this is a great
time, especially with the openenrollment, to look at next
(06:21):
year's positioning for thingslike long-term disability,
short-term disability.
Are you opting into thesetax-free benefits at work that a
lot of other people don't have?
Speaker 1 (06:32):
Well, I mean speaking of that.
I just did a talk from my othercompany, c2p, the national
company for all of our employees.
We have about 60, 65 employeesand talking about the benefits
of maxing out their HSA.
And so you're in a highdeductible health plan, you have
access to an HSA account, it'sgot triple tax benefits tax
deferred income going in,tax-free growth over time and
(06:55):
tax-free withdrawals forqualified medical expenses.
And so again, check yournumbers.
If you haven't maxed this outfor 2023, this could be an area
where you can save some incometaxes and again going into your
2024 benefits.
Check out this plan if it'savailable for you.
In some cases, employer, youremployer might even put money
(07:18):
into this for you and it's anincredible retirement asset.
So, kind of check all thosethings.
Check your 401k, check your HSA.
If you're eligible, make sureyou're taking advantage of these
opportunities.
Yeah.
Speaker 2 (07:31):
I love that the HSA is one of the most underutilized
accounts that I see.
All the time that I harp onthat and I will die on this hill
that the HSA should be maxedout every year by every single
person.
Speaker 1 (07:43):
A hundred percent and I see so many people miss that
and let's kind of close the loopon the benefit side of things.
So we talked about the 401k andthe other side on the 401k is,
even if you're maybe retired andmaybe you have a little bit of
consulting income and you don'tnecessarily need that income to
live off of, there areself-employment retirement
(08:04):
accounts like a CEP IRA or asolo 401k that you could
participate in.
So this isn't just for theyounger accumulator, this is
really anybody who has anyincome coming in at all from
some sort of kind of workrelated self-employment
consulting side hustle or, ofcourse, your normal W2
(08:25):
day-to-day job.
We talked about the HSA andthen the last two are the FSA.
There's really two typesavailable out there.
There's a dependent care FSA,which you can use for childcare
expense if you meet certaineligibility requirements, and
this is a great benefit becauseit's like being able to use
(08:46):
pre-tax money to help offsetsome of your childcare cost.
And then there's your medicalFSA, and the key I wanna kind of
touch on with the medical FSAis it's in many cases use it or
lose it, and so make sure if yougot money left in there, if you
deferred and put some money inthere at the beginning of the
year and you have some left.
(09:08):
Get out there and use it beforeDecember 31st.
Now a lot of plans might allowyou to roll over $500 to the
next year.
But again, pay attention tothose numbers.
And it becomes really important, as we kind of land the plane
on the end of the year here,that you don't lose any money or
(09:28):
miss out on any deferralopportunities like the dependent
care, fsa and being able to usethat to pay for some childcare.
Speaker 2 (09:36):
Absolutely great points great points.
Speaker 1 (09:39):
So let's backtrack a little bit something that most
people have access to as a RothIRA and outside of the HSA.
If I had to name my secondfavorite account to accumulate
wealth in, it's a Roth IRA.
Because, david, what are thecharacteristics of a Roth?
Speaker 4 (09:55):
IRA yeah, roth IRA.
It goes in and you pay taxes asit goes in.
But when you put it in there itgrows tax deferred and then
when you take it out it comesout tax-free, as long as you
take it out qualified.
Speaker 1 (10:08):
So it's not the triple tax benefit like the HSA,
but it's a double tax benefit,and if you think taxes are gonna
be higher in the future or ifyou think your wealth is gonna
continue to grow and you'regonna be in a higher tax bracket
in the future, a Roth IRA is agreat place to stash away some
money, have it grow, invest itand then it is tax-free for
(10:29):
retirement.
You could also access the moneybefore retirement without any
penalties or any taxes, but it'sonly up to your contribution
limits, and so there are limitsto how much income for you to be
eligible to contribute directlyinto a Roth IRA.
I don't have the numbers offthe top of my head.
You guys have the numbers offthe top of your head, I think
(10:52):
for married filing join us.
Speaker 2 (10:53):
I mean, it's a decently high number, 212,000 of
AGI, something like that, Imean.
But we have a lot of clientsthat make four, five, 600,000
and would love to fund the RothIRA anyway.
Speaker 1 (11:05):
So you know how do they do that.
Speaker 2 (11:07):
Conrad, oh, you know.
I'm glad you asked, dave.
You know it's called a backdoorRoth contribution, right, and
you hit on.
You know some of thetraditional IRA characteristics
where you get a tax deduction oran adjustment on your taxes
when you contribute to atraditional IRA but if you make
too much money you can't deductthat in the current year.
(11:29):
You have what's called anon-deductible IRA contribution
and all that means is you have Xnumber of dollars that you put
in that can come out of thattax-free, right?
So we leverage that and saywe'll be put $7,000 in a
traditional IRA and it'snon-deductible, right At the end
of the year we convert that toa Roth IRA and really there's no
(11:53):
tax on that because you'reconverting your basis.
There is no taxable amount thatwe have to recognize as part of
that transaction.
Speaker 1 (12:00):
Yeah, this is one of those things.
I kind of call it theno-brainer.
We do this for almost all ofour clients at Allison Well
Management who have earn incomethat are high-income earners.
Now there are some rules yougot to be aware of.
There's this thing called thepro-rata rule which you have to
be able to navigate.
I'm not gonna cover that today.
We have a YouTube video on thaton our Allison Well Management
YouTube page.
(12:21):
So you might be checking outthis podcast on YouTube.
Check out some of our othervideos.
We kind of walk through howthat pro-rata rule works.
But there are some things to beaware of.
But at the end of the day, toyour point, if we can get six
$7,000 for each person into aRoth for a high-income earner,
it's just kind of one of thoseno-brainer moves when you're
saving if you have thediscretionary opportunities.
(12:43):
David, you brought up a greatopportunity, though.
This was a couple of ourclients that they were retired.
Well, one of the spouses wasretired, the other one was still
working and had earned incomeand what you recommended we do
was actually a spousal IRA thatfor some of our clients.
(13:06):
They were not at a high enoughincome level that they were
eligible to make a contributiondirectly into the Roth, but one
I could think of off the top ofmy head who was retired but has
a very high amount of retirementincome, well over the
contribution limits.
We were able to do a spousalnon-deductible IRA contribution
(13:30):
and then the backdoor conversionto get that $7,000 into the
Roth.
Speaker 4 (13:35):
Yep, and with that, though, the one thing I'd add is
that you do need earned incomefor that.
So there was a small amount ofearned income.
So as long as you have at leastthat limit of earned income,
then you can contribute that tothat non-deductible IRA.
Speaker 1 (13:49):
Absolutely and that was the case.
He was doing some consultingwork, husband was, and so the
wife.
We were able to do thatbackdoor spousal.
So the 529 is.
The next kind of thing is we'rechecking the box on how you're
accumulating money.
We talked about the 401K, wetalked about the Roth IRA.
We talked about the healthsavings account.
(14:10):
We talked about the dependentcare FSA and the traditional
medical FSA.
If you're looking to save moneyfrom an educational benefit
standpoint a college or aneducational 529, I can't say
college anymore because of the2017 Tax Cuts and Jobs Act now
(14:32):
allow us to take withdrawals outof a 529 plan for a private
school K through 12, and thosedistributions are tax-free.
But you might wanna check outyour state limits.
If you're in a state like Ammanin South Carolina that gives
you a state tax deduction forputting money into that 529,
(14:53):
that could be another way toreduce some of your state tax
liability.
But even if you're not in astate like, for example,
california gives no state taxbenefit for the 529, it still
allows you to grow money taxdeferred and then take it out
tax-free later on in life.
So there are some tax benefits,while not so much on the front
(15:14):
end of things.
It's really on the back end ofthings.
Speaker 2 (15:18):
Yeah, yeah.
And Dave, how many of yourclients come to you and say I
don't know if I wanna fund a 529, I don't know if my kids or
grandkids are gonna go tocollege?
I've been hearing that all thetime and I still make the
recommendation.
Hey, but do you know, right?
So should we take a blendedapproach and with the lower
limits that you can fund anyway,does it still make sense to
(15:40):
fund a 529?
What are you guys seeing andtalking?
Speaker 1 (15:43):
about Absolutely, and I think it depends on the
client's financial situation,right?
So there's a couple of things.
If it's a very high net worth orultra high net worth family,
that of course you know,sometimes we advise well, just
go ahead and max out those 529plans because you can use it for
educational planning for otherfamily members, right that?
(16:03):
Maybe you want to be able tohelp out and support because you
can change the beneficiary, somaybe your child gets a full
ride to Stanford and you don'tneed to tap into that 529, but
maybe you have a niece or anephew or maybe, a long time
from now, you have a grandchildthat you want to be able to help
out with educational funding,and so it's not like you'll lose
(16:24):
the money.
But then, on top of that, wehad recent tax law that was
passed at the end of 2022.
That now says if you haveleftover money in a 529, the
beneficiary can roll a portionof that money tax free to a Roth
IRA for their benefit, andthere's a lot of moving parts
and rules on how that works.
(16:45):
It's going to be availablebasically in 2024 and beyond, so
there are some things to thinkabout in terms of release valves
on that money.
It's not hostage and locked upforever.
Yeah great points.
So let's talk about investments.
If we go back to 2022, therewas a much greater opportunity
(17:06):
for this, because it was a veryvolatile, essentially a down
year for the stock market.
2023 so far has been a prettygood year, bouncing off of that
rebound.
But, of course, in any bigbroad market, there's always
winning investments and there'slosing investments, and so one
thing that's available is afinancial technique for your
non-retirement account money.
(17:27):
So this is like your brokerageaccounts, your living revocable
trust, anything that's non 401kor IRA, which is called tax lost
harvesting or what I like tocall tax deduction creation, and
this is where you optimize yourtaxable investment accounts by
strategically sellingunderperforming investments, and
(17:51):
that essentially creates acapital loss.
And so what can you do withthat capital loss?
What are some ideas that yousee that we've done with our
clients or that you can sharewith the audience here?
Speaker 4 (18:02):
Yeah, I mean, I know we've had a couple of situations
where we use that to offsetgain, one with a sale of a
business and another was with asale of a home.
So you had this big gain fromthis accumulated asset that was
sold in a particular year.
But we happened to havespecific assets that they had a
tax deduction attached to itbecause they were at a loss, so
(18:22):
we could sell it and it wouldoffset what would otherwise be a
large gain and the other sideis company stock On tax loss
harvesting.
Speaker 1 (18:30):
A big part of our business at Allison Wealth is
managing assets on behalf of ourclients, and when we're
managing their post tax moneyit's a very different strategy
than when we manage their pretax money.
