Don’t Trust the internet
August 1, 2023
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.
In this episode Steven and Ben discuss themes that come up online around “tax planning” and share their thoughts on how you should be looking at them. They give specific examples of strategies that are worth looking into and ones that are more sizzle than steak. More than anything they reinforce the importance of making sure you (or a professional you work with) are taking the time to understand the details and not make decisions based on headlines or TikTok videos. Ben and Steven advocate for focusing on the small, consistent things that can be done over time to sand the rough edges off of your lifetime tax bill instead of getting caught up in the latest tax fad.
What You’ll Learn In Today’s Episode:
Read The Transcript Below:
Welcome back to the Retirement Tax Podcast, aka the least boring tax podcast on the internet. I’m your humble co-host, as always, Benjamin Brandt joining me as always, Steven Jarvis, how you doing today?
Ben, I’m doing great. Excited to be recording with you today. As always, this is the last episode we’re recording before we see each other in person, so I’m really excited to go be able to see you here in a couple weeks. Get our families together and spend some time together.
I love it. So if you know of something, so I’ve got a family of eight and Steven’s got a family of five, four, family of four. I knew that, family of four. So if you know something fun in Rapid City or Keystone, leave us a review on Apple and say, Hey, while you’re in doing the Black Hills Mount Rushmore thing, you should go to Treetop Adventures or whatever the thing is, and then we’ll check it out. But I’m very excited. I’ve got a cabin that we rented and Steven’s got a cabin just down the street that he rented and I’m very, very excited. But you know what else is exciting? Steven, Google, it’s exciting to Google things. When you wanna learn things about income taxes, if you don’t have a friend that’s a CPA that you can text like I do, you go to Google. And so the funny thing is when you Google how can I pay less in taxes, some really helpful information comes up, but then some information that is decidedly less than helpful comes up. So I, Steven thought it’d be a good idea if we kind of go through the really helpful things and maybe some of the less than helpful things that come up when you Google how do I pay the less in income taxes. So Steven, where do you wanna start with, the good stuff or the not so good stuff?
I think we’ll kind of sprinkle a little bit of both of it in, but I mean for our listeners, like literally this is, if you go to Google and type this in, how can I pay less in taxes? You’re gonna see some of these articles. We won’t name specific names because there’s a lot of great people trying to do good things out there. It’s just, it feels a little misguided at times. So maybe we’ll start a little bit in the middle of the road here. One of the very first things that came up as I was doing this on an article that was really titled of, Hey, how do I save a bunch of money in taxes? One of the very first things that came up was, well, you should invest in municipal bonds, which I see where they’re coming from. And this is certainly accurate that municipal bonds will create tax-free income. But perfect example of taxes are a consideration when we’re making decisions, not necessarily the consideration. Because as I go down my list of what are the most impactful way to save money on taxes? I mean, I’m not personally dropping all of my money to municipal bonds just so I get tax-free income.
Right? And when I think about Munis, while I suppose it’s true, and you can correct me if I’m wrong, but while I suppose it’s true that your income tax will be less ’cause you’ll be paying taxes on that interest income, the IRSs is hip to that, right? There’s a few areas in the IRS code, they’re gonna add that back on us, right? Is that if memory serves and they’re calculating the taxability of social security and I think one or two other things, they actually add it back. Is that right?
Yeah. As we talked about one of our recent episodes that that’s one of the add-backs when you’re getting to modified AGI for IRMAA. And so, yeah, you’re not gonna pay income tax on it, but in my mind, that becomes more of an investment conversation, which the next one that was in that article related to that was, Hey, if you wanna save money on taxes, you should take long-term capital gains. Which again, in theory, there’s the potential for long-term capital gains to be taxed at a lower tax rate. But just the way it was presented to me seemed overly simplistic. We can’t just go out and magically make long-term capital gains appear. We need to have invested and have those available to us. We need to understand how that fits into the bigger tax planning picture.
