Proactive Tax Strategies
Proactive Tax Strategies
The hosts explain the benefits of having multiple buckets to pull income from during retirement, including tax-deferred, tax-free, and taxable dollars. This approach provides flexibility and can help smooth out the tax situation.
Paul and Garrett also discuss the importance of being proactive in tax strategies and saving, even if you don't necessarily need the deductions or plan to save for the long term. By doing the legwork now, individuals can be better prepared for future tax situations and have more optionality.
- The importance of considering taxes when saving for retirement
- Benefits of having multiple buckets to pull income from during retirement
- The importance of being proactive in tax strategies and saving
- How to prepare for future tax situations and have more optionality
Thanks for tuning in. Questions about today's episode let us know.
Our Podcast – Your Investment Partners
Sit down with Paul and Garrett of Ascend Investment Partners for a bi-weekly conversation about all things financial. Focusing on helping you plan, keep, and grow for a bright future.
Transcript:
00;00;06;29 - 00;00;20;20
Speaker 1
Hello and welcome to Your investment partners with Paul and Garrett, where we talk about all things financial, focusing on helping you plan, keep and grow for a successful future. If you're new to the podcast, welcome. And if you're tuning in again, welcome back and thank you for listening.
00;00;21;20 - 00;01;06;15
Speaker 2
Hello and welcome. Cheers and vest from Partners Paul and Garrett. Today we are talking taxes. As we wrap up the tax season, it's time prepare for next year. We cover some key points to consider for retirees being proactive instead of reactive to taxes. What you can do if you're still working to maximize any benefits. If you have any questions about any of the items discussed today, please reach out by email or phone.
00;01;07;14 - 00;01;13;04
Speaker 2
My name is Garrett Smith and we look forward to having you with us today.
00;01;13;22 - 00;01;15;19
Speaker 3
Here we are in.
00;01;16;07 - 00;01;24;28
Speaker 2
Good time to be. We're recording this right after tax season now. It's always nice to have in the rearview mirror, but it's no fun for anybody.
00;01;24;29 - 00;01;27;10
Speaker 3
My least favorite time of year for sure.
00;01;27;11 - 00;01;29;24
Speaker 2
I don't know. Taxes are a root canal. Which one are you voting for?
00;01;30;28 - 00;01;32;01
Speaker 3
I think this year, root canal.
00;01;32;11 - 00;01;59;29
Speaker 2
I think you see that every year today. Let's just kind of talk about some future tax strategies. We're not not tax planners. We don't you know, we want to always incorporate your tax professional. This is not tax advice, just kind of ideas to have front of mind because there are certain things that need to be done in the calendar year, right, to make sure you're kind of maximizing the opportunity, your benefit that it's there.
00;02;00;13 - 00;02;13;01
Speaker 2
And, you know, sometimes they apply and sometimes they don't. And so I think today just kind of raise the discussion now that you have your taxes in front of you, you just got them done going through and saying, what can I do to be ready for next year?
00;02;13;02 - 00;02;29;20
Speaker 3
Right. Because it changes every year. Yeah. You know, it seems like tax law changes all the time. And, you know, there's you know, there's some sneaky deductions out there that, you know, people need to just take advantage of if they're eligible for sure.
00;02;30;01 - 00;02;53;18
Speaker 2
Yeah. And I think along with everything, you know, the first and foremost is always just keep records, more records you have the better. Yeah. You know, no, when it comes to all of these things, it's just keep track of what you're doing and loop in the professionals in your life. You know, us, your CPA, you know, make sure they're aware so they that it actually gets on the tax form from the sheet.
00;02;53;23 - 00;03;08;20
Speaker 2
You know, you can do all this work and then it gets missed, you know, amongst the, you know, hundreds of things you're you're you're doing. And so, you know, records help as well as you know, keep them kind of everything top of mind. But I think we figure let's kind of break the discussion today kind of into two different camps.
00;03;09;02 - 00;03;37;11
Speaker 2
You're talking about those who are already retired because that's a little different than those who are still working. Right. Kind of two different things usually arise. Not that things some don't apply to others, but I think to lead us off just talking about the retiree side of it. One of the biggest things that happened this year was a really large cost of living increase for Social Security, an 8.7% increase, just a massive, massive bump for Social Security benefits.
