21 Strategic Year End Tax Moves | Episode 12

Welcome to The Complete Wealth Management's podcast, where tax experts and Certified Financial Planners Dave Alison, Conrad Levesque  and David Roth unpack "21 Strategic Year-End Tax Moves" for to help build your wealth. Join us as we navigate key actions to optimize your tax situation before the year concludes.

👉 Maximize retirement contributions, seize Roth IRA opportunities, and leverage triple tax benefits with HSA contributions. 

👉 Explore opportunities like the Mega Backdoor Roth and strategic stock sales. 

👉 Consider charitable giving optimization and explore tax-efficient gifting. 

👉 Ensure property tax deductions, cost segregation for property owners, and explore Qualified Opportunity Zones.

👉 Fine-tune your withholdings, evaluate stock options, and review paycheck withholdings.

Whether it's tax loss harvesting, maximizing 529 plans, or prepaying property taxes, we've got you covered.

Tune in for a concise guide to make the most of your financial resources before year-end!

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The information provided in this presentation is not intended to be individual investment advice or legal advice.  The information provided is for informational and training purposes only.

Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Transcript

Speaker 1: 0:01

What's going on, conrad?

Speaker 2: 0:04

Living the dream. Yeah, you know it's a nice dreary day here in Georgia and I got a child that doesn't want to sleep through the night, so it's everything is wonderful in my world.

Speaker 1: 0:16

How many hours did you get? You guys were just on vacation, weren't you? Or did I see on Facebook you were up in the mountains.

Speaker 2: 0:22

Yeah, we actually took Chelsea and I always celebrate our anniversary and we eloped during COVID. We go up there every year to the same orchard and we actually took pictures of Caroline this year. Awesome time, great weather, always a good time in Blue Ridge, Georgia. If you haven't, have you ever been to Blue Ridge?

Speaker 1: 0:40

I haven't, but you know I was looking. I think we were only like two and a half hours from each other because I was in Linville, north Carolina. Yeah, up in the Blue Ridge Mountains, kind of outside of Asheville, which was, it was gorgeous. All the leaves were changing Uh-huh. We were just warm, 75 during the day, a brisk 40 at night time. Oh, yeah. I think we were too far from each other.

Speaker 2: 1:04

Yeah, no, it was a great time. We enjoyed it. Of course, it was the first time we went with Caroline, so we're learning how to do all this as new parents. And you know, nobody ever told me that it would be this hard to travel with a six month old.

Speaker 1: 1:18

So we took our eight month old to Cali or to Italy and we started traveling with Avery when she was, I think, six or eight weeks old. So really, yeah, our kids always grew up as travelers. Yeah, it kind of core value, we're all about it. So you know what, if you're not sleeping at home, why not sleep while you're out traveling? That's right.

Speaker 4: 1:40

That's right it could be worse.

Speaker 1: 1:42

David was at home with sick kids, so oh man.

Speaker 4: 1:45

Yeah, she's going to the doctor today. She's had a fever for like four days now and they're like she should come in and see so.

Speaker 1: 1:53

So the joys of where we're all at in the phase of life, with that bringing home sickness. Well, let's go out and get things kicked off. We got an awesome episode today. It's hard to believe we are in the home stretch of 2023, almost mid-November here. So we're going to go out and get this episode kicked off with 21 strategic tax moves that you should consider before the end of the year, because, as we all know, if the clock strikes midnight, it is use it or lose it when it comes to a lot of these strategies. And so let's go ahead and we're going to get rolling here, all right.

Speaker 1: 2:35

So in this episode, we're going to be talking about 21 strategic tax moves, and I can't think of anyone better to be joining me today than, of course, my colleagues David Roth and Conrad, two tax experts in their own right. Conrad, of course, a CPA, david, an enrolled agent admitted to practice before the IRS. And so let's go ahead and let's just start brainstorming here. Of course, 21 strategies. We could make this episode four hours long, but of course, none of our viewers would stay on with us that long. So we're going to kind of rapid fire through some of these things and just go kind of in an order of some things that we think are quite simple, things that almost everybody should be doing.

Speaker 1: 3:16

And I think kind of the no brainer one right out of the gate is just double check and make sure you're maxing out those retirement account contributions, take advantage of those tax benefits.

Speaker 1: 3:26

And I'll kind of kick off on this one that when we talk to clients about this number one is if you have the discretionary savings ability and you're still working, make sure you are maxing out those 401ks. If you're in a lower tax bracket maybe you don't have a very high household income, you're in that 12% or 22% or maybe even 24% it might be prudent to look at maxing out your Roth 401k. And then, if you're in those high tax brackets 32, 35, 37% it might be more prudent to defer that income while you're in these high tax rates and go to the traditional 401k. But I mean, david and Conrad, how many times do we see that when we're doing taxes for people and we get their pay stubs or their W-2s, we find out that, hey, they just didn't quite hit the maximum and there could have been more benefits that they could have partaken in throughout the year had they just kind of focused and checked this off the list before December 31st.

Speaker 4: 4:32

Yeah, it happens all the time. You could see it in the W-2 where it shows the 401k contributions and it's November, right now, and now is really the ideal time, or really the last time, to check it, because you might only have a couple more pay periods to get that in. So you really want to look at this right now. Make sure they're maxed out so you can get it in, because this is one of those situations that if you do not get it in by the end of the year, you can't max it out.

