Episode 44: Act Now To Receive Year-End Tax Benefits

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This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show where we're always discovering how to make way more money and pay way less taxes. Hi, this is your host Tom Wheelwright, founder and CEO of WealthAbility®. Are you leaving money on the table as the clock runs out? Today, you're going to discover five things that you can do to minimize this year's taxes in the next few weeks. These are things that you must do now. You can't wait. You have to do it right now and the very first thing you have to do is sit down with your tax advisor. Okay? Make sure, first of all, that your tax advisor and your tax preparer should be the same person.

 

You should know who this is. If it isn't, make sure that you sit down with somebody who really understands the tax law in the next few weeks. Because here's what's going to happen, you don't know. Unless you're an employee with a W2 and you don't have any other income, you really don't know what your tax liability is for this year. I mean if you have investments in real estate or oil and gas or you have investments in the stock market outside of your 401(k) or you have alimony or you have any kind of business whatsoever, you probably don't know without sitting down with your accountant where you stand.

 

And how can you ever do planning? How can you ever take action if you don't know where you stand? It may turn out, for example, we have a number of clients that came to us this year and said, I don't know exactly where our numbers are. I think we're going to be okay. And it turned out that they had a much better year than they expected. So we had to actively plan to reduce their taxes. So the very first step that you must take is to sit down with your accountant right away. Because remember we've got holidays coming up. Some accountants actually closed their office.

 

This is beyond my understanding, but some accounts actually closed their office the last week of the year. I'm going, how do you help your clients if your office is closed? I know where all open. I know that are members of the WealthAbility® Network are open. So please, please, please call your accountant and sit down and do a calculation so that you know where you are. You may find out that you're fine. Great. You've spent a few dollars on fees to be able to sleep at night. That's pretty good deal right there. You may however find out that you have an opportunity to reduce your taxes.

Now, you may also find out that you have an opportunity to reduce next year's taxes this year. And maybe that you've had such a year that you really need to pick up more income this year. I've seen that happen multiple times over my career where we did year end planning and we came up with a number and it looked like they were going to lose their itemized deductions, they were going to lose their standard deduction. They were going to lose tax benefits if they didn't bring in more income this year. So we're always thinking about how to reduce this year's taxes. What about reducing next year's taxes?

 

So all of this happens when you sit down with your tax advisor, your tax prepare over the next few weeks. Number two, if you're in a situation where your income is too high, in other words, you're paying taxes that you'd rather not pay, you might want to consider prepaying some expenses. Now for sure, you can prepaid January expenses, for example, your January mortgage, you can prepay that. Okay. So that interest deduction comes now. Let's say you've got alimony due on the first of the month, pay it on the 31st. This may be the only time you pay your alimony early, but pay it early.

 

You might have other expenses. I'll tell you what. We actually have clients who prepay their tax preparation expenses. All right. So prepay whatever expenses that you know you're going to have in the next few months. Now, I mean, I'd think long and hard before prepaying something that was a year out. But prepay any expenses that you think that you might have in the next few months. And some people have big expenses beginning of the year. They might have annual dues, they might have other things that are legitimate business expenses and they're going, wow.

 

In fact, I have a client I'm working with right now and their income is actually higher than I had any idea it was going to be until now. We're prepaying $300,000 of expenses. Now these are legitimate expenses that are just prepaid. Those are January expenses. These aren't two years from now expenses. You don't want to do that. But prepaying January expenses, absolutely. So look long and hard at are there expenses that are deductible expenses. Remember there are a lot of things that aren't deductible anymore. Investment expenses, no longer deductible, taxes.

 

So we used to prepay state income taxes, but for many of you, between your state income taxes that have been withheld, your estimated payment taxes and your real estate taxes, you're already way over the $10,000 tax limitation. So you don't need to pay that state income tax this year. Wait until it's due in January. Most state estimated payments are not due until January 15th. Wait until January 15th. It's not going to do you any good this year if you're already over the $10,000 limit. So when you're looking at prepaying these expenses, does it help me this year?

 

If it doesn't, don't prepay it. So this is again why you sit down with your accountant and again, I'm not trying to drum up business. I'm legitimately trying to get you to sit down with your accountant because I see too many people who get surprises in March, April, and then they're upset with their accountant. I'm going, don't be upset with your accountant if they offered to bring you in for a year end planning and you chose not to do it. Or if you heard this podcast and you chose not to do year end planning. Okay. Call your account now.