It's peddle to the metal ontrying to maximize the gross
return because it's all going tobe taxed at ordinary income
(18:52):
when it comes out of thoseretirement accounts.
But with post tax money it'snot just about what you make,
it's about what you get to keepnet after taxes.
And so we're constantlythroughout the year looking for
tax harvesting right, because alot of times, if you look at the
kind of history of the market,the fourth quarter tends to be a
(19:12):
pretty good quarter for stockmarket returns.
Some people call it the SantaClaus rally.
Q4 and Q1 are historically goodtimes for the market.
That might not be the right timeto look for your tax harvesting
right, and now we're educatingyou on this going into 2024 if
you're not having a professionaldo this for you.
But look at the example of 2020.
(19:34):
When the pandemic hit In Marchand April, the market fell by
30% but, as we all remember, ithad almost a V-shaped recovery
and by the end of 2020, itactually finished in the
positive.
And so if you were waiting tillNovember or December to look
for tax-lost harvestingopportunities, you missed them
forever because they hopped totheir head up in March and April
(19:58):
when there was total chaos anduncertainty in the world.
And so look at tax harvestingthroughout the entire year.
But again, it's a good thing.
Right now, what you can dobefore December 31st is just
check your investments, andConrad talked about one rule
that you need to navigate,because, like what, if I have a
stock that I bought and it'sdown in value, but I really want
(20:22):
to hold that stock, can I sellit, realize the gain and then
buy it right back?
Speaker 2 (20:28):
Yeah, You're talking and I love that you've posed
this, because you're talkingabout something that I see a lot
, which is called the wash salerule, right, and what.
The IRS and Congress got reallysmart at some point and said,
hey, we should really considerthe fact that you can sell
something at a loss and rebuy itand you get to claim that loss,
but you're still on the asset,right?
(20:50):
They figured out that's notright.
We don't want to do that.
We don't want to let everybodyin the world do that.
So they implemented a 30-dayrule, right?
So if you sell, if I holdAmazon stock that drops by 10%,
I can't sell it and rebuy itwithin the same 30 days and
claim that loss.
I actually have to wait 31 daysand once you get through that
(21:13):
wash sale period you can rebuyright, but you're not likely
going to buy at the same bottomvalue.
So the wash sale rules are veryimportant.
I see this mistake made with alot of clients every year.
A couple of years ago, I hadone that to the tune of $300,000
of losses that he was not ableto capture.
Now, it's not that those lossesare just gone, they add to your
(21:36):
basis, but it's still if you'replanning around claiming a loss
or offsetting other gains,you've missed the boat.
Speaker 1 (21:44):
Yeah.
So this is something that wekind of automate and again do
for our clients when we'remanaging money.
But there's other things likemaybe you're in a mutual fund or
ETF and you sell that realizethe loss and we can put a
different fund in, so you're notout of the market and sitting
in cash.
But if it's an individual stock, there is a bit of a gamble
(22:05):
because in 31 days, like Conradsaid, maybe the stock went up in
value and now you've got to buyit back at a higher price.
But on the flip side, maybeit's gone down in value and you
could actually buy it for alower price and it's a win.
So here's a pop quiz for youguys or any other listener, when
you think of anything thatsomebody could put money into
right now and technically theIRS tax code does not apply wash
(22:29):
sale rules to David, I know youknow this one.
Speaker 2 (22:34):
Well, now you're putting me on the spot.
Go ahead, David.
Speaker 4 (22:37):
Yeah, it's going to be like commodities, so like a
cryptocurrency.
I was going to say Bitcoin.
Speaker 1 (22:42):
Yeah, crypto that's something we saw constantly is
crypto.
Right now, it's not subject tothose wash sale rules.
I knew I was throwing acurveball out.
So, again, if you have cryptoit's gone up recently in the
last couple months here but youmight still be holding positions
that you jumped on the gravychain to train at the wrong time
, like in 2021, and you'reholding these positions that
(23:04):
have big losses but you want tohold on for the long haul.
Those are positions where youcould hit the sell button and
rebuy it back.
Now there's pending tax lawlegislation out on this because,
again, congress doesn't reallylike this, but it kind of is
what it is today.
So tax loss harvesting isdefinitely something you should
be thinking about.
Now, the flip side to that issomething that not a lot of
(23:28):
people think about.
Right, tax loss harvesting issomewhat well known, but
although it's well known, not alot of people do it because it
takes a lot of work to implement.
Trust us, we know we do thisall day long for our clients.
But the other side is exploringtax gain harvesting, and so
there's a couple of reasons thatyou might actually and although
(23:50):
it seems counter intuitive, youmight actually hit the sell
button and realize a taxablegain.
Can you guys think of someexamples and I know I have a
couple off the top of my head Ican share as well.
Speaker 2 (24:04):
Yeah, all day, right, let's take the Amazon one,
because I do this with mine is Ialways look and say, well, how
do I reset my basis on a gainposition and can I sell and
reset the basis, meaning I getto realize, basically a tax-free
transaction, right, withouthaving to actually pay tax on
(24:25):
other stuff to do it.
So just look at if you have aloss of $10 and a gain of $10,
your total gain is still zero,but you're able to really
continue to accelerate gainswithout having to recognize the
current year tax hit to do it.
Speaker 1 (24:45):
So you're referring to kind of the combination of
the two taking tax loss,harvesting, realizing a loss and
then taking a gain, selling it,realizing the gain, helping
those two things offset eachother.
So you don't owe anyout-of-pocket tax, that's it,
that you could immediately buythat Amazon stock back, because
(25:07):
there are no wash sale rules tonavigate on gains, Right?
So essentially you have ahigher cost basis in that Amazon
stock, which means if itappreciates further from here on
out, then you're going to haveless of a taxable capital gain,
or the flip side if itdepreciates or goes down in
(25:30):
value, you might actually beable to use that position in a
future year to do some tax-lostharvesting on.
So it's what we call basismanagement, which is incredibly
important and another hugeconcept people overlook.
But let's talk about somebodywho's in a lower tax bracket.
So maybe you're retired ormaybe you just had the financial
(25:55):
freedom to slow down work ortake on part-time work.
Let's say, for example, you'rein the 12% federal tax bracket,
so you have about $75,000 ofincome.
Well, there's a couple ofthings that are working for you
here.
Number one is you get astandard deduction if you're not
(26:18):
itemizing, which was about27,700 if you're under the age
of 65.
So that brings your $75,000 ofincome down to about 46,000,
47,000.
And then from a capital gainstandpoint, there's actually a
(26:38):
0% bracket and for a marriedfiling jointly family it's up to
about $89,000 of total income.
And so that means you might beable to realize $20, $30,
$40,000 of long-term capitalgain and pay no income tax at
all on that money.
(26:59):
You could even buy thosepositions right back.
And now to Conrad's point.
You have a higher basis, andthat's another great form of
basis management that I hardlyhear of any other financial
advisor doing.
When I teach this conceptacross the country at our tax
management journey training, Ijust see people's eyes light up,
(27:21):
Even CPAs they're like.
I never thought about that.
I've always thought about taxloss harvesting, but never tax
gain harvesting.
Speaker 2 (27:29):
Yeah, yeah, those are all great points and you
actually beat me to the punch onthe zero gains tax rate.
But let's share it.
Speaker 1 (27:38):
My favorite tax bracket.
What can I say?
Absolutely Listen.
Speaker 2 (27:42):
I'm right there with it.
I love the 0% bracket.
How can we look at it?
And I think you made a goodpoint and most people don't
think about it.
But how does social securityfactor?
Speaker 1 (27:53):
into that.
Yeah, you got to be careful onsocial security.
Right and I always share thiswhen I speak is, for most of us
we're on a two-tax system.
We have ordinary income andthen we have capital gains.
Now for some of you a lot ofour clients, you're actually on
a three-tax system because youmight have things like incentive
(28:14):
stock options and then you goto ordinary income, capital
gains and alternative minimumtax and for those of you that
are on social security, you alsocould have a provisional income
tax to think about and that'sbasically the taxation of your
social security benefit.
So, before you do any of thisgain harvesting, if you're on
(28:37):
social security, we need to do asocial security tax analysis
because we need to understandthe trade-off of realizing some
capital gain.
Maybe it's even at a low taxrate on the capital gain itself,
but if it causes you a wholebunch of additional tax on your
social security benefit or if itcauses you to go into a higher
(28:59):
Medicare premium tax, thosemight be reasons to not do it.
And so just a number of movingparts.
Great point, conrad.
The last thing that I want toshare on tax gain harvesting and
when I talk about taxmanagement, I always use the
analogy that it's a game ofchess.
In chess you've got to bethinking three, four, five moves
(29:20):
ahead, and so what I mean bythat is, let's say, it's 2023,
and I have a kind of normalizedincome for our family.
But I know in a year or sixmonths or a year and a half, I'm
going to have a big financialcommitment.
(29:41):
Maybe I'm going to put anaddition on the house that I
want to pay cash for and I'mgoing to have to sell a bunch of
investments to do that.
Well, what's better?
Selling those investments overtwo tax years or having all of
that gain lumped into one taxyear next year, when I have to
go pay the contractors and formany people and I'm doing this
(30:05):
myself right now because we'regetting ready to start with an
addition on the house and Idon't want to take out debt to
really pay that right now withwhere interest rates are what
I'm going to do is I'm going tosell some of this stock towards
the end of this year and then Ican sell some more of the stock
in January or February so I canspread that tax liability over
(30:27):
two years.
And so that's another exampleof just tax gain harvesting, so
that you're thinking about thesecommitments ahead.
Yeah, all great points.
So, speaking of stock ESPPs,david, talk about what an ESPP
is for those of you who mightnot know, might not be aware.
Maybe you're eligible for them,maybe you're not, but what is
(30:49):
an ESPP?
Speaker 4 (30:50):
Yeah, it's an employee stock purchase program
and it's a scheme where youcould purchase stock from your
company the company that youwork for at a discount, and
usually the way that they haveit set up is you enroll it
before the year starts andthey'll set aside a certain
percentage of your paycheck andthen, twice a year, they will
(31:11):
purchase the stock at a discount.
And the reason why I like it somuch is because it's one of the
few scenarios where you'reactually getting stock at a
discount and then you haveoptions if you want to hold it
or sell it afterwards.
So, david Conrad, I'd love tohear your thoughts on what you
do with the ESPPs and your endplanning.
Speaker 1 (31:33):
So the first thing I'll share is I'm a pretty big
fan of any time I have theopportunity to get free money.
If you want to give me freemoney, I'll take all that you
want to send my way.
And ESPPs are a form of whereyou could potentially get some
free money.
Because if you participate init and your employer goes out on
your behalf and allocates someof those funds and you get to
(31:55):
buy the stock at a 15% discount,as soon as you're eligible to,
you could sell that stock and,assuming that stock price is at
the same price you bought it for, essentially that's about 15%
free money.
