Whatcha gonna do when they come for you?

Ben (00:08):

Welcome back to the Retirement Tax Podcast. I am your humble co-host, als always, Benjamin Brandt joining me today. As always, Steven Jarvis, how are you doing today, Steven?

Steven (00:17):

Ben, I’m doing really good. Excited to talk taxes. What else would we want to talk about?

Ben (00:21):

We’re talking taxes and we’re talking conflicting advice. What we do if we’ve got two trusted people in our lives and we’re getting conflicting advice, I guess in this example, maybe I’m thinking of your advisor and your accountant, aren’t on the exact right page, or maybe it’s your brother-in-Law that you get all of your financial advice from and your accountant. I know you never into that, Steven, but..,,,

Steven (00:42):

No, never. Yeah, Ben, this is such a great topic because we’re going to use some specific examples here, but there’s so much application and one of the examples that I came across recently, it adds the question of how do you validate whether someone really should be a trusted advisor? Because one of the examples that came across my desk recently, a new client that I’m working with this year that the taxpayers are now married and so they are actually because of some student loan things, they’re filing married filing separately, but this is the first year, 2023 is the first year they’re legally married. I was looking at their 2022 tax returns because that’s a normal part of our process, and I said, Hey, you both filed as head of household on two separate tax returns claiming the same child to qualify as head of household, and I had never seen that before. It immediately struck me as this can’t possibly be the right way to go about this, and it really didn’t take that much digging to find a specific example on the IRS’s website that specifically calls out and says, no, you can’t do that. One child with one social security number can only help one person qualify as head of household. And so really what they should have done is had one of them file head of household and one of them files single and they can choose who files which way we could do some evaluation of which one makes more sense, but with only one child between the two of ’em, there is no option for claiming head of household. So as I’m going through this with them, I always try to assume positive intent and so I say, Hey, this could have been an honest mistake if I were you, I would go back to the person who helped you prepare your taxes the prior year they had worked with a professional and say: Hey, can you help us understand why it was done this way? We’re always looking to learn more, and I might’ve even mentioned that on this podcast before, but just this last week just talking to the client again and they basically heard back from the original tax repairer who said:et Nope, we think this is right and we’re not going to change anything about it. And so this is where it gets into this question of as a non-tax expert themselves, how do they evaluate which trusted advisor really can be trusted?

Ben (02:40):

Yeah, I have run into this where we would recommend a donor-advised fund, but the accountant would recommend something else, and so you wanna your client ,into,-, and the client was happy, and they didn’t have to play the game of telephone,, and I have all of the answers,to get the best advice, but you don’t want to put them in a position where they have to pick trusted advisors. So that is a sticky situation.

Steven (02:55):

So Ben, have you had that happen before where a client comes back to you kind of playing the game of telephone from a different trusted advisor that says, and they’re coming back and saying, Hey Ben, this person just completely disagrees with you. Have you had that happen? I mean, what do you do about that?

Ben (03:08):

We did, yeah. There was an instance where a client had, they were selling some farmland that was in the family for years and years, so it was they’re getting several years, maybe even a few decades worth of income in one year through capital gains. And so we said, well, let’s look out a few decades and say how much annual charitable giving do we do? It’s around 5,000 a year. Okay. Would it be reasonable to assume that’s going to continue? Yes, definitely. We always give this amount of money to whatever, so why don’t we layer in 10 or 20 years, we’ll do all of the charitable giving over your whole retirement. We’ll do it all this year and that’s going to help offset some of this big gain. And they’re like, oh, that sounds great. Let’s take that idea to our account. And the account just wasn’t as familiar with donor-advised funds and he thought that a donor-advised fund was something different where you’d have to give all of the money out of the charitable account in one year or something. And so he just had a misunderstanding. So we just had a meeting together and I explained my side of the story and he kind of did some research and said, yeah, actually we should do that in tandem with this other thing that I had forgotten about, where it was a state specific thing that if you give to an endowment, you can get a state tax credit for that year. So we just combined ideas and the client was happy and they didn’t have to play the game of telephone and we all went about our merry way.

Steven (04:20):

I think there’s a couple of great things you’re highlighting in there for people to take away from this as they work with other professionals in their life because it can really challenging because of course every professional’s going to say, yeah, of course I know my stuff. I’m good at what I do. Of course you should trust me. But the fact that you were starting from a place of curiosity when the client came to you, you didn’t say, Nope, I am the Lord and I have all of the answers and only you can trust me. You said, Hey, well let’s talk to this, but let’s have a collaborative conversation. That’s another positive sign to me that someone, it’s somebody you want to work with. If they’re willing to come to the table with other professionals and potentially learn, and not that you’re going to come to the table and say, oh, well, it’s totally up to you. Do whatever you want. You came, you said, Hey, here’s what we’re trying to accomplish and why we think it fits. And then you are clearly open to learning more because you combine these strategies at that point. So I think those are a couple of really key points as we look at professionals we want to be working with and professionals that we can trust because the way I look at it is I don’t expect the professionals I work with to have all of the answers off the top of their head. I do expect them to be committed to finding the right answers and to be willing to be transparent with me if they don’t have the answer right off the top of their head.