00;03;37;11 - 00;03;47;19
Speaker 3
I'm sure that's the largest there's been in since the. Yeah, but, you know, unfortunately, it probably didn't quite keep up with inflation, but it it did move the tax brackets though.
00;03;47;24 - 00;04;04;14
Speaker 2
I mean yeah that's you know more income usually means you're moving up in the tax bracket and we're kind of guessing that's going to catch a lot of people by surprise. But when they do their taxes next year because that is that is a significant increase for the most people.
00;04;04;14 - 00;04;05;04
Speaker 3
Is right.
00;04;05;18 - 00;04;16;26
Speaker 2
Is your Social Security income and and it is a good thing It's just something we need to be aware of. And so kind of at a high level, if your Social Security goes up, what should you be aware of?
00;04;17;29 - 00;04;41;02
Speaker 3
Yeah. So when your Social Security goes up, it's is just, you know, the potential as you move into another bracket and you're under withheld, you know, on the taxes they do withhold, you need to kind of check that and the the risk is is that you know your your the other thing that's happening this year is interest rates are up.
00;04;41;02 - 00;05;08;26
Speaker 3
You know, last year for part of the year, we earned a little interest. But you know, from a year ago, a year ago, interest rates at the bank were still essentially zero at this point, You know, well, they started maybe to go up about this time, but they you know, early in 2022, interest rates are zero. Now. Interest rates are you know, you can get, you know, four and a half, 5% and on just cash money.
00;05;08;26 - 00;05;36;01
Speaker 3
And so between a bump in Social Security and an increase in in interest on your emergency fund and your savings and investment accounts and things like that, I suspect that they're going to be a lot of people that are, you know, going to be moving up on their income, which is always good. But we got to be aware of it and make sure that you're planning ahead and, you know, you have the money to pay the taxes when the time comes.
00;05;36;06 - 00;05;40;04
Speaker 2
Yeah. And as you move up to more of your Social Security may become taxable as well.
00;05;40;04 - 00;05;40;18
Speaker 3
Yes.
00;05;40;28 - 00;06;01;02
Speaker 2
So that, you know, those two kind of worked together. And that's why we always advocate having multiple tax buckets in retirement. You know, you want to have some tax deferred. It's like a traditional IRA. You want to have some tax free dollars, you know, a Roth IRA or Roth 41k, and then some taxable money that's taxed in the capital gains rates.
00;06;01;02 - 00;06;26;03
Speaker 2
And that's just usually held in the name of a trust or the name of the individual. And so if you kind of can get an estimate of, okay, how much more Social Security am I getting and what's my likely additional income from higher interest rates And, you know, plug that all in and it kind of it will kind of help dictate where maybe you should take the other dollars from to help fit in and not be so surprised of a higher tax bracket.
00;06;26;03 - 00;06;28;12
Speaker 2
All things considered, it looks like we're headed that direction.
00;06;28;27 - 00;06;53;20
Speaker 3
And the other thing people can consider is should I move some of my interest earning investments into tax free investments? Because there are you know, you you buy municipal securities that are just bonds issued by state and local governments. The interest on that is excluded from from federal income tax. So it's a it's a, you know, another good time to kind of review how the math works on that.
00;06;53;20 - 00;06;55;04
Speaker 3
In your personal situation.
00;06;55;18 - 00;07;16;03
Speaker 2
And the reason why it's good to do it right now is because you can look back and say, what were my taxes? You've got all the numbers right in front of you right now because they were just done. And so you can kind of just start to build a projection going forward of, okay, if this number moves, if my ordinary income moves or if my capital gains income move, how does that impact everything else?
00;07;16;21 - 00;07;44;21
Speaker 3
Right. And for a specific example, let's just say you have $100,000 in a in just in a savings account. And and last year, your 1099 from the credit union shows while you earned 1500 dollars for the year. Well, this year it could could easily be, you know, four or $5,000 for the year. So what impact would that have on on your total income going forward, along with my extra 8% Social Security bump.
00;07;44;25 - 00;07;57;19
Speaker 3
So, you know, it'll all add up and just be aware of it. It's easier to address it now rather than try and scramble and figure out how can we fix this in December, because there's not anything you can do at that point.