Speaker 1: 5:00

Now, the only exception to that, conrad. Touch on this because I know you have a lot of business owner clients. It's a market you really deal with all day long. Business owners if they own the business, they get a little grace period, don't they?

Speaker 2: 5:11

Absolutely, and depending on the plan that you have set up. You know you really, as a business owner, typically have, under a lot of structures, up to April 15th or the filing due date, right, and that's a very key part of this for folks in California. You actually just got extended a little bit further and so we have a lot of extensions into the next year. I call it next year's money for today's benefit, right, it's a cash flow game that we play, but you ultimately can get to the end of the year and say you know, what did I actually make for my business? You should know that throughout the year anyway, but I digress on that. But really, once you get to the end of the year, you'll have an idea of what you've made. So low-key contributions can be made based on that amount.

Speaker 2: 5:53

For you know, schedule C filers Covers will still be based on your W2 wages, but you still have timing of these things that you get to utilize as a business owner, so it's a great opportunity for them. I'm going to actually double down on this and say, especially if you're a W2 employee, don't just look at only your 401k, look at your full benefits package, right, this is a great time, especially with the open enrollment, to look at next year's positioning for things like long-term disability, short-term disability. Are you opting into these tax-free benefits at work that a lot of other people don't have?

Speaker 1: 6:32

Well, I mean speaking of that. I just did a talk from my other company, c2p, the national company for all of our employees. We have about 60, 65 employees and talking about the benefits of maxing out their HSA. And so you're in a high deductible health plan, you have access to an HSA account, it's got triple tax benefits tax deferred income going in, tax-free growth over time and tax-free withdrawals for qualified medical expenses. And so again, check your numbers. If you haven't maxed this out for 2023, this could be an area where you can save some income taxes and again going into your 2024 benefits. Check out this plan if it's available for you. In some cases, employer, your employer might even put money into this for you and it's an incredible retirement asset. So, kind of check all those things. Check your 401k, check your HSA. If you're eligible, make sure you're taking advantage of these opportunities. Yeah.

Speaker 2: 7:31

I love that the HSA is one of the most underutilized accounts that I see. All the time that I harp on that and I will die on this hill that the HSA should be maxed out every year by every single person.

Speaker 1: 7:43

A hundred percent and I see so many people miss that and let's kind of close the loop on the benefit side of things. So we talked about the 401k and the other side on the 401k is, even if you're maybe retired and maybe you have a little bit of consulting income and you don't necessarily need that income to live off of, there are self-employment retirement accounts like a CEP IRA or a solo 401k that you could participate in. So this isn't just for the younger accumulator, this is really anybody who has any income coming in at all from some sort of kind of work related self-employment consulting side hustle or, of course, your normal W2 day-to-day job. We talked about the HSA and then the last two are the FSA. There's really two types available out there. There's a dependent care FSA, which you can use for childcare expense if you meet certain eligibility requirements, and this is a great benefit because it's like being able to use pre-tax money to help offset some of your childcare cost.

Speaker 1: 8:51

And then there's your medical FSA, and the key I wanna kind of touch on with the medical FSA is it's in many cases use it or lose it, and so make sure if you got money left in there, if you deferred and put some money in there at the beginning of the year and you have some left. Get out there and use it before December 31st. Now a lot of plans might allow you to roll over $500 to the next year. But again, pay attention to those numbers. And it becomes really important, as we kind of land the plane on the end of the year here, that you don't lose any money or miss out on any deferral opportunities like the dependent care, fsa and being able to use that to pay for some childcare.

Speaker 2: 9:36

Absolutely great points great points.

Speaker 1: 9:39

So let's backtrack a little bit something that most people have access to as a Roth IRA and outside of the HSA. If I had to name my second favorite account to accumulate wealth in, it's a Roth IRA. Because, david, what are the characteristics of a Roth?

Speaker 4: 9:55

IRA yeah, roth IRA. It goes in and you pay taxes as it goes in. But when you put it in there it grows tax deferred and then when you take it out it comes out tax-free, as long as you take it out qualified.

Speaker 1: 10:08

So it's not the triple tax benefit like the HSA, but it's a double tax benefit, and if you think taxes are gonna be higher in the future or if you think your wealth is gonna continue to grow and you're gonna be in a higher tax bracket in the future, a Roth IRA is a great place to stash away some money, have it grow, invest it and then it is tax-free for retirement. You could also access the money before retirement without any penalties or any taxes, but it's only up to your contribution limits, and so there are limits to how much income for you to be eligible to contribute directly into a Roth IRA. I don't have the numbers off the top of my head. You guys have the numbers off the top of your head, I think for married filing join us.

Speaker 2: 10:53

I mean, it's a decently high number, 212,000 of AGI, something like that, I mean. But we have a lot of clients that make four, five, 600,000 and would love to fund the Roth IRA anyway.

Speaker 1: 11:05

So you know how do they do that.

Speaker 2: 11:07

Conrad, oh, you know. I'm glad you asked, dave. You know it's called a backdoor Roth contribution, right, and you hit on. You know some of the traditional IRA characteristics where you get a tax deduction or an adjustment on your taxes when you contribute to a traditional IRA but if you make too much money you can't deduct that in the current year. You have what's called a non-deductible IRA contribution and all that means is you have X number of dollars that you put in that can come out of that tax-free, right? So we leverage that and say we'll be put $7,000 in a traditional IRA and it's non-deductible, right At the end of the year we convert that to a Roth IRA and really there's no tax on that because you're converting your basis. There is no taxable amount that we have to recognize as part of that transaction.

