Episode 37

The building blocks of taxes

March 15, 2023

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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.

In this episode Ben and Steven discuss foundational principles that every tax payer should be aware of but was likely never taught. Taking ideas right out of Steven’s new book, “Don’t Get Killed on Taxes”, the Least Boring Tax Podcast will teach you a few things you need to understand to get started on making your own tax plan.


What You’ll Learn In Today’s Episode:

  • What exactly is a “marginal tax rate”.
  • Why it’s critical to be intentional when it comes to taxes.
  • The reason you need to mark May 24th on your calendar.

Welcome back to the Least Boring Tax Podcast, the Retirement Tax Podcast. I’m your humble host, as always, Benjamin Brandt. Joining me is my co-host Steven Jarvis. How you doing today? Steven.

Steven (00:15):

Ben, I’m doing really good. Excited to be here on the Least Boring Tax podcast.

Ben (00:19):

I love that name by the way that came to us in just like, like shining ray from heaven directly into our brains and we’re running with it. I I just love the new subtitle. The new subtitle. I don’t know what you’d call it.

Steven (00:31):

Well, it’s something I’ve started using as I talk to people that I tell ’em I’m the least boring CPA they know, which is a very low bar. I understand that. But maybe on, on some upcoming episodes or an event, we’re doing this later, this later this year, I can share why I think I’m the least boring CPA, you know, I’ve got some pretty good reasons.

Ben (00:49):

So, speaking of non boring topics, now we don’t want it to get political on the show, but I heard somebody complaining recently that over, they lived in California and they said over 50% of my income goes to income taxes. Now what they were doing is adding up the top bracket of their federal return, the top bracket of California’s return. And then I think even Los Angeles has a local tax as well, and that number was over 50%. And of course, because we’ve been hosting this podcast a long time, and you’ve helped me understand even more the difference between marginal and effective rates, I thought, I bet he’s making a common math error and I’m wondering if you could maybe talk me through some of those errors he or she may be making in their calculations.

Steven (01:28):

Yeah, of course. Actually this is a great question. As I wrote my book, don’t Get Killed on Taxes. This is one of kinda the building blocks that we went through trying to help people bridge the gap between this tax we have to pay every year and the fact that no one ever taught us how to do it. But the difference between what we call marginal tax rate and effective tax rate is really key to understanding what’s going on here. And you’ll see these headlines, these articles all the time that tout just how much of your income is gonna go to tax. And un unfortunately, there are situations where it’s that high, but for most of us thankfully it’s a little bit lower. So Ben, what’s important to understand here is that when we say marginal tax rate, we mean what’s gonna be your tax on the next dollar of income.


So as we look at the tax brackets, whether at the federal level or for a lot of states, as our income goes up, we’re going to pay tax at a higher rate. So you mentioned that they’re probably thinking of the top federal tax rate, which right now is 37%. But even if we get to that bracket where we have to pay 37% on additional income, we don’t have to go back and pay 37% on all the income up to that point. So it’s this progressive, this gradual process of everybody still gets that first bucket where we paid 10% income tax at the federal level, and then that next bucket where we paid 12% and so on.

Ben (02:54):

Fantastic. Yeah, that’s a great way to kind of look at that is I pay X percent on the first X and then X percent on the next, and then on the next, on the x being $1 into the next bracket doesn’t mean that we rewind and then pay that 36% on dollar zero to dollar 500,000 or whatever that whatever that person’s income is. That’s interesting. Okay, so what work can we do then to manage some of those brackets? I know we’re talking retirement planning for, for this audience, but there are really some fun things that we can do kind of year round to massage those brackets a little bit cuz there’s friendlier parts of the marginal brackets. There’s some places where we pay higher capital gains, some places we pay average capital gains and places we pay no capital gains. So there’s a lot of work we can do within those marginal brackets that would affect our effective tax rate. Not to combine too many effects in one sentence, but

Steven (03:44):

Yeah, Ben, that’s a great point. I mean, really  a lot maybe all of what we’re doing with this podcast, with a lot of what we do around taxes is helping people understand where these decisions are. Because unfortunately, there’s very few opportunities to just at least legally avoid taxes altogether. There’s some nuanced places where you can get tax free income, but in general, the only way we’re gonna be able to kind of sand the rough edges off of our lifetime tax bill is if we understand what our tax rate is now and what it could be in the future. And then we make choices by using these different tax advantage accounts at strategic times in our life. And of course, our listeners are very familiar with some of these, at least in concept, whether we’re talking about 401ks or IRAs or health savings accounts, HSAs. And then within those different types of accounts, we have pre-tax contributions and Roth contributions there’s all these different moving pieces, but at the end of the day to do the most possible to reduce that lifetime tax bill, it’s understanding when to take advantage of those.

