Writing the book on taxes, literally

Ben:

Welcome back to the Least Boring Tax podcast, also known as the Retirement Tax Podcast. I am your humble co-host, as always, Benjamin Brand. Joining me as always, Stephen Jarvis, how you doing? Steven?

Steven:

Ben, I’m doing really good. Excited to be talking about taxes in the least boring way possible.

Ben:

Well, speaking of least boring, I heard a little bird told me that you had some exciting work on your plate last year, and it finally came to fruition in the form of something that our audience can have access to. Could you tell me more about that?

Steven:

By a little bird, Ben. I mean, I sent you a personally autographed copy, but yes, the

Ben:

Little bird was the UPS man.

Steven:

Yeah. I dedicated a lot of time to writing a book called Don’t Get Killed on Taxes. That really came from this motivation of we’re all expected to pay taxes every year, but none of us are really ever taught about taxes. And the, so there’s this big gap of people who want to better understand this massive expense in their life and their retirement, but don’t really know where to start or what to even do. And so what I’d love to do today, Ben, is talk through just kind of the first part of this book, because it gets into a bunch of specific strategies that might be applicable to some of our listeners, but we really need to start with foundation of kind of thought process philosophy around taxes. And so the book actually starts with myths that taxpayers need to stop believing about taxes.

Ben:

Yeah. I love the myths. I think in the book you mentioned the quote that taxes are a matter of factwhereas investments might be a matter of opinion. So let’s talk about that.

Steven:

Yeah. One of my favorite quotes right along with that is that the tax code is written in pencil. And so taxes are a matter of fact right up until they get changed. But, but yes, it feels more concrete than some of the other planning that we do.

Ben:

Excellent. And how can our audience get ahold of a copy of this book?

Steven:

It’s actually available on Amazon if you search for search for Steven Jarvis, CPA or don’t Get Killed on Taxes, and it’s available as an e-book as well as a physical copy.

Ben:

I really love that name, by the way. All right. So let’s talk myths.

Steven:

Yeah. So the first myth that we really, that we kick this off with, and this one was an important one to me just because of the, you know, hundreds of conversations I have with taxpayers and the myth is that taxes are a matter of fact, and I have no control over how much I pay. And the reason this is such an important place to start is that a lot of taxes can feel like something that just happens to us, especially if we’ve been a W2 employee at any point in our lives and we get our paycheck, they’ve already taken the taxes out, we get to the end of the year and it feels just like we’re saying, okay, here’s what happened. Let’s move on with life. And so there’s a lot of things that kind of train us into this idea of, well, taxes just happen, just kind of keep moving ahead. And that’s just not the reality. Ben, this is something you work with clients on all the time of , I’m pretty sure I learned this from you, but this idea of sanding off the rough edges of your lifetime tax bill, and that takes proactive choices. It picks us doing things. And so that’s why this first myth is so important of this isn’t just something that happens to us. We can do something about it.

Ben:

I really like that, you know, the not that they’re, they have some devious plan, but they almost count on taxpayers to not be proactive. You know, I’ve heard some really smart people say that the biggest advantage that we have over the IRS is that we have the entire 30 years of our retirement, the entire scope of our retirement, to decide how much taxes we’re gonna pay. And we could take it to two extremes. We could wait until it absolutely is mandated that we take money out of our retirement accounts on one end of the spectrum, or we could cash out our IRAs entirely on the first day of retirement and pay all the taxes all at once, and everything in between, you know, the IRS looks at your taxes one year at a time, with exception of looking back two years for your Medicare premiums. Other than that, we get to decide over 20, 30, 40 years of retirement when exactly we are gonna pay taxes. And that’s a tremendous advantage that we have over the IRS.

Steven:

Yes, this is likely one that a lot of our listeners are probably already ready to embrace. They come and listen to us talk about taxes all the time. So the, the next myth that we talk about is this idea that paying more in taxes is what I should do. It kind of gets wrapped up in this idea of paying my fair share of taxes. And we’re not gonna go down a political rabbit hole here. I like to work with people individually on taxes because my experience has been that people on a personal level would prefer to pay less in taxes. And from a legal standpoint, everything we share on the show are things that we both work with clients on that are, are perfectly allowable under the tax code. The tax code creates choices for us. We’re not talking about setting up secret accounts in the Cayman Islands. We’re talking about taking this complex set of rules and saying, which ones apply to me? And how can I be intentional over that extended period of time to reduce the amount I pay?

Ben:

And you could pay less taxes, guilt free, right? Because if your sense of patriotism says, I should be paying a lot more, there’s ways to voluntarily pay more. Is that correct?