Now it's taxable, of course,but I still don't care.
If you want to give me freemoney, I'll pay tax on it
because after tax there's stillsome free money left over.
(32:18):
Now if you decide to sell,you're going to be taxed as
ordinary income on that gain,that free money.
But there's also some ruleswith ESPPs that if you're
bullish on your company and youhold it for a period of two
years from when it was grantedto you and one year from when
(32:42):
you actually had that stocksettle and took ownership of it,
you're now eligible for thegain to be taxed at a long-term
capital gain versus ordinaryincome if you would have sold it
without meeting those twoholding requirements, which is
what's known as a qualifyingdisposition versus a
(33:02):
disqualifying disposition.
If you've done stock optionplanning with us on incentive
stock options, it works somewhatsimilarly.
Again, a strategic plan goinginto the end of the year.
Here is number one check yourelections and if you're not
participating in your ESPP plan,you might want to take
advantage of that.
(33:23):
But then number two is look atyour ESPPs that you have,
because maybe it makes sense tosell some of those before the
end of the year to capitalize onthe discount or the current
market conditions.
And so two things that we thinkabout and look at with our
clients.
Thank you, conrad.
(33:44):
Any other points on the STPsthat you've seen Ditto.
Speaker 2 (33:48):
Yeah, I think it's important number one to
understand what you have, right?
I get asked a lot of questionsfrom clients that don't quite
fully understand what it is andso just having that conversation
, if any listeners out theredon't understand it and don't
have somebody to ask, call us.
Right, you're Conrad, dave orDavid like.
This is what we love to talkabout.
(34:08):
I think we could probably spendfour hours on this topic alone,
right?
I think what you mentioned,though, is across the board.
Everybody has to remember.
Right, if you are given freemoney, even if the government
wants a portion of that, youstill have some free money left
right, and so don't avoid thefree money because of the
(34:30):
government right.
Take what you have and utilizeit, and I think these, just like
anything else, have to bemanaged over time.
Speaker 1 (34:39):
Yeah, absolutely.
Well.
The next two things I want totalk about, I would say, consume
about half to maybe 60% of alot of the strategic tax
management work that we do atAllison Wealth.
The first one is Rothconversions for optimal tax
planning, and so there's allkinds of reasons to think about
doing a Roth conversion.
(34:59):
This is where you take yourretirement dollars, your pre-tax
dollars, and you opt to paytaxes now and that money goes
into a Roth account for tax-freegrowth into the future, and so
there's a number ofopportunities.
The first one is what we callbracket bumping Roth conversions
.
This is where you're fillingthe lower brackets up.
(35:22):
So, for example, if you have amodest income and you're in the
12% bracket, every single yearyou should be converting some of
your IRA or 401K to a Roth IRAor Roth 401K just up to the top
of that 12% bracket.
Maybe some of your goals andobjectives actually substantiate
(35:43):
bumping up to the top of the 22or the 24.
We just had a client hire uslast night.
They've got about $9 million inan IRA, and they're very
focused on multi-generationalplanning.
They want this money to getleft behind to their two
children as tax-efficiently aspossible.
(36:03):
Well, what is the worst accountyou could think of to leave
money to a child or abeneficiary In IRA.
They're horrible.
They can be subject to a statetax of 40% and income tax of 37%
.
They can be taken a tax hit ofalmost 70% to 75%, depending on
(36:24):
the net worth of the client.
Those are reasons where maybeyou even do Roth conversions up
to 32% or 35%, because I knowI'd rather pay 32% or 35% than
60% or 70% under the righttraditions.
Think about strategic Rothconversions.
The second area is, as wementioned earlier, incentive
(36:47):
stock options.
Just like Roth conversions,this is another.
Use it or lose it.
David, you are our analyticalguru at this point on
thoughtfully exercising ISOs.
We did a whole episode on this,a podcast episode.
Give us the one-minute cliffnote version For any listeners.
(37:08):
If this is relevant to you,either on ISOs or NSOs.
Go check out our podcastepisode on demystifying stock
options, because David and I doa deep dive on this.
Speaker 4 (37:20):
Yeah, and essentially with the incentive stock
options, if the stock is worthmore than what your exercise
price is, then there might besome additional AMT income when
you exercise that.
What does AMT stand for?
Alternative minimum tax?
That's a good question.
There might be some alternativeminimum taxable income.
(37:42):
If you have enough of thatincome, essentially you'll pay
more than your regular tax.
There's a key it's almost likea dance that you could do where
you could have enough AMT incomewhere you get to exercise the
shares but you don't pay anyadditional tax.
We're always looking at that.
For some of our clients withreally concentrated positions.
(38:03):
We might even look to exercisebeyond that AMT limit where
you're going to pay tax, if youhave a very concentrated
position.
Again, we could go into thisfor hours.
I love talking about this.
I'm one of those people wholikes to go into the analysis.
But that's just a quickoverview of the incentive stock
options.
Speaker 1 (38:22):
Yeah, the bottom line is there's what we call the AMT
sweet spot.
It's the no brainer.
It's to use it or lose it.
If you have incentive stock,you need to exercise each and
every year up to that point, butthen from there, depending on
the outlook of the stock, youmight do a lot more.
David, you and I had a clientthat we did a three-year long
exercise plan with and notfitness exercise, a stock option
(38:43):
exercise His company IPO.
It was one of the biggest IPOsin tech, I think.
What did?
We end up selling Over $70 to$80 million of company stock for
him over a two-year period.
Because of the strategicexercise strategy that we laid
out three to four years beforeIPO, we were able to save
(39:05):
millions and millions of dollarsof income tax.
So again, yes, if you ownincentive stock, I don't care if
it's a small amount or amassive amount.
There's so much strategy to beable to deploy.
Conrad, let's talk about number.
I think we're on number 13 ofthe 21 tax strategies right now.
But something that happens tous and you've been a CPA for how
(39:28):
many years now?
Speaker 2 (39:31):
Eight years?
Well, no, I think.
Speaker 1 (39:34):
I'm on year 11 now.
All right, how long have youbeen doing taxes for?
This was year 21.
Right, 21.
And how many times have youfound that come April 15th, you
deliver somebody's tax return tothem and they owe a whole bunch
of taxes and they're absolutelysurprised by it?
Speaker 2 (39:54):
Probably 100 times a year.
No, maybe that's too much, butI see it every single year, at
least 10 to 15 times withoutfail, and it's an easy one to
change it's so easy.
Speaker 1 (40:09):
It's all set Like.
I hate bad surprises.
Everyone hates bad surprises,right?
If I wake up one morning andyou tell me I owe a bunch more
money than I thought was coming,I'm not only going to be mad at
myself, I'm going to be mad atyou, I'm going to be mad at the
IRS.
It's going to ruin my day.
So how do you not have thesenegative surprises?
What kinds of things can we bedoing here in November and
December?
Speaker 2 (40:29):
Well, number one, just understand where your
income.
Right, if you take last year'stax return and you apply the
same increases or decreases thatyou're seeing through your pay,
where will you end up and whatwas the tax that you paid?
Right, there are some verysimple, linear things that you
can do.
You could actually we do thisfor all our clients.
We run through an actualmock-up of a 2023 return, right,
(40:53):
and I want to know if I need totell my client that they've got
a bad news coming up.
I want to tell them now, rightbefore we get to tax time, and
say oh, by the way, I know youdidn't plan for this $10,000 tax
bill, but here it is.
Anyway, you just mentionedyou're going to be pissed off at
me, at the IRS, at everyone.
So, just having anunderstanding of where you are,
(41:13):
knowing where your income'scoming from, and then checking
your withholdings right, thingslike bonuses right now, right
Under the new regime that wehave well, it was a couple of
years ago.
Bonus rates changed.
They're now a flat 22%withholding.
Speaker 1 (41:28):
Well, if you're in the 37% bracket, you're going to
be quite surprised at tax timeright, and David and I deal with
that with clients withrestricted stock units all the
time, because the statutorywithholding rate is 22% for
people under a million and wecan't tell you how many times we
meet with clients that are in a35% bracket and there's a 13%
(41:49):
under withholding and that is abig surprise come tax time for
them, which is why, to yourpoint, we do pro forma estimated
tax payments throughout theyear so that there are no
surprises come April 15.
That's right.
Speaker 2 (42:03):
Yeah, and for other people, business owners you're
supposed to be making estimatedtax payments, and if you haven't
been doing that, be prepared,right, you might want to set
aside a large chunk.
And for business owners, youhave to factor in not just
income tax but self-employmenttax, right, which is the same.
We'll call both sides of FICA,right?
(42:24):
It is the same thing.
It's about 15% on businessincome.
That could equate to a largenumber, and if you haven't
planned for it, you're in for abig surprise.
Speaker 1 (42:34):
Well, and depending on what type of business you own
.
David, you brought thisstrategy to one of our clients
in California, where weconverted his LLC to an S-corp
so that he could take advantageof, in California, this pass
through entity tax, and it savedhim what?
$300,000 a year of federal tax,$250,000, something like that,
no, $360,000.
(42:55):
$360,000.
Okay, I was close, I wastracking it.
Well, what is that pass throughentity tax If we have
self-employed individualslistening and maybe they're
eligible, like in South Carolina?
We opted in for this as wellfor our business income at
Allyson.
Speaker 4 (43:10):
Well, so the pass through entity tax.
We could do a whole episode onthis.
And there's when they did theTax Cut and Jobs Act, they
restricted the tax deduction forfederal purposes on your
Schedule A to $10,000.
So if you earn one of thosehigher tax brackets, you have a
(43:31):
restriction on what you candeduct.
Now what they did is they setup the pass-through entity tax
at the state level.
So if you own a pass-throughentity, such as a business or a
partnership, you could pay thetax at the entity level or
through the business and takethe deduction, which then will
essentially flow through to yourpersonal return.
So again, I'm simplifying it alot, but it allows you to take a
(43:54):
state tax deduction on yourfederal return if you run it
through a business and as aself-employed individual, you
could create something like asingle member LLC and then elect
to have it come taxed as anS-Corporation, which allows you
to make that transaction.
So again, very simplified.
Definitely speak to an advisorif you're looking at enacting
(44:15):
any of these, but it's a reallypowerful strategy, especially if
you have a business that isproducing a lot of income.
Speaker 1 (44:23):
Yeah, definitely Hundreds of thousands of dollars
of taxes saved for our clientson that.
So, moving on, another kind ofcheck the box If you have this
as an option, if you're workingand your 401k plan allows,
there's a concept called a megabackdoor Roth.
It's like the big brother tothe backdoor Roth Conrad opened
up this session talking about,but it's where your 401k might
(44:44):
allow you to contribute, aftertax, money into your 401k and
then do an in-plan conversion.
