March 7, 2025 • 25 mins
Unlock the secrets to smarter tax planning with insights from Daniel, founder of Bookkeeping for Painters, and Richard, our advising director. Understanding tax strategies might just be your ticket to financial growth. Discover how tax deferral isn't just about postponing payments—it's a pathway to reinvestment and future financial success. From income deferral and expense acceleration to maximizing retirement plans and using 1031 exchanges in real estate, we break down how these strategies harness the time value of money to boost your financial potential.
But that's not all! Explore innovative tax reduction tactics, such as maximizing deductions, choosing between itemizing and standard deductions, and even creative methods like income splitting and the gift and lease back technique. Learn how to leverage tax-efficient investing through HSAs and Roth IRAs without delaying your tax responsibilities. We also illuminate the power of tax credits, like the child tax credit, in reducing your tax burden. Our conversation highlights the importance of strategic planning and consulting with knowledgeable tax planners to craft personalized tax plans. Engage with us and share your tax journey on our Facebook page, "Grow Your Painting Business.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
This is Daniel, the founder of Bookkeeping for
Painters.
Speaker 2 (00:03):
And this is Richard, the advising director.
How's it going, Daniel?
Speaker 1 (00:07):
It's going well, I can't complain.
It's middle of January.
It's super busy for us rightnow.
I mean this is prime time foraccounting firms, so we are busy
, but it's going well, bring outa lot of new folks and
(00:27):
delivering value, so enjoying it.
Speaker 2 (00:30):
Awesome.
Yeah, it's definitely the timeof year where people start to
think about 2024 is over.
How are we going to make 2025even better?
And it's never too early in theyear to kind of start thinking
about your tax situation.
And are there things that I cando to pay less tax than I did
(00:51):
previously?
I thought we could have a goodtime to talk about the different
types of tax strategies and howeach one works and how some are
better than others.
I know you know, generally wekind of think about like well,
aren't all tax strategiescreated equal?
The answer is actually no.
(01:13):
They can be very different andtheir benefits can be very
different.
However, they do tend to fallin like one of three categories.
So I kind of think of it as,like you know, good, better or
best.
You know, any tax strategy thatsaves you money and aligns with
, like, your values is good, butif you can kind of emphasize
(01:35):
the ones that move the needleeven more, that's a great place
to start.
So, you know, just kind ofjumping into it.
We've got tax deferral, that Iwould consider to be good.
We have tax reduction, which Ithink is even better, and then
we've got the gold standard taxcredits, which I think are best.
(01:56):
So when we're talking about taxdeferral, this is the one that
kind of gets a bad rap.
Sometimes there's a little bitof misunderstanding around how
this works and if it even isbeneficial at all.
But that's basically postponingyour taxes to a later date.
To put an analogy on it, it'skicking the can down the road.
(02:21):
It does not remove the taxes,but it does delay you from
having to pay them, and that canbe a benefit.
It's not being irresponsible tokick the can down the road.
I kind of like the analogy moreof like planting a tree you
plant it now, you monitor it andthen you have benefits later on
(02:45):
.
So some examples of taxdeferral One that we've talked
about a lot on our podcast isincome deferral, and that is
where, if you're a cash basistaxpayer, you might wait until
next year to collect on some ofyour invoices for work that's
(03:06):
been done in November orDecember and that way you don't
have to recognize that incomeand pay taxes on that money
until the following year.
That's deferring those taxes.
Side of that is expenseacceleration, where again in
(03:27):
December, you're looking at whatare you planning on buying in
January and February and seeingif you can't make those
purchases now, before the yearis over, and get that tax break
now, and then you would pay thetaxes on that income the
following year.
You're pulling it forward.
Another one that folks arefamiliar with is 401k and
(03:50):
traditional IRA retirementaccounts.
We're taking money that wouldnormally be taxed, we're putting
it away for the future.
We're getting a tax break onthat money.
It's going to grow and thenwe'll pay the taxes on it when
we pull it out in retirement.
So the first strategy deferstaxes for maybe 12 months.
(04:12):
This strategy delays taxesuntil we're at least 59 and a
half, possibly even older.
You might even be able to keepit deferred until you're 72 when
required minimum distributionskick in, and we'll kind of
mention that later on.
You know another type ofdeferral strategy has to do with
(04:34):
holding assets long term.
So if you've got stocks thathave appreciated and grown, you
know that you don't have to paytaxes on that appreciation until
you go to sell it.
So depending on your investmentstrategy, you might hold on to
those stocks for a while andthen not have to pay taxes until
(04:55):
you sell.
The way we do this type of thingin real estate is with a 1031
exchange, and that's where yousell a piece of property and, as
long as you follow the rulesand buy another piece of
property that's very similar tothe one you just sold, you don't
have to pay those capital gainstax.
(05:16):
You're deferring them, and youcan keep doing this until
eventually you sell the propertyand you don't buy a new one.