Speaker 1: 12:00

Yeah, this is one of those things. I kind of call it the no-brainer. We do this for almost all of our clients at Allison Well Management who have earn income that are high-income earners. Now there are some rules you got to be aware of. There's this thing called the pro-rata rule which you have to be able to navigate. I'm not gonna cover that today. We have a YouTube video on that on our Allison Well Management YouTube page. So you might be checking out this podcast on YouTube. Check out some of our other videos. We kind of walk through how that pro-rata rule works. But there are some things to be aware of. But at the end of the day, to your point, if we can get six $7,000 for each person into a Roth for a high-income earner, it's just kind of one of those no-brainer moves when you're saving if you have the discretionary opportunities.

Speaker 1: 12:43

David, you brought up a great opportunity, though. This was a couple of our clients that they were retired. Well, one of the spouses was retired, the other one was still working and had earned income and what you recommended we do was actually a spousal IRA that for some of our clients. They were not at a high enough income level that they were eligible to make a contribution directly into the Roth, but one I could think of off the top of my head who was retired but has a very high amount of retirement income, well over the contribution limits. We were able to do a spousal non-deductible IRA contribution and then the backdoor conversion to get that $7,000 into the Roth.

Speaker 4: 13:35

Yep, and with that, though, the one thing I'd add is that you do need earned income for that. So there was a small amount of earned income. So as long as you have at least that limit of earned income, then you can contribute that to that non-deductible IRA.

Speaker 1: 13:49

Absolutely and that was the case. He was doing some consulting work, husband was, and so the wife. We were able to do that backdoor spousal. So the 529 is. The next kind of thing is we're checking the box on how you're accumulating money. We talked about the 401K, we talked about the Roth IRA. We talked about the health savings account. We talked about the dependent care FSA and the traditional medical FSA.

Speaker 1: 14:17

If you're looking to save money from an educational benefit standpoint a college or an educational 529, I can't say college anymore because of the 2017 Tax Cuts and Jobs Act now allow us to take withdrawals out of a 529 plan for a private school K through 12, and those distributions are tax-free. But you might wanna check out your state limits. If you're in a state like Amman in South Carolina that gives you a state tax deduction for putting money into that 529, that could be another way to reduce some of your state tax liability. But even if you're not in a state like, for example, california gives no state tax benefit for the 529, it still allows you to grow money tax deferred and then take it out tax-free later on in life. So there are some tax benefits, while not so much on the front end of things. It's really on the back end of things.

Speaker 2: 15:18

Yeah, yeah. And Dave, how many of your clients come to you and say I don't know if I wanna fund a 529, I don't know if my kids or grandkids are gonna go to college? I've been hearing that all the time and I still make the recommendation. Hey, but do you know, right? So should we take a blended approach and with the lower limits that you can fund anyway, does it still make sense to fund a 529? What are you guys seeing and talking?

Speaker 1: 15:43

about Absolutely, and I think it depends on the client's financial situation, right?

Speaker 1: 15:47

So there's a couple of things.

Speaker 1: 15:48

If it's a very high net worth or ultra high net worth family, that of course you know, sometimes we advise well, just go ahead and max out those 529 plans because you can use it for educational planning for other family members, right that?

Speaker 1: 16:03

Maybe you want to be able to help out and support because you can change the beneficiary, so maybe your child gets a full ride to Stanford and you don't need to tap into that 529, but maybe you have a niece or a nephew or maybe, a long time from now, you have a grandchild that you want to be able to help out with educational funding, and so it's not like you'll lose the money. But then, on top of that, we had recent tax law that was passed at the end of 2022. That now says if you have leftover money in a 529, the beneficiary can roll a portion of that money tax free to a Roth IRA for their benefit, and there's a lot of moving parts and rules on how that works. It's going to be available basically in 2024 and beyond, so there are some things to think about in terms of release valves on that money. It's not hostage and locked up forever.

Speaker 1: 16:57

Yeah great points. So let's talk about investments. If we go back to 2022, there was a much greater opportunity for this, because it was a very volatile, essentially a down year for the stock market. 2023 so far has been a pretty good year, bouncing off of that rebound. But, of course, in any big broad market, there's always winning investments and there's losing investments, and so one thing that's available is a financial technique for your non-retirement account money. So this is like your brokerage accounts, your living revocable trust, anything that's non 401k or IRA, which is called tax lost harvesting or what I like to call tax deduction creation, and this is where you optimize your taxable investment accounts by strategically selling underperforming investments, and that essentially creates a capital loss. And so what can you do with that capital loss? What are some ideas that you see that we've done with our clients or that you can share with the audience here?

Speaker 4: 18:02

Yeah, I mean, I know we've had a couple of situations where we use that to offset gain, one with a sale of a business and another was with a sale of a home. So you had this big gain from this accumulated asset that was sold in a particular year. But we happened to have specific assets that they had a tax deduction attached to it because they were at a loss, so we could sell it and it would offset what would otherwise be a large gain and the other side is company stock On tax loss harvesting.

