Episode 28

Do I Really Have to Think About Taxes Before April?

November 1, 2022

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

Thinking about taxes isn’t the most fun thing in the world, and most people like to put off all thoughts of it until February or later. In this episode, Steven and Ben weigh in on why they think it’s so important to do your tax planning before the end of the year. Listen in to get the scoop on how you can make the best decisions for your money and goals well before the new year.

The guys will lay down the basics of what they tend to look into and go over with clients in the last quarter of the year, as well as the interesting decisions and opportunities that pop up when it comes to Roth conversions, end-of-year spending, and more. Sit down and be sure to take notes on the pitfalls and potential goals to keep in mind and plan for!


What You’ll Learn In Today’s Episode:

  • Why end-of-year planning is so useful and when to do it.
  • Where the real opportunities lie when it comes to “tax season.”
  • Why you want to get as close as you can to forecasting your needs and planning distributions.
  • What you need to look into to ensure you have all bases covered.
  • Where you can really come out ahead when it comes to taxes.
  • Changes to filing status and understanding your options.
  • The best time to find a tax preparer.
  • What to ask to find the right tax preparer.
Ideas Worth Sharing:

“I love doing this end-of-year planning because, not only can we get as close as we can to the goals we’re setting for ourselves income-wise and tax-wise, but it also sparks some really interesting conversations when we say you should do x-amount in Roth conversions or you should spend it because it’s the same tax-wise.” –  Benjamin Brandt

“People think about taxes and they think about February, March, April. For tax preparers, yes, that’s a very busy time of year, but for the most part, that means our opportunity to do something about taxes has passed.” – Steven Jarvis

“The more we can guide our income and guide our investment withdrawals and say, ‘we’re going to keep it within these marginal brackets,’ the more we can sand the rough edges off the biggest bill we have to pay, which is our income taxes.” – Benjamin Brandt

Resources In Today’s Episode:
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Read The Transcript Below:

Benjamin Brandt:         Welcome back to the Retirement Tax Podcast. I’m your humble co-host as always, Benjamin Brandt, and joining me as always, the lovely Steven Jarvis. How you doing Steve?

Steven Jarvis:     I’m doing really well, Ben. Thanks for having me again.

Benjamin Brandt:         Boy, we’re getting close to the end of the year now, and at end of the year is an exciting time in our office. We do what’s called surge appointments and so, we meet with all of our clients.

In a perfect world, if time was — and the calendar was not any kind of a construct, we’d meet with every single client like on December 30th so we could get as close as we humanly could to like the most accurate tax projections possible.

And I really love doing these year-end tax projections. Now, of course, because we can’t do that and who wants to meet with me at midnight on December 30th, we do those between like October 15th and the day before Thanksgiving.

And then that allows us to do all the trading, rebalancing paperwork, all the stuff that comes after that with the team.

So, I love doing this year-end planning because not only can we get as close as we can to whatever targets we’re setting for ourselves income-wise and tax-wise, it also sparks some really interesting conversations when you approach a client and say, “We should do X amount of Roth conversion or you should spend it because it’s the same tax-wise.” And then the conversations that come out of that.

Yeah, we’ve made a lot of really fun gifts to family and bought a few RVs and Bass boats as well, but it’s always fun the conversations that spark out of year in tax playing. So, it’s one of my favorite times of the year. Do you share the same sentiment, Steven?

Steven Jarvis:     Yeah, I love this time of year because it’s not what people traditionally think of as tax season. I mean, especially with my CPA background, people think about taxes and they think about February, March, April.

And for tax preparers, yes, that is a very busy time of year, but for the most part, that means our opportunity to do something about taxes has passed. So, I love that you intentionally have yours that surge cycle in that October-November timeframe. As this is getting aired, we’re right in the middle of it.

So, whether you work with an advisor or not, this is an important time of year to be thinking about these things because there are a lot of opportunities that run out once the calendar turns over into 2023. And so, that’s what we want to talk about today, is some of those things that we should be thinking about right now.