So those are just some examplesof tax deferral.
There are other ones, but whywould we even bother with this
right?
Why kick the can?
Well, it has to do with, like,there's this economic concept of
(05:37):
the time value of money, andthat's just a, you know, a geeky
way of saying that money youreceive today is more valuable
than the same amount of moneyreceived in the future, and the
reason for that is because moneyis an asset that can be
deployed to earn you more money.
(05:59):
So if you have to choose betweengiving your cash to the IRS now
or keeping your cash, lettingit go to work for you for a
while, and then giving it to theIRS, there's benefit in being
able to keep your cash forlonger.
Some of the ways that you mightbe able to leverage that is,
you could reinvest that cashback into your business and grow
(06:23):
your business before having topay those taxes.
Maybe you put it into aretirement account.
We know that there are maximumamounts that we can contribute
to IRAs 401ks each year and ifwe don't hit that maximum in a
year, that opportunity is goneforever.
(06:44):
So if we need to defer sometaxes to have enough cash so
that we can max out our IRA,that could be worth doing that
so that we don't lose out onthat opportunity.
Or just very simply, maybe wetake that cash and we put it
into a high yield savingsaccount.
I'll hold on to it, I'llcollect some interest on it and
(07:07):
then I'll give it to Uncle Sam.
That's something that we do alot with our tax planning, where
we understand what theestimated payments are going to
be and we talk about what is theminimum that has to be paid
versus what the actual taxliability is going to be, and so
our clients are able to decidedo I want to pay everything to
(07:30):
the IRS now, or do I want tojust pay the minimum, hold back
the remainder in a high-yieldsavings account and then pay it
only when I have to, usually onApril 15th of the following year
?
Now just some not downsides, butthings to be careful about when
(07:52):
you are deferring taxes to thefuture.
We don't know what the taxrates are going to be in the
future.
We've seen tax rates come downwith the Tax Cuts and Jobs Act
and there was a lot of you knowpolitical will right now to keep
those tax rates low.
But could Congress change thetax rates to a higher bracket in
(08:14):
the future?
Well, anything's possible, sothat is a risk that you take.
Additionally, you might beearning more income in the
future than you are now, and ifthat's the case, you could be in
a higher tax bracket.
So we want to take that intoconsideration.
And then, when it comes to our401ks and traditional IRAs, we
(08:36):
mentioned deferring taxes untilyou're 72.
Well, that's when thoserequired minimum distributions
or the dreaded RMD kicks in andthe government forces you to
take that money out and pay thetaxes on it.
So just be prepared for that.
What's your tax bracket goingto be at 72?
(08:56):
Are you living in a state withan income tax?
Or maybe you're retired andyou're in Florida or Texas where
there is no state tax tax?
Or maybe you're retired andyou're in Florida or Texas where
there is no state tax.
Or perhaps, if you're verywealthy, you can avoid taxes on
those RMDs by donating thatmoney to charity.
There's tax planningopportunities there, but we just
want to be aware thateventually we will have to pay
(09:19):
the piper.
So just have a plan in placefor when that happens the piper.
So just have a plan in placefor when that happens.
So, moving on to our silvermetal here, or better, this is
reducing taxes, and I think thisis what most people think of
when they think of taxstrategies, and this is exactly
(09:40):
what it sounds like.
This means reducing the amountof taxable income or lowering
your effective tax rate.
So we're not kicking the candown the road anymore.
Now we're actually bringing ourtax liability down.
This is mostly done through taxdeductions and exclusions.
So some examples of that Well,you're a business owner If
(10:05):
you're listening to this podcast, you're probably a business
owner.
You're very familiar with IRCsection 162 that you can exclude
from your income expenses thatare necessary and ordinary for
your business.
So we want to maximize ourbusiness deductions.
We want to track that mileage,keep those receipts, have good
(10:27):
records and books so that we'renot leaving any tax deductions
on the table.
Another way we can finddeductions is in either
itemizing versus standarddeduction.
When it comes to our personaltax return, this has gotten a
little bit more difficult inrecent years, but if you have a
(10:48):
very high mortgage interestexpense or you make large
donations to charity or maybeyou have very high medical bills
, it might make more sense foryou to itemize your deductions
versus the standard deduction.
So you'd want to have your taxprofessional run that both ways
to see which is going to be moreadvantageous.
(11:12):
Another way to reduce tax isthrough tax-efficient investing.
So one of my favorite things isthe HSA, the health savings
account.
You can put up to $8,300 in.
Actually it's higher now Ithink it's $8,500 for 2025.
You can put that in for yourfamily.
That money goes in tax free andit grows tax free.
(11:35):
So that's not a deferral,that's an actual reduction of
your tax, reduction of your tax.
An HSA is kind of similar to aRoth IRA, except a Roth is very
long-term.
We're not taking money out of aRoth until we retire, but when
we do take it, that money isgoing to be completely tax-free
(12:00):
the growth and the interest onthat.