Speaker 1: 18:30

A big part of our business at Allison Wealth is managing assets on behalf of our clients, and when we're managing their post tax money it's a very different strategy than when we manage their pre tax money. It's peddle to the metal on trying to maximize the gross return because it's all going to be taxed at ordinary income when it comes out of those retirement accounts. But with post tax money it's not just about what you make, it's about what you get to keep net after taxes. And so we're constantly throughout the year looking for tax harvesting right, because a lot of times, if you look at the kind of history of the market, the fourth quarter tends to be a pretty good quarter for stock market returns. Some people call it the Santa Claus rally. Q4 and Q1 are historically good times for the market.

Speaker 1: 19:23

That might not be the right time to look for your tax harvesting right, and now we're educating you on this going into 2024 if you're not having a professional do this for you. But look at the example of 2020. When the pandemic hit In March and April, the market fell by 30% but, as we all remember, it had almost a V-shaped recovery and by the end of 2020, it actually finished in the positive. And so if you were waiting till November or December to look for tax-lost harvesting opportunities, you missed them forever because they hopped to their head up in March and April when there was total chaos and uncertainty in the world. And so look at tax harvesting throughout the entire year. But again, it's a good thing. Right now, what you can do before December 31st is just check your investments, and Conrad talked about one rule that you need to navigate, because, like what, if I have a stock that I bought and it's down in value, but I really want to hold that stock, can I sell it, realize the gain and then buy it right back?

Speaker 2: 20:28

Yeah, You're talking and I love that you've posed this, because you're talking about something that I see a lot, which is called the wash sale rule, right, and what. The IRS and Congress got really smart at some point and said, hey, we should really consider the fact that you can sell something at a loss and rebuy it and you get to claim that loss, but you're still on the asset, right? They figured out that's not right. We don't want to do that. We don't want to let everybody in the world do that.

Speaker 2: 20:56

So they implemented a 30-day rule, right? So if you sell, if I hold Amazon stock that drops by 10%, I can't sell it and rebuy it within the same 30 days and claim that loss. I actually have to wait 31 days and once you get through that wash sale period you can rebuy right, but you're not likely going to buy at the same bottom value. So the wash sale rules are very important. I see this mistake made with a lot of clients every year. A couple of years ago, I had one that to the tune of $300,000 of losses that he was not able to capture. Now, it's not that those losses are just gone, they add to your basis, but it's still if you're planning around claiming a loss or offsetting other gains, you've missed the boat.

Speaker 1: 21:44

Yeah. So this is something that we kind of automate and again do for our clients when we're managing money. But there's other things like maybe you're in a mutual fund or ETF and you sell that realize the loss and we can put a different fund in, so you're not out of the market and sitting in cash. But if it's an individual stock, there is a bit of a gamble because in 31 days, like Conrad said, maybe the stock went up in value and now you've got to buy it back at a higher price. But on the flip side, maybe it's gone down in value and you could actually buy it for a lower price and it's a win. So here's a pop quiz for you guys or any other listener, when you think of anything that somebody could put money into right now and technically the IRS tax code does not apply wash sale rules to David, I know you know this one.

Speaker 2: 22:34

Well, now you're putting me on the spot. Go ahead, David.

Speaker 4: 22:37

Yeah, it's going to be like commodities, so like a cryptocurrency. I was going to say Bitcoin.

Speaker 1: 22:42

Yeah, crypto that's something we saw constantly is crypto. Right now, it's not subject to those wash sale rules. I knew I was throwing a curveball out. So, again, if you have crypto it's gone up recently in the last couple months here but you might still be holding positions that you jumped on the gravy chain to train at the wrong time, like in 2021, and you're holding these positions that have big losses but you want to hold on for the long haul. Those are positions where you could hit the sell button and rebuy it back.

Speaker 1: 23:12

Now there's pending tax law legislation out on this because, again, congress doesn't really like this, but it kind of is what it is today. So tax loss harvesting is definitely something you should be thinking about. Now, the flip side to that is something that not a lot of people think about. Right, tax loss harvesting is somewhat well known, but although it's well known, not a lot of people do it because it takes a lot of work to implement. Trust us, we know we do this all day long for our clients. But the other side is exploring tax gain harvesting, and so there's a couple of reasons that you might actually and although it seems counter intuitive, you might actually hit the sell button and realize a taxable gain. Can you guys think of some examples and I know I have a couple off the top of my head I can share as well.

Speaker 2: 24:04

Yeah, all day, right, let's take the Amazon one, because I do this with mine is I always look and say, well, how do I reset my basis on a gain position and can I sell and reset the basis, meaning I get to realize, basically a tax-free transaction, right, without having to actually pay tax on other stuff to do it. So just look at if you have a loss of $10 and a gain of $10, your total gain is still zero, but you're able to really continue to accelerate gains without having to recognize the current year tax hit to do it.

Speaker 1: 24:45

So you're referring to kind of the combination of the two taking tax loss, harvesting, realizing a loss and then taking a gain, selling it, realizing the gain, helping those two things offset each other. So you don't owe any out-of-pocket tax, that's it, that you could immediately buy that Amazon stock back, because there are no wash sale rules to navigate on gains, Right? So essentially you have a higher cost basis in that Amazon stock, which means if it appreciates further from here on out, then you're going to have less of a taxable capital gain, or the flip side if it depreciates or goes down in value, you might actually be able to use that position in a future year to do some tax-lost harvesting on. So it's what we call basis management, which is incredibly important and another huge concept people overlook. But let's talk about somebody who's in a lower tax bracket. So maybe you're retired or maybe you just had the financial freedom to slow down work or take on part-time work.