Ben (04:51):

That’s interesting because  I think a lot of times those are at odds, you know, our tax-deferred opportunities versus our tax-free opportunities we kind of have to pick which devil you know, the devil, you know, or the devil you don’t know. So there’s a lot of ways we can get our taxes very low this year, but it will actually increase our tax bill next year. And in retirement, our tax bill is often based on our income, which comes from our assets. So the longer we wait, if we’re investing for growth, the bigger the bill we pay. So how do we navigate those two at odds items? Tax deferred, I don’t wanna pay taxes now or later versus tax free, you gotta pay taxes now, but you don’t have to pay taxes later. How do you navigate that kind of, that those add odds items?

Steven (05:30):

As much as I would love to be able to give just one rule of thumb or one really simple solution to say, Hey, as long as you follow this theory, you’re gonna be all set. Unfortunately with taxes, it does take some work and it really takes consistency. So it’s something that you need to be coming back to year after year to say, what were the actions I was supposed to take this year? Do I need to adjust those actions? Because I mean, the world we live in now, it’s all about clickbait, right? It’s all about exciting headlines and like simple statements that people try to apply to everyone of you should always defer your income no matter what. And it’s like, well, no, there are situations where deferring taxable income now to reduce the amount of tax I pay this year. That might be a great idea in a specific situation, but we’ve gotta make sure it’s that specific situation that we’re not just across the board saying, defer, defer, defer, defer.

Ben (06:22):

So another thing that we can do when we’re deciding between do we wanna pay taxes now and how much and do we wanna pay taxes later is making choices based on the timing of that income. So if we want to really live on the wild side, we could convert all of our IRA dollars to Roth the first day of retirement, right? That would be an extreme example of making a choice to realize all of your income this year, convert to Roth IRA and pay significantly less taxes later versus the other end of the extreme deferring everything until we possibly can. And then at 73 or potentially 75 with the new secure 2.0, then we have to start taking income. So those that would represent two kind of extreme polarities on this, on the spectrum to combine different science terms, I guess, how do we look at making those choices and timing our income?

Steven (07:06):

Yeah, Ben, on one of our recent episodes, we talked about common myths that people believe around taxes and this idea of being able to make choices about your taxes,  it’s gotta be one of the most critical pieces of tax planning to understand there are choices available to us. And that’s really how we can get ahead what you outlined are certainly options that we could do tho those, those definitely are choices, I

Ben (07:30):

Guarantee somebody who’s done that had have happened, right? Oh,

Steven (07:33):

Oh, definitely. It 100% has happened. But where I see clients have more success, and honestly, Ben, how I approach this in my own life is that I’m coming back to this every year and I’m reviewing my tax return, I’m reviewing clients’ tax returns, and there’s things I’m going through and looking for to try to identify, okay, is this going to be a year where we look to accelerate income? Do we look to defer income? Are we all set this year? And there’s no changes that we need to make because at the end of the day, what I’m gonna choose as far as do I want my income higher or lower this year is based on where I feel like my marginal tax rate is now versus where it might be in the future. And so again, personally and for a lot of client situations, I see right now I am leaning towards finding opportunities to get money into Roth.


Maybe not as aggressively as you’re saying to do it all at once, but that’s what I’m leaning towards because as I look at where tax rates are already headed with the expiration of the tax cuts and jobs acts in a few years, and if I take a step back and say, Hey, do I think tax rates will be higher in the future than they are now? I have a hard time convincing myself that they won’t be higher. And so I lean towards Roth and we talk about that a lot in this show, but it comes down to what choices can we make and are we taking the time to set aside time to review our tax situation, to review our life situation and say, does this make sense for me to do?

Ben (09:03):

Now, Steven, another one of the building blocks that I learned from your book was understanding the importance of where you pay taxes. What can we learn about where we pay our taxes?

Steven (09:10):

Yeah, so we dove in to this specific idea just for a minute because there, this gets missed by people who get towards retirement and get excited about, Hey, I’m gonna go live near my kids, or wouldn’t it be great to live in Florida or wherever it is that they envision themselves enjoying their retirement. We spend a lot of time talking about the federal taxes, but you kicked off the episode talking about how high taxes can be in California. And so as we’re looking at this long-term tax plan for ourselves, if we have any intention or we think there is a possibility that we could move dur, whether it’s during our career or during our retirement, if there’s potential we’re moving out of state at some point that has to get into our tax plan because as fun as the federal tax code is, every state gets to have their own tax rules as well.