And so we have some clientsthat are getting an additional
30, 40, $50,000 a year into aRoth account, even though
they're very high income earning, and so I did a YouTube video
on that.
It's on our YouTube channel.
(45:05):
You can check it out.
Charitable giving optimizationAgain, consider cash donations
to charity or explore thebenefits of a donor advice fund
for strategic tax deductions.
So maybe you're only giving$5,000 or $6,000 a year to
charity, but you want toconsistently do that, and if
(45:27):
you're taking the standarddeduction, you're getting no tax
break for that charity.
Charitable contribution so oneway that you can actually get a
tax benefit is to bundle four orfive, six years of that
charitable contribution into onelump sum, into a thing called a
donor advice fund, which islike a family account for you to
(45:51):
do charitable giving through.
You could take a appreciatedstock.
Let's say you bought a stockfor $10 and now it's worth $100
a share and you put that in adonor advice fund.
When we sell the stock in thedonor advice fund, there's no
capital gains tax due.
So, number one, you just save$90 per share of capital gain.
(46:12):
And then, number two, you get afull deduction of the fair
market value, which is one ofthe most lucrative tax benefits,
because it's not getting adeduction for what you paid for
the stock, it's getting adeduction for the fair market
value of the stock which isappreciated.
Now there's some limits, likeyou can donate up to 30% of your
(46:35):
adjusted gross income.
But if you have any charitableintent, appreciated securities,
donor advice funds are such abig thing you need to look at.
Speaker 2 (46:45):
Yeah, it's such a no brainer.
Now, have you guys seen orutilized the strategy with your
clients where you may havesomebody that has the
ex-exercised options and thestock goes through the roots?
Speaker 1 (46:58):
Right, yeah, that client that we were just talking
about, I think.
What did we do?
Eight or nine million in hisdonor advice fund, because he
has a big charitable intent andhe's going to use that money to
be able to really do a lot ofgood with charities.
In addition, it saved him ahuge tax benefit.
But you're exactly right,conrad, this is probably a whole
(47:19):
nother episode as well.
But for property owners, right,people who have rentals,
commercial real estate, thingslike that, what is cost
segregation?
If you had to summarize it inone minute, Cost segregation.
Speaker 2 (47:32):
If I had to summarize it, I would say cost, seg or
cost segregation is reallytaking something that you buy.
Think about buying a vehicle,right, and you buy the whole
vehicle for one price, but allits components are treated
differently.
Same thing with a piece ofproperty.
You may buy a house for$100,000, but the stove is not
(47:55):
the same depreciable asset as ahouse.
And so what professionals dohere is go in and they say well,
that stove should be $500 ofthe $100,000 purchase and we're
going to depreciate that overseven years or five years.
So it's a way to basicallybreak apart smaller pieces of
(48:16):
the pie and accelerate thedepreciation for better
reduction of income early in theprocess.
Speaker 1 (48:24):
So depreciation is basically saying here's what we
paid for this building and it'snot an appreciating asset, it's
a depreciating asset and sowe're going to get an allowance
each and every year to offsetour income by what it's
depreciating by.
And if I buy the whole building, then let's say that what's the
traditional depreciationschedule of a building, for
(48:47):
example?
Speaker 2 (48:48):
For a commercial building.
Speaker 1 (48:49):
it's 39 years, so it's going to take me 39 years
to depreciate this and recoupall the expense and get the full
tax benefit.
But cost segregation might say,okay, well, the building is
that, but what about the lightbulbs, what about the different
components that are inside ofthat building?
And if we can accelerate thosequicker, we can bundle that tax
(49:13):
savings quicker.
So again, something we can do awhole nother episode on, but
something to take a look at.
If you own real estate, ifyou've experienced a large
capital gain, there are thingscalled qualified opportunity
zones you could look at.
Investing in.
These give you the ability todefer that capital gain into the
(49:33):
future and realize some taxbenefits.
Qualified opportunity zones aredesignated by the government,
usually in determining zones ofthe country that they are trying
to incentivize investment into,and they give you some tax
benefits to do that.
David mentioned earlier, justfinishing up our checklist here,
(49:55):
that there's a $10,000 cap onstate and local tax deduction.
That's salt deduction.
So if you're under that let'ssay your total tax is equal
$7,000, maybe you have theability to prepay next year's
payments.
So instead of waiting toJanuary, maybe you pay part of
(50:16):
it in December and again, you'rea cash basis payer, so it's
based on when you paid it, notwhen it was due.
And then the last two here are.
There's always opportunity againfor more affluent clients to
potentially strategically giftto children.
The exemption is $17,000 perspouse.
(50:38):
So we have some clients thatare gifting highly appreciated
stock to their kids.
Husband and wife can do $17,000each.
That's $34,000.
Maybe the kids are going tohold that stock for five or 10
years, but when they sell itthey're going to be in a lower
tax bracket than mom and dadwere in.
So there's some considerationsand trade-offs because, of
(51:01):
course, if mom and dad held thestock and then passed away, the
kids would get a step up inbasis.
There's also kiddie tax rulesthat we need to navigate, but
something that we do commonly.
And then, last but not least,closing out here, your required
minimum distribution.
If you're of RMD age, make sureyou take that RMD before
(51:22):
December 31st, because it is asubstantial penalty for missing
it.
If you have an inherited IRA,you probably need to take an RMD
as well.
So whether you're of RMD age oryou've inherited an IRA, make
sure you've taken that.
And if you're over age 70 and ahalf and you have charitable
(51:44):
intent, you could actuallyeliminate the tax on that RMD by
doing something called aqualified charitable
distribution, which is where youhave that RMD essentially get
sent right to a charity and youdon't have to report it on your
tax return, assuming you followthe right rules.
And so those are our Court 21.
(52:04):
Again, a huge amount ofopportunity.
These are things that we gothrough a checklist towards the
end of the year and make surewe're delivering for our clients
at Allison Wealth, and I'lltell you, even if you just do
two, three, four of these, itcan lead to massively better
wealth outcomes.
And so, conrad David, thanksfor dropping a ton of knowledge
(52:26):
on all your years of experienceon tax management and tax
planning and tax preparation andthe investment side.
Any closing thoughts as we wrapup another episode?
Speaker 4 (52:37):
I would just say that I love to do this and love to
talk about all these end of taxyears.
So if anybody wants to spendmore than an hour with us, we're
always happy to have you andchat with you.
Speaker 2 (52:48):
Yeah, I agree with David on that and I want
everybody to understand.
Well, we have 21 items here.
These aren't the only 21 itemswe talk about, but you also
should not expect to do all 21items every year.
I think that's the.
What I like to tell my clientsis tax planning and tax
reduction strategy is nothitting a home run.
(53:11):
It's hitting a lot of singlesover long periods of time, right
?
So if you're left by a thousandcuts and if I can save you $100
here or $200 there, those doadd up tremendously without
being high risk or having to beso burdensome along the way.
So you know, if you can reduceby 5% your tax bill, you're in a
(53:32):
good place.
Speaker 1 (53:33):
Yeah, would you rather keep the money for you
and your family or have it go tothe IRS?
I always say there's two typesof taxes.
There's avoidable taxes andunavoidable taxes.
Unavoidable ones are the thingsthat we're talking about here,
the unavoidable ones.
If you don't pay those, you getto retire in an orange jumpsuit
, and that's not where we wantto be.
So again, check out, subscribeto our YouTube page, follow us,
(53:55):
continue to follow the podcast.
Hopefully you found thisinformative.
Reach out to us, go to AlisonWealth.
You can access and contact anyof us on there.
And thank you, fellas.
Appreciate it.
Speaker 2 (54:05):
Thanks, Dave.
Thanks.
Speaker 4 (54:06):
Dave.
Thanks everyone, Thank you.
What's going on, conrad?
Speaker 2 (00:04):
Living the dream.
Yeah, you know it's a nicedreary day here in Georgia and I
got a child that doesn't wantto sleep through the night, so
it's everything is wonderful inmy world.
Speaker 1 (00:16):
How many hours did you get?
You guys were just on vacation,weren't you?
Or did I see on Facebook youwere up in the mountains.
Speaker 2 (00:22):
Yeah, we actually took Chelsea and I always
celebrate our anniversary and weeloped during COVID.
We go up there every year tothe same orchard and we actually
took pictures of Caroline thisyear.
Awesome time, great weather,always a good time in Blue Ridge
, Georgia.
If you haven't, have you everbeen to Blue Ridge?
Speaker 1 (00:40):
I haven't, but you know I was looking.
I think we were only like twoand a half hours from each other
because I was in Linville,north Carolina.
Yeah, up in the Blue RidgeMountains, kind of outside of
Asheville, which was, it wasgorgeous.
All the leaves were changingUh-huh.
We were just warm, 75 duringthe day, a brisk 40 at night
(01:01):
time.
Oh, yeah.
I think we were too far fromeach other.
Speaker 2 (01:04):
Yeah, no, it was a great time.
We enjoyed it.
Of course, it was the firsttime we went with Caroline, so
we're learning how to do allthis as new parents.
And you know, nobody ever toldme that it would be this hard to
travel with a six month old.
Speaker 1 (01:18):
So we took our eight month old to Cali or to Italy
and we started traveling withAvery when she was, I think, six
or eight weeks old.
So really, yeah, our kidsalways grew up as travelers.
Yeah, it kind of core value,we're all about it.
So you know what, if you're notsleeping at home, why not sleep
while you're out traveling?
(01:39):
That's right.
Speaker 4 (01:40):
That's right it could be worse.
Speaker 1 (01:42):
David was at home with sick kids, so oh man.
Speaker 4 (01:45):
Yeah, she's going to the doctor today.
She's had a fever for like fourdays now and they're like she
should come in and see so.
Speaker 1 (01:53):
So the joys of where we're all at in the phase of
life, with that bringing homesickness.
Well, let's go out and getthings kicked off.
We got an awesome episode today.
It's hard to believe we are inthe home stretch of 2023, almost
mid-November here.
So we're going to go out andget this episode kicked off with
21 strategic tax moves that youshould consider before the end
(02:18):
of the year, because, as we allknow, if the clock strikes
midnight, it is use it or loseit when it comes to a lot of
these strategies.
And so let's go ahead and we'regoing to get rolling here, all
right.
So in this episode, we're goingto be talking about 21 strategic
(02:38):
tax moves, and I can't think ofanyone better to be joining me
today than, of course, mycolleagues David Roth and Conrad
, two tax experts in their ownright.
Conrad, of course, a CPA, david, an enrolled agent admitted to
practice before the IRS.
And so let's go ahead and let'sjust start brainstorming here.
Of course, 21 strategies.
(02:59):
We could make this episode fourhours long, but of course, none
of our viewers would stay onwith us that long.