 

Accountants should be doing this affirmatively, but not all accounts do that. So remember, taxes are primarily your responsibility. It's not your accountant's responsibility. Okay. I'm not relieving your accountants of any responsibility. I'm just saying that while a great accountant will always be proactive with you, that doesn't mean that you can't just be proactive with them. My best clients are proactive with me. So take the time, sit down with your accountant and look at should I prepay or should I not prepay. On the flip side of that is income.

 

Should I, do I, if I have a choice of receiving income until next year. Now this is a little touchy with the IRS because if you truly have the choice, it's income this year. In other words, you constructively received that income. For example, you cannot wait to deposit checks until next until January. You can't do that. If you have the checks, they're taxable. So let's not try to fudge the numbers here. Okay. On the other hand, let's say that somebody, you decide, am I going to close on this deal in on December 31st or January 1st? Close January 1st.

 

Okay. If that makes a big difference in your taxes. Okay? On the other hand, you might say, look, I want to close as soon as possible just because I want the money. And I think that's absolutely cash in hand is way better than tax benefits. Cash in hand is always better than tax benefits. So whether it's prepaying expenses, deferring income, that's all part of the same thing. Now most accountants will tell you those. What are some things accountants don't always tell you? What about this last couple of years have been really good in the stock market.

 

A lot of you are very charitable minded and I have great respect and admiration for that. So you're thinking about next year's donations. Let's say you have had a really good year this year, and I have a lot of clients who've had a really good year this year. Maybe you want to donate appreciated stock now and you can prepay all of your charitable donations because that's not really a prepayment. That's just donating earlier. And so the rules for prepaying expenses are completely different than the rules for making a charitable donation.

 

Charitable donations are always deductible the day you make them. Now, here's the great thing about stock donations. Remember, if you sold that stock, that highly appreciated stock, you would have capital gain and then you would get a deduction for the amount of cash that you gave to the charity, which would be less than you would only you would otherwise give because you had to pay tax on that capital gain. Well, what if you just gave them the stock? Now, if this is publicly traded stock that the charity is going to be happy to take your publicly traded stock because what are they going to do?

 

They're going to turn around and sell it the next day and guess what? They won't pay tax and you'll get a deduction for the entire value of that stock on the day you donate it. So donating highly appreciated stock is a really good idea at this time of year if you're going to donate anyway. Don't do it just for tax purposes. Do it for the charitable purpose. If you have had an especially good year, you might want to consider making next year's donations this year, if you've got the cash on hand and especially if you can do it in appreciates stock.

 

Now what if you don't have appreciated stock? What if you have appreciated real estate? You can actually donate appreciated real estate. Now for that you need some serious tax advice. I'm just telling you that you can donate any appreciated asset and there are certain charitable organizations typically called donor advised funds that allow you to donate appreciated real estate without giving up control of the real estate. You can donate without giving up control. Once again, you can donate without giving up control. So that's where again, sit down with your tax advisor and go through is their stock I should donate.

 

You hopefully have kept track of your basis in your stock. If not, your accountant has. If not, your broker has. Okay. Which stocks should I donate? You can donate it and then buy it back the next day. I mean you absolutely can donate it and buy it back the next day. So don't be afraid of donating assets that have gone up in value. Number four. Number four is, and this is very hard for me to say. There are times under this new tax law, there are times when maxing out a self directed 401(k) or a defined benefit pension plan is going to be important for you.

 

Okay? And I know I'm not a big fan of qualified plans, government controlled plans. I'm not a big fan of it. There are times though, when it makes total sense, both from a tax standpoint and investment standpoint. Let's say, for example, that you invest in the stock market. Well, why not use it? Why not invest in the stock market through a qualified plan? I mean, you're at least going to defer the tax and if it's a Roth, you're going to avoid the tax on the gains. So why not do that? If you're trading stocks, if you're investing in the stock market, if you're investing in loans, you're lending money, you're doing hard money lending or some other type of lending, those are the times when a qualified plan makes sense.

 

So let's think about maxing that out. But here's the thing, you have to set up the plan before the end of the year. You can't wait for a few weeks and set it up even though you don't actually have to put the money in until next year. Did you get that? You don't have to put the money in until next year. You have to set up the plan this year. So it's very important that you're taking the time to set up the plan. Now, here's another reason that you might want to do this. Let's say that you're in the professional services industry like I am. All right.

 

And you could set up a 401(k). You could do a self directed 401(k). You could do a defined benefit plan because you're the only employee. Guess what? You might be able to get your income down enough to get below that limit, that $315,000 limit for married and or 157,500 for single people that allows you to take the 20% deduction. So let's say that you put, let's say you're at $415,000 and you put $100,000 into a defined benefit plan, which you can do by a certain age. You can put $100,000 in. So you put $100,000 in, now you're at 315,000, now you get another $63,000 deduction.