For me, what I get really excited about is when we can harvest capital gains intentionally at the 0% tax rate. So that gets back into discussions that we have all the time, Ben, of understanding kind of what your long-term relative tax rates might look like, how to take advantage of those years right after you retire, before social security kicks in. Because we do, especially for couples that are married filing jointly, we do have quite a bit of room where we could potentially recognize capital gains at a 0% rate. So there’s definitely some opportunity there. But again, if you just google this, what you’re gonna find is probably an overly simplistic explanation of what you need to do.
I would say overly simplistic and if I wasn’t an advisor, I would be thinking, I would be more confused because if I have the choice, of course I’m gonna take long-term capital gains, but you can’t just decide something’s long-term. It either is or isn’t. And unless we’re actively trading, you’re not gonna make too many investments that you have the idea that you’re gonna exit from in less than two years. So, I mean, really the illusion of choice that like, well, you know, I’m gonna wait and then you get in the situation where if you are, you know, making some speculative investments, well I wanna hold onto that for another 18 months. I get long-term capital gains. So now you’re letting the tax tail wag the investment dog. And the only thing worse than a loss is a gain that turns into a loss. So I’m not thinking too much about it long-term versus short-term when I’m trying to save on taxes. I think that that is a little bit overly simplistic. Yeah, you’re trying to get everything long term essentially, but it’s not, you’re deciding what it is. It’s just when the calendar flips over.
Yeah. So Ben, the next one that stood out to me, and this came up on several of the first articles that when I went ahead and googled this, and I get this question a lot from taxpayers and that’s should I start a business so I can save on taxes? And I think it’s a well-intentioned question. This perfectly highlights getting things out of order that we wanna make great decisions and then figure out how to do them tax efficiently. In general, my response to someone who says, Hey, should I start a business to save on taxes, is going to be were you planning to start a business anyways or is there already something you’re doing that makes sense to have a business for the idea of going out and spinning up some made up business just so we can deduct our personal expenses.
That’s not how this works. We’re not, if we’ve ever given you the impression on this podcast that we’re trying to help you play some kind of shell game with the IRS that, let me just be real clear. You need to pay every dollar you owe. It’s just you don’t need to leave a tip if you have a side hustle if you’re doing some consulting, if you’ve got some legitimate business going on, there’s absolutely ways that we can make sure we’re getting the most tax benefit from that business. But just in my experience, it’s not gonna make sense to go try to spin up a business just for tax purposes.
So you’re saying, you know, organizing things that you’re already doing in a way that can be tax beneficial rather than starting something. So it almost sounds like your same advice for charitable giving. Like we can’t save money giving to charity money that we weren’t gonna give away anyway because yeah, we saved 25 cents, but we go 75 cents backwards. If that’s a dollar we weren’t gonna give away anyway. But if you’ve already demonstrated you’re giving this money away, let’s organize it in a way that we can save the most on taxes. ‘Cause we’re gonna give it away anyway. Kind of the same thing with this business. If you’re already using your car first to your side house, so you’re already using your phone, you’re maybe using a corner of your house as your office. If we can organize those things around a business, not start something from scratch and intentionally lose money in order to save on taxes. If it’s something we’re already doing, let’s make sure it’s structured in a way that’s the most tax preferential. So it sounds like charitable and business are kinda the same. Your logic is consistent is what I’m saying.
Yes, there is very similar logic there. And so things you should be on the lookout for if you think this might be relevant for you is are do you have income that’s not from a W2, that’s also not from like a retirement account or investment account. So if you have a 1099 miscellaneous, if you are things like Instacart or Uber, these things that you might just do on a part-time or kind of ad hoc basis, if you have that type of income coming in, you should absolutely be looking for expenses to offset that. And if you’re not yet, you need to take the time to do that. But yeah, go in and spinning up a business so that now you know, my weekend trips to the beach can be tax deductible. That’s not how that works.
And, that story doesn’t end well for people to try that eventually they figured out.