So we're going to kind of rapidfire through some of these
things and just go kind of in anorder of some things that we
think are quite simple, thingsthat almost everybody should be
doing.
And I think kind of the nobrainer one right out of the
gate is just double check andmake sure you're maxing out
(03:21):
those retirement accountcontributions, take advantage of
those tax benefits.
And I'll kind of kick off onthis one that when we talk to
clients about this number one isif you have the discretionary
savings ability and you're stillworking, make sure you are
maxing out those 401ks.
If you're in a lower taxbracket maybe you don't have a
(03:44):
very high household income,you're in that 12% or 22% or
maybe even 24% it might beprudent to look at maxing out
your Roth 401k.
And then, if you're in thosehigh tax brackets 32, 35, 37% it
might be more prudent to deferthat income while you're in
(04:06):
these high tax rates and go tothe traditional 401k.
But I mean, david and Conrad,how many times do we see that
when we're doing taxes forpeople and we get their pay
stubs or their W-2s, we find outthat, hey, they just didn't
quite hit the maximum and therecould have been more benefits
that they could have partaken inthroughout the year had they
(04:27):
just kind of focused and checkedthis off the list before
December 31st.
Speaker 4 (04:32):
Yeah, it happens all the time.
You could see it in the W-2where it shows the 401k
contributions and it's November,right now, and now is really
the ideal time, or really thelast time, to check it, because
you might only have a couplemore pay periods to get that in.
So you really want to look atthis right now.
Make sure they're maxed out soyou can get it in, because this
(04:53):
is one of those situations thatif you do not get it in by the
end of the year, you can't maxit out.
Speaker 1 (05:00):
Now, the only exception to that, conrad.
Touch on this because I knowyou have a lot of business owner
clients.
It's a market you really dealwith all day long.
Business owners if they own thebusiness, they get a little
grace period, don't they?
Speaker 2 (05:11):
Absolutely, and depending on the plan that you
have set up.
You know you really, as abusiness owner, typically have,
under a lot of structures, up toApril 15th or the filing due
date, right, and that's a verykey part of this for folks in
California.
You actually just got extendeda little bit further and so we
have a lot of extensions intothe next year.
I call it next year's money fortoday's benefit, right, it's a
(05:35):
cash flow game that we play, butyou ultimately can get to the
end of the year and say you know, what did I actually make for
my business?
You should know that throughoutthe year anyway, but I digress
on that.
But really, once you get to theend of the year, you'll have an
idea of what you've made.
So low-key contributions can bemade based on that amount.
For you know, schedule C filersCovers will still be based on
(05:57):
your W2 wages, but you stillhave timing of these things that
you get to utilize as abusiness owner, so it's a great
opportunity for them.
I'm going to actually doubledown on this and say, especially
if you're a W2 employee, don'tjust look at only your 401k,
look at your full benefitspackage, right, this is a great
time, especially with the openenrollment, to look at next
(06:21):
year's positioning for thingslike long-term disability,
short-term disability.
Are you opting into thesetax-free benefits at work that a
lot of other people don't have?
Speaker 1 (06:32):
Well, I mean speaking of that.
I just did a talk from my othercompany, c2p, the national
company for all of our employees.
We have about 60, 65 employeesand talking about the benefits
of maxing out their HSA.
And so you're in a highdeductible health plan, you have
access to an HSA account, it'sgot triple tax benefits tax
deferred income going in,tax-free growth over time and
(06:55):
tax-free withdrawals forqualified medical expenses.
And so again, check yournumbers.
If you haven't maxed this outfor 2023, this could be an area
where you can save some incometaxes and again going into your
2024 benefits.
Check out this plan if it'savailable for you.
In some cases, employer, youremployer might even put money
(07:18):
into this for you and it's anincredible retirement asset.
So, kind of check all thosethings.
Check your 401k, check your HSA.
If you're eligible, make sureyou're taking advantage of these
opportunities.
Yeah.
Speaker 2 (07:31):
I love that the HSA is one of the most underutilized
accounts that I see.
All the time that I harp onthat and I will die on this hill
that the HSA should be maxedout every year by every single
person.
Speaker 1 (07:43):
A hundred percent and I see so many people miss that
and let's kind of close the loopon the benefit side of things.
So we talked about the 401k andthe other side on the 401k is,
even if you're maybe retired andmaybe you have a little bit of
consulting income and you don'tnecessarily need that income to
live off of, there areself-employment retirement
(08:04):
accounts like a CEP IRA or asolo 401k that you could
participate in.
So this isn't just for theyounger accumulator, this is
really anybody who has anyincome coming in at all from
some sort of kind of workrelated self-employment
consulting side hustle or, ofcourse, your normal W2
(08:25):
day-to-day job.
We talked about the HSA andthen the last two are the FSA.
There's really two typesavailable out there.
There's a dependent care FSA,which you can use for childcare
expense if you meet certaineligibility requirements, and
this is a great benefit becauseit's like being able to use
(08:46):
pre-tax money to help offsetsome of your childcare cost.
And then there's your medicalFSA, and the key I wanna kind of
touch on with the medical FSAis it's in many cases use it or
lose it, and so make sure if yougot money left in there, if you
deferred and put some money inthere at the beginning of the
year and you have some left.
(09:08):
Get out there and use it beforeDecember 31st.
Now a lot of plans might allowyou to roll over $500 to the
next year.
But again, pay attention tothose numbers.
And it becomes really important, as we kind of land the plane
on the end of the year here,that you don't lose any money or
(09:28):
miss out on any deferralopportunities like the dependent
care, fsa and being able to usethat to pay for some childcare.
Speaker 2 (09:36):
Absolutely great points great points.
Speaker 1 (09:39):
So let's backtrack a little bit something that most
people have access to as a RothIRA and outside of the HSA.
If I had to name my secondfavorite account to accumulate
wealth in, it's a Roth IRA.
Because, david, what are thecharacteristics of a Roth?
Speaker 4 (09:55):
IRA yeah, roth IRA.
It goes in and you pay taxes asit goes in.
But when you put it in there itgrows tax deferred and then
when you take it out it comesout tax-free, as long as you
take it out qualified.
Speaker 1 (10:08):
So it's not the triple tax benefit like the HSA,
but it's a double tax benefit,and if you think taxes are gonna
be higher in the future or ifyou think your wealth is gonna
continue to grow and you'regonna be in a higher tax bracket
in the future, a Roth IRA is agreat place to stash away some
money, have it grow, invest itand then it is tax-free for
(10:29):
retirement.
You could also access the moneybefore retirement without any
penalties or any taxes, but it'sonly up to your contribution
limits, and so there are limitsto how much income for you to be
eligible to contribute directlyinto a Roth IRA.
I don't have the numbers offthe top of my head.
You guys have the numbers offthe top of your head, I think
(10:52):
for married filing join us.
Speaker 2 (10:53):
I mean, it's a decently high number, 212,000 of
AGI, something like that, Imean.
But we have a lot of clientsthat make four, five, 600,000
and would love to fund the RothIRA anyway.
Speaker 1 (11:05):
So you know how do they do that.
Speaker 2 (11:07):
Conrad, oh, you know.
I'm glad you asked, dave.
You know it's called a backdoorRoth contribution, right, and
you hit on.
You know some of thetraditional IRA characteristics
where you get a tax deduction oran adjustment on your taxes
when you contribute to atraditional IRA but if you make
too much money you can't deductthat in the current year.
(11:29):
You have what's called anon-deductible IRA contribution
and all that means is you have Xnumber of dollars that you put
in that can come out of thattax-free, right?
So we leverage that and saywe'll be put $7,000 in a
traditional IRA and it'snon-deductible, right At the end
of the year we convert that toa Roth IRA and really there's no
(11:53):
tax on that because you'reconverting your basis.
There is no taxable amount thatwe have to recognize as part of
that transaction.
Speaker 1 (12:00):
Yeah, this is one of those things.
I kind of call it theno-brainer.
We do this for almost all ofour clients at Allison Well
Management who have earn incomethat are high-income earners.
Now there are some rules yougot to be aware of.
There's this thing called thepro-rata rule which you have to
be able to navigate.
I'm not gonna cover that today.
We have a YouTube video on thaton our Allison Well Management
YouTube page.
(12:21):
So you might be checking outthis podcast on YouTube.
Check out some of our othervideos.
We kind of walk through howthat pro-rata rule works.
But there are some things to beaware of.
But at the end of the day, toyour point, if we can get six
$7,000 for each person into aRoth for a high-income earner,
it's just kind of one of thoseno-brainer moves when you're
saving if you have thediscretionary opportunities.
(12:43):
David, you brought up a greatopportunity, though.
This was a couple of ourclients that they were retired.
Well, one of the spouses wasretired, the other one was still
working and had earned incomeand what you recommended we do
was actually a spousal IRA thatfor some of our clients.
(13:06):
They were not at a high enoughincome level that they were
eligible to make a contributiondirectly into the Roth, but one
I could think of off the top ofmy head who was retired but has
a very high amount of retirementincome, well over the
contribution limits.
We were able to do a spousalnon-deductible IRA contribution
(13:30):
and then the backdoor conversionto get that $7,000 into the
Roth.
Speaker 4 (13:35):
Yep, and with that, though, the one thing I'd add is
that you do need earned incomefor that.
So there was a small amount ofearned income.
So as long as you have at leastthat limit of earned income,
then you can contribute that tothat non-deductible IRA.
Speaker 1 (13:49):
Absolutely and that was the case.
He was doing some consultingwork, husband was, and so the
wife.
We were able to do thatbackdoor spousal.
So the 529 is.
The next kind of thing is we'rechecking the box on how you're
accumulating money.
We talked about the 401K, wetalked about the Roth IRA.
We talked about the healthsavings account.
(14:10):
We talked about the dependentcare FSA and the traditional
medical FSA.
If you're looking to save moneyfrom an educational benefit
standpoint a college or aneducational 529, I can't say
college anymore because of the2017 Tax Cuts and Jobs Act now
(14:32):
allow us to take withdrawals outof a 529 plan for a private
school K through 12, and thosedistributions are tax-free.
But you might wanna check outyour state limits.
If you're in a state like Ammanin South Carolina that gives
you a state tax deduction forputting money into that 529,
(14:53):
that could be another way toreduce some of your state tax
liability.
But even if you're not in astate like, for example,
california gives no state taxbenefit for the 529, it still
allows you to grow money taxdeferred and then take it out
tax-free later on in life.
So there are some tax benefits,while not so much on the front
(15:14):
end of things.
It's really on the back end ofthings.
Speaker 2 (15:18):
Yeah, yeah.
And Dave, how many of yourclients come to you and say I
don't know if I wanna fund a 529, I don't know if my kids or
grandkids are gonna go tocollege?