Speaker 1: 25:59

Let's say, for example, you're in the 12% federal tax bracket, so you have about $75,000 of income. Well, there's a couple of things that are working for you here. Number one is you get a standard deduction if you're not itemizing, which was about 27,700 if you're under the age of 65. So that brings your $75,000 of income down to about 46,000, 47,000. And then from a capital gain standpoint, there's actually a 0% bracket and for a married filing jointly family it's up to about $89,000 of total income. And so that means you might be able to realize $20, $30, $40,000 of long-term capital gain and pay no income tax at all on that money. You could even buy those positions right back. And now to Conrad's point. You have a higher basis, and that's another great form of basis management that I hardly hear of any other financial advisor doing. When I teach this concept across the country at our tax management journey training, I just see people's eyes light up, Even CPAs they're like. I never thought about that. I've always thought about tax loss harvesting, but never tax gain harvesting.

Speaker 2: 27:29

Yeah, yeah, those are all great points and you actually beat me to the punch on the zero gains tax rate. But let's share it.

Speaker 1: 27:38

My favorite tax bracket. What can I say? Absolutely Listen.

Speaker 2: 27:42

I'm right there with it. I love the 0% bracket. How can we look at it? And I think you made a good point and most people don't think about it. But how does social security factor?

Speaker 1: 27:53

into that. Yeah, you got to be careful on social security. Right and I always share this when I speak is, for most of us we're on a two-tax system. We have ordinary income and then we have capital gains. Now for some of you a lot of our clients, you're actually on a three-tax system because you might have things like incentive stock options and then you go to ordinary income, capital gains and alternative minimum tax and for those of you that are on social security, you also could have a provisional income tax to think about and that's basically the taxation of your social security benefit. So, before you do any of this gain harvesting, if you're on social security, we need to do a social security tax analysis because we need to understand the trade-off of realizing some capital gain. Maybe it's even at a low tax rate on the capital gain itself, but if it causes you a whole bunch of additional tax on your social security benefit or if it causes you to go into a higher Medicare premium tax, those might be reasons to not do it. And so just a number of moving parts. Great point, conrad.

Speaker 1: 29:08

The last thing that I want to share on tax gain harvesting and when I talk about tax management, I always use the analogy that it's a game of chess. In chess you've got to be thinking three, four, five moves ahead, and so what I mean by that is, let's say, it's 2023, and I have a kind of normalized income for our family. But I know in a year or six months or a year and a half, I'm going to have a big financial commitment. Maybe I'm going to put an addition on the house that I want to pay cash for and I'm going to have to sell a bunch of investments to do that. Well, what's better?

Speaker 1: 29:52

Selling those investments over two tax years or having all of that gain lumped into one tax year next year, when I have to go pay the contractors and for many people and I'm doing this myself right now because we're getting ready to start with an addition on the house and I don't want to take out debt to really pay that right now with where interest rates are what I'm going to do is I'm going to sell some of this stock towards the end of this year and then I can sell some more of the stock in January or February so I can spread that tax liability over two years. And so that's another example of just tax gain harvesting, so that you're thinking about these commitments ahead. Yeah, all great points. So, speaking of stock ESPPs, david, talk about what an ESPP is for those of you who might not know, might not be aware. Maybe you're eligible for them, maybe you're not, but what is an ESPP?

Speaker 4: 30:50

Yeah, it's an employee stock purchase program and it's a scheme where you could purchase stock from your company the company that you work for at a discount, and usually the way that they have it set up is you enroll it before the year starts and they'll set aside a certain percentage of your paycheck and then, twice a year, they will purchase the stock at a discount. And the reason why I like it so much is because it's one of the few scenarios where you're actually getting stock at a discount and then you have options if you want to hold it or sell it afterwards. So, david Conrad, I'd love to hear your thoughts on what you do with the ESPPs and your end planning.

Speaker 1: 31:33

So the first thing I'll share is I'm a pretty big fan of any time I have the opportunity to get free money. If you want to give me free money, I'll take all that you want to send my way. And ESPPs are a form of where you could potentially get some free money. Because if you participate in it and your employer goes out on your behalf and allocates some of those funds and you get to buy the stock at a 15% discount, as soon as you're eligible to, you could sell that stock and, assuming that stock price is at the same price you bought it for, essentially that's about 15% free money. Now it's taxable, of course, but I still don't care. If you want to give me free money, I'll pay tax on it because after tax there's still some free money left over. Now if you decide to sell, you're going to be taxed as ordinary income on that gain, that free money. But there's also some rules with ESPPs that if you're bullish on your company and you hold it for a period of two years from when it was granted to you and one year from when you actually had that stock settle and took ownership of it, you're now eligible for the gain to be taxed at a long-term capital gain versus ordinary income if you would have sold it without meeting those two holding requirements, which is what's known as a qualifying disposition versus a disqualifying disposition. If you've done stock option planning with us on incentive stock options, it works somewhat similarly.

