Your Life Simplified

No Deadline in Sight: How Often Should You Be Talking Taxes? (25:03)

November 12, 2019

Many people consider their tax situations when there is a filing deadline coming up, but the reality is, by taking a more comprehensive look at your tax plan, you can potentially improve your overall wealth plan. Ryan Drake of the Mariner Wealth Advisors tax planning and preparation group joins us to talk about common mistakes and opportunities he sees when speaking with clients. Additionally, he shares ways in which you could potentially improve your tax situation before year end.


Brian: Hello and thanks for listening to another episode of Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. In this episode, we’re going to talk about year-end tax planning, because we’re getting close to the end of the year, and we still have some time to improve our overall tax situation, which will can help improve our overall financial situation. So to join us today for some tips and tricks on how to reduce our taxes before year-end. We have Ryan Drake here and he’s a CPA at Mariner Wealth Advisors. So Ryan, thanks for being here today.

Ryan: Happy to be here. Always glad to talk about year-end planning ideas.

Brian: Always interested in saving taxes for yourself and others, I’m sure.

Ryan: Oh, absolutely.

Brian: Hey, so, first of all, congratulations. You got through a pretty lethally tax season. How you doing?

Ryan: You know, the last almost month has been really nice. I forgot what life felt like after this last year of tax reform, tax form changes, a bunch of other things. It was a brutal year for a lot of us in the industry, but I think we’re all recovering nicely.

Brian: I know you guys have been burning the midnight oil, so, clients and others appreciate all the work you guys are doing, so thank you.

Ryan, I know when you review tax returns, you’re likely going to find mistakes and opportunities. Let’s talk about some of those mistakes. What are some of the common mistakes that you saw this past tax season with folks?

Ryan: Sure. I think despite the new tax reform, some common things carried over from prior years. Just little things like whether or not a Form 2210 was filled out, which is an underpayment of estimated tax penalties. If you don’t meet certain requirements for estimated taxes, you get charged interest in penalties. So it’s one of the things I look for and is a quick way to prove and justify my fees to clients, because I can save them money just by doing what is right instead of reactionary tax planning.

Brian: Just to be clear, that’s when an individual didn’t withhold enough inside of his or her paycheck or in payroll taxes because that person owns a business. If I didn’t withhold enough on a quarterly basis, I may owe a penalty. Correct?

Ryan: That’s correct. And actually that’s a great point, because what we found last year was that almost everyone was in the wrong, the IRS when they did the payroll withholding tables, somehow something got messed up and what everyone started finding in the big nasty news articles that came out was that half of America is underpaying on their estimated taxes and everyone said, “Well I have a W2, right? I’m never underpaid.” And there was some relief that Congress passed or the IRS allowed that made up for that to a degree. People still owed the tax because it was due, but they got rid of the penalties. With underpayment of taxes and estimated taxes everyone is involved. And it is as simple as, am I getting enough of my payroll withholding done right throughout the year.

And going into 2019 that’s a wonderful thing to look for, because the payroll tables haven’t changed and the W4, which is the form you fill out when you are considering what withholding you want, hasn’t changed yet. They are talking about updating that form by the end of the year, but that will be a forward-looking change. So 2020 would be different. But if you found yourself a little surprised, let’s say with your April tax bill, and you have a W2 and a bank statement, and you’re traditionally over withheld, it’s probably a great time to actually get that most recent pay stub look at it compared to where you’re at last year to see where your withholding is falling out.

Brian: And depending on the way in which you are paid, maybe there’s some variable compensation. I mean, how often do you want to review what your withholding looks like? Just because you don’t want to owe too much, you don’t want to pay taxes, and at the same time you don’t want to give the government an interest-free loan. What do generally recommend?

Ryan: You know, that’s a great question. Pay varies based on what you do. For the typical salaried employee or hourly employee who is maybe getting a year-end bonus, I would recommend maybe in June taking a pulse and in November taking a pulse again and just seeing where you are. If you’re on a variable pay schedule, such as a commissioned- based consulting fee or receive quarterly bonuses, you would probably want to do a withholding check every quarter, let’s say, just to make sure that your increased income is being withheld on enough.