Another way to reduce taxes andthis is one that doesn't get
talked about as much, but it's areally cool strategy has to do
with income splitting, and thisis where you take your income
that would normally be taxed atyour higher rate income that
(12:25):
would normally be taxed at yourhigher rate and you transfer it
to a family member who has alower tax bracket.
So you might do this by hiringyour kids to work in your
business and now you're payingthem.
If they're making less than$14,000 a year, they're going to
pay zero federal tax.
If you live in a state with anincome tax, that threshold might
be a little bit lower, so justkeep an eye on that.
(12:47):
But if you're in a 35% taxbracket and you're shifting that
to your children at close tozero, there's some serious
savings there.
Another way you might shiftincome is through a gift and
lease back strategy.
You have to have the rightcircumstances for this, but it's
basically where you would giftan asset to someone who has a
(13:13):
lower tax bracket and then youwould lease that asset in your
business so that the income isgoing to your family member in
the low tax bracket instead ofbeing in your higher tax bracket
.
So that could be a way too.
Just some tips on this.
We want to keep good records.
(13:33):
That's tip number one.
If you know, if we ever get,we're going to be required to
substantiate all of thesedeductions, so make sure that we
have the receipts and thebookkeeping to back these up.
We want to maybe think about amI missing any deductions?
Am I getting my home officededuction if I'm running my
business out of my home?
(13:54):
Am I getting the full autodeduction because I'm tracking
my mileage and I understand thedifference between actual
expenses and the standarddeduction and I'm taking the
right one?
You know we really want to kindof tailor these strategies
towards our financial goals.
So conversation to have withyour tax professional for sure,
(14:17):
am I getting all my deductionsor am I maybe leaving some of
these tax breaks on the table?
So that's reducing taxes.
That's our better of the three.
Now let's talk about the goldstandard, and this is by far the
best.
This is tax credits.
This is where the governmentreduces your tax dollar for
(14:41):
dollar, and in some cases theywill actually pay you through
tax credits.
We have what we call refundableand non-refundable credits.
So a refundable credit is where,if you reduce your taxes to
(15:01):
zero and you still have taxcredit on your return, the IRS
will send you a check.
Non-refundable credits willreduce your tax down to zero,
but once it gets there, anythingthat's not used kind of
disappears, so they won't besending you a refund.
Some examples of tax creditsone of the most popular ones is
(15:22):
the child tax credit.
That's worth $2,000 forchildren who are under 17, who
you provide support for and livein your home for at least six
months out of the year.
I'm going to say, forsimplicity's sake, I'm going to
say that's a refundable creditbecause you can get that $2,000
sent back to you if you don'thave enough tax to absorb it.
(15:46):
Technically speaking, theybreak it out into different
areas, but it's okay to thinkabout it, you know, simply as
being refundable.
I just don't want to get anycomments.
You know that that, uh,technically, child tax credit's
not refundable yeah, people aregonna be pissed if you say that
yeah, only the accountants.
Um, yeah, the people getting themoney are cool with it yeah,
(16:10):
child tax credit is one of myfavorite ones.
Speaker 1 (16:12):
I mean, that's, I got four kids at this point and
just trying to rack up thosecredits.
You know, that's the mainmotivation of having all these
kids there's.
There's a country I can'tremember.
I was trying to look it up realquick.
They actually, if you have,like I think it's four or five
kids, you basically you don'thave to pay taxes anymore.
(16:33):
It's like once you get to thatlevel of that many kids, you're
like you don't have to pay taxesanymore.
It's like once you get to thatlevel of that many kids, you're
like you don't even have to uh,worry about taxes.
So so I'm crossing my favoritefingers that uh, that's where
the us starts moving yeah, well,I think is that the brady bunch
bill where um you have to um,yeah, you know.
Speaker 2 (16:56):
We've seen that the child tax credit increase.
It was a thousand dollars.
The Tax Cuts and Jobs Act uppedit to two thousand.
We saw it temporarily increasedduring COVID all the way as
high as thirty six hundred, andthere has been some.
Now it has gone back down totwo thousand.
There has been some.
Now it has gone back down to$2,000.
(17:17):
There has been some, you know,talk about moving it back up to
$3,000 or $3,600 on a permanentbasis.
Those bills have not yet passedCongress, so we'll have to see.
Maybe it will become even morevaluable.
You know, another credit thatkind of gets missed sometimes
are education credits, and soyou know, when your children
(17:40):
turn 17, you don't get the full$2,000 anymore, but if they're
going to college, they couldqualify for the American
Opportunity Credit or theLifetime Learning Credit, and
these are different credits thatboth apply to, you know,
educational expenses and theycan both be used.
(18:01):
So the American OpportunityCredit is usually the better of
the two, so we want to hit thatone first.