Yeah, that does not end well. And this is an area where I find a lot of people who will tell me, oh, well I have a friend who’s done this for 10 years and the IRS has never said anything so clearly that means it’s right. And that is not the right logic. The IRS does not audit everyone. They can’t get to everyone. That doesn’t mean they won’t get to you and that they won’t eventually get to your friend. Just because it hasn’t been flagged by the IRS doesn’t mean it’s correct. Something that came up that was related to this as I was doing my Googling, that very much falls in the category of all sizzle and no stake. That even might be a little bit generous, but it might even more be, Hey, we’re trying to give you the illusion of tax savings, but really we’re not offering you anything substantial here.
And that was an article I found one of the first few results that said, great way to save on taxes is to deduct the half of your self-employment tax from your income. Now, if you’ve never had self-employment income, you might say, okay, well that sounds great. I like deductions, but the reason this one kind of rubs me the wrong way is that you either have self-employment income or you don’t, you’re not gonna go start getting self-employment income just for this deduction. And then this is something that automatically happens. This isn’t something you need to elect, this isn’t something you need to plan for. Any tax prep software that you use, as long as you’re not doing this by hand, is going to automatically calculate that half of self-employment tax is deductible. So writing an article that says, Hey, I’ve got this great tax planning idea for you. This would be like me telling you that my great tax planning recommendation is that you include social security numbers for your kids when you’re getting the child tax credit. It’s like, aye. Yes, that’s the bare minimum.
Bare minimum. Right. How about maxing out retirement accounts?
Yes, this is one that comes up a lot and obviously it fits in with things that you and I talk about Ben, but this is something we should absolutely be thinking about, right? If we want to be doing things in a tax efficient way, again, the things that we’re already planning to do. So if we were already planning on retiring someday, if we’re already trying to plan for the future, invest for the long term, then making sure we’re doing that tax efficiently, whether that’s, you know, depending on the point of our career, our earning lifecycle that we’re at, that might be pre-tax, that might be after tax, but understanding what’s available to us and using those accounts is absolutely a great way to be saving on taxes.
Absolutely. Yeah. Along those same lines, using a health savings account, if you’re eligible to put money in, that’s a great way to save on income taxes.
Definitely. In fact you know, we’ve done a whole episode on this before, but health savings account at times can even be better than just your more traditional retirement accounts because the HSA is the only account that at least that I’m aware of, I would love for someone to tell me different that you can put money in tax deferred, then it can grow tax free, and then you can use it tax free as long as it’s used on qualified medical expenses. So that’s kind of the triple tax threat on HSAs.
Right? And if you’re planning on getting older, the likelihood of you needing more money for healthcare later on is it seems like a pretty safe bet. You know, God bless if you’re wrong and you get healthier as you get older. I’d love to learn your secrets. Yeah, it’s a safe bet. We’re gonna need more money for healthcare as we get older and you know, there are some tricks we can use where we can actually, you potentially save on save up healthcare bills and, and then maybe offset some things, you know, after retirement and things like that as well. So again, things you’re already doing, if we can organize them in a specific way to help save on taxes, that’s something we definitely want to want to check out. Now if I google how can I pay less in taxes, there are a couple usual suspects that pop up that it says I should talk to my accountant about something like EIDL or ERC. Steven, have you ever fielded a question about either of those items? Something to do with payroll and paying employees and getting covid credits or something?
Yes, I have fielded lots of questions about both of those. The one we’re seeing more right now come up is the ERC, which is the employee retention credit. But both of these, so EIDL is economic injury disaster loans. ERC is employee retention credit. These both came out of some of the Covid stimulus bills that happened in the middle of all of that fund. And they were a lot, they were all over the news right at first, and then they’re kind of coming back and unfortunately they’re coming back in the news for one of two reasons. It’s one because there are certain firms and professionals out there who are pushing on these really hard, and then the IRS is bringing these back up because they’re pretty much saying, wait, a lot of people were way too aggressive and some people might have even been scammed a little bit by some of these firms.