Steven:

That’s absolutely correct. Although no one takes me up on that. The, one pushback I’ll get that we sometimes I have to talk a little bit about is I’ll have people say, but I really care a lot about social programs that I’d like to support. What, whatever it is, and, the follow up I have to that is, Hey, would it be all right if we still worked on a plan together to reduce your tax bill so you have control to decide where those monies go. So if you have a particular social cause that you’re very passionate about, I still work with clients to say let’s retain that control. Let’s pay as only what we have to in taxes. And then you can go pick the organization that you think is doing the best job addressing that issue.

Ben:

Right. More direct action than just paying taxes. Cuz your taxes go to any number of things. If you want to take direction, direct action for a charity. I, I think there’s better way to, I appreciate the idea, but there’s probably more direct action we could take if there are charities that we deeply care about.

Steven:

Yeah, absolutely. Now, Ben, the next myth that we included that this might be one of the most important from a tax planning standpoint. And the myth is this idea that as long as I get a refund, I’ve won. And again, as we talk about how taxpayers have been trained, this one is a theme I see all the time. In fact, as we’re recording this, it’s in the lead up to the Super Bowl. I can promise that during the Super Bowl there will be commercials from the biggest DIY tax prep software is out there, which we’ll talk about in a second. And all of their messaging is around let’s get you the biggest refund possible. And that’s not how we win against the IRS

Ben:

Yeah. Sometimes we have a little bit of fun with this in our office in that we’ll have the tax prep software up at the end of the year and we’ll have, you know, all their IRA distributions, Roth conversions, all the things that they’ve done so far this year. And then we’ll ask the client, do you prefer to get a refund or prefer to pay in? And some clients will say, well, I love it if I get a thousand dollars refund and we just program it right into their tax plan that we’re just gonna make a distribution and do extra withholding. So we kind of we’re lighthearted about it, saying, we can get you whatever refund you want, you’re just gonna take it out of your investments. But it’s not my money. It’s their money, right? So whatever they want us to do, we’re gonna do.

But we do it that way to kind of reinforce this idea that getting a refund isn’t winning. You still, you know, there’s still a column at the bottom of that return that says, this is the total amount that you owe. If you pay it in more than that and withholdings or estimates you’re gonna get, you’re gonna get a refund. So the refund itself isn’t winning, it’s the total amount of taxes that you pay times 30 years getting that number as low as we can. That’s what winning really feels like, because that’s actual more money in your pocket, not giving a tax free or an interest free loan to the government. And then just getting it back, you know, nine months later, whatever it’s.

Steven:

Yeah. So instead of focusing on whether you got a refund or made a payment at the end of the yearline 24 of the 1040 is the one we want to zoom in on. That’s your total tax that you’re talking about. So if you go back and look at your 2021 return, or you’re looking at your 2022 return, it’s, it’s the same line both years line 24. That’s what we need to focus on. That’s our baseline for let’s start trying to move the needle.

Ben:

I’m thankful you didn’t put me on the spot and ask me what line, cuz we’d have to edit that in after the show, cuz I have no idea.

Steven:

And

Ben:

Where it is roughly, I don’t know the number. So this is this one. Keep you around, Steven.

Steven:

Yep. I know I’m a bigger tax nerd and that, and that’s okay.

Ben:

Excellent. What’s the next myth we could tackle?

Steven:

Yeah, so I alluded to it already, but this idea that if I use tax preparation software, I’m all set. And it ties right into this myth around getting big refunds because most tax prep software, particularly DIY tax prep software, is really geared to reinforce that and is geared to get you to take actions that drive up your refund as you go through it. All the prompts, all the questions, they’re all about, Hey, look how massive of a refund we got you this year. It and adding to that, all those softwares will also default to encouraging people to make estimated payments. And we see this even when people are W2 employees and they’re getting all of their weight, their income tax directly withheld because, and the reason that happens is because the tax prep software wants you to come back every year. And they know that, we’ve all been programmed to think that a refund is winning. And so if they’re helping you get a $5,000 refund every year, even if it’s kind of smoke and mirrors and you haven’t really won, you’re, Hey this software’s so great, I got this big refund. Yeah, of course I’m coming back.

Ben:

That is so diabolical. I love it. Yeah.

Steven:

Unfortunately, I can even understand why the tax prep software does this. The  forward looking planning is a lot more challenging. It’s a lot more specific. It takes some some estimating and some decision making and that that can feel big and dark and scary. But that’s where we get the gains. That’s where we get the improvements. That’s where we get the wins when we look at our lifetime tax bill.

