Pre-Planning for Tax Season
On Episode 70 of the Your Financial Pharmacist Podcast, Tim Baker, YFP Team Member and owner of Script Financial, talks with special guest Paul Eikenberg. Paul works alongside Tim at Script Financial and handles all of the tax planning and preparation for Script clients. On this episode, they discuss the new changes to the tax code and tips you can use for pre-planning for tax season.
Summary
In this episode, Tim and Paul discuss changes to the tax code that will affect your tax preparation for this year. There are several changes that have been made. The 1040 form is 23 lines and has new schedules. Standard deduction amounts are changing from $12,700 (couple) and $6,350 (individual) to $24,000 and $12,000, respectively. Personal and dependent exemptions are going away, meaning that those who have itemized before will probably take the standard deduction. Other changes include the amount that’s able to be deducted for medical expenses (now 7.5%), limits for local and state income taxes, child tax credit (now $2,000/child), student loan discharge due to death or disability is not taxable in the future, and the 529 is now available for primary and secondary education in addition to college. Paul also discusses how tax brackets have changed. There are the same number of brackets, however, the rates have been lowered. Paul suggests that most people will get a tax reduction between higher standard deductions and lower tax rates.
Tim and Paul then talk about the differences between tax planning and tax preparation. Tax planning involves long term strategy matching with your personal goals. Tax preparation is more mechanical where you plug in what happened financially from last year.
Paul offers tax review services through Script Financial. In a tax review, Paul uses your tax return from last year, current paycheck stubs, and payroll statements to project what your tax bill will be, assess if you are withholding enough from your check, and walk you through different options. Paul is still offering tax review services.
About Today’s Guest
Paul Eikenberg has been involved in starting and selling 4 businesses, has worked in the IT field as a franchisee and executive, as VP of Franchise Operation for a 500 unit Franchise System and is currently is serving as Vice Chairman of the Board of APG Federal Credit $ 1.4 billion asset Federal Credit Union. He has a wealth business operations and financial experience. In addition to being a licensed Maryland Tax Preparer, he is scheduled to completed the IRS’ Enrolled Agent exams by year end.
Mentioned on the Show
- Policy Genius
- Script Financial
- Script Financial Tax Review
Episode Transcript
Tim Baker: What’s up, everybody? Welcome to Episode 070 of the Your Financial Pharmacist podcast. Paul, thanks for joining me on today’s episode. How’s it going?
Paul Eikenberg: It’s great, Tim. Thanks for having me.
Tim Baker: Yeah, of course. So Paul, why don’t we take a step back before we kind of get into all of the exciting things that are tax. And we don’t spend enough time on taxes, which is a very important part of the financial plan. But before we kind of do a deep dive into discussing the different changes to the tax code and what our listeners can do to prep for the upcoming tax season, why don’t you tell us a little bit about yourself and how you came to be the tax guy at Script Financial?
Paul Eikenberg: Sure, I’ve had several careers now. I’ve owned two businesses. And most recently, I was working with a network service provider. When that job got eliminated, I decided that I’d go back to tax preparing and got my Maryland certification, and I’m working on the enrolled agent program with the IRS, which I’ll be completing in December. And was looking to work real hard for part of the year and not so hard the rest of year has been my life. So that’s when you and I sat down together and started talking about our financial plans, and I wasn’t ready to retire, but I wasn’t ready to go back to work full-tilt. So you and I came to an understanding that Script Financial needed a tax practice and that it was a good fit for me at the right time.
Tim Baker: Yeah, and I think for me, you know, I think tax is so important because it really permeates every part of the financial plan. And I think a good understanding of one’s own tax situation and how you can practically plan for your tax situation I think is super important. So like I said, I’ve really enjoyed working with you and Anne over the years, and I feel like when I think back on the first time we met, I think we talked a lot about finances, but especially with Anne, we talked a lot about just life and just experiences and things that you guys have experienced and my experience, and it was more about the human element, I think, that we connected. And it’s been a good ride so far, and I’m lucky to have you as part of the team. So yeah, thanks again for coming on the podcast today. So let’s hop right in. So Paul, last year, the new administration passed the new tax code. The Tax Cuts and Jobs Act was signed by President Trump on December 15, 2017. What has that done to the tax system from where you sit as you’re looking at preparing taxes for 2018? What are some of the big changes?
Paul Eikenberg: Oh, everybody’s still working on figuring it out. The forms, the 1040’s changing. And the IRS has released drafts of the 1040s and all their forms, but they’re still in draft form. None of it’s been finalized. But one of the big changes you’ll see is that form 1040, which was 79 lines last year, is going to be 23 lines this year, postcard-sized, which sounds great until you find out there are six new schedules to support the 1040.
Tim Baker: Right.
Paul Eikenberg: And those lines really haven’t been removed, they’ve been moved to other schedules. So from a complexity of doing your taxes, it is I expect to be every bit as complex as last year. We will have a lot more people this year will be itemizing than previous because of the changes in the standard deduction.
Tim Baker: Yeah, it’s funny because I think the rhetoric behind the tax changes were that we want people to be able to basically file their taxes on the back of a napkin. And obviously, the 1040 itself is smaller, but it looks like they just moved the information to these new schedules, which I understand are actually numeric. So if people are familiar with the tax forms, you know, you have Schedule A, which was typically for your itemized deductions, Schedule C for business income. And now we actually have Schedule 1-6, so it actually makes it a little bit more confusing, in my opinion. Obviously, we haven’t seen kind of the final product of what the forms will actually look like, but interesting that I think it’s still going to be as complex as it was before. So let’s talk about some of the meat of some of the changes that we’re seeing. So you mentioned the new standard deduction. So walk us through some of the big — what is the standard deduction compared to the itemized deduction? And how has that changed for this upcoming year?