Brian: That makes sense. And that’s just, again, being proactive with your overall tax situation and that that happens to be withholding. But there are many different areas. What I find is that people who are really proactive as it relates to their investment plan, they are not proactive as it relates to their taxes. I mean they think it’s a one-time event, whether that is maybe April 14, because they have to get everything in by April 15. But the reality is, it’s more of a year-round exercise. Right?

Ryan: I would agree. I’ve had enough conversations with my friends and others through the years that I’ve really come to understand taxes are basically the financial equivalent of going to your doctor, right? Like you should go whenever you notice a change in your life, but you should really go at least once a year for your annual checkup. They might send you on the way with a clean bill of health. But that’s better than being caught unaware or surprised.

Brian: You bet. I appreciate it the analogy, that’s great. What other mistakes have you seen?

Ryan: I’ve also seen a lot of equity award-based mistakes and compensation and the subsequent disposition of those awards. It seems to be an increasing trend, which is wonderful, where employees of publicly traded companies, such as Starbucks or Comcast, have these equity awards that roll through their payroll and without getting too technical in that it triggers a tax event when they are awarded or when they vest. And then it’s a tax event when you sell. If you are preparing your own taxes or if your CPA is not paying close enough attention and just taking what the broker statement says at face value, sometimes we miss this bump up in tax bases that ran through your W2. I was just reviewing return a couple weeks ago and within probably five minutes- another quick check I do, other than the estimated tax penalties is look at capital gains. It’s as easy as, what are your proceeds? How much of a gain are you reporting? If I see something that’s doubled in value, I always try and figure out what stock it is. And then if I noticed that the stock is where that person is employed at as well. I always ask follow-up question, “Hey, was this gain from an equity award?” In some cases, it’s probably about $60,000 – $70,000 of tax savings from an amended return. That will probably take me 20 minutes to do.

Brian: That’s terrific, Ryan. I know you and I were in a meeting not too long ago with a client and there wasn’t necessarily an error in terms of the awards that they received for the company, but there was an election that your team put together as a strategy to convert some of this ordinary income to capital gains. I think that’s really interesting where you guys can recognize not only the mistakes, but the opportunity on how to further the benefit that the company’s really giving these individuals from a tax perspective.

Ryan: Sure. And I think just as a general highlight on why it’s important to be very active with your tax situation or your financial plan, it’s equally important to have everyone talking to each other. In these instances, if your advisor for wealth isn’t the same as your advisor for taxes, or you have multiple advisors in the wealth sphere and tax sphere, that every party is brought to the table annually to talk about who’s doing what, what levers are being tripped so that these things can get worked out and we don’t have, let’s say broker A selling a bunch of tax losses, and then broker B waiting until the following year to recognize gains because they think it helps out in some situation.

Brian: Yes, that, that’s an excellent point in terms of harvesting losses. If one advisor is buying X and the other advisor is buying X, you have a potential issue regarding the wash sale rules and now losses that they might not be able to deduct.

Ryan: Absolutely. It’s a very tricky sphere. What I always joke with people who talk to me about their taxes are, you know, it may look simple on a 1040, but it gets complicated really quickly.

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Brian: Ryan, thanks for touching on those. I would tell you that I think the biggest one that we generally see are or a really common question that comes from folks is effectively letting the tail wag the dog, right? So it could be, “I just don’t want to pay taxes, so I need to buy another house. I don’t want to pay taxes, so I need to invest in something that’s going to give me some massive deduction.” I think it’s important for everybody to take a step back and say, “Does this investment make sense for me and my plan?” I know that’s a common one that you guys deal with quite a bit, and advisors deal with quite a bit. So as it relates to opportunities, what should we all be thinking about right now?