That can only be used for fouryears, though, and once that's
used up, we might be looking atthe lifetime learning credit or
the tuition interest deduction,which is not a tax credit, it's
(18:21):
a deduction that falls into thesecond category, but if it's
available, you want to take thattoo.
One that's been popular isenergy credits for like solar
panels and energy efficient homeimprovements.
Even folks who do not want toput solar panels on their own
home have been able to, you know, invest in solar property and
(18:47):
benefit from these credits.
That's kind of a high endstrategy.
There are funds that will helpyou do that, but the government
will basically help you pay forabout 30% of the cost of putting
solar panels on your roof.
That one's been around for alittle while.
It might not last forever.
So if you're interested ingoing green with solar, I would
(19:12):
go ahead and act on that soonerrather than later.
And then another popular one isthe earned income tax credit,
and this applies specifically tolow and moderate income workers
.
It's basically an incentive tohave W-2 wages even though
you're a lower income earner,even though you're a lower
(19:34):
income earner, and the amount ofthe credit you get as a reward
for working increases dependingon your family size.
So that's a nice thing to helpkind of pull people out of
poverty who are working andtrying to do what they can.
(19:55):
It's also a very abused credit,so just be careful that you
really do apply.
Did you qualify for that?
So I mean, tax credits aresuper powerful, right, we call
them the gold standard becausethey are a dollar for dollar
reduction of your tax.
A $1,000 tax credit is $1,000in your pocket, whereas a $1,000
tax deduction would be whateveryour marginal rate is.
(20:17):
So, say, 22% times 1,000, soabout $220 in your pocket.
So when discussing these things, kind of understand what the
numbers mean and how it actuallyis going to affect your bank
account.
(20:41):
To affect your bank account, taxcredits are also a very
powerful way for, you know,society to incentivize behaviors
that somebody feels isimportant.
You know, at some point wedecided that we need to have
more citizens in this country.
We want people to have children, to have more citizens in this
country.
We want people to have children, and so we incentivize that
behavior with child tax credit.
(21:01):
You know, some politiciansbelieve that we need to have
more solar panels or electricvehicles, and so they're
incentivizing those behaviorswith tax credits.
And if those types of thingsalign with your values and goals
, then you should take advantageof those credits.
However, if it does not makesense for you to say buy an
(21:26):
electric vehicle, then youshouldn't worry about it, you
shouldn't feel guilty about notdoing it.
The credit is there for thosewho can benefit from it.
Uh, but I guess my point withthis is, you know, don't let the
tax tail wag the dog.
Do what's right for yourbusiness and what aligns with
(21:46):
your values.
Uh, and if there's a credit tobe had, great, and if not,
that's okay too.
Speaker 1 (21:55):
So, and if you uh it's, the country is hungry, so
I had to look it up if you havefour more babies in hungary, you
have, you'll pay no income taxfor life.
So that's my, uh, that's my newquest to move to hungary, my
kids and not pay taxes for life.
So you could always do that.
(22:16):
That's one bold tax strategythat just solves it all.
Speaker 2 (22:21):
Yeah, as long as you don't have any US source income,
right.
Speaker 1 (22:24):
Yeah, you have to renounce your US citizenship.
Speaker 2 (22:28):
Yeah.
Now, if that aligns with yourvalues and goals, Daniel, I
think you should do that.
Yeah, I'm just kidding.
No, I'm just kidding.
No, I'm just kidding.
Um interesting.
So it's four kids in hungary,no taxes yeah, four.
Speaker 1 (22:43):
If you have four more babies hungry, you don't pay
taxes for life.
Apparently all these europeancountries in japan they're not
having kids anymore and they'rejust basically societies are
going to start collapsing overthere because they're not having
any kids.
Speaker 2 (23:04):
Well, I think that's a really powerful example of how
governments will use taxes toincentivize behavior.
I know I've mentioned it before.
We think about taxes arenecessary to fund the government
.
In a way they are, but I think,more importantly, taxes are
used to incentivize behavior.
So just kind of understand whysome of these decisions are
(23:28):
being made and then you can makethe decisions that are good for
you.
So we discussed three differenttax strategy types Tax deferral
, which is good, especially ifyou have a long-term plan.
Tax reduction, which is evenbetter because you're getting
immediate benefits making thosetaxes disappear.
(23:49):
And then tax credits, which isthe best, because now the
government is paying you.
Understanding how thesedifferent types of strategies
work will allow you to craft aplan that meets your goals.
It will allow you to betterutilize these strategies if you
(24:12):
understand how they're going tohelp you, and it will kind of
allow you to prioritize whichones you want to implement first
, will kind of allow you toprioritize which ones you want
to implement first.
So, that being said, Idefinitely suggest that you
consult with a tax planner whoreally understands these things
and knows not just like thethree categories, but also all
the tax strategies that fit intothese categories.
You know we pull from arepertoire of over 75 different
(24:36):
tax strategies when we'reworking with our clients, trying
to find which ones are reallygoing to give them the most
benefit and which ones fit intotheir goals and lifestyle.