And Ben, you already started kind of mentioning some of those things that come out of your client meetings. What are other things that you’re going to have on the agenda for your clients that you’re working with in this October-November timeframe as they look forward to the end of the year from a tax perspective?

Benjamin Brandt:         Well, we want to be cognizant of any pitfalls. If we’re getting close to IRMAA, if we’re going to do something with our capital gains that our income isn’t too high — we sent out maybe an income goal when we met with our clients in the spring and how close are we to that?

What levels of life happened between the spring and the fall that maybe we need to adjust our plan to accommodate for. So, we look at a client’s portfolio as untapped potential and we want to tap as much potential as we possibly can, but we know that there’s a silent partner in most of our IRAs and investments. We call him or her Uncle Sugar and we got to pay. We got to wet the government’s beak a little bit.

So, we say that that’s fine, we’re not anti-taxes, but the more that we can guide our income and guide our investment withdrawals to say we’re going to keep it within these certain marginal brackets, I think we can sand the rough edges off the biggest bill we’ll have to pay, which is our income taxes.

So, we’re trying to forecast as closely as we can. There is some guesswork involved with the capital gains, and your furnace could explode on December 31st, and we’d have to take money out. Some of those things are out of our control.

We’re trying to get as close as we can. You may have heard the saying, Steven, there’s close enough only counts with horseshoes and hand grenades. I think it also counts with retirement plan distributions; horseshoes, hand grenades, and taking money out of your IRA. Close enough is usually where we want to be.

Steven Jarvis:     Well, as we’re recording this, my daughter just started seventh grade today, and so I know when I was in middle school, and I’ll never tell her this, but it was horseshoes, hand grenades and slow dancing because well, we were middle school boys and we thought that was funny.

Benjamin Brandt:         Oh, so this is funny. I went to a little private Christian school. We did not have prom, we had junior-senior banquet because you cannot do any dancing. But when I went to church camp and there was dancing, they would have a ruler and they would say, “Leave room for the Holy Spirit.”

Steven Jarvis:     That’s perfect. There’s a tax advice that everyone needed. Leave room for the IRS. So, as we’re getting to this time of year and we’re thinking about, okay, what does this mean? What do we need to be looking at?

Ben’s giving some great examples there. We also want to make sure we’re not skipping the basics. Obviously, we talk about that on the podcast a lot, of just making sure we have all these different areas covered.

So, one of the things I’m always looking at is, hey, did we have any life changes this year? Did we retire? Did we start a side business? Was there death in the family? Does our dependence status change?

Whatever that might be, but there’s a lot of things that can come up during the year that would make our otherwise consistent tax situation suddenly different.

And so, again, we want to be thinking about these kind of things and talking about these kind of things before the calendar year turns over so that if there are decisions we need to make, we can go ahead and do that.

Benjamin Brandt:         Because so much of the tax year it’s game over when that calendar flips over from 2022 to 2023. So, if we’re thinking about this a month or six weeks ahead of time, it’s all the more likely that we can make these choices and make these changes before that window closes.

Now, when we talk about tax time, typically being in March or April, there are some things where we can go back to the previous year and look at. We can fund IRAs, we can fund Roth IRAs and call that a previous year contribution.

But many, many things, especially in the world of retirement planning, when that window closes in December 31st, your tax year is sealed up and that’s what our health insurance premiums are going to be based on for the next year or two.

There are so many things that were strictly calendar year locked off. So, we want to give ourselves a month or six weeks to look out and say, “What can we take advantage of? What do we need to avoid?”

Even looking beyond December 31st and saying there’s been situations where clients say, “I need to make a big down payment, or I need a bunch of cash within the next 90 days.”

Well, the end of the year is a wonderful time to have that conversation because if you need $30,000. Taking $30,000 out of your IRA is one thing. Taking $15,000 out in December and $15,000 out in January can make a really big difference as to how much income taxes you can pay.

So, when we’re modeling out in our tax software with clients, one, we want to try to get as close to tax what’s actually going to happen as possible. So, there’s no surprises.