I've been hearing that all thetime and I still make the
recommendation.
Hey, but do you know, right?
So should we take a blendedapproach and with the lower
limits that you can fund anyway,does it still make sense to
(15:40):
fund a 529?
What are you guys seeing andtalking?
Speaker 1 (15:43):
about Absolutely, and I think it depends on the
client's financial situation,right?
So there's a couple of things.
If it's a very high net worth orultra high net worth family,
that of course you know,sometimes we advise well, just
go ahead and max out those 529plans because you can use it for
educational planning for otherfamily members, right that?
(16:03):
Maybe you want to be able tohelp out and support because you
can change the beneficiary, somaybe your child gets a full
ride to Stanford and you don'tneed to tap into that 529, but
maybe you have a niece or anephew or maybe, a long time
from now, you have a grandchildthat you want to be able to help
out with educational funding,and so it's not like you'll lose
(16:24):
the money.
But then, on top of that, wehad recent tax law that was
passed at the end of 2022.
That now says if you haveleftover money in a 529, the
beneficiary can roll a portionof that money tax free to a Roth
IRA for their benefit, andthere's a lot of moving parts
and rules on how that works.
(16:45):
It's going to be availablebasically in 2024 and beyond, so
there are some things to thinkabout in terms of release valves
on that money.
It's not hostage and locked upforever.
Yeah great points.
So let's talk about investments.
If we go back to 2022, therewas a much greater opportunity
(17:06):
for this, because it was a veryvolatile, essentially a down
year for the stock market.
2023 so far has been a prettygood year, bouncing off of that
rebound.
But, of course, in any bigbroad market, there's always
winning investments and there'slosing investments, and so one
thing that's available is afinancial technique for your
non-retirement account money.
(17:27):
So this is like your brokerageaccounts, your living revocable
trust, anything that's non 401kor IRA, which is called tax lost
harvesting or what I like tocall tax deduction creation, and
this is where you optimize yourtaxable investment accounts by
strategically sellingunderperforming investments, and
(17:51):
that essentially creates acapital loss.
And so what can you do withthat capital loss?
What are some ideas that yousee that we've done with our
clients or that you can sharewith the audience here?
Speaker 4 (18:02):
Yeah, I mean, I know we've had a couple of situations
where we use that to offsetgain, one with a sale of a
business and another was with asale of a home.
So you had this big gain fromthis accumulated asset that was
sold in a particular year.
But we happened to havespecific assets that they had a
tax deduction attached to itbecause they were at a loss, so
(18:22):
we could sell it and it wouldoffset what would otherwise be a
large gain and the other sideis company stock On tax loss
harvesting.
Speaker 1 (18:30):
A big part of our business at Allison Wealth is
managing assets on behalf of ourclients, and when we're
managing their post tax moneyit's a very different strategy
than when we manage their pretax money.
It's peddle to the metal ontrying to maximize the gross
return because it's all going tobe taxed at ordinary income
(18:52):
when it comes out of thoseretirement accounts.
But with post tax money it'snot just about what you make,
it's about what you get to keepnet after taxes.
And so we're constantlythroughout the year looking for
tax harvesting right, because alot of times, if you look at the
kind of history of the market,the fourth quarter tends to be a
(19:12):
pretty good quarter for stockmarket returns.
Some people call it the SantaClaus rally.
Q4 and Q1 are historically goodtimes for the market.
That might not be the right timeto look for your tax harvesting
right, and now we're educatingyou on this going into 2024 if
you're not having a professionaldo this for you.
But look at the example of 2020.
(19:34):
When the pandemic hit In Marchand April, the market fell by
30% but, as we all remember, ithad almost a V-shaped recovery
and by the end of 2020, itactually finished in the
positive.
And so if you were waiting tillNovember or December to look
for tax-lost harvestingopportunities, you missed them
forever because they hopped totheir head up in March and April
(19:58):
when there was total chaos anduncertainty in the world.
And so look at tax harvestingthroughout the entire year.
But again, it's a good thing.
Right now, what you can dobefore December 31st is just
check your investments, andConrad talked about one rule
that you need to navigate,because, like what, if I have a
stock that I bought and it'sdown in value, but I really want
(20:22):
to hold that stock, can I sellit, realize the gain and then
buy it right back?
Speaker 2 (20:28):
Yeah, You're talking and I love that you've posed
this, because you're talkingabout something that I see a lot
, which is called the wash salerule, right, and what.
The IRS and Congress got reallysmart at some point and said,
hey, we should really considerthe fact that you can sell
something at a loss and rebuy itand you get to claim that loss,
but you're still on the asset,right?
(20:50):
They figured out that's notright.
We don't want to do that.
We don't want to let everybodyin the world do that.
So they implemented a 30-dayrule, right?
So if you sell, if I holdAmazon stock that drops by 10%,
I can't sell it and rebuy itwithin the same 30 days and
claim that loss.
I actually have to wait 31 daysand once you get through that
(21:13):
wash sale period you can rebuyright, but you're not likely
going to buy at the same bottomvalue.
So the wash sale rules are veryimportant.
I see this mistake made with alot of clients every year.
A couple of years ago, I hadone that to the tune of $300,000
of losses that he was not ableto capture.
Now, it's not that those lossesare just gone, they add to your
(21:36):
basis, but it's still if you'replanning around claiming a loss
or offsetting other gains,you've missed the boat.
Speaker 1 (21:44):
Yeah.
So this is something that wekind of automate and again do
for our clients when we'remanaging money.
But there's other things likemaybe you're in a mutual fund or
ETF and you sell that realizethe loss and we can put a
different fund in, so you're notout of the market and sitting
in cash.
But if it's an individual stock, there is a bit of a gamble
(22:05):
because in 31 days, like Conradsaid, maybe the stock went up in
value and now you've got to buyit back at a higher price.
But on the flip side, maybeit's gone down in value and you
could actually buy it for alower price and it's a win.
So here's a pop quiz for youguys or any other listener, when
you think of anything thatsomebody could put money into
right now and technically theIRS tax code does not apply wash
(22:29):
sale rules to David, I know youknow this one.
Speaker 2 (22:34):
Well, now you're putting me on the spot.
Go ahead, David.
Speaker 4 (22:37):
Yeah, it's going to be like commodities, so like a
cryptocurrency.
I was going to say Bitcoin.
Speaker 1 (22:42):
Yeah, crypto that's something we saw constantly is
crypto.
Right now, it's not subject tothose wash sale rules.
I knew I was throwing acurveball out.
So, again, if you have cryptoit's gone up recently in the
last couple months here but youmight still be holding positions
that you jumped on the gravychain to train at the wrong time
, like in 2021, and you'reholding these positions that
(23:04):
have big losses but you want tohold on for the long haul.
Those are positions where youcould hit the sell button and
rebuy it back.
Now there's pending tax lawlegislation out on this because,
again, congress doesn't reallylike this, but it kind of is
what it is today.
So tax loss harvesting isdefinitely something you should
be thinking about.
Now, the flip side to that issomething that not a lot of
(23:28):
people think about.
Right, tax loss harvesting issomewhat well known, but
although it's well known, not alot of people do it because it
takes a lot of work to implement.
Trust us, we know we do thisall day long for our clients.
But the other side is exploringtax gain harvesting, and so
there's a couple of reasons thatyou might actually and although
(23:50):
it seems counter intuitive, youmight actually hit the sell
button and realize a taxablegain.
Can you guys think of someexamples and I know I have a
couple off the top of my head Ican share as well.
Speaker 2 (24:04):
Yeah, all day, right, let's take the Amazon one,
because I do this with mine is Ialways look and say, well, how
do I reset my basis on a gainposition and can I sell and
reset the basis, meaning I getto realize, basically a tax-free
transaction, right, withouthaving to actually pay tax on
(24:25):
other stuff to do it.
So just look at if you have aloss of $10 and a gain of $10,
your total gain is still zero,but you're able to really
continue to accelerate gainswithout having to recognize the
current year tax hit to do it.
Speaker 1 (24:45):
So you're referring to kind of the combination of
the two taking tax loss,harvesting, realizing a loss and
then taking a gain, selling it,realizing the gain, helping
those two things offset eachother.
So you don't owe anyout-of-pocket tax, that's it,
that you could immediately buythat Amazon stock back, because
(25:07):
there are no wash sale rules tonavigate on gains, Right?
So essentially you have ahigher cost basis in that Amazon
stock, which means if itappreciates further from here on
out, then you're going to haveless of a taxable capital gain,
or the flip side if itdepreciates or goes down in
(25:30):
value, you might actually beable to use that position in a
future year to do some tax-lostharvesting on.
So it's what we call basismanagement, which is incredibly
important and another hugeconcept people overlook.
But let's talk about somebodywho's in a lower tax bracket.
So maybe you're retired ormaybe you just had the financial
(25:55):
freedom to slow down work ortake on part-time work.
Let's say, for example, you'rein the 12% federal tax bracket,
so you have about $75,000 ofincome.
Well, there's a couple ofthings that are working for you
here.
Number one is you get astandard deduction if you're not
(26:18):
itemizing, which was about27,700 if you're under the age
of 65.
So that brings your $75,000 ofincome down to about 46,000,
47,000.
And then from a capital gainstandpoint, there's actually a
(26:38):
0% bracket and for a marriedfiling jointly family it's up to
about $89,000 of total income.
And so that means you might beable to realize $20, $30,
$40,000 of long-term capitalgain and pay no income tax at
all on that money.
(26:59):
You could even buy thosepositions right back.
And now to Conrad's point.
You have a higher basis, andthat's another great form of
basis management that I hardlyhear of any other financial
advisor doing.
When I teach this conceptacross the country at our tax
management journey training, Ijust see people's eyes light up,
(27:21):
Even CPAs they're like.
I never thought about that.
I've always thought about taxloss harvesting, but never tax
gain harvesting.
Speaker 2 (27:29):
Yeah, yeah, those are all great points and you
actually beat me to the punch onthe zero gains tax rate.
But let's share it.
Speaker 1 (27:38):
My favorite tax bracket.
What can I say?
Absolutely Listen.
Speaker 2 (27:42):
I'm right there with it.
I love the 0% bracket.
How can we look at it?
And I think you made a goodpoint and most people don't
think about it.
But how does social securityfactor?
Speaker 1 (27:53):
into that.
Yeah, you got to be careful onsocial security.
Right and I always share thiswhen I speak is, for most of us
we're on a two-tax system.
We have ordinary income andthen we have capital gains.
Now for some of you a lot ofour clients, you're actually on
a three-tax system because youmight have things like incentive
(28:14):
stock options and then you goto ordinary income, capital
gains and alternative minimumtax and for those of you that
are on social security, you alsocould have a provisional income
tax to think about and that'sbasically the taxation of your
social security benefit.