And for some states it’s important where you earn the income and in other states it’s more important where you’re distributing the income, where you’re taking the money out of retirement accounts. Some states tax social security in some states don’t some states have have flat tax rates where it doesn’t matter if you have a dollar of income or a million dollars of income, it’s the same tax rate. And so, Ben, I know you do a great job of talking about this with clients, that we don’t want taxes to be the primary reason we do something. So this isn’t all to say that, hey, where you live has to solely be based on what’s most advantageous from a tax standpoint, but we do want to be aware of it. There can be some nasty surprises for people who move without considering the tax impacts.

Ben (10:47):

You’re absolutely right, Steven. There’s no doubt that you could take a high tax state like a New Jersey, a New York or California, and you could see significant tax savings if your income is very high and from a high tax state just by moving to Florida or somewhere that is retirement friendly and you don’t pay a state income tax. But well, I don’t wanna devalue the idea of saving a lot of money on state income tax, especially if your income is very high. There’s other reasons to move, right? So from a financial planning, from retirement planning standpoint, I hope you have hobbies in the new place. I hope you have family, I hope you have connections. Don’t just move for the money. It’s just sort of like investments, you know? Don’t, don’t invest in something just for the tax purposes. Don’t move just for the taxes.


It can be significant savings, but there’s more to life than than money. So we wanna make sure you’re having a good even better retirement, not just I’m trying to save on income taxes. So I think that goes along well with your number four. And then finally, number five, you want to have a tax plan. You want to be intentional is something I saw in your book. I am betting that the IRS is betting that most people will approach taxes in retirement in a very passive fashion. And so I feel the rules are set up that you’ll pay significantly more taxes approaching your retirement income in a passive way versus someone that implements some of the action items we talk about on this podcast and is very proactive with their income and their taxes. I think they’re gonna pay a lot less in taxes. So what do you say about intentionality in tax planning, in retirement planning?

Steven (12:13):

Ben, the biggest thing that I always come back to on this is that if we just let taxes happen to us, if we just let the default happen, that’s when we get killed on taxes. This whole idea of don’t get killed on taxes, it’s not something nefarious or malicious that I think the IRS is trying to do to all of our listeners. But if you don’t take ownership of this, if you don’t take the time to have some intentionality behind what you’re doing, the default method is, hey, you’re gonna get killed in taxes because you’re gonna pay the highest amounts at times in your life when you’d love to be spending those dollars on other fun things that you’d love to be doing. And so, when we talk about having a tax plan and being intentional, there’s a couple of pieces to this.


One piece of that is taking the time to understand what opportunities are available to you, which our listeners clearly are committed to that, that’s why they take the time to listen to this podcast or read blogs, read books, whatever it might be. That that understanding is a critical piece of that. The piece that I see get missed quite often is the consistently coming back and adjusting that plan, knowing what you need to be doing at any given time. What I see at times is people will get excited is probably not the right the right word. It’s probably more that they get angry or frustrated that they have some painful thing happen. They say, Hey, I’m gonna take care of my tax situation. I want this keep happening. And that emotion drives ’em to take a bunch of action all at once and then they don’t keep coming back to it.


So that’s why so often we work with people to say, okay, what are those things that you can be looking at on your tax return every single year when this episode’s coming out in the middle of March? So maybe some of our listeners already have their tax return, maybe some will have it in the next few weeks, but having a system, having a an intentional plan for, okay, great, every year when I get my tax return, here are the things that I’m gonna go and look for. And then here’s the actions I’m gonna take as a result.

Ben (14:02):

You know, I don’t want to get the cart before the horse here, but you’re reminding me of what we’re gonna talk about at our webinar. We’re gonna announce at the end of this show our first ever webinar, so we’ll make sure the audience stays tuned in until the end to hear us announce our webinar date. But I think maybe we could pivot on to a listener question, if that sounds good to you, Steven.

Steven (14:18):

Let’s do it Ben.