But then also the conversations that come along with that are really valuable because then those are all planning opportunities that we can help deliver massive value so.

Steven Jarvis:     That’s a great reminder that really where we can come out ahead on taxes is when we look more than one year at a time. There are things we need to take care of every year, but where we can really come out ahead and not tip the IRS is by looking at those multiple years.

Benjamin Brandt:         That’s our number one advantage. I’m actually recording some content this week. I’ve either heard of that from you or from your brother, but our number one advantage over the IRS is that we’ve got 30 years to pay these taxes. We can pay it all at once, we can pay it over a number of years. We can do whatever we feel like doing.

But the IRS is really going to look at year by year. So, our number one advantage over the IRS is that we can kind of modify our income. We can take it out of our IRA, earn it as we see fit.

So, we could do a lot one year, zero the next year, whatever we think is going to be the best strategy. That’s all perfectly above board.

Steven Jarvis:     We do of course, make sure that we are paying the taxes we owe each year. And so, one of the things that I look at with clients and recommend that people think about as we get towards the end of the year is taking that step back to say, “Okay, where am I at with paying my taxes this year?”

This might just be a passing thought for people who are still primarily earning wages from W2 income, the taxes are being withheld from your paycheck every pay period. Maybe you’re just fine.

But especially in years where we have transitions or income is going up or down, it’s not as clear how the taxes physically get paid, it’s good to take a step back and say, “Okay, where am I at with my income for the year and where am I at with actually paying taxes?”

Steven Jarvis:     Because while it’s not exactly the end of the year, the last deadline for estimated payments to the IRS is January 15th, so well before the tax filing deadline.

And so, by thinking about this in the November timeframe, we can really do ourselves some favors on avoiding surprises in March and April and avoiding underpayment penalties if we’re thinking ahead to say, “Okay, are we on track with the amount of tax we owe this year? Do we need to look at having some additional funds withheld from an IRA distribution? Do we need to make an estimated payment?”

Of course, any of those things that we’re going to do, we’re going to do electronically. We don’t want to mail anything to the IRS. And hopefully, their backlog will get lower, but I am not holding my rep for that one.

Benjamin Brandt:         Well, we covered it in a previous episode, but 90,000 IRS agents, hopefully, they can work through that stack. We’ll see.

Steven Jarvis:     We’ll see. Ben, one of the other questions I get quite often from taxpayers this time of year is around understanding what their options are for their filing status at the end of the year.

Now, a lot of us probably don’t think about filing status from year to year, whether we’re single or married filing jointly. We just kind of assume that that’s the best for us. And so, that’s what we’re going to continue with.

But sometimes, there are going to be changes that are beyond our control, especially in the year that a spouse passes away. And so, it’s good to understand what drives what our filing status is going to be at the end of the year. And the few situations where we do have options.

And so, in general, our marital status on 12/31 on the last day of the year, is what dictates what our filing status can be.

So, we’re looking at our legal marital status and the year that a spouse passes away, we can still maintain married filing jointly for that calendar year, whether they passed away on 12/31 or not.

I’ve had a couple of people recently tell me that they’re working with tax preparers who have basically instructed them to file as single even though they are legally married. And there’s a couple of really weird situations with like separations and court mandated things like that.

But in general, that’s not just a choice you can make. The chances that being advantageous from a tax standpoint to begin with are rather questionable.

But I’ve come across it a couple times recently, so I wanted to just throw it out there that if you’re legally married on 12/31, you can decide if you want to file jointly or separately, you can’t just choose to file single. That’s not an option available to you.

Benjamin Brandt:         I see. And that’s why they have this specifically married filing separate designation, which is different than single.

Steven Jarvis:     Yes, yes. There are quite a few different provisions for single versus married filing separately. But if you are legally married, you can’t just elect to file single, which I would never have thought to share on here, but like I said, it’s come up a few times.

So, if you are working with a tax professional who is encouraging to go that route, maybe it’s time for a second opinion.