Ben (05:27):

So you know ,my son, Ben, he’s 12, he has this habit of when he has a little bit of knowledge about something, he wants to demonstrate that knowledge and so he can kind of come across as a 12-year-old and I say, Ben, you’ll get a lot farther in life. Don’t be a learn it all. Be humble. Say, yes, you do know this thing, but you just learned about it yesterday and there’s probably a lot more depth. So be a learn-it-all. So if a client comes to me with something, I want to be curious. I might think it’s wrong or it’s right, but I want to learn it all. And as professionals, we have this experience. So I knew about a donor-advised fund because I’d helped clients with it in the past and this other CPA had his experience as well. So the client can benefit if we can both bring our wisdom, our knowledge, plus lived experience to the table. You have the client benefits, so is the person you’re getting advice from a know-it-all or a learn-it-all? I think that would be a potential red flag identifier.

Steven (06:24):

Yeah, I r, they aren’t often for me, but there are going to be situations where you get to a place where there’s just an impasse between two professionals,eally like that distinction. A learn it all clearly that had a great really positive outcome because of your approach to that. There are going to be situations, thankfully there, they aren’t often for me, but there are going to be situations where you get to a place where there’s just an impasse between two professionals and sometimes that can be ego, sometimes that can be a lack of understanding. There can be a lot of things that come into play, but what I’ve found in my experience is that you’re going to have a really challenging time trying to balance professionals that don’t agree with each other. You might get to a point where you say, I’ve got to pick who I’m going to trust and who I’m going to work with, or I’m going to work with somebody completely new. I mean, unfortunately , these, situations come up like this situation I’m dealing with on this filing status, we had to have a conversation of, well, here’s what the rules are and how they’re laid out, and I helped the client with some of the language and communication of reaching back out to this tax preparer. But then you get to the point where you got to say, okay, who am I going to trust and who am I going to move forward with? The client was even asking questions about, well, if this is just clearly wrong and they aren’t willing to fix it, at what point do I find a regulatory body to report them to? They brought up an interesting conversation of, well, if the IRS sees this and says, Hey, this was wrong, who’s liable as a taxpayer can I say, well, I worked with a tax professional, so it’s all on them. I’m not liable for any of this. So there’s a lot of different questions that can come up here.

Ben (07:41):

Yeah, ask Wesley Snipes about that. Who, who’s responsible? When I get tax advice, you’re signing your return, right? So maybe your CPA is assign it, maybe not. I don’t think this would be a good example in your case, but if we have conflicting advice, one of my rules of thumb would be something I learned from the book, Free Economics by Steven Dubner. He says, the first rule of economics is that human beings are motivated by incentives. So this doesn’t always work, but if you’re getting conflicting advice, try to take it back to the incentive. What incentive does Steven have for this versus what incentive does this other person have for this,,, insurance is the thing that’s mainly coming up in my mind is that someone told me that I should have X, Y, Z insurance policy or X, Y, Z trust that this advisor makes or X, Y, Z, you name it. And so while as a professional, I probably wouldn’t say, ah, that person’s just trying to take advantage of you. I would encourage the client to try to find the incentive, and then sometimes you can find the real meaning behind the advice.

Steven (08:42):

And Ben, that’s a conversation that comes up a lot in this industry because there’s so many different ways that people get compensated, and I think you and I are fairly aligned on this. There isn’t one perfect way to get compensated. The more important thing is what you’re speaking to is is it transparent? Are they willing to talk to me about it? Do I understand how they’re incentivized? Because when somebody offers me a professional service, I want them to get compensated. I want them to make money. I want them to provide for their family and go on nice vacations, all those kinds of things. What I don’t want is someone who feels like they need to hide behind something or try to kind of blur the lines on my understanding of where things are coming from. And so I get approached quite often with various tax planning strategies, sometimes ones that are new to me that I haven’t heard of, and that’s one of my questions that always comes up and is it immediate red flag to me if they aren’t quick and transparent with their response when I ask, how do you get compensated on this? Because again, I want them to get compensated just in a way I understand,

Ben (09:37):