Ryan: I think that for year-end planning, there are a lot of different opportunities you can look at. Traditionally it’s doing an analysis on whether I should prepay my fourth quarter estimated taxes by year and then move up that deduction. There’s a school of thought that thinks, depending on your itemized deductions, you should try and accelerate a mortgage payment to get the most out of one year’s itemized and standard deduction the next year, since the tax reform, donor-advised funds and charitable giving have continued to be items of concern. Roth conversions continued to be a very important topic, and there are a lot of reasons for that. But as we go through all of these, I think those are the biggest areas of concern. It can be anything from, should I get married this year or next year, all the way up to, should I sell my business?

Brian: How do you go about understanding what that opportunity is for each of those? So, you know, one of them you mentioned, should I prepay my mortgage? What are some of the things that we should be paying attention to?

Ryan: I approach life on a pain tolerance level. Right?

Brian: That’s a great outlook on life, by the way.

Ryan: Well, I mean, I’m jovial at times, but I’m a realist. So I approach this on a pain-level tolerance spectrum. If I go into my year-end planning and analysis, I’m going to look for the quick fixes first. And that includes, I am I at my real estate and personal property tax limits for state income tax, otherwise known as SALT on your items and deductions. If I’m under $10,000 between my state income taxes, real estate tax and property taxes, maybe I look at prepaying my real estate tax to get up to the $10,000. If I am right on the cusp of having enough mortgage interest and real estate taxes to deduct to get to an itemized deduction, and I haven’t been charitable this year, maybe I think about throwing in $1,000 just to make sure I get into that. Or I knew I was going to do $5,000 in February. Can I accelerate that into December? That way I can get the most out of my deduction.

Brian: And just to be clear for folks who are listening, you’re getting the greater of the standard deduction or itemized deductions, so that’s the game that you’re trying to play, right?

Ryan: That is correct. And so once, again, the tax reform has just changed so many things and everyone’s probably well-versed in it by now, but the standard deduction has basically doubled. It used to be fairly simple to get to an itemized deduction. If you had a mortgage, now you’re finding that with the SALT limits, the state and local income tax deductions, real estate, personal property, state income taxes with the limits on that and your mortgage interest, you’re not always going to be at the new $24,200 of standard deduction that a married filing joint couple gets. So without additional charitable deductions or investment interest expense or a few of the other ways you can itemize the deduction, a lot of America is now falling into standard deductions.

Brian: Yes, I think, I think the stats were, 90% of people now take the standard deduction, which is interesting. A couple of things you mentioned, one of them was SALT, the state and local taxes. Thinking about that, the $10,000 limitation you can have on real estate taxes. You think about the states where real estate taxes are sky-high, such as on the coasts. I know that some of these states have come back and said, we’re either trying to repeal this or trying to find a work-around, is there any update on that? Are we still subject to this limitation?

Ryan: You know, there has  been a lot of a gamesmanship is what I would say that, I won’t get into all of it, but again, gamesmanship that has been played through the last year as clever and fun as trying to establish charitable funds that you give money into and then you get an offsetting credit back for your taxes owed for real estate taxes. And it’s been very interesting. The IRS isn’t buying it. They are simply not. They have shut down a lot of those. I think the update is that we are stuck with it. Ten thousand is our max for now until Congress decides otherwise in 2026.

Brian:                  Yes, that’s, that’s actually driving a decent amount of folks from relocating out of some of these states into some of the other tax havens, if you will, from this perspective. So I know Florida has been a better beneficiary of that. A few, well-known celebrities have recently moved out of the greater New York city area into Florida, trying to improve their tax situations. Frankly, it’s a raise right away. It’s an improvement to their overall financial picture. Some of these celebrities probably don’t need those additional funds, but for others, and if anyone’s interested in that and changing your domicile, we did a podcast a few months ago on the topic if you want to go back and listen to it. One of the other things you mentioned was the Roth IRA. I think that there is a lot of misinformation as it relates to the Roth. I personally think the Roth IRA is probably one of the best, accounts you can possibly hold, so talk to us a little bit about the Roth conversion.