So having that conversationwith your tax professional is
really important.
If you have any questions or ifyou'd like to suggest tax
(24:57):
strategies that work really wellfor you, we would love to get
your feedback.
You can go to our Facebook page.
It's called Grow, your PaintingBusiness, and we would love to
hear what you have to say.
But otherwise, you know Iappreciate everybody listening
to this episode.
I hope you find lots of taxbreaks for 2025 and we will see
(25:19):
you on the next episode.
This is Daniel, the founder of Bookkeeping for
Painters.
Speaker 2 (00:03):
And this is Richard, the advising director.
How's it going, Daniel?
Speaker 1 (00:07):
It's going well, I can't complain.
It's middle of January.
It's super busy for us rightnow.
I mean this is prime time foraccounting firms, so we are busy
, but it's going well, bring outa lot of new folks and
(00:27):
delivering value, so enjoying it.
Speaker 2 (00:30):
Awesome.
Yeah, it's definitely the timeof year where people start to
think about 2024 is over.
How are we going to make 2025even better?
And it's never too early in theyear to kind of start thinking
about your tax situation.
And are there things that I cando to pay less tax than I did
(00:51):
previously?
I thought we could have a goodtime to talk about the different
types of tax strategies and howeach one works and how some are
better than others.
I know you know, generally wekind of think about like well,
aren't all tax strategiescreated equal?
The answer is actually no.
(01:13):
They can be very different andtheir benefits can be very
different.
However, they do tend to fallin like one of three categories.
So I kind of think of it as,like you know, good, better or
best.
You know, any tax strategy thatsaves you money and aligns with
, like, your values is good, butif you can kind of emphasize
(01:35):
the ones that move the needleeven more, that's a great place
to start.
So, you know, just kind ofjumping into it.
We've got tax deferral, that Iwould consider to be good.
We have tax reduction, which Ithink is even better, and then
we've got the gold standard taxcredits, which I think are best.
(01:56):
So when we're talking about taxdeferral, this is the one that
kind of gets a bad rap.
Sometimes there's a little bitof misunderstanding around how
this works and if it even isbeneficial at all.
But that's basically postponingyour taxes to a later date.
To put an analogy on it, it'skicking the can down the road.
(02:21):
It does not remove the taxes,but it does delay you from
having to pay them, and that canbe a benefit.
It's not being irresponsible tokick the can down the road.
I kind of like the analogy moreof like planting a tree you
plant it now, you monitor it andthen you have benefits later on
(02:45):
.
So some examples of taxdeferral One that we've talked
about a lot on our podcast isincome deferral, and that is
where, if you're a cash basistaxpayer, you might wait until
next year to collect on some ofyour invoices for work that's
(03:06):
been done in November orDecember and that way you don't
have to recognize that incomeand pay taxes on that money
until the following year.
That's deferring those taxes.
Side of that is expenseacceleration, where again in
(03:27):
December, you're looking at whatare you planning on buying in
January and February and seeingif you can't make those
purchases now, before the yearis over, and get that tax break
now, and then you would pay thetaxes on that income the
following year.
You're pulling it forward.
Another one that folks arefamiliar with is 401k and
(03:50):
traditional IRA retirementaccounts.
We're taking money that wouldnormally be taxed, we're putting
it away for the future.
We're getting a tax break onthat money.
It's going to grow and thenwe'll pay the taxes on it when
we pull it out in retirement.
So the first strategy deferstaxes for maybe 12 months.
(04:12):
This strategy delays taxesuntil we're at least 59 and a
half, possibly even older.
You might even be able to keepit deferred until you're 72 when
required minimum distributionskick in, and we'll kind of
mention that later on.
You know another type ofdeferral strategy has to do with
(04:34):
holding assets long term.
So if you've got stocks thathave appreciated and grown, you
know that you don't have to paytaxes on that appreciation until
you go to sell it.
So depending on your investmentstrategy, you might hold on to
those stocks for a while andthen not have to pay taxes until
(04:55):
you sell.
The way we do this type of thingin real estate is with a 1031
exchange, and that's where yousell a piece of property and, as
long as you follow the rulesand buy another piece of
property that's very similar tothe one you just sold, you don't
have to pay those capital gainstax.
(05:16):
You're deferring them, and youcan keep doing this until
eventually you sell the propertyand you don't buy a new one.
So those are just some examplesof tax deferral.
There are other ones, but whywould we even bother with this
right?
Why kick the can?
Well, it has to do with, like,there's this economic concept of
(05:37):
the time value of money, andthat's just a, you know, a geeky
way of saying that money youreceive today is more valuable
than the same amount of moneyreceived in the future, and the
reason for that is because moneyis an asset that can be
deployed to earn you more money.
(05:59):
So if you have to choose betweengiving your cash to the IRS now
or keeping your cash, lettingit go to work for you for a
while, and then giving it to theIRS, there's benefit in being
able to keep your cash forlonger.