Benjamin Brandt:         Well, speaking of second opinion, when would be the best time to find a tax preparer? And when we’re looking for a tax preparer, we’re going to get into this a little bit more in our listener questions.

When we’re looking for a tax preparer, do we hire them on the spot or are we asking them to model out some of these things that we’re talking about? Do we do that with an advisor?

I did put into our notes a couple resources for the do-yourself investor, but if we’re looking to interview a tax preparer, where do we start? Is the end of the year better than the spring? I think maybe you mentioned a little bit, but …

Steven Jarvis:     Yeah, so this episode is airing on November 1st. If you are interested in working with a tax preparer this year or changing tax preparers, I would definitely be putting the work in now. I would not wait until February or March. I wish there was a real simple or easy answer to this. Everyone has to have a tax return prepared each year.

And so, there is a lot of demand for tax preparers, and for some reason, little kids don’t dream a dream of growing up and being a tax professional. They want to be baseball players and doctors.

Benjamin Brandt:         I hope they want to be financial advisors.

Steven Jarvis:     Yeah, so we have a lot of demand, unfortunately, not as much supply. So, you definitely want to start early if you’re going to look for a professional to work with.

It’s going to depend on, I mean, similar to a lot of other professions, it’ll depend on their individual business model as to whether they’re going to offer to model some of these things out before you start working with them.

Unfortunately, a lot of tax preparers are very focused on just filing tax returns. So, I would certainly be asking questions of, “Hey, what does this relationship look like after the tax return is filed? What happens if I have questions during the year? Would you be willing to collaborate with my financial advisor?”

Asking some of those questions up front to gauge those responses, you’re certainly going to get a variety of responses. And like I said, there’s very few tax preparers who are taking a proactive forward-looking approach.

But I would suggest, especially if you work with a financial advisor that at a minimum you make it clear to your tax preparer that you work with this other professional and that you would expect there to be some level of collaboration.

Benjamin Brandt:         And if your tax advisor, if you don’t have a tax advisor, if your tax advisor’s not doing those sort of calculations, your financial advisor is one route you could look into. There have been some amazing leaps technology-wise in financial planning and in tax planning software.

One piece of software that we use is Holistiplan. And so, you could ask your financial advisor if they use something like Holistiplan or Tax Tools or something like that where they can make some of these projections.

If you’re firmly a do-it-yourself investor when it comes to your investments and also your tax planning, there are great free resources like TurboTax and NerdWallet where they have calculators where you can sort of in October, November sort of dummy up what you think your year-end income is going to be.

Look at your marginal bracket, look at your average bracket, double check that against all of your withholding just to make sure that there’s not going to be any scary surprises come April when it’s time to pay your taxes.

You can also model in your income, and in addition to that, model in Roth conversions model in charitable. Do all the things that your advisor would likely be doing for you.

If you’re a do-it-yourself investor, it’s your job to do all the stuff that you would imagine an advisor to do. So, I would really look at modeling those out if you can, and both TurboTax and NerdWallet have great calculators and resources to do that.

Steven Jarvis:     Yeah, it’s definitely not something you want to do kind of back at the napkin. If you’re an Excel nerd like myself, I’ve seen some pretty impressive models that people have built.

In fact, Ben a client that you and I work on together who’s very data-focused, has one of the more impressive spreadsheets I’ve ever seen. But that would not be the route I’d recommend most people take. It’s something he’s passionate about. He spent a lot of time putting that together.

But a great example of someone who definitely has the knowledge and know how to be a DIY-er but appreciates having a professional looking at what he’s doing and really, I mean, he wants to be retired and not focus on these kind of things.

So, it’s great to see kind of that balance of yes, maybe I could figure this out on my own, but why not hit the easy button to work with someone else.

Benjamin Brandt:         Special shout out to John from Minnesota, the spreadsheet that belongs in the Smithsonian.

Steven Jarvis:     Yes, 100%.

Benjamin Brandt:         Shall we move on to our listener questions?

Steven Jarvis:     Absolutely.