And I think a close cousin to finding the incentives would be finding the conflicts of interest and there aren’t any conflicts of interest, is a big red flag. There’s conflicts of interest in anything me hiring you versus not. Are you hiring me versus not, or this product that someone might be recommending or the lack thereof. There’s conflicts of interest in every aspect of a professional transaction. It doesn’t mean that it’s bad or you shouldn’t do the transaction. It should mean though that these conflicts of interest are disclosed. I was had a meeting with a client the other day and they had a variable annuity that they bought like 10 years ago, and they don’t really love it. They don’t plan on annuitizing. It has broken through any kind of safety nets due to good market performance. And they’re like, well, it’s 2% if I surrender this year. And so I said, well, this is a conflict of interest for me to tell you, but something that has happened in the past is if there’s one year left in the contract and it’s 1% to surrender the contract and my services are 1% cheaper, you would be at a breakeven. Now I want to disclose, it’s a conflict of interest for me to tell you to liquidate that account and invest it with me, but here’s something we’ve done in the past, and then let the client make their own choice. So I think if you’re not hearing some sort of effort for disclosure of conflicts of interest, possibly red flag.

Steven (10:51):

Yeah, absolutely. I want to circle back just really quick on something we touched on. You made the joke about Wesley Snipes, which is unfortunately all too real, just to be clear. You hit it right on the head, Ben, you sign your own tax return and to me, it’s a red flag if you’re working with the tax repairer who won’t sign the tax return. In fact, we talked about the IRS is dirty dosen recently. That’s usually on the IRS’s list too of hey, be wary of tax repairers who aren’t willing to sign the return, but even if they do sign the return, your name is still on it and that isn’t a get out of jail free card, you’re still responsible for your tax return. So then it kind of goes back into this question of, well, what if I think I was working with an unscrupulous or unqualified tax preparer and I got bad advice? ,They’re unwilling to correct. If you end up in that situation, I would encourage you first to go through the same kind of exercise of start with curiosity, give them a chance to correct their mistake, just like you would want to have that chance yourself. But ultimately, if you’re dealing with someone who isn’t going to do that, you can go to the IRS’s website and there is a way to report sketchy tax preparers. And while I don’t want everyone listening to this podcast to suddenly get gung ho about leaving one-star reviews on Google for every CPA out there, if there are people who aren’t doing the industry justice, we all have a responsibility to make sure that that gets identified.

Ben (12:06):

Thats true. Yeah, that’s true. At what point do you want to protect yourself or maybe protect the next poor sucker that’s coming down the road? I guess you’ve got to ask yourself those questions as well.

Steven (12:16):

Yeah, Ben, let’s change gears here just a little bit still on this topic of when things go wrong, but there’s another example that came up recently and something we’ve talked about on the podcast before, so I think it’s relevant to discuss, and it’s always a little bit scary when people hear from the IRS, and that’s what this is related to. So backdoor Roth contributions. I’m working through a situation with a client right now where they did a backdoor Roth contribution in 2020 or 2021, and the IRS basically just doesn’t understand their own rules. And so the IRS reached back out to the client to say: Hey, you had this taxable event and here’s all this back tax and penalties you owe. I literally had to sit down and write a letter for this client explaining to the IRS how their own rules work more than anything, this is just a reminder, kind of like when we get pulled over by a police officer, when we’re dealing with someone in a place of authority, we really need to start by checking our ego and looking at how do we create the best possibility for a positive outcome. I tend to be a bit of a cynical person. We’ve talked about you and I both doing standup comedy before. I’ve got no shortage of fun ways. I could tell the IRS that they screwed this all up, but that’s not going to help anyone. And so we start with very objective. We start with things that we can support and evidence we can provide, and no condescension, no passive-aggressive comments about what are they even doing. Anytime we’re dealing with a regulator, a person and authority, same thing applies when you get pulled over and you want to be the politest person in the world; you can to that police officer, let’s solve for a positive outcome for the situation, not an emotional reaction to how we feel like we’re being treated.

Ben (13:50):

That is sound advice. Yeah, that’s something similar that we told our kids when they got their driver’s licenses ,, instead paying for medical expenses on a pay-as-you-andwhen you get pulled over, not if you get pulled over. When you get pulled over, you are in the wrong and the cop has all of the authority in the situation. Even if you are a hundred percent right and justified, that is not your time to fight it unless you really want to get tased, and that probably sounds like a personal issue, but there’s a chain of command and there’s order of operations. We can fight that later if that’s what you want. Now, me being the kind of dad that I am, you’re just going to pay the fine. I don’t care if you’re right or wrong, you’re going to pay it out of your own money. We’re not going to fight in traffic court. But yeah, so same general idea. There’s a time and a place, and if we’ve got a letter from the IRS, we’ve got to go through those order of operations. Hopefully you’ve got an advisor or CPA that you can turn that around to, and it’s not a super stressful moment in your life,

Steven (14:38):

And thankfully my kids aren’t old enough to be my clients yet. I don’t have to think about the dad angle on this because we are absolutely going to get them their money back, but we’re going to be very intentional about how those communications go.