Speaker 1: 33:11

Again, a strategic plan going into the end of the year. Here is number one check your elections and if you're not participating in your ESPP plan, you might want to take advantage of that. But then number two is look at your ESPPs that you have, because maybe it makes sense to sell some of those before the end of the year to capitalize on the discount or the current market conditions. And so two things that we think about and look at with our clients. Thank you, conrad. Any other points on the STPs that you've seen Ditto.

Speaker 2: 33:48

Yeah, I think it's important number one to understand what you have, right? I get asked a lot of questions from clients that don't quite fully understand what it is and so just having that conversation, if any listeners out there don't understand it and don't have somebody to ask, call us.

Speaker 2: 34:02

Right, you're Conrad, dave or David like. This is what we love to talk about. I think we could probably spend four hours on this topic alone, right? I think what you mentioned, though, is across the board. Everybody has to remember. Right, if you are given free money, even if the government wants a portion of that, you still have some free money left right, and so don't avoid the free money because of the government right. Take what you have and utilize it, and I think these, just like anything else, have to be managed over time.

Speaker 1: 34:39

Yeah, absolutely. Well. The next two things I want to talk about, I would say, consume about half to maybe 60% of a lot of the strategic tax management work that we do at Allison Wealth. The first one is Roth conversions for optimal tax planning, and so there's all kinds of reasons to think about doing a Roth conversion. This is where you take your retirement dollars, your pre-tax dollars, and you opt to pay taxes now and that money goes into a Roth account for tax-free growth into the future, and so there's a number of opportunities. The first one is what we call bracket bumping Roth conversions. This is where you're filling the lower brackets up. So, for example, if you have a modest income and you're in the 12% bracket, every single year you should be converting some of your IRA or 401K to a Roth IRA or Roth 401K just up to the top of that 12% bracket. Maybe some of your goals and objectives actually substantiate bumping up to the top of the 22 or the 24.

Speaker 1: 35:47

We just had a client hire us last night. They've got about $9 million in an IRA, and they're very focused on multi-generational planning. They want this money to get left behind to their two children as tax-efficiently as possible. Well, what is the worst account you could think of to leave money to a child or a beneficiary In IRA. They're horrible. They can be subject to a state tax of 40% and income tax of 37%. They can be taken a tax hit of almost 70% to 75%, depending on the net worth of the client. Those are reasons where maybe you even do Roth conversions up to 32% or 35%, because I know I'd rather pay 32% or 35% than 60% or 70% under the right traditions. Think about strategic Roth conversions.

Speaker 1: 36:43

The second area is, as we mentioned earlier, incentive stock options. Just like Roth conversions, this is another. Use it or lose it. David, you are our analytical guru at this point on thoughtfully exercising ISOs. We did a whole episode on this, a podcast episode. Give us the one-minute cliff note version For any listeners. If this is relevant to you, either on ISOs or NSOs. Go check out our podcast episode on demystifying stock options, because David and I do a deep dive on this.

Speaker 4: 37:20

Yeah, and essentially with the incentive stock options, if the stock is worth more than what your exercise price is, then there might be some additional AMT income when you exercise that. What does AMT stand for? Alternative minimum tax? That's a good question. There might be some alternative minimum taxable income. If you have enough of that income, essentially you'll pay more than your regular tax. There's a key it's almost like a dance that you could do where you could have enough AMT income where you get to exercise the shares but you don't pay any additional tax. We're always looking at that. For some of our clients with really concentrated positions. We might even look to exercise beyond that AMT limit where you're going to pay tax, if you have a very concentrated position. Again, we could go into this for hours. I love talking about this. I'm one of those people who likes to go into the analysis. But that's just a quick overview of the incentive stock options.

Speaker 1: 38:22

Yeah, the bottom line is there's what we call the AMT sweet spot. It's the no brainer. It's to use it or lose it. If you have incentive stock, you need to exercise each and every year up to that point, but then from there, depending on the outlook of the stock, you might do a lot more.

Speaker 1: 38:36

David, you and I had a client that we did a three-year long exercise plan with and not fitness exercise, a stock option exercise His company IPO. It was one of the biggest IPOs in tech, I think. What did? We end up selling Over $70 to $80 million of company stock for him over a two-year period. Because of the strategic exercise strategy that we laid out three to four years before IPO, we were able to save millions and millions of dollars of income tax. So again, yes, if you own incentive stock, I don't care if it's a small amount or a massive amount. There's so much strategy to be able to deploy. Conrad, let's talk about number. I think we're on number 13 of the 21 tax strategies right now. But something that happens to us and you've been a CPA for how many years now?

Speaker 2: 39:31

Eight years? Well, no, I think.

Speaker 1: 39:34

I'm on year 11 now. All right, how long have you been doing taxes for? This was year 21. Right, 21. And how many times have you found that come April 15th, you deliver somebody's tax return to them and they owe a whole bunch of taxes and they're absolutely surprised by it?

Speaker 2: 39:54

Probably 100 times a year. No, maybe that's too much, but I see it every single year, at least 10 to 15 times without fail, and it's an easy one to change it's so easy.

Speaker 1: 40:09

It's all set Like. I hate bad surprises. Everyone hates bad surprises, right? If I wake up one morning and you tell me I owe a bunch more money than I thought was coming, I'm not only going to be mad at myself, I'm going to be mad at you, I'm going to be mad at the IRS. It's going to ruin my day. So how do you not have these negative surprises? What kinds of things can we be doing here in November and December?