Ben:

Yeah. And tax software is like any other kind of calculator or software. If you have bad inputs, you’re gonna have bad outputs. So before Steven was kind enough to do our client’s tax returns, I had countless frustrations over the phone, over Zoom helping clients with their tax software with things like qualified charitable distributions. Like I have X number of thousands of dollars in distributions, but it, but the taxable distributions does not match and the software doesn’t like that, and what do we do? And that was a really difficult thing to explain around for clients thatyes, there was a distribution, but only part of it was taxable. So you’ve gotta have some level of knowledge, I think, to use the tax soccer correctly, or even if it doesn’t get caught in, you know, in year one or year two at some point down the road that could come back to invite you. And it’s always harder to go back years and figure out what we told the tax software to do.

Steven:

Yeah. Well, another example of a client that we worked on together had, he had been a DIYer doing a great job, real smart guy. And a couple years ago he used tax prep software, and as far as I can tell, he did it correctly from the standpoint of he filled in the prompts the software gave him, he didn’t make any errors in data entry. He did exactly what the software told him. And we still had to go back and amend a return for him to get about $20,000 back in taxes because the software wasn’t designed to help him in that situation. And it was a very specific situation dealing with some employees non-qualified stock options. And so very specific situation, but again, he did everything the way the software told him to, and it was still wrong to the tune of $20,000 in taxes.

Ben:

That’s amazing. That’s amazing. So what’s the next myth we can tackle?

Steven:

Yeah, so then classically, and it’s alternative to, I’m doing my return myself using software is, okay, well I have a tax preparer, which that can be a really great step and a really important step to work with a professional in your taxes. But we can’t assume that just because we work with a tax preparer that we’re all set from a tax planning standpoint. Most CPAs and enrolled agents EAs are just incredibly laser focused on what happened last year and can we get everything reported. And I don’t even necessarily mean that as a knock on the profession. The tax code is so large and complicated and so deadline driven that they’re doing all they can to help out the clients they’re working with. But it can be easy for a client to assume, Hey, I work with this really smart tax person, they must be looking out for all of those things for me. And most of the time they’re not, they’re only focused on what happened last year.

Ben:

Yeah, no knock on tax planners at all. But if we’re looking back a couple myths, as long as they got a refund, I have one. That’s the instruction that most of us have given our taxpayers. So just like the calculator example, if you have bad inputs, you’re gonna have bad outputs. If your tax planner thinks that your number one objective is to get a big refund, that’s obviously what they’re gonna focus on. That’s what you told them to do. But in reality, we know that the tax over the course of our retirement is gonna be in the high six figures and even low seven figures for many of the people listening to thise podcast. If we’re just focused on each year individually, we’re not taking advantage of any sort of leverage that we have in our plan deciding when to take this income. So what an example that I heard, again, not a knock on tax preparers at all, but a tax preparer is driving the car, looking through the rear view mirror, looking at what is already in the past, proper retirement planning combined with tax planning is looking out the windshield. What are the next 30 years or 30 miles gonna be and how can I act appropriately?

Steven:

Yeah. So for our listeners who work with a tax preparer, this can be something that you start having an impact on just in the expectations you set with your tax professional of not just, Hey, let’s make sure we get a giant refund this year. But having that conversation of really what I wanna do is minimize my taxes over the coming years. Are there strategies that we can talk about?

Ben:

Love it. Love it. Now what’s our final myth before we move on to our listener question?

Steven:

Yeah, so there are certainly other myths that exists out there about taxes, but the last one we included in the book, and Ben you’ve already been speaking to this, is this idea that taking taxes one year at a time is enough, especially because I know my taxes will go down in retirement. We kind of grouped a couple in there. So a lot of people like to think about taxes once a year because that’s when they come due. We take care of last year and we move on. And then the second part we tied in there, because we are very focused on the long term, is this idea that so many people really lean into of let’s just not worry about it. My taxes will go down in retirement. They’ll go down later in life. And I mean, you work with retirees and people getting ready for retirement all the time, then you know, this just isn’t the case.

Ben:

Yeah. I want your income in retirement to be dictated by your goals specifically. So a lot of times if people say, I think my income is gonna go down to retirement, maybe it will, maybe it won’t. I wanna start with the goals and then we’ll make the income match that through your investments or through whatever income means that you have. But there are a lot of things that we can proactively do during our working years, just like there’s things we can proactively do in our retired years or if we’re approaching some sort of hybrid or we’re doing both retiring and working at the same time. So those are some fantastic myths. Any final words, Stephen, before we move on to the listener questions?