Benjamin Brandt:         And so, the person that put this in didn’t specifically say if they wanted Benjamin or Steven to answer, but I’m going to guess that this is going to be more towards Steven.

But the question is; other than looks, what should we look for in a tax preparer? No, they just said, “What should we look for in a tax preparer?”

Steven Jarvis:     Other than looks — I get lots of, what I think are sincere compliments, but I don’t think people realize how they sound. I get told quite often that I’m very social for a CPA, I give great presentations for a CPA. Those kinds of things.

But your comment also made me think of I’ve also heard the comment of, “Well, you have a face for podcasting.”

Looks aside, what should we look for in a tax preparer? I mean, we touched on a few questions that you should definitely be asking. Depending on your situation, I love recommending that taxpayers look for someone who works with people like them.

So, that’s a great question to be asking of what does your typical client look like? Or who are you best at serving? Another version of that maybe at times will solicit a more interesting response is, “Who are you not a good fit for? Or who don’t you work with?”

And for professionals who say, “Oh no, we work with everyone,” for me, personally, that’s a little bit of a red flag because if you think you can serve everyone, something else has to give. Walmart serves everyone, something kind of gives there.

Benjamin Brandt:         Goes for financial advisors as well. If you serve everyone, you’re probably an expert for no one.

Steven Jarvis:     Yeah. So, that’s something I would look at. Again, for me personally, I’d be asking questions about how likely is it that my return is going to be extended and when would you let me know that that’s going to be the case?

These are things like working with any professional, you want to ask these questions up front so you’re setting clear expectations. There are a lot of professionals. Of course, it’s going to be an interview. They might give you the answer you want to hear, but you’ve set really clear expectations.

So, if that doesn’t live up to what you expected, you’ve already let them know of where you’re coming from and you’re more likely to get the level of service that you are looking for.

If you come to that conversation and say, “I’ve always been a DIY tax preparer, in part, because I like having my taxes done early. I would love for my taxes to be done by the middle of March, is that reasonable for your service?” Things like that.

And they’re going to work with a lot of taxpayers, so maybe it’s not reasonable that they’re going to be done by the same date, but they should be able to clearly tell you what their process is for keeping you informed, keeping you up-to-date, and letting you know how that would work if they did need to extend your filing.

Benjamin Brandt:         Like any other professional, there are accounts that prefer to do more extensions than others. You could ask them what their personal preference is. Do you file extensions for 50%, 90%, 10%? Just ask them. And if you don’t mind having your taxes extended, then maybe that wouldn’t be a big deal for you.

I would specifically give some thought about before the interview. What are you looking for? Are you looking for someone that’s going to teach you, that has the heart of a teacher? Are you looking for someone that maybe you don’t like that at all, that you just want somebody that’s kind of all business and they’re going to get it done quickly with the minimum number of emails back and forth?

Or maybe you’re looking for someone that is going to do projections and help you reduce your tax bill over time or someone that’s just getting this year’s tax bill as low as possible and things like that.

So, what should we look for in a tax preparer? It really depends on what you want to accomplish. I think just like investing in retirement planning, what are you trying to accomplish? And then we can build a resume, build what we’re looking for around that what are we trying to accomplish.

Steven Jarvis:     The other question I would definitely recommend that you ask, and this is probably the way I would phrase it; I’d say “In the unlikely event that the IRS comes back and asks questions about my tax return, does your service include support for that or would that be an additional or separate service?”

And there’s going to be different answers to that, and I’m not necessarily set on what the answer has to be. But yes, it’s very unlikely the IRS comes back and sends you a letter or asks you questions. Seeing how taxpayers experience this, knowing upfront whether you’ve got someone on your team that’s going to help take care of you definitely adds a level of peace of mind and comfort in those moments if they come up.

Benjamin Brandt:         Perfect.

Steven Jarvis:     Well, Ben, it’s been a pleasure as always going through this stuff with you. For everyone listening, until next time, remember that we want to make sure you don’t let the tax man hit you where the good Lord split you.

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