00;07;58;03 - 00;08;16;26
Speaker 2
Right? Yeah. The more time you give yourself, the more options usually are available. All right. So that's why we're having this conversation now, even though taxes is probably the last thing you want to be thinking about. Yeah, I think that leads into the next step of how the next things to look at of things that you need to get done this year to be ready for next year.
00;08;17;08 - 00;08;44;17
Speaker 2
And that's obviously one of those things is if you're now in required minimum distributions days, so you've hit the age where you need to start taking distributions from from your IRAs, you've deferred long enough and it's time to take those distributions. And one thing you can do is if you have charitable intent, you can donate directly out of your IRA to a charity, a church or organization that that and kind of get some benefits that way.
00;08;44;29 - 00;08;53;23
Speaker 2
So one thing to look at is if you're looking to taken RMD this year and you have charitable intent, there are some really good things you can do before the end of the year.
00;08;54;17 - 00;09;19;00
Speaker 3
Yeah, the great thing about that is that you satisfy the government's requirement to pull money out of the account, but you're not taxed on it. And if you're itemizing your deductions, you still get a deduction for it. So it's it's like pulling money out of your IRA, not only tax free, but in a way that you can deduct from your taxes.
00;09;19;00 - 00;09;34;04
Speaker 3
The the the part that you give to charity. So that's I mean, that's a killer. That's the the best tax loophole I know of. So if you have charitable intent and you're in that age where you have to take distributions from your IRA, it's that's a no brainer.
00;09;34;15 - 00;09;54;10
Speaker 2
Yeah, definitely, definitely worth some doing before the end of the year. And that kind of leads into the next thing, that kind the last thing you look at for retirees right now is just your what I call your hurdle rate, your standard deduction versus your itemized deduction. When you have all your taxes, all your income and everything up, right?
00;09;54;14 - 00;10;19;14
Speaker 2
You can either itemize and take individual pieces and deduct against it or the standard deduction. Now, most people take the standard deductions it covers by far the majority of Americans. But it's worth looking at if you're close to that standard deduction limit, it's where sometimes doubling up your deductible things you can do in one year and then taking the standard deduction and the other year.
00;10;19;14 - 00;10;37;06
Speaker 2
So, you know, things like your charitable contributions, property taxes, medical expenses, you know, anything you kind of can get your hands on. It's worth looking. Should we take some double up on the deductions one year and then the next year take the standard deduction to just kind of maximize that benefit?
00;10;38;04 - 00;10;45;23
Speaker 3
Yeah. Yeah, that works really well. But sometimes just figuring it out is the, you know, the challenging part for sure.
00;10;45;23 - 00;11;23;26
Speaker 2
Yeah. And that's when you definitely want to have the CPA in a strong conversation with a lot of them do recommend saying, hey, you're this could be a good benefit for you, but it's just something to be made aware of. And this applies both to retirees and those who are still working because there's a lot more deductions If you have a business or if you have other sources of income and you're still working in a high tax bracket, you're looking reviewing that same hurdle rate of kind of should I itemize all my deductions or take standard deductions is one thing worth looking at as a you know, as a working theory, someone who's still in
00;11;23;26 - 00;11;25;27
Speaker 2
their income and savings year.
00;11;26;02 - 00;11;27;02
Speaker 3
Right. Yeah.
00;11;27;20 - 00;11;36;09
Speaker 2
And I think that kind of business owners some things change for for the state of Utah business owners last year some opportunities there let it you touch on that one.
00;11;36;24 - 00;12;03;03
Speaker 3
Yeah that this was can I think this is well it's really new and it's it's kind of little known when when they changed the tax law I think it was in 2008 they kind of limited the amount of deductions that you could take on the federal level. And you know, you could deduct all of the income taxes you paid to the state and your property taxes.
00;12;03;03 - 00;12;30;08
Speaker 3
And those were all fully deductible from your from your federal income tax. And they changed that and they capped that at $10,000. And so, you know, property taxes are sneaking up and it's it's not very hard for people nowadays to pay more than $10,000 to, you know, between the state of Utah or, you know, you're saving some tax where you live and your your property tax.