Steven:

Well, so as you’re listening to this episode, it’s likely the middle of February, it’s releasing on February 15th. So we’re kind of in the thick of that tax filing season that we traditionally think about. So this is a good time to take a step back and say, okay, what are those things that I typically think about taxes and how do I need to shift my mindset so that I can take advantage of these proactive opportunities and not just get in this rut of, I think about taxes once a year I compile a bunch of documents and I move on.

Ben:

Excellent. Excellent. Well, let’s dive into our listener questions. Fred writes in and Fred has a question for Steven. He said, I filed based, I assume he means my income taxes I filed based on income for years. Recently I inherited some investments and I cashed them out and I sent the proceeds to my children. Will I be taxed on these or will my children be taxed on the receipt of these funds? Let’s say you Steven.

Steven:

Yeah, this is a great question from Fred. And this is a really common scenario that people come across of they’ve only ever experienced one type of income. And then something changes, whether it’s an inheritance, it’s retiring, it’s starting in pension, it’s social security, whatever it is, what they’ve been used to for decades is now different. And for most of those situations, and certainly in Fred’s situations, unfortunately I have to start the answer with it depends. There’s, if I was having a conversation with Fredthere was some things I would instantly need to start learning. Okay. When you say you inherited some investments, we need to understand what type of investments are we talking about? Is this that you inherited someone taxable brokerage account, you inherited some, some stocks or mutual funds or ETFs or whatever they might be, but it’s an, a taxable account cuz that’s a totally different situation than if you inherited someone’s IRA and that the tax treatment is completely different.

And then we need to make sure we’re using the state the term terminology consistently. So when he says that he cashed out the investments and then is sending the proceeds to his children, was that sense to the children as a gift? When we say it was cashed out again, did we, did we sell stocks or did we make a distribution from an ira? Did we sell stocks and then make a distribution from an ira? There’s some different really key pieces here to make sure we know how this is going to be taxed to Fred. And I would say from a really high level, lots of disclaimers with us from the little we have, I would say most likely there’s going to be some tax impact to Fred and very unlikely any tax impact to the children just because of how gifting rules work.

The federal exemptions on kind of our lifetime gifting and our, our estate taxes are so high that most people aren’t ever gonna pay taxes on gifts to their children. But that doesn’t mean that there might not be a reporting requirement. Depending on how much Fred is giving, he might have to file IRS form 709 and at least acknowledge the IRS. Here’s all this money I gave to my kids. So there’s a bunch of different moving pieces here and we would need to answer some of those questions before we could say definitively say, yes, here’s how you’re going to be taxed.

Ben:

Yeah. So for Fred, the results are somewhere between no big deal and, and noo. I don’t my kids take a lot of Spanish, I don’t know if that’s the proper use of no buenoyeah, so for Fred, if anybody’s gonna pay the taxes, it’s very likely that Fred is going to, if there’s any taxable consequence, very unlikely the kids will pay any taxes. So thanks Deb for that one. That’s fantastic. If you give money to the kids, you wanna structure it properly. You know, if there’s annual gifting, de minimus guidelinesthat sort of under the radar. You wanna make sure that you’re not just giving your kids $50,000, you can give them that amount, but you should structure it properly. You should structure it in something like $16,000 increments. So that’s on individual advice.

Google, whatever year you’re listening to this, what the appropriate amount is. But I give my son and my daughter-in-law X amount of dollars. My wife gives my daughter, my son and daughter-in-law the same amount. So you can, you can structure these things in a legal way, but just me writing you a check for 50,000, that is not the right way. Will it ever come to bite you in the butt? Probably not. But if it does, boy will that be difficult to kind of figure out what the details are and rectify years and years after the fact. And you can give anybody really any amount of money. But if you give over that annual gifting limit, then we’ve gotta make sure it’s some proper paperwork is filed. Again, not the end of the world. Cuz aswe’re recording this, I believe it’s a million dollar lifetime exception for giving. So we just take away from that amount. But we wanna make sure that we do all the paperwork properly and make sure it doesn’t come bite us in the rear end later. So thanks for the question, Fred,

Steven:

Yeah, so Fred, I’m sure you’re hoping for an answer like $13,282. Unfortunately we can’t get that specific, but that at least gives you some marching orders on what to figure out next.

Ben:

Excellent. And tell us again, Steven, how we can find your book.

Steven:

Yeah, it’s called Don’t Get Killed On Taxes. It’s available on Amazon, both physical copy and e-version.

Ben:

Excellent. And be sure to leave Steven an excellent author review as well, if you buy that on Amazon. So excellent episode this week and until next time, don’t let the tax man hit you, or the good Lord split you.

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.