Some of the ways that you mightbe able to leverage that is,
you could reinvest that cashback into your business and grow
(06:23):
your business before having topay those taxes.
Maybe you put it into aretirement account.
We know that there are maximumamounts that we can contribute
to IRAs 401ks each year and ifwe don't hit that maximum in a
year, that opportunity is goneforever.
(06:44):
So if we need to defer sometaxes to have enough cash so
that we can max out our IRA,that could be worth doing that
so that we don't lose out onthat opportunity.
Or just very simply, maybe wetake that cash and we put it
into a high yield savingsaccount.
I'll hold on to it, I'llcollect some interest on it and
(07:07):
then I'll give it to Uncle Sam.
That's something that we do alot with our tax planning, where
we understand what theestimated payments are going to
be and we talk about what is theminimum that has to be paid
versus what the actual taxliability is going to be, and so
our clients are able to decidedo I want to pay everything to
(07:30):
the IRS now, or do I want tojust pay the minimum, hold back
the remainder in a high-yieldsavings account and then pay it
only when I have to, usually onApril 15th of the following year
?
Now just some not downsides, butthings to be careful about when
(07:52):
you are deferring taxes to thefuture.
We don't know what the taxrates are going to be in the
future.
We've seen tax rates come downwith the Tax Cuts and Jobs Act
and there was a lot of you knowpolitical will right now to keep
those tax rates low.
But could Congress change thetax rates to a higher bracket in
(08:14):
the future?
Well, anything's possible, sothat is a risk that you take.
Additionally, you might beearning more income in the
future than you are now, and ifthat's the case, you could be in
a higher tax bracket.
So we want to take that intoconsideration.
And then, when it comes to our401ks and traditional IRAs, we
(08:36):
mentioned deferring taxes untilyou're 72.
Well, that's when thoserequired minimum distributions
or the dreaded RMD kicks in andthe government forces you to
take that money out and pay thetaxes on it.
So just be prepared for that.
What's your tax bracket goingto be at 72?
(08:56):
Are you living in a state withan income tax?
Or maybe you're retired andyou're in Florida or Texas where
there is no state tax tax?
Or maybe you're retired andyou're in Florida or Texas where
there is no state tax.
Or perhaps, if you're verywealthy, you can avoid taxes on
those RMDs by donating thatmoney to charity.
There's tax planningopportunities there, but we just
want to be aware thateventually we will have to pay
(09:19):
the piper.
So just have a plan in placefor when that happens the piper.
So just have a plan in placefor when that happens.
So, moving on to our silvermetal here, or better, this is
reducing taxes, and I think thisis what most people think of
when they think of taxstrategies, and this is exactly
(09:40):
what it sounds like.
This means reducing the amountof taxable income or lowering
your effective tax rate.
So we're not kicking the candown the road anymore.
Now we're actually bringing ourtax liability down.
This is mostly done through taxdeductions and exclusions.
So some examples of that Well,you're a business owner If
(10:05):
you're listening to this podcast, you're probably a business
owner.
You're very familiar with IRCsection 162 that you can exclude
from your income expenses thatare necessary and ordinary for
your business.
So we want to maximize ourbusiness deductions.
We want to track that mileage,keep those receipts, have good
(10:27):
records and books so that we'renot leaving any tax deductions
on the table.
Another way we can finddeductions is in either
itemizing versus standarddeduction.
When it comes to our personaltax return, this has gotten a
little bit more difficult inrecent years, but if you have a
(10:48):
very high mortgage interestexpense or you make large
donations to charity or maybeyou have very high medical bills
, it might make more sense foryou to itemize your deductions
versus the standard deduction.
So you'd want to have your taxprofessional run that both ways
to see which is going to be moreadvantageous.
(11:12):
Another way to reduce tax isthrough tax-efficient investing.
So one of my favorite things isthe HSA, the health savings
account.
You can put up to $8,300 in.
Actually it's higher now Ithink it's $8,500 for 2025.
You can put that in for yourfamily.
That money goes in tax free andit grows tax free.
(11:35):
So that's not a deferral,that's an actual reduction of
your tax, reduction of your tax.
An HSA is kind of similar to aRoth IRA, except a Roth is very
long-term.
We're not taking money out of aRoth until we retire, but when
we do take it, that money isgoing to be completely tax-free
(12:00):
the growth and the interest onthat.
Another way to reduce taxes andthis is one that doesn't get
talked about as much, but it's areally cool strategy has to do
with income splitting, and thisis where you take your income
that would normally be taxed atyour higher rate income that
(12:25):
would normally be taxed at yourhigher rate and you transfer it
to a family member who has alower tax bracket.
So you might do this by hiringyour kids to work in your
business and now you're payingthem.
If they're making less than$14,000 a year, they're going to
pay zero federal tax.