00;12;30;25 - 00;13;04;00
Speaker 3
And so the there's a kind of a workaround on that. If you own a business. And the way that works is you can pay from your business, pay your state income tax ahead of time. So if you think your state tax liability for the year looks like it's going to come in, let's say it's a $25,000, you know, you can you can pay that out of your business and it's a business deduction and then it flows through to your personal your personal tax.
00;13;04;00 - 00;13;10;05
Speaker 3
And so it's a way that you're able to write off your state income taxes if you do it through a business.
00;13;11;13 - 00;13;18;01
Speaker 2
Yeah. And that's just something that needs to be done before year end. Yeah. And obviously in combination with your, you know, tax professionals, I.
00;13;18;01 - 00;13;29;11
Speaker 3
Talk to the tax guy about it because this is the first year that I did it and I hope it works. But the CPA said it's that it will work so you know we'll see.
00;13;29;23 - 00;13;47;13
Speaker 2
Yeah. But one of those to be made aware of because like any tax rules, just because it was worked last year doesn't mean it'll work the next year. You know, there's always things to consider. I think some other areas to look at if you're working is to kind of review your taxes. If you have kids if you have kids in college, right.
00;13;47;13 - 00;14;13;26
Speaker 2
There's some child tax credits, child and dependent care credits, lifetime learning credits and American opportunity tax credits. They all show up on your tax returns if you're eligible, as well as if you have kids at home or if you have kids in college. You need to be reviewing what needs to be in place so that you're eligible for those and unable to claim those because they can be a really good benefit on your.
00;14;13;26 - 00;14;31;07
Speaker 2
So just be aware of those. You can see if you were able eligible for them on your tax return this year. And then you know, to just make sure you can structure things in a way that don't make you ineligible the next year or to make you eligible for for the coming year. So that's if you're working, you've got kids at home, kids in college.
00;14;31;07 - 00;14;42;00
Speaker 2
Those are some other things to do. And then I think the other one other place to look at is, is your withholdings on your income.
00;14;42;00 - 00;15;11;13
Speaker 3
Yeah, And this goes back to that idea that if you're income's going to be up this year due to extra interest income, Social Security increases, just, you know, maybe maybe look at that now and just check those withholding amounts so that, you know, I don't know the worst thing in the world when it comes to tax time is to be significantly overpaid or significa ently underpaid.
00;15;11;15 - 00;15;42;05
Speaker 3
Right. You know, I think people like to get a refund, which is fine. I'd rather pay in 2000 than or get 2000 back than pay in 2000. You know, if you're under it's always kind of a pain because you're like, Oh, where am I going to get the money? But it's just a time to kind of check the withholdings and make sure that you're on a glide path to, you know, to to get to the point where you're in the ballpark, maybe just a hair over or what you're expecting to have to pay.
00;15;42;12 - 00;16;00;26
Speaker 2
Yeah. And that, you know, that can be impacted by a number of things, kids leaving the home, you know, missing out on some different credits because of situation and changes. Maybe your income's gone up because you've gotten a raise. Maybe a spouse is working again. So it's just kind of estimating all of those and saying, what's the best rate of withholding?
00;16;01;17 - 00;16;05;17
Speaker 2
So I can have the least surprise or whatever, you know, convenient for you. Yeah. You know.
00;16;05;17 - 00;16;33;08
Speaker 3
The nice thing about it, reviewing this, when you just have recently got your taxes done, all the numbers are fresh and you can you can look at all the numbers. This is what was last year and just specifically look at each those numbers and say, okay, is this number going to change this year? Then? Yeah, we have a frame of reference of whether you're going to be your income is going to be up a little or is it going to be down a little bit or you're are your deductions going to be up or are they going to be down?
00;16;33;08 - 00;16;40;06
Speaker 3
And it just is a good time to give you a frame of reference of of, you know, what your expected change will be year over year.
00;16;40;15 - 00;16;57;21
Speaker 2
Yeah. And oftentimes there's there's surprises that show up. You know, maybe you had some stock options that vested or you were able to get those or maybe there was outside inheritance dollars or something. And so if you can kind of say there may be a chance that this is going to happen next year, that can impact all of this as well.