Not to say that these aren’t valid programs, but you’ve gotta be really careful to make sure that if you’re going down these routes that that do in fact apply to you and that you’re working with a qualified professional, that you’re working with someone who’s on your team and got your back to make sure these things get done correctly. So for a lot of our listeners, you might have heard of these, they might not be particularly applicable for the most part. They’re geared towards small businesses and it has to do with a set, the goal is trying to incentivize keeping people on payroll. And so I’ve absolutely worked with people who have done this and it’s been a great thing. They’ve got the credit, they qualified for it, it was a huge opportunity. But we’re also seeing more and more where these get pushed as well.
Everyone should do it. Everyone should start a business for tax purposes. Everyone should write off their new Tesla, you know, these taglines that aren’t as universally applicable as the headlines make them out to be. So we definitely wanna exercise some caution anytime we see really trendy tax topics. ‘Cause it turns out that while what Ben and I talk about week after week as it relates to these small hinges that swing big doors, that these might not be the most exciting things we talk about, but they are the most impactful if you’re consistently applying them over time. This is base hit after base hit, not trying to hit Grand Slams.
Well, I think it’s the TikTok-ification. If we can just kind of create a word out scratch the TikTok-ification of Financial and Retirement Planning is that I’ve got 17 seconds and I’m going to explain to you what earned the ERC is. And you know, I guess call me and I’ll be your advisor or something like that. You know, we want just short bursts of serotonin and financial knowledge, I guess, but along those same lines, looking at these tax credits, what about something like the Augusta Rule? That’s something that I’m seeing a lot of on social media and different email campaigns that they find their way into my email inbox. I should be using the Augusta Rule every year and it’s gonna help my business save, I’m gonna be able to take a bunch of money outta my business tax free because of the Augusta rule. Is that true?
It’s like so many taxing. It’s a maybe, I’m a big fan of the Augusta rule, but this is another Ben, you’re spot on. This is an example of people trying to, it click bait at times. It’s people trying to grab a lot of attention really without the substance that it might imply. So from a high level, the Augusta rule is the ability to rent out your house, your dwelling units is the IRS calls it for up to 14 days, completely tax free. And so there, this is a legitimate strategy. There are great ways to use it, but there are very specific ways to use it. There’s a lot of documentation that’s required, and it’s one that you wanna make sure before you start down that path that you really understand kind of the sequence of events and what is required to make that happen.
I would just say as a general rule, the very much the old adage, if it sounds too good to be true, it probably is very much applies to taxes. And so when people suddenly tell you, wait, we’ve got this great new way for you to get tax free income, it’s gonna completely revolutionize your life. Let’s proceed with some caution. The Augusta rule can be an interesting way to save on some taxes in the right situations, but it’s not gonna apply to everyone and it’s not going to change the course of your retirement. Ben, another one that comes up that people will probably see at times that email campaigns and certainly on the TikTok-ification of financial advice, is the idea of cost segregation studies, which again, completely valid tax planning strategy, one that I’ve seen used very successfully in a lot of situations, but one that gets people at times will get a little carried away pushing it as if it’s something that everyone should do all the time at cost segregation studies are specific to real estate property.
And so a lot of times this will be something that business owners look at, but potentially even just people who have or own or investing in real estate, the idea is that we’re trying to get really specific with the timing of depreciation, which now you’re gonna just start, like, I’m just throwing out all the words I learned when I took the CPA exam, but there’s some really great potential here to take advantage of the tax code in completely authorized ways from the IRS. But again, we gotta make sure that when we go in, we’ve got a really good strategy in place because this is one of those services that someone’s gonna come along and say, yep, I do this for everyone. I need to do it for you. Here’s everything that I’m going to make magically happen on your tax return. And oh, by the way, here’s how much I’m going to charge you. But you really need to understand that it’s the right fit for you before you see something like this as here’s the game changer for my retirement.