If you live in a state with anincome tax, that threshold might
be a little bit lower, so justkeep an eye on that.
(12:47):
But if you're in a 35% taxbracket and you're shifting that
to your children at close tozero, there's some serious
savings there.
Another way you might shiftincome is through a gift and
lease back strategy.
You have to have the rightcircumstances for this, but it's
basically where you would giftan asset to someone who has a
(13:13):
lower tax bracket and then youwould lease that asset in your
business so that the income isgoing to your family member in
the low tax bracket instead ofbeing in your higher tax bracket
.
So that could be a way too.
Just some tips on this.
We want to keep good records.
(13:33):
That's tip number one.
If you know, if we ever get,we're going to be required to
substantiate all of thesedeductions, so make sure that we
have the receipts and thebookkeeping to back these up.
We want to maybe think about amI missing any deductions?
Am I getting my home officededuction if I'm running my
business out of my home?
(13:54):
Am I getting the full autodeduction because I'm tracking
my mileage and I understand thedifference between actual
expenses and the standarddeduction and I'm taking the
right one?
You know we really want to kindof tailor these strategies
towards our financial goals.
So conversation to have withyour tax professional for sure,
(14:17):
am I getting all my deductionsor am I maybe leaving some of
these tax breaks on the table?
So that's reducing taxes.
That's our better of the three.
Now let's talk about the goldstandard, and this is by far the
best.
This is tax credits.
This is where the governmentreduces your tax dollar for
(14:41):
dollar, and in some cases theywill actually pay you through
tax credits.
We have what we call refundableand non-refundable credits.
So a refundable credit is where,if you reduce your taxes to
(15:01):
zero and you still have taxcredit on your return, the IRS
will send you a check.
Non-refundable credits willreduce your tax down to zero,
but once it gets there, anythingthat's not used kind of
disappears, so they won't besending you a refund.
Some examples of tax creditsone of the most popular ones is
(15:22):
the child tax credit.
That's worth $2,000 forchildren who are under 17, who
you provide support for and livein your home for at least six
months out of the year.
I'm going to say, forsimplicity's sake, I'm going to
say that's a refundable creditbecause you can get that $2,000
sent back to you if you don'thave enough tax to absorb it.
(15:46):
Technically speaking, theybreak it out into different
areas, but it's okay to thinkabout it, you know, simply as
being refundable.
I just don't want to get anycomments.
You know that that, uh,technically, child tax credit's
not refundable yeah, people aregonna be pissed if you say that
yeah, only the accountants.
Um, yeah, the people getting themoney are cool with it yeah,
(16:10):
child tax credit is one of myfavorite ones.
Speaker 1 (16:12):
I mean, that's, I got four kids at this point and
just trying to rack up thosecredits.
You know, that's the mainmotivation of having all these
kids there's.
There's a country I can'tremember.
I was trying to look it up realquick.
They actually, if you have,like I think it's four or five
kids, you basically you don'thave to pay taxes anymore.
(16:33):
It's like once you get to thatlevel of that many kids, you're
like you don't have to pay taxesanymore.
It's like once you get to thatlevel of that many kids, you're
like you don't even have to uh,worry about taxes.
So so I'm crossing my favoritefingers that uh, that's where
the us starts moving yeah, well,I think is that the brady bunch
bill where um you have to um,yeah, you know.
Speaker 2 (16:56):
We've seen that the child tax credit increase.
It was a thousand dollars.
The Tax Cuts and Jobs Act uppedit to two thousand.
We saw it temporarily increasedduring COVID all the way as
high as thirty six hundred, andthere has been some.
Now it has gone back down totwo thousand.
There has been some.
Now it has gone back down to$2,000.
(17:17):
There has been some, you know,talk about moving it back up to
$3,000 or $3,600 on a permanentbasis.
Those bills have not yet passedCongress, so we'll have to see.
Maybe it will become even morevaluable.
You know, another credit thatkind of gets missed sometimes
are education credits, and soyou know, when your children
(17:40):
turn 17, you don't get the full$2,000 anymore, but if they're
going to college, they couldqualify for the American
Opportunity Credit or theLifetime Learning Credit, and
these are different credits thatboth apply to, you know,
educational expenses and theycan both be used.
(18:01):
So the American OpportunityCredit is usually the better of
the two, so we want to hit thatone first.
That can only be used for fouryears, though, and once that's
used up, we might be looking atthe lifetime learning credit or
the tuition interest deduction,which is not a tax credit, it's
(18:21):
a deduction that falls into thesecond category, but if it's
available, you want to take thattoo.
One that's been popular isenergy credits for like solar
panels and energy efficient homeimprovements.
Even folks who do not want toput solar panels on their own
home have been able to, you know, invest in solar property and
(18:47):
benefit from these credits.
That's kind of a high endstrategy.
There are funds that will helpyou do that, but the government
will basically help you pay forabout 30% of the cost of putting
solar panels on your roof.