00;16;57;27 - 00;17;23;28
Speaker 2
You're taking your best guess around any income, surprises, good or bad? You know, sometimes it's you know, you can always ask the question of what if I lose my job, right? Then you go on your emergency fund that there's I just kind of thinking through all the scenarios that you can allows you to best prepare now and you have the most amount of time now versus you know, in December when you're saying, oh, man, this this happened and now do I do?
00;17;23;28 - 00;17;58;08
Speaker 2
Yeah. And then I think the last in a very critical area to look at if you're still working particularly if you have a business is looking the best places to save you know just because you saved in your traditional 41k last year and got the tax deduction doesn't mean it's the best place this coming year. You know, once again, taking all those places into consideration, it might be worth moving into maybe more Roth dollars or maybe doing even doing a Roth conversion because it's going to be a low income year or adding more into your taxable investment bucket.
00;17;58;08 - 00;18;21;01
Speaker 2
You want to save more, but you don't necessarily need the deductions, nor do you want to save more in the long term. You just need to prepare for something here in the next five or six years. Well, that opens up a different tax bucket to save into. So I think one thing that's well worth looking at is where's the best place to save your dollars, not only from an investment standpoint, from just bringing in the consideration of taxes.
00;18;21;01 - 00;18;32;18
Speaker 3
Sure. Yeah. If you just take a look at all those and make a conscious decision, then list your, you know, you're consciously looking at it and and trying to do the best thing for your situation.
00;18;33;16 - 00;18;56;22
Speaker 2
Yeah. And you know, we always, you know, go back to it and talk about the best thing in retirement is if you can have multiple buckets to pull income from tax deferred dollars. So those dollars that you have paid taxes on tax free dollars, Right. The Roth dollars and then as well as the taxable dollars, because they give you the most flexibility, just like what we were talking about earlier with kind of the increase in Social Security.
00;18;56;22 - 00;19;10;21
Speaker 2
Now you've got other levers in other buckets to pull from to kind of help smooth out the tax situation. And so you're better prepared for it. So this is this is the legwork right now is to get ready for that day in the future when you're going to need that optionality.
00;19;11;18 - 00;19;27;08
Speaker 3
Yeah, well, good luck with good luck with all the the tax stuff. It's just it seems like it's always on our mind and and, you know, you just got over it and now we're asking you to take a look at it again. But, you know, hopefully it'll help out your situation.
00;19;27;19 - 00;19;40;28
Speaker 2
Yeah. Bring in your professional. And obviously if you're a client, you can bring your taxes by happy to kind of help step through each one of these with you on a personal level, I just wanted to highlight some things to be prepared for now.
00;19;41;27 - 00;19;43;09
Speaker 3
Till next time. Thanks.
00;19;44;11 - 00;20;01;05
Speaker 1
Thank you for tuning in and listening to your investment partners with Paul and Garrett. If you like what you heard, be sure to subscribe to our podcast on iTunes, Spotify or wherever you get your podcasts. Also, visit us at s an investment dot com where you can subscribe to our newsletter to keep you up to date. See you in the next episode.
00;20;01;14 - 00;20;38;09
Speaker 1
Kessler Norman and Ride LLC, DBA, Ascend Investment Partners is a registered investment advisor. Advisory services are only offered to clients or prospective clients where our firm and its representatives are properly licensed or exempt from licensure. No advice may be rendered by ASCEND Investment partners unless the client service agreement is in place. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice, performance data, or recommendations that any particular security portfolio of securities transaction or investment strategy is suitable for any specific person.
00;20;38;19 - 00;21;04;01
Speaker 1
This program is only intended to provide education about the financial industry. All opinions contained in this podcast are subject to change at any time without notice to determine which, if any, investments may be appropriate for you, please consult with your financial advisor prior to investing any past performance discussed during this podcast is not guaranteed of future results. As always, please remember that all investing involves risk and possible loss.
All opinions contained in this podcast are subject to change at any time without notice to determine which, if any, investments may be appropriate for you, please consult with your financial advisor prior to investing. Any past performance discussed during this podcast is not guaranteed of future results. As always, please remember that all investing involves risk and possible loss.
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Ascend Investment Partners employees providing such comments, and should not be regarded as a description of advisory services provided by Kesler, Norman & Wride, LLC dba Ascend Investment Partners or performance returns of any Ascend Investment Partners Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Ascend Investment Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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