So, before you do any of thisgain harvesting, if you're on
(28:37):
social security, we need to do asocial security tax analysis
because we need to understandthe trade-off of realizing some
capital gain.
Maybe it's even at a low taxrate on the capital gain itself,
but if it causes you a wholebunch of additional tax on your
social security benefit or if itcauses you to go into a higher
(28:59):
Medicare premium tax, thosemight be reasons to not do it.
And so just a number of movingparts.
Great point, conrad.
The last thing that I want toshare on tax gain harvesting and
when I talk about taxmanagement, I always use the
analogy that it's a game ofchess.
In chess you've got to bethinking three, four, five moves
(29:20):
ahead, and so what I mean bythat is, let's say, it's 2023,
and I have a kind of normalizedincome for our family.
But I know in a year or sixmonths or a year and a half, I'm
going to have a big financialcommitment.
(29:41):
Maybe I'm going to put anaddition on the house that I
want to pay cash for and I'mgoing to have to sell a bunch of
investments to do that.
Well, what's better?
Selling those investments overtwo tax years or having all of
that gain lumped into one taxyear next year, when I have to
go pay the contractors and formany people and I'm doing this
(30:05):
myself right now because we'regetting ready to start with an
addition on the house and Idon't want to take out debt to
really pay that right now withwhere interest rates are what
I'm going to do is I'm going tosell some of this stock towards
the end of this year and then Ican sell some more of the stock
in January or February so I canspread that tax liability over
(30:27):
two years.
And so that's another exampleof just tax gain harvesting, so
that you're thinking about thesecommitments ahead.
Yeah, all great points.
So, speaking of stock ESPPs,david, talk about what an ESPP
is for those of you who mightnot know, might not be aware.
Maybe you're eligible for them,maybe you're not, but what is
(30:49):
an ESPP?
Speaker 4 (30:50):
Yeah, it's an employee stock purchase program
and it's a scheme where youcould purchase stock from your
company the company that youwork for at a discount, and
usually the way that they haveit set up is you enroll it
before the year starts andthey'll set aside a certain
percentage of your paycheck andthen, twice a year, they will
(31:11):
purchase the stock at a discount.
And the reason why I like it somuch is because it's one of the
few scenarios where you'reactually getting stock at a
discount and then you haveoptions if you want to hold it
or sell it afterwards.
So, david Conrad, I'd love tohear your thoughts on what you
do with the ESPPs and your endplanning.
Speaker 1 (31:33):
So the first thing I'll share is I'm a pretty big
fan of any time I have theopportunity to get free money.
If you want to give me freemoney, I'll take all that you
want to send my way.
And ESPPs are a form of whereyou could potentially get some
free money.
Because if you participate init and your employer goes out on
your behalf and allocates someof those funds and you get to
(31:55):
buy the stock at a 15% discount,as soon as you're eligible to,
you could sell that stock and,assuming that stock price is at
the same price you bought it for, essentially that's about 15%
free money.
Now it's taxable, of course,but I still don't care.
If you want to give me freemoney, I'll pay tax on it
because after tax there's stillsome free money left over.
(32:18):
Now if you decide to sell,you're going to be taxed as
ordinary income on that gain,that free money.
But there's also some ruleswith ESPPs that if you're
bullish on your company and youhold it for a period of two
years from when it was grantedto you and one year from when
(32:42):
you actually had that stocksettle and took ownership of it,
you're now eligible for thegain to be taxed at a long-term
capital gain versus ordinaryincome if you would have sold it
without meeting those twoholding requirements, which is
what's known as a qualifyingdisposition versus a
(33:02):
disqualifying disposition.
If you've done stock optionplanning with us on incentive
stock options, it works somewhatsimilarly.
Again, a strategic plan goinginto the end of the year.
Here is number one check yourelections and if you're not
participating in your ESPP plan,you might want to take
advantage of that.
(33:23):
But then number two is look atyour ESPPs that you have,
because maybe it makes sense tosell some of those before the
end of the year to capitalize onthe discount or the current
market conditions.
And so two things that we thinkabout and look at with our
clients.
Thank you, conrad.
(33:44):
Any other points on the STPsthat you've seen Ditto.
Speaker 2 (33:48):
Yeah, I think it's important number one to
understand what you have, right?
I get asked a lot of questionsfrom clients that don't quite
fully understand what it is andso just having that conversation
, if any listeners out theredon't understand it and don't
have somebody to ask, call us.
Right, you're Conrad, dave orDavid like.
This is what we love to talkabout.
(34:08):
I think we could probably spendfour hours on this topic alone,
right?
I think what you mentioned,though, is across the board.
Everybody has to remember.
Right, if you are given freemoney, even if the government
wants a portion of that, youstill have some free money left
right, and so don't avoid thefree money because of the
(34:30):
government right.
Take what you have and utilizeit, and I think these, just like
anything else, have to bemanaged over time.
Speaker 1 (34:39):
Yeah, absolutely.
Well.
The next two things I want totalk about, I would say, consume
about half to maybe 60% of alot of the strategic tax
management work that we do atAllison Wealth.
The first one is Rothconversions for optimal tax
planning, and so there's allkinds of reasons to think about
doing a Roth conversion.
(34:59):
This is where you take yourretirement dollars, your pre-tax
dollars, and you opt to paytaxes now and that money goes
into a Roth account for tax-freegrowth into the future, and so
there's a number ofopportunities.
The first one is what we callbracket bumping Roth conversions
.
This is where you're fillingthe lower brackets up.
(35:22):
So, for example, if you have amodest income and you're in the
12% bracket, every single yearyou should be converting some of
your IRA or 401K to a Roth IRAor Roth 401K just up to the top
of that 12% bracket.
Maybe some of your goals andobjectives actually substantiate
(35:43):
bumping up to the top of the 22or the 24.
We just had a client hire uslast night.
They've got about $9 million inan IRA, and they're very
focused on multi-generationalplanning.
They want this money to getleft behind to their two
children as tax-efficiently aspossible.
(36:03):
Well, what is the worst accountyou could think of to leave
money to a child or abeneficiary In IRA.
They're horrible.
They can be subject to a statetax of 40% and income tax of 37%
.
They can be taken a tax hit ofalmost 70% to 75%, depending on
(36:24):
the net worth of the client.
Those are reasons where maybeyou even do Roth conversions up
to 32% or 35%, because I knowI'd rather pay 32% or 35% than
60% or 70% under the righttraditions.
Think about strategic Rothconversions.
The second area is, as wementioned earlier, incentive
(36:47):
stock options.
Just like Roth conversions,this is another.
Use it or lose it.
David, you are our analyticalguru at this point on
thoughtfully exercising ISOs.
We did a whole episode on this,a podcast episode.
Give us the one-minute cliffnote version For any listeners.
(37:08):
If this is relevant to you,either on ISOs or NSOs.
Go check out our podcastepisode on demystifying stock
options, because David and I doa deep dive on this.
Speaker 4 (37:20):
Yeah, and essentially with the incentive stock
options, if the stock is worthmore than what your exercise
price is, then there might besome additional AMT income when
you exercise that.
What does AMT stand for?
Alternative minimum tax?
That's a good question.
There might be some alternativeminimum taxable income.
(37:42):
If you have enough of thatincome, essentially you'll pay
more than your regular tax.
There's a key it's almost likea dance that you could do where
you could have enough AMT incomewhere you get to exercise the
shares but you don't pay anyadditional tax.
We're always looking at that.
For some of our clients withreally concentrated positions.
(38:03):
We might even look to exercisebeyond that AMT limit where
you're going to pay tax, if youhave a very concentrated
position.
Again, we could go into thisfor hours.
I love talking about this.
I'm one of those people wholikes to go into the analysis.
But that's just a quickoverview of the incentive stock
options.
Speaker 1 (38:22):
Yeah, the bottom line is there's what we call the AMT
sweet spot.
It's the no brainer.
It's to use it or lose it.
If you have incentive stock,you need to exercise each and
every year up to that point, butthen from there, depending on
the outlook of the stock, youmight do a lot more.
David, you and I had a clientthat we did a three-year long
exercise plan with and notfitness exercise, a stock option
(38:43):
exercise His company IPO.
It was one of the biggest IPOsin tech, I think.
What did?
We end up selling Over $70 to$80 million of company stock for
him over a two-year period.
Because of the strategicexercise strategy that we laid
out three to four years beforeIPO, we were able to save
(39:05):
millions and millions of dollarsof income tax.
So again, yes, if you ownincentive stock, I don't care if
it's a small amount or amassive amount.
There's so much strategy to beable to deploy.
Conrad, let's talk about number.
I think we're on number 13 ofthe 21 tax strategies right now.
But something that happens tous and you've been a CPA for how
(39:28):
many years now?
Speaker 2 (39:31):
Eight years?
Well, no, I think.
Speaker 1 (39:34):
I'm on year 11 now.
All right, how long have youbeen doing taxes for?
This was year 21.
Right, 21.
And how many times have youfound that come April 15th, you
deliver somebody's tax return tothem and they owe a whole bunch
of taxes and they're absolutelysurprised by it?
Speaker 2 (39:54):
Probably 100 times a year.
No, maybe that's too much, butI see it every single year, at
least 10 to 15 times withoutfail, and it's an easy one to
change it's so easy.
Speaker 1 (40:09):
It's all set Like.
I hate bad surprises.
Everyone hates bad surprises,right?
If I wake up one morning andyou tell me I owe a bunch more
money than I thought was coming,I'm not only going to be mad at
myself, I'm going to be mad atyou, I'm going to be mad at the
IRS.
It's going to ruin my day.
So how do you not have thesenegative surprises?
What kinds of things can we bedoing here in November and
December?
Speaker 2 (40:29):
Well, number one, just understand where your
income.
Right, if you take last year'stax return and you apply the
same increases or decreases thatyou're seeing through your pay,
where will you end up and whatwas the tax that you paid?
Right, there are some verysimple, linear things that you
can do.
You could actually we do thisfor all our clients.
We run through an actualmock-up of a 2023 return, right,
(40:53):
and I want to know if I need totell my client that they've got
a bad news coming up.
I want to tell them now, rightbefore we get to tax time, and
say oh, by the way, I know youdidn't plan for this $10,000 tax
bill, but here it is.
Anyway, you just mentionedyou're going to be pissed off at
me, at the IRS, at everyone.
So, just having anunderstanding of where you are,
(41:13):
knowing where your income'scoming from, and then checking
your withholdings right, thingslike bonuses right now, right
Under the new regime that wehave well, it was a couple of
years ago.
Bonus rates changed.
They're now a flat 22%withholding.