That one's been around for alittle while.
It might not last forever.
So if you're interested ingoing green with solar, I would
(19:12):
go ahead and act on that soonerrather than later.
And then another popular one isthe earned income tax credit,
and this applies specifically tolow and moderate income workers
.
It's basically an incentive tohave W-2 wages even though
you're a lower income earner,even though you're a lower
(19:34):
income earner, and the amount ofthe credit you get as a reward
for working increases dependingon your family size.
So that's a nice thing to helpkind of pull people out of
poverty who are working andtrying to do what they can.
(19:55):
It's also a very abused credit,so just be careful that you
really do apply.
Did you qualify for that?
So I mean, tax credits aresuper powerful, right, we call
them the gold standard becausethey are a dollar for dollar
reduction of your tax.
A $1,000 tax credit is $1,000in your pocket, whereas a $1,000
tax deduction would be whateveryour marginal rate is.
(20:17):
So, say, 22% times 1,000, soabout $220 in your pocket.
So when discussing these things, kind of understand what the
numbers mean and how it actuallyis going to affect your bank
account.
(20:41):
To affect your bank account, taxcredits are also a very
powerful way for, you know,society to incentivize behaviors
that somebody feels isimportant.
You know, at some point wedecided that we need to have
more citizens in this country.
We want people to have children, to have more citizens in this
country.
We want people to have children, and so we incentivize that
behavior with child tax credit.
(21:01):
You know, some politiciansbelieve that we need to have
more solar panels or electricvehicles, and so they're
incentivizing those behaviorswith tax credits.
And if those types of thingsalign with your values and goals
, then you should take advantageof those credits.
However, if it does not makesense for you to say buy an
(21:26):
electric vehicle, then youshouldn't worry about it, you
shouldn't feel guilty about notdoing it.
The credit is there for thosewho can benefit from it.
Uh, but I guess my point withthis is, you know, don't let the
tax tail wag the dog.
Do what's right for yourbusiness and what aligns with
(21:46):
your values.
Uh, and if there's a credit tobe had, great, and if not,
that's okay too.
Speaker 1 (21:55):
So, and if you uh it's, the country is hungry, so
I had to look it up if you havefour more babies in hungary, you
have, you'll pay no income taxfor life.
So that's my, uh, that's my newquest to move to hungary, my
kids and not pay taxes for life.
So you could always do that.
(22:16):
That's one bold tax strategythat just solves it all.
Speaker 2 (22:21):
Yeah, as long as you don't have any US source income,
right.
Speaker 1 (22:24):
Yeah, you have to renounce your US citizenship.
Speaker 2 (22:28):
Yeah.
Now, if that aligns with yourvalues and goals, Daniel, I
think you should do that.
Yeah, I'm just kidding.
No, I'm just kidding.
No, I'm just kidding.
Um interesting.
So it's four kids in hungary,no taxes yeah, four.
Speaker 1 (22:43):
If you have four more babies hungry, you don't pay
taxes for life.
Apparently all these europeancountries in japan they're not
having kids anymore and they'rejust basically societies are
going to start collapsing overthere because they're not having
any kids.
Speaker 2 (23:04):
Well, I think that's a really powerful example of how
governments will use taxes toincentivize behavior.
I know I've mentioned it before.
We think about taxes arenecessary to fund the government
.
In a way they are, but I think,more importantly, taxes are
used to incentivize behavior.
So just kind of understand whysome of these decisions are
(23:28):
being made and then you can makethe decisions that are good for
you.
So we discussed three differenttax strategy types Tax deferral
, which is good, especially ifyou have a long-term plan.
Tax reduction, which is evenbetter because you're getting
immediate benefits making thosetaxes disappear.
(23:49):
And then tax credits, which isthe best, because now the
government is paying you.
Understanding how thesedifferent types of strategies
work will allow you to craft aplan that meets your goals.
It will allow you to betterutilize these strategies if you
(24:12):
understand how they're going tohelp you, and it will kind of
allow you to prioritize whichones you want to implement first
, will kind of allow you toprioritize which ones you want
to implement first.
So, that being said, Idefinitely suggest that you
consult with a tax planner whoreally understands these things
and knows not just like thethree categories, but also all
the tax strategies that fit intothese categories.
You know we pull from arepertoire of over 75 different
(24:36):
tax strategies when we'reworking with our clients, trying
to find which ones are reallygoing to give them the most
benefit and which ones fit intotheir goals and lifestyle.
So having that conversationwith your tax professional is
really important.
If you have any questions or ifyou'd like to suggest tax
(24:57):
strategies that work really wellfor you, we would love to get
your feedback.
You can go to our Facebook page.
It's called Grow, your PaintingBusiness, and we would love to
hear what you have to say.
But otherwise, you know Iappreciate everybody listening
to this episode.
I hope you find lots of taxbreaks for 2025 and we will see
(25:19):
you on the next episode.
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