Ryan: A Roth conversion is more than just an IRA. It can be that or it can be a Roth 401(k) through your employer. The idea here is you’re basically saying, I have enough tax-deferred assets in my traditional IRA or traditional 401(k) account. I would like to recognize some of that income now, so it can grow tax free and come out tax free later. Your traditional 401(k) is tax-deferred growth, but tax law on distribution, your Roth accounts are tax-deferred growth but not taxable on distribution, because you tax them before you put them in the account. The conversion is a process where you look at those accounts and you say, I’m going to move $50,000 from my deferred account into my tax account into a Roth. There are some tricks that you want to do there. The basic principle is rate arbitrage. You’re trying to look at what marginal bracket you’re in and make the absolute most out of that without clipping into the next one.

Brian: It’s also plan where you think tax rates are headed. I remember the 70% tax bracket, I mean, it wasn’t that long ago that we had that, and I don’t know if we’re headed there, but, rates today are so low that most professionals suggest that they’re going to be up in the future. The reality is that taxes are effectively on sale. So to do a conversion, everyone’s situation is a little bit different, but if they believe that they’re going to be at a higher income tax bracket later on and then want the ability to legally manipulate their taxes later. We talk about diversification as it relates to investments but probably not often enough.

Do we talk about it from a tax perspective? A lot of folks over the years have put so much money in their tax-deferred accounts that when they’re forced to take these distributions out at age 72, they don’t have enough leverage at that point to manipulate their taxes. So I think the Roth IRA conversion is a great strategy, although it’s not for everybody. You’ll have to pay particular attention to what other types of accounts you already have, because there are some aggregation rules that need to be followed. And you know, there’s a lot to that.

Ryan: I agree. I would tack on a few things to that. We’re not really manipulating a situation. We’re just maximizing a situation. But with the Roth conversions, where it gets sticky is people can get lost in that, “Oh, I’m in the 12% bracket, I’ve got $30,000 to go before I clip into the next bracket, I’ll just do it.” What I always like to do is take a step back and say, Roth conversions look different in your early 60s  than they do your late 60s. In your early 60s, you might be in early retirement and have enough assets that you’re not drawing from your IRAs yet, but maybe you’re on Social Security. If you are in a fixed income situation, and you start to bump up that income level, you’re increasing your adjusted gross income and that can just get you into trouble quickly.

Suddenly what was tax free is now taxable and that takes that same 12% hit. And from a marginal to an effective tax rate, bumps it sky-high. You can also have people who own rental properties. They are wonderful investments from a tax side of life, because they are tax sheltered due to depreciation and deductions. They also have complicated rules around deducting those losses, one of which is your AGI level, or your adjusted gross income. If your adjusted gross income is too high, you can start to lose those deductions. Again, another example of, “I thought I was in bracket X,” but really that marginal rate isn’t what’s being taxed anymore, because I’m introducing more income to it.

Brian: Ryan, those are great points and this is where it’s a little bit different than just the headline of, “Oh, I should have a Roth or, this is what I should be doing right now.” It impacts, like you said, Social Security and Medicare premiums—there is a handful of “stealth” taxes, I would say, that are triggered based upon this, so I think again, you don’t have to do it all at once. Having a multi-year approach regardless as to whether you’re going to do this conversion or not is just incredibly important, because taxes are going to impact all of the areas of your overall financial plan. Hey Ryan, just to come more opportunities I made before the end of the year that we should be thinking about.

Ryan: Yes, I think that one of the items we haven’t talked about that is tremendously important is the idea of taking a qualified charitable distribution from your IRA account and those are only available when you hit age 70 ½  and get to that wonderful level of required minimum distributions (age 72 in 2020). The idea is that, instead of taking income from my IRA that I have to take as a required minimum distribution because I’m 72 (in 2020) and required to now, I can instead direct my trustee to send money directly to a charitable organization. Whether that’s my church or Big Brothers Big Sisters or any other organization I want to promote. And there are tremendous benefits to that. The first is adjusted gross income. We always want to be mindful of this number. It impacts so many things in our life, and this is a great way to manage it. The income never comes in so I don’t have to worry about my AGI going up. I also don’t have to worry about whether I’m itemizing or not, because charitable contributions are an itemized deduction. And if I don’t meet that $24,000 limit ($24,800 in 2020), then I’m not actually getting benefit from my charitable contributions. But it’s income, and it’s still funding my charitable desires.