What I’m thinking about depreciation and things like that. While that does save money on taxes, that money isn’t saved permanently, right? There are in some instances we’re just deferring the bill, right?
Yes. So yeah, we’re taking advantage of the time value of money and in some cases we might be layering multiple tax strategies to potentially defer tho that tax bill for a very long time, if not indefinitely. So there is potential there, but it’s definitely a, proceed with caution. This is only exciting in the right circumstances. It’s not gonna be applicable for everyone,
Right? So where it applies, it can be very valuable, but it might not apply to everybody. So, you know, our favorite answer is kind of, it depends, right? This could be the greatest thing ever. It could be smoke and mirrors, it could be a giant waste of your time. Do your due diligence and, visit with your advisor or your CPA or ideally both at the same time. And then you’ll be able to find out what what does apply to you.
Ben, one thing I’d say on these, especially some of these topics we’re throwing around here, like with anytime there’s acronyms involved, there’s new terms you haven’t heard of, like cost segregation. I guess just one piece of advice I’d give is that these are not concepts that can be explained in a paragraph or two. So if everything you know about these topics came from a TikTok video or a social media post or an article that had one or two paragraphs trying to tell you that they gave you everything you need to know about employer retention credits, you need to dive deeper, whether that’s working with a professional or if you’re really committed to doing this on your own, you need to take the time to potentially read a few pages, if not quite a few pages on how this stuff really works before you dive into it.
Right? A lot of our listeners are definitely smart enough to do this themselves, but it’s gonna take a lot of extra due diligence. The more complicated you want to get and the more fancy you wanna get with your taxes, either the more due diligence you have to do, or you gotta bring in some professionals just to be safe.
And then the last thing we’ll talk about, the last thing we’ll talk about is kind of a new one. This is probably a late 2022, early 2023 vintage of new ideas, but that’s the idea of taking your 529, that’s your kids’ college savings plan and flipping that into a Roth now forever and ever, our only option for a 529 was either change the beneficiary so we could keep that money kind of rolling down the family tree or we could just take the money out and run, and then we’d pay some taxes and potentially some penalties as well. But now we’ve got kind of a new final frontier of what we could do with the 529 if we end up not needing it for college. And that’s moving into the Roth IRA. So because that’s new, we’re seeing a lot more of that in the TikTok-ification of financial advice. But Steven, is that an example of something that applies to everyone or something that we need to pay attention to the details ?
Definitely need to pay attention to the details. One of the reasons I included that on our list for this episode is when this came outta secure Act 2.0 and I think is potentially a really great opportunity for a lot of people, but again, under this idea of, okay, what is Google telling me about tax planning? This is one of the first articles that came up. It’s from a very well-known publication, and again, it was maybe one paragraph on this topic and it made it seem like, oh, this is gonna apply to everyone. You can just do it at your discretion. It left out all of the important details, like the fact that there are time requirements on how long things stay in the 529 before you can convert them to Roth, or the limits on how much can be converted to Roth or the fact that this applies towards your annual contribution limit towards Roth. So we can’t both fund a Roth and convert 529 to Roth in the same year. And so again, this one here I mean potentially great opportunity. We’re still waiting to hear some of the details get ironed out by the IRS, but we gotta make sure that when, if we’re gonna be learning things from the internet, that we’re doing our due diligence to make sure we’ve really understood all of the details.
Yes, the internet is amazing, but the due diligence is even more amazing. So I think that’s about all we’ve got for time this week. Steven, thank you so much for all of your wisdom. Every time I google something from here on out, I’m gonna run it by you first. But thanks for keeping us squared away and keeping us on the right side of the IRS. So I appreciate it as always.
Absolutely, Ben. It’s a pleasure to be here and for all of our listeners, until next time, remember to not let the tax man hit you where the good Lord split you.
Steven (Disclaimer) (21:35):
Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.