Speaker 2: 40:29

Well, number one, just understand where your income. Right, if you take last year's tax return and you apply the same increases or decreases that you're seeing through your pay, where will you end up and what was the tax that you paid? Right, there are some very simple, linear things that you can do. You could actually we do this for all our clients. We run through an actual mock-up of a 2023 return, right, and I want to know if I need to tell my client that they've got a bad news coming up. I want to tell them now, right before we get to tax time, and say oh, by the way, I know you didn't plan for this $10,000 tax bill, but here it is. Anyway, you just mentioned you're going to be pissed off at me, at the IRS, at everyone. So, just having an understanding of where you are, knowing where your income's coming from, and then checking your withholdings right, things like bonuses right now, right Under the new regime that we have well, it was a couple of years ago. Bonus rates changed. They're now a flat 22% withholding.

Speaker 1: 41:28

Well, if you're in the 37% bracket, you're going to be quite surprised at tax time right, and David and I deal with that with clients with restricted stock units all the time, because the statutory withholding rate is 22% for people under a million and we can't tell you how many times we meet with clients that are in a 35% bracket and there's a 13% under withholding and that is a big surprise come tax time for them, which is why, to your point, we do pro forma estimated tax payments throughout the year so that there are no surprises come April 15. That's right.

Speaker 2: 42:03

Yeah, and for other people, business owners you're supposed to be making estimated tax payments, and if you haven't been doing that, be prepared, right, you might want to set aside a large chunk. And for business owners, you have to factor in not just income tax but self-employment tax, right, which is the same. We'll call both sides of FICA, right? It is the same thing. It's about 15% on business income. That could equate to a large number, and if you haven't planned for it, you're in for a big surprise.

Speaker 1: 42:34

Well, and depending on what type of business you own. David, you brought this strategy to one of our clients in California, where we converted his LLC to an S-corp so that he could take advantage of, in California, this pass through entity tax, and it saved him what? $300,000 a year of federal tax, $250,000, something like that, no, $360,000. $360,000. Okay, I was close, I was tracking it. Well, what is that pass through entity tax If we have self-employed individuals listening and maybe they're eligible, like in South Carolina? We opted in for this as well for our business income at Allyson.

Speaker 4: 43:10

Well, so the pass through entity tax.

Speaker 4: 43:15

We could do a whole episode on this.

Speaker 4: 43:16

And there's when they did the Tax Cut and Jobs Act, they restricted the tax deduction for federal purposes on your Schedule A to $10,000. So if you earn one of those higher tax brackets, you have a restriction on what you can deduct. Now what they did is they set up the pass-through entity tax at the state level. So if you own a pass-through entity, such as a business or a partnership, you could pay the tax at the entity level or through the business and take the deduction, which then will essentially flow through to your personal return. So again, I'm simplifying it a lot, but it allows you to take a state tax deduction on your federal return if you run it through a business and as a self-employed individual, you could create something like a single member LLC and then elect to have it come taxed as an S-Corporation, which allows you to make that transaction. So again, very simplified. Definitely speak to an advisor if you're looking at enacting any of these, but it's a really powerful strategy, especially if you have a business that is producing a lot of income.

Speaker 1: 44:23

Yeah, definitely Hundreds of thousands of dollars of taxes saved for our clients on that. So, moving on, another kind of check the box If you have this as an option, if you're working and your 401k plan allows, there's a concept called a mega backdoor Roth. It's like the big brother to the backdoor Roth Conrad opened up this session talking about, but it's where your 401k might allow you to contribute, after tax, money into your 401k and then do an in-plan conversion. And so we have some clients that are getting an additional 30, 40, $50,000 a year into a Roth account, even though they're very high income earning, and so I did a YouTube video on that. It's on our YouTube channel. You can check it out.

Speaker 1: 45:07

Charitable giving optimization Again, consider cash donations to charity or explore the benefits of a donor advice fund for strategic tax deductions.

Speaker 1: 45:19

So maybe you're only giving $5,000 or $6,000 a year to charity, but you want to consistently do that, and if you're taking the standard deduction, you're getting no tax break for that charity.

Speaker 1: 45:32

Charitable contribution so one way that you can actually get a tax benefit is to bundle four or five, six years of that charitable contribution into one lump sum, into a thing called a donor advice fund, which is like a family account for you to do charitable giving through. You could take a appreciated stock. Let's say you bought a stock for $10 and now it's worth $100 a share and you put that in a donor advice fund. When we sell the stock in the donor advice fund, there's no capital gains tax due. So, number one, you just save $90 per share of capital gain. And then, number two, you get a full deduction of the fair market value, which is one of the most lucrative tax benefits, because it's not getting a deduction for what you paid for the stock, it's getting a deduction for the fair market value of the stock which is appreciated. Now there's some limits, like you can donate up to 30% of your adjusted gross income. But if you have any charitable intent, appreciated securities, donor advice funds are such a big thing you need to look at.

Speaker 2: 46:45

Yeah, it's such a no brainer. Now, have you guys seen or utilized the strategy with your clients where you may have somebody that has the ex-exercised options and the stock goes through the roots?