Speaker 1 (41:28):
Well, if you're in the 37% bracket, you're going to
be quite surprised at tax timeright, and David and I deal with
that with clients withrestricted stock units all the
time, because the statutorywithholding rate is 22% for
people under a million and wecan't tell you how many times we
meet with clients that are in a35% bracket and there's a 13%
(41:49):
under withholding and that is abig surprise come tax time for
them, which is why, to yourpoint, we do pro forma estimated
tax payments throughout theyear so that there are no
surprises come April 15.
That's right.
Speaker 2 (42:03):
Yeah, and for other people, business owners you're
supposed to be making estimatedtax payments, and if you haven't
been doing that, be prepared,right, you might want to set
aside a large chunk.
And for business owners, youhave to factor in not just
income tax but self-employmenttax, right, which is the same.
We'll call both sides of FICA,right?
(42:24):
It is the same thing.
It's about 15% on businessincome.
That could equate to a largenumber, and if you haven't
planned for it, you're in for abig surprise.
Speaker 1 (42:34):
Well, and depending on what type of business you own
.
David, you brought thisstrategy to one of our clients
in California, where weconverted his LLC to an S-corp
so that he could take advantageof, in California, this pass
through entity tax, and it savedhim what?
$300,000 a year of federal tax,$250,000, something like that,
no, $360,000.
(42:55):
$360,000.
Okay, I was close, I wastracking it.
Well, what is that pass throughentity tax If we have
self-employed individualslistening and maybe they're
eligible, like in South Carolina?
We opted in for this as wellfor our business income at
Allyson.
Speaker 4 (43:10):
Well, so the pass through entity tax.
We could do a whole episode onthis.
And there's when they did theTax Cut and Jobs Act, they
restricted the tax deduction forfederal purposes on your
Schedule A to $10,000.
So if you earn one of thosehigher tax brackets, you have a
(43:31):
restriction on what you candeduct.
Now what they did is they setup the pass-through entity tax
at the state level.
So if you own a pass-throughentity, such as a business or a
partnership, you could pay thetax at the entity level or
through the business and takethe deduction, which then will
essentially flow through to yourpersonal return.
So again, I'm simplifying it alot, but it allows you to take a
(43:54):
state tax deduction on yourfederal return if you run it
through a business and as aself-employed individual, you
could create something like asingle member LLC and then elect
to have it come taxed as anS-Corporation, which allows you
to make that transaction.
So again, very simplified.
Definitely speak to an advisorif you're looking at enacting
(44:15):
any of these, but it's a reallypowerful strategy, especially if
you have a business that isproducing a lot of income.
Speaker 1 (44:23):
Yeah, definitely Hundreds of thousands of dollars
of taxes saved for our clientson that.
So, moving on, another kind ofcheck the box If you have this
as an option, if you're workingand your 401k plan allows,
there's a concept called a megabackdoor Roth.
It's like the big brother tothe backdoor Roth Conrad opened
up this session talking about,but it's where your 401k might
(44:44):
allow you to contribute, aftertax, money into your 401k and
then do an in-plan conversion.
And so we have some clientsthat are getting an additional
30, 40, $50,000 a year into aRoth account, even though
they're very high income earning, and so I did a YouTube video
on that.
It's on our YouTube channel.
(45:05):
You can check it out.
Charitable giving optimizationAgain, consider cash donations
to charity or explore thebenefits of a donor advice fund
for strategic tax deductions.
So maybe you're only giving$5,000 or $6,000 a year to
charity, but you want toconsistently do that, and if
(45:27):
you're taking the standarddeduction, you're getting no tax
break for that charity.
Charitable contribution so oneway that you can actually get a
tax benefit is to bundle four orfive, six years of that
charitable contribution into onelump sum, into a thing called a
donor advice fund, which islike a family account for you to
(45:51):
do charitable giving through.
You could take a appreciatedstock.
Let's say you bought a stockfor $10 and now it's worth $100
a share and you put that in adonor advice fund.
When we sell the stock in thedonor advice fund, there's no
capital gains tax due.
So, number one, you just save$90 per share of capital gain.
(46:12):
And then, number two, you get afull deduction of the fair
market value, which is one ofthe most lucrative tax benefits,
because it's not getting adeduction for what you paid for
the stock, it's getting adeduction for the fair market
value of the stock which isappreciated.
Now there's some limits, likeyou can donate up to 30% of your
(46:35):
adjusted gross income.
But if you have any charitableintent, appreciated securities,
donor advice funds are such abig thing you need to look at.
Speaker 2 (46:45):
Yeah, it's such a no brainer.
Now, have you guys seen orutilized the strategy with your
clients where you may havesomebody that has the
ex-exercised options and thestock goes through the roots?
Speaker 1 (46:58):
Right, yeah, that client that we were just talking
about, I think.
What did we do?
Eight or nine million in hisdonor advice fund, because he
has a big charitable intent andhe's going to use that money to
be able to really do a lot ofgood with charities.
In addition, it saved him ahuge tax benefit.
But you're exactly right,conrad, this is probably a whole
(47:19):
nother episode as well.
But for property owners, right,people who have rentals,
commercial real estate, thingslike that, what is cost
segregation?
If you had to summarize it inone minute, Cost segregation.
Speaker 2 (47:32):
If I had to summarize it, I would say cost, seg or
cost segregation is reallytaking something that you buy.
Think about buying a vehicle,right, and you buy the whole
vehicle for one price, but allits components are treated
differently.
Same thing with a piece ofproperty.
You may buy a house for$100,000, but the stove is not
(47:55):
the same depreciable asset as ahouse.
And so what professionals dohere is go in and they say well,
that stove should be $500 ofthe $100,000 purchase and we're
going to depreciate that overseven years or five years.
So it's a way to basicallybreak apart smaller pieces of
(48:16):
the pie and accelerate thedepreciation for better
reduction of income early in theprocess.
Speaker 1 (48:24):
So depreciation is basically saying here's what we
paid for this building and it'snot an appreciating asset, it's
a depreciating asset and sowe're going to get an allowance
each and every year to offsetour income by what it's
depreciating by.
And if I buy the whole building, then let's say that what's the
traditional depreciationschedule of a building, for
(48:47):
example?
Speaker 2 (48:48):
For a commercial building.
Speaker 1 (48:49):
it's 39 years, so it's going to take me 39 years
to depreciate this and recoupall the expense and get the full
tax benefit.
But cost segregation might say,okay, well, the building is
that, but what about the lightbulbs, what about the different
components that are inside ofthat building?
And if we can accelerate thosequicker, we can bundle that tax
(49:13):
savings quicker.
So again, something we can do awhole nother episode on, but
something to take a look at.
If you own real estate, ifyou've experienced a large
capital gain, there are thingscalled qualified opportunity
zones you could look at.
Investing in.
These give you the ability todefer that capital gain into the
(49:33):
future and realize some taxbenefits.
Qualified opportunity zones aredesignated by the government,
usually in determining zones ofthe country that they are trying
to incentivize investment into,and they give you some tax
benefits to do that.
David mentioned earlier, justfinishing up our checklist here,
(49:55):
that there's a $10,000 cap onstate and local tax deduction.
That's salt deduction.
So if you're under that let'ssay your total tax is equal
$7,000, maybe you have theability to prepay next year's
payments.
So instead of waiting toJanuary, maybe you pay part of
(50:16):
it in December and again, you'rea cash basis payer, so it's
based on when you paid it, notwhen it was due.
And then the last two here are.
There's always opportunity againfor more affluent clients to
potentially strategically giftto children.
The exemption is $17,000 perspouse.
(50:38):
So we have some clients thatare gifting highly appreciated
stock to their kids.
Husband and wife can do $17,000each.
That's $34,000.
Maybe the kids are going tohold that stock for five or 10
years, but when they sell itthey're going to be in a lower
tax bracket than mom and dadwere in.
So there's some considerationsand trade-offs because, of
(51:01):
course, if mom and dad held thestock and then passed away, the
kids would get a step up inbasis.
There's also kiddie tax rulesthat we need to navigate, but
something that we do commonly.
And then, last but not least,closing out here, your required
minimum distribution.
If you're of RMD age, make sureyou take that RMD before
(51:22):
December 31st, because it is asubstantial penalty for missing
it.
If you have an inherited IRA,you probably need to take an RMD
as well.
So whether you're of RMD age oryou've inherited an IRA, make
sure you've taken that.
And if you're over age 70 and ahalf and you have charitable
(51:44):
intent, you could actuallyeliminate the tax on that RMD by
doing something called aqualified charitable
distribution, which is where youhave that RMD essentially get
sent right to a charity and youdon't have to report it on your
tax return, assuming you followthe right rules.
And so those are our Court 21.
(52:04):
Again, a huge amount ofopportunity.
These are things that we gothrough a checklist towards the
end of the year and make surewe're delivering for our clients
at Allison Wealth, and I'lltell you, even if you just do
two, three, four of these, itcan lead to massively better
wealth outcomes.
And so, conrad David, thanksfor dropping a ton of knowledge
(52:26):
on all your years of experienceon tax management and tax
planning and tax preparation andthe investment side.
Any closing thoughts as we wrapup another episode?
Speaker 4 (52:37):
I would just say that I love to do this and love to
talk about all these end of taxyears.
So if anybody wants to spendmore than an hour with us, we're
always happy to have you andchat with you.
Speaker 2 (52:48):
Yeah, I agree with David on that and I want
everybody to understand.
Well, we have 21 items here.
These aren't the only 21 itemswe talk about, but you also
should not expect to do all 21items every year.
I think that's the.
What I like to tell my clientsis tax planning and tax
reduction strategy is nothitting a home run.
(53:11):
It's hitting a lot of singlesover long periods of time, right
?
So if you're left by a thousandcuts and if I can save you $100
here or $200 there, those doadd up tremendously without
being high risk or having to beso burdensome along the way.
So you know, if you can reduceby 5% your tax bill, you're in a
(53:32):
good place.
Speaker 1 (53:33):
Yeah, would you rather keep the money for you
and your family or have it go tothe IRS?
I always say there's two typesof taxes.
There's avoidable taxes andunavoidable taxes.
Unavoidable ones are the thingsthat we're talking about here,
the unavoidable ones.
If you don't pay those, you getto retire in an orange jumpsuit
, and that's not where we wantto be.
So again, check out, subscribeto our YouTube page, follow us,
(53:55):
continue to follow the podcast.
Hopefully you found thisinformative.
Reach out to us, go to AlisonWealth.
You can access and contact anyof us on there.
And thank you, fellas.
Appreciate it.
Speaker 2 (54:05):
Thanks, Dave.
Thanks.
Speaker 4 (54:06):
Dave.
Thanks everyone, Thank you.
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
Ridiculous History
History is beautiful, brutal and, often, ridiculous. Join Ben Bowlin and Noel Brown as they dive into some of the weirdest stories from across the span of human civilization in Ridiculous History, a podcast by iHeartRadio.