Ben (14:19):

So listener writes in, I’m trying to help my mom find her future taxes with social security coming in and pensions, what’s the best way to run this scenario as a do-it-yourself investor? So when I’ve helped clients with this in the past with their parents we would either, you know, use their parents tax returns with our tax software or we’d encourage clients to run up dummy returns either on TurboTax or with their personal DIY tax software. Now you have to look at the overall plan. You have to look at retirement accounts and everything together. But there are, there are friendly spots where we could potentially pay very little income tax on social security or 50% or 85% on social security if you’re specifically solving for that. Now, if your retirement age and your parents are, I would assume older than you are, they’re potentially already past the R m D age.


So there’s a little bit less playing that we can do, but there are absolutely mistakes that we can avoid. You know, so we wanna look at things like charitable giving. Can we bunch every other year? Can we file property taxes every other year? Can we fund a donor advised fund? Are we doing qualified charitable distributions? If your parents are over 73 and they’re giving any amount of charity at all and they have an IRA, that is a great way that we could save some money on income taxes, which potentially could lessen the amount that we’re paying on taxes on our pension, but then especially on our social security, depending on high incomeb or low income or not. So that’s kind of where I go, I want to dummy up I wanna go to find some software, whether it’s free or something you pay for, depending on what your budget level is, and then dummy up that return. You can play with the numbers for a long time before you know, you, hit submit on filing the return so that I would arm myself with the information and that’s the route that I would go down. What would say you, Stephen?

Steven (15:57):

Yeah, for the person who sent this question in for the people who really like to get in and play with the numbers. You’re absolutely right Ben. You gotta find a tool like don’t, don’t try to build your own Excel file. I believe I’m a huge Excel nerd. There’s actually there’s somebody who puts out a Excel version of the 10 40 every year. You can Google it, just 1040 Excel template if you really wanna get in and play around with that. But having, having some sort of tool that you can help to get around that math cuz especially when you get social security involved, and like you said, it’s not, social security’s never a hundred percent taxable, but depending on your income level, it can range from zero to 85% taxable. And so there’s some nuance there that makes it a little bit tricky to just,  it’s not as simple as saying, oh, well multiply it by 22% and you’re fine. So having a tool is great. And then I love that you gave a list there of some things you can be doing to try to reduce your taxable income to maybe have an impact, again, standing off the rough edges of that retirement tax bill.

Ben (16:56):

Another thing that just occurred to me, it’s actually something my grandpa did in retirement. He, loves spreadsheets and he loved numbers and probably where I get it from, but he would volunteer at the local senior center and they would do tax filing, you know, state and local tax filing and federal for no cost for seniors. It wasn’t even needs based. So I would check with in, with local resources, if you’re not the the numbers guy or gal that loves to play with this, but you wanna help your parents out if you have a power of attorney for them, you could just do this for them yourself or you could take them down. But, evaluate or look into local resources, it’s probably gonna be at the civic center or the senior center, excuse me, might be you know, if there’s a local AARP chapter. But look at some of those free resources. A lot of times those are retired numbers, guys and gals and retired accountants that are just giving back to their community and helping people seniors specifically process their return. So I would look if you’re not the full blown numbers geek like Steven and myself on some days I would really investigate that and become the favored child. What could it hurt?

Steven (18:02):

Well, Ben, and on the topic of free resources, let’s just go ahead and share some information about an upcoming event that we’re gonna do because we we’re always looking for ways that we can help our listeners do even more when it comes to tax planning. So go ahead and save the date for May 24th. Ben and I are gonna do our first live webinar. This will be an online session will be freely available to our listeners where we’ll have a chance to take this great audio format of a podcast and put some visuals to it as well. And we’re really gonna focus on some of these things we’ve been talking about today of understanding what you can be looking at on your tax return to identify tax plan opportunities, understanding how to start estimating what your lifetime tax bill might be so that you can see just how important it is to take the time for tax planning. So something we’re really excited to be doing, May 24th, save the date. We’ll get more details as it gets closer, but we’re very excited about it.

Ben (18:59):

Yeah, I’m very excited. We set out a little bit of an outline as we were getting ready to record the show today and talking about how we specifically help clients to ascertain their lifetime tax bill. But then, because we’re doing it after taxes are due, we can pull 2022 taxes and say specifically, here are the action items we want you to look at. So we’re going to be firmly outside of the world of theory and we’re gonna take that number of your, we’re gonna show you how to calculate your lifetime tax bill and then we’ll point directly to that tax return and say, here’s the action items that you can take this year and every year going forward until the change of the rules in us again. Then we’ll do another webinar. So that’s what we’ve got prepared for you this week. Thank you as always, Steven, and until next time, don’t let the taxmen hit you for the good Lord. Split you.

Steven (19:43):

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.

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