Speaker 1: 46:58

Right, yeah, that client that we were just talking about, I think. What did we do? Eight or nine million in his donor advice fund, because he has a big charitable intent and he's going to use that money to be able to really do a lot of good with charities. In addition, it saved him a huge tax benefit. But you're exactly right, conrad, this is probably a whole nother episode as well. But for property owners, right, people who have rentals, commercial real estate, things like that, what is cost segregation? If you had to summarize it in one minute, Cost segregation.

Speaker 2: 47:32

If I had to summarize it, I would say cost, seg or cost segregation is really taking something that you buy. Think about buying a vehicle, right, and you buy the whole vehicle for one price, but all its components are treated differently. Same thing with a piece of property. You may buy a house for $100,000, but the stove is not the same depreciable asset as a house. And so what professionals do here is go in and they say well, that stove should be $500 of the $100,000 purchase and we're going to depreciate that over seven years or five years. So it's a way to basically break apart smaller pieces of the pie and accelerate the depreciation for better reduction of income early in the process.

Speaker 1: 48:24

So depreciation is basically saying here's what we paid for this building and it's not an appreciating asset, it's a depreciating asset and so we're going to get an allowance each and every year to offset our income by what it's depreciating by. And if I buy the whole building, then let's say that what's the traditional depreciation schedule of a building, for example?

Speaker 2: 48:48

For a commercial building.

Speaker 1: 48:49

it's 39 years, so it's going to take me 39 years to depreciate this and recoup all the expense and get the full tax benefit. But cost segregation might say, okay, well, the building is that, but what about the light bulbs, what about the different components that are inside of that building? And if we can accelerate those quicker, we can bundle that tax savings quicker. So again, something we can do a whole nother episode on, but something to take a look at. If you own real estate, if you've experienced a large capital gain, there are things called qualified opportunity zones you could look at. Investing in. These give you the ability to defer that capital gain into the future and realize some tax benefits. Qualified opportunity zones are designated by the government, usually in determining zones of the country that they are trying to incentivize investment into, and they give you some tax benefits to do that. David mentioned earlier, just finishing up our checklist here, that there's a $10,000 cap on state and local tax deduction. That's salt deduction. So if you're under that let's say your total tax is equal $7,000, maybe you have the ability to prepay next year's payments. So instead of waiting to January, maybe you pay part of it in December and again, you're a cash basis payer, so it's based on when you paid it, not when it was due. And then the last two here are.

Speaker 1: 50:27

There's always opportunity again for more affluent clients to potentially strategically gift to children. The exemption is $17,000 per spouse. So we have some clients that are gifting highly appreciated stock to their kids. Husband and wife can do $17,000 each. That's $34,000. Maybe the kids are going to hold that stock for five or 10 years, but when they sell it they're going to be in a lower tax bracket than mom and dad were in. So there's some considerations and trade-offs because, of course, if mom and dad held the stock and then passed away, the kids would get a step up in basis. There's also kiddie tax rules that we need to navigate, but something that we do commonly.

Speaker 1: 51:12

And then, last but not least, closing out here, your required minimum distribution. If you're of RMD age, make sure you take that RMD before December 31st, because it is a substantial penalty for missing it. If you have an inherited IRA, you probably need to take an RMD as well. So whether you're of RMD age or you've inherited an IRA, make sure you've taken that. And if you're over age 70 and a half and you have charitable intent, you could actually eliminate the tax on that RMD by doing something called a qualified charitable distribution, which is where you have that RMD essentially get sent right to a charity and you don't have to report it on your tax return, assuming you follow the right rules.

Speaker 1: 52:01

And so those are our Court 21. Again, a huge amount of opportunity. These are things that we go through a checklist towards the end of the year and make sure we're delivering for our clients at Allison Wealth, and I'll tell you, even if you just do two, three, four of these, it can lead to massively better wealth outcomes. And so, conrad David, thanks for dropping a ton of knowledge on all your years of experience on tax management and tax planning and tax preparation and the investment side. Any closing thoughts as we wrap up another episode?

Speaker 4: 52:37

I would just say that I love to do this and love to talk about all these end of tax years. So if anybody wants to spend more than an hour with us, we're always happy to have you and chat with you.

Speaker 2: 52:48

Yeah, I agree with David on that and I want everybody to understand. Well, we have 21 items here. These aren't the only 21 items we talk about, but you also should not expect to do all 21 items every year. I think that's the. What I like to tell my clients is tax planning and tax reduction strategy is not hitting a home run. It's hitting a lot of singles over long periods of time, right? So if you're left by a thousand cuts and if I can save you $100 here or $200 there, those do add up tremendously without being high risk or having to be so burdensome along the way. So you know, if you can reduce by 5% your tax bill, you're in a good place.

Speaker 1: 53:33

Yeah, would you rather keep the money for you and your family or have it go to the IRS? I always say there's two types of taxes. There's avoidable taxes and unavoidable taxes. Unavoidable ones are the things that we're talking about here, the unavoidable ones. If you don't pay those, you get to retire in an orange jumpsuit, and that's not where we want to be. So again, check out, subscribe to our YouTube page, follow us, continue to follow the podcast. Hopefully you found this informative. Reach out to us, go to Alison Wealth. You can access and contact any of us on there. And thank you, fellas. Appreciate it.

Speaker 2: 54:05

Thanks, Dave. Thanks.

Speaker 4: 54:06

Dave. Thanks everyone, Thank you.