Ben (14:50):

Got some good life lessons in there,

Steven (14:51):

Ben. I think we had a listener question following up on a conversation we had recently on the podcast around HSA. So let’s tackle another listener question.

Ben (14:59):

Yeah, so Steve writes in, Steve says, I have an HSA with about 60,000 in value. That’s excellent. That’s several years of time or some amazing, some amazing growth. Maybe he bought NVIDIA and his HSA two years ago or something, who knows? But I have never taken a distribution from the HSA instead paying for medical expenses on a pay as yougo basis. I am retired and no longer making contributions. My wife is the primary beneficiary of the account who would enjoy the same HSA benefits as I upon my passing. However, given the highly unfavorable tax treatment for HSAs inherited by a non-spouse, considering using the account for medical expense reimbursement going forward rather than continuing to let it ride, I’ve not seen any guidance about a methodology or the optimal way to decumulate the HSA, the idea of being to deplete the account over my wife’s life and combined lifetimes. Any thoughts? Thanks for you and all your team do from Steve. Great question. So we talked about this a little bit on our last episode, but we can reach back years, potentially decades to find medical expenses that we want to reimburse ourselves for if we want to. Decumulate, like we mentioned in the last episode, you can’t go back any farther than the age of the HSA. I think when I saw that this was 60,000, I assumed that it was quite old. So I think what my recommendation was is if there is a big expense that we want to offset, that might be a good opportunity to dig out some of those receipts, do that almost like tax loss harvesting. I’ve got a gain that I want to harvest; I want to offset it with a loss. We could maybe do something similar with our HSA. I want to take a $60,000 distribution to give a gift or go on a vacation. Let me offset with $60,000 worth of legitimate distributions that are younger than the HSA, and that could be an interesting way to decumulate. Also, I think I mentioned when I was answering this question it could be a fun way to reward yourself for all this really positive record-keeping over the years. It’s like, I’m going to pay for this Disney trip partially by my good accounting skills, which I thought was kind of fun.

Steven (16:52):

Ben. That’s all fantastic advice. The other piece that stands out to me is Steve specifically talks about the highly unfavorable tax treatment for HSAs inherited by a non-spouse, and I just want to make sure that we know that there’s an option here that if we’re not going to use the HSA for medical expenses, that once you’re over the age of 65, you can actually use those funds for non-medical expenses. You are goi,ng to pay ordinary tax. There aren’t going to be penalties or interest. There’s not some egregious penalty for doing that. And so if you’re to that point where you say, you know what? We’re in really good health. We’ve already gone back and we don’t have big expenses that we can reimburse. Maybe you start using those funds anyway, knowing that you’re going to pay a little bit of tax on ’em but that you’re going to get the benefit of that hard work th,eat you had done. And if you ultimate goal is legacy planning anyways, geez, maybe we accelerate taking that Disney trip and doing it while we’re all so alive we can enjoy it together. So thankfully, once we at the age of 65, there aren’t additional penalties, we’re just paying ordinary income tax.

Ben (17:49):

That’s an easy one for me to forget about because yeah, I think HSA, I think I’ve got to match up my pluses and minuses, right? I got to file, I did a distribution, I got to match that out. But yeah, worst case scenario, I think we mentioned this last week, it’s just like an IRA distribution. You pay income tax, no big deal. Paying taxes, we often remind ourselves and clients paying tax means we made some money at somewhere some junction, so we should pay taxes, paying taxes as good, that means we’re profitable somewhere.

Steven (18:14):

I don’t know who this is attributed to, but I heard it again recently. The idea that the only thing worse than paying a lot of tax is paying no tax. Yeah. Because it usually means we had no income. Yeah.

Ben (18:23):

There’s a similar one that the only thing worse than a loss in your investment is a profit that turns into a loss. Excellent. Well, any parting thoughts for us today, Steven?

Steven (18:33):

,Yeah, Ben, I enjoy the conversation as always, as we talk through these things. Again, it’s really about the simple consistent things over time. So thanks for tuning in and learning more about what you can be doing to not overpay the IRS.

Ben (18:44):

And my parting thought for all of you is until next time, don’t let the tax man hit you or the good Lord split you

Steven (18:50):

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.