 

So for putting $100,000 in, that's your money, you get $163,000 deduction. Now I think that's a good deal, and that's one of those deals where if I'm going to invest the money in the stock market or some other type of portfolio income anyway, I'm absolutely want to consider that. Or let's say I'm only a year or two away from retirement. Okay? Let's say I'm a year or two away from that, and I'm going to be selling my business or delivering my business to my children or something like that. And I'm not going to be in business.

 

I'm not going to get this 20% deduction after the next couple of years. So why not maximize that now? So for those of you who are in professional services, healthcare services, financial services, legal services, consulting services, all of these, all of these qualify once you get down below that threshold. You pick up that extra 20% deduction. So very important to be considering how do you get your income down so that you can get the 20% deduction. Remember, you get the 20% deduction, not only on your business income, you also get on your real estate income.

 

So that 20%, that's like only paying tax on 80%. That's why that is. So you want to make sure that when you're sitting down to your accountant and you're going, what can I do to maximize my deduction? Now this is another case where prepaying some expenses, there are some things we can do. For example, there's a limit on the 20% deduction. You're limited to fit to an amount equal to 50% of the wages. Well, maybe you need to pay yourself wages. Maybe you need to pay yourself wages. So even though you've got social security tax on those wages, that deduction, the 20% deduction may be worth more than the cost for the wages.

 

So these are the types of things. Again, this is why you don't just try to do this yourself. You sit down with your tax advisor. If you own a business or you're a serious investor, you must have a good tax advisor and you must sit down with them before year end because these are the types of things you're going to go through. How do I maximize my 20% deduction? Should I convert to a C corporation? Should I convert to a C corporation? Maybe I could do that as of the first of the year. If I have an LLC that's taxed as a partnership, should I convert that to an S corporation?

 

I can do that before the end of the year that even though, and I can make it retroactive to the first of the year. So there are things we can do and setting up that pension plan, those qualified plans. By the way, those have to be done by December 31st and time's running out and you know that the pension and 401(k) people, they are busy right now, so get in front of them right now. Next, a lot of you have children who have done work for you or they could model for you or they could do something else for you. Pay your kids. If you're a business owner, for heaven sakes, your child, each one of your children has a $12,000 standard deduction.

 

$12,000 that is tax free, so pay them out of your business for legitimate work that they're doing or legitimate work they've done. They may have done a bunch of work during the year. Go back and document it and you never paid them for it or you paid them a small amount. Maybe they deserve a bonus and maybe they really do deserve a bonus. Okay. Again, this is something that ideally is done throughout the year. I'm just saying that if you haven't done it, if you haven't taken advantage of this amazing tax benefit for business owners that the government is telling you that they want you to do, the government gives you all sorts of incentives to do this, just make sure it's a legitimate amount.

 

Make sure that it's well documented. When you do that, you're going to end up with a deduction that your tax rate. Let's say you're in a 30% tax rate, $12,000 is worth $3,600 to you. Are you going to leave that on the table? Are you only $3,600 on the table when all it takes is writing a check to your child for work that they've legitimately done during the year? Why would you do that? Let's say you want to prepay them for January, February, and March services. Prepay them for those services, get them involved in your business now, make sure that you take the deduction now and the next year we can keep doing this.

 

Okay? Now eventually you want to catch up so that it's actually even so you're not prepaying all the time. But at the same time, look what you can do if you just spend the time to think about where am I today and do I need to accelerate expenses? Do I need to take more expenses? And there are hundreds and hundreds of expenses. What if you've taken … What if you actually paid expenses but you haven't documented it yet? Do that. Okay. Now, does that have to be done before the end of the year? Maybe not. Okay. But a lot of these things like setting up the qualified plan, prepaying the expenses, deferring the income, donating the highly appreciated stock, paying your children.

 

All of these, they have to be done before the end of the year. When you take the time and the effort to actually make these decisions, change your tax by changing your facts. You have a few weeks left in the year. You can reduce your taxes as long as you understand the principles that you must have a team behind you. You must have a legal team. You must have a tax team. And on top of that, you must understand that there's a number of things you can do right now to reduce your taxes that makes an immediate impact, an immediate impact and it just takes a little coordination with your accountant.

 

So with that, just remember when we do our urine planning, when we take the time, we'll spend a few professional dollars in fees, which by the way, deductible. And what's going to happen? We're going to make way more money and pay way less tax. See you next time.

 

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You've been listening to The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to WealthAbility.com.