Brian: So that is a huge point because I think people are under the impression now that when I give or I donate, I can’t take the deduction. And the reality is this is an opportunity to do just that and it has nothing to do with itemized deductions and therefore they’re able to take that deduction regardless of whether they’re taking the standard deduction or they are itemizing their deductions.

Ryan: That’s right. It’s really not even a deduction. It’s just never even income to consider. There are some important limitations. So the dollar threshold for making a qualified charitable distribution from a taxable IRA is $100,000 per individual. You are capped at that amount. Your spouse would also have their individual cap as well. There are some other stipulations. You can’t give it to a donor-advised fund. It has to be to the nonprofit organization directly. And the other thing I’d really like to touch on that I think gets overlooked is the Medicare premiums. This is a great way again, because we’re monitoring AGI that we can get benefit through our Medicare premiums and people after age 70 ½ generally have those types of things to worry about.

So I know Brian, that another area that we’ve talked about recently is the idea of gifting, you know, setting up that legacy fund to the next generation or two. I think it’d be fun to talk about what we can do by year-end to establish those gifts. One area that I always see is that people love to give money, but is money actually the best thing to give in all circumstances? What are your thoughts on that?

Brian: Yeah, most people do give cash, and I think it’s one of the worst assets to give for a variety of reasons.

Ryan: I can agree with that. I believe that giving stocks can have a large benefit. It limits your estate. It gets the appreciation into the next holder’s hands, depending on if you do dividend paying assets or interest bearing assets, that gives them not only the value of the gift, but the earnings that go along with it. Now that kind of trips into another category of an expanded Kiddie Tax realm, which is more alive today. If your child earned so much of unearned income, they have to pay their own taxes on that.

Brian: Now caveat to the cash. We talked about the difference between giving cash to a charitable organization versus children, but I do love the idea of giving cash to those children who have earned income, because if they have earned income, they are able to open up an IRA and can open up a Roth IRA, assuming that they qualify for that. To be able to supplement in some way. I don’t know a lot of young kids who just started working, who are going to want to put all of their money into a Roth IRA. And we’ve seen parents who will match a certain dollar contribution to the Roth. Obviously we all know that, if time is on your side, the earlier you can invest, the greater savings you’ll likely have later on. Putting several thousand dollars a year, even just over a 30- to 40-year period. We have folks who are retiring with maybe a $1 million in that account, depending upon how much you’re putting in and the projected rates of return. And so I do think that’s an interesting strategy. Again, it’s a way to teach kids about delayed gratification, the importance of savings, investments and things of that nature. So, I do think that’s a great strategy.

Ryan: I agree with that. I think that touches on one of the things that we value here so much and that is education, right? Any conversation I go into, I don’t just want to tell you what the diagnosis is, I don’t want to tell you what the prescription is, I want to tell you how to identify it going forward and how to learn from it or be better with it in the future. And I think this is a great point on not getting into too much parenting, but how do we raise our kids to understand what money is? Is money a tool or a toy? And if we can get them financially literate at a young age, tell them that the responsible, prudent thing to do is always get some kind of money going into a retirement account. I think it just sets them up for the future so much better.

Brian: I couldn’t agree with you more. The other strategy we see quite a bit is through philanthropy. So you mentioned donor-advised funds earlier. It’s a great way to get your kids involved in understanding of how money works. Maybe it’s a family value on why we support these organizations. Another great tip, I really appreciate it. Ryan, we’re almost out of time here today, but I want to thank you for the advice. Hopefully folks who are listening can heed some of this advice and take advantage of it with a few weeks left to go before the end of the year. So again, thanks a lot for coming in.

Ryan: Always happy to be here.

Brian: We know that your time is incredibly valuable, and we hope you find this podcast a worthwhile investment of your time. Thank you for listening.

Additional fees may apply for tax planning and preparation services.

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