Paul Eikenberg: Well, in 2017, the standard deduction for an individual was $6,350. For couples, you were looking at $12,700. This year, it’s going to be $12,000 for single and $24,000 for couples.
Tim Baker: So essentially, it’s doubled.
Paul Eikenberg: It would seem that way except that your personal and dependent exemptions are going away, which was $4,050 per individual.
Tim Baker: So it looks like a little bit of the same stuff with kind of just rearranging the numbers, similar to the lines in the 1040.
Paul Eikenberg: It is. You’ll have, you know, you’ll have a higher standard deduction. So a lot of people who were itemizing last year will be taking the standard deduction this year. There’s estimates all over the board as to how many people will be affected. But you know, we saw a lot of them in our practice that were maybe $2,000-3,000 over the standard deduction last year that it made sense to itemize. This year, they’ll be taking the standard deduction.
Tim Baker: So just to back up, typically, what you want to do as a taxpayer is you want to look at what the standard deduction is and then what you’re itemized deduction is and then you want to take the greater one of those. So last year, if you were single, and you had itemized deductions of $6,500, you would have took that over the standard deduction of $6,350 because it was a greater number. So Paul, quickly, what are some examples of what would constitute an itemized deduction?
Paul Eikenberg: Mortgage interest is one of the big ones. Property taxes, state taxes, charitable contributions, employee business expenses, medical expenses can be if you have a significant amount of medical expenses. In the past, it had to be the amount over 10% of your adjusted gross income. This year, it’s dropped to 7.5%. But for the most part, unless you had a major health factor, you’re not — most people aren’t getting to itemize the medical insurance, I mean medical deduction.
Tim Baker: OK.
Paul Eikenberg: Last year, one of the big changes, state and local income taxes were deductible. They’re still deductible, but there’s a $10,000 limit on the amount of state taxes that can be itemized, and that is withholding taxes and property taxes. So higher income earners, that’s going to be a reduction in what you can itemize.
Tim Baker: So that’s big for high income earners and if you live in a part of the country where your mortgage and state and local taxes are higher, so say in the San Francisco area, that’s going to obviously affect those areas more than, you know, if you live in more of a rural area. How about, Paul, how about with kind of the, you know, if you have kids — how does the tax code change if you have kids?
Paul Eikenberg: Well, the biggest change there is the child tax credit goes from $1,000 per child to $2,000 per child. And the amount that’s refundable goes from $1,100 to $1,400. So that is the biggest change. The other change is that credit was phased out at $110,000 last year for a married couple. The phase-out has been raised to $400,000 this year.
Tim Baker: Which is huge, especially for our listeners, you know, probably as a couple are making more than $110,000. Now if you make up to $400,000, you get that $2,000 tax credit. And really good point of emphasis here is a credit is actually a dollar-for-dollar reduction from your tax bill, whereas a deduction just kind of decreases the income that you’re taxed on, so it’s not necessarily a dollar-for-dollar. And I think for the child tax credit, I believe if you’re single, I think it’s you can make up to $200,000 and still get that $2,000 credit per child. So just like you were talking about, it’s changed but the personal exemptions have gone away, but you’ve increased the child tax credit. So it’s a little bit of a — I don’t want to say bait and switch, but not a huge change. OK, so what about the — in terms of like education? We’re talking like the 529, the student loans and forgiveness. Are there big changes for that? Because that would obviously be something with listeners who have kids that are trying to avoid maybe the student loan hell that they’re in, so they’re saving for 529 or, you know, if you are a borrower and you’re trying to navigate your student loans, are there any big changes to the tax code in those two areas?
Paul Eikenberg: One of the big changes is the student loan discharge due to death or disability is not going to be taxable in the future.
Tim Baker: OK.
Paul Eikenberg: The interest deduction, the phase-out earnings have been raised a little bit but not significantly. I guess the biggest change is the 529 is going to be available for use for primary and secondary education.
Tim Baker: Yeah, so from what I understand, Paul, the 529, you can actually use for kind of your grade school, middle school, high school, which was a change because the 529 was really — before, it was just locked into just college. They did, for you homeschoolers out there, there was supposed to be a benefit that was stripped out at the last minute, so unfortunately, the 529 is no longer good for homeschooling. And so you know, from what I’m hearing more about people that work with clients that use 529s, it could actually — you could use it as a pass-through. So if you’re paying for private school, make sure you’re funding a 529 because you get a state deduction in most states. But then you can also use a 529 almost like you would use a retirement account where you’re accumulating, you know, so if you have a child and they’re going to go to school in 18 years, you’re investing that money and you’re accumulating it over time so you have a bucket of money for your child in the future to apply towards college. And then to circle back, the student loan interest deduction, it remained intact. I think it goes up a little bit, but not enough to really affect a regular pharmacist. Maybe for residents out there, the 2017 phaseouts were I think $65,000-80,000, so anything above $80,000, you didn’t get a deduction. So obviously for residents, for those maybe your PGY1, PGY2 year, you’d probably get a deduction for those years. But you know, beyond that, not necessarily. But the fact that the loans are discharged due to death and disability and not taxable because of death and disability is a big win for those people that unfortunately have to deal with that situation. So I guess, Paul, before we kind of talk about what we can do to prepare for the 2018 tax season, just about I guess the brackets. You know, I think everyone would like simplicity, but with the new tax code, do the tax brackets, how did they change? Did they change? What does that look like?
Paul Eikenberg: It’s pretty much the same number of brackets, but the rates are a little lower. The base rate is still 10%, but the next bracket down from 15% to 12%. The bracket above that went from 25% to 22%. 28% to 24% and then the next bracket, 33% to 32%. The others are pretty much the same or higher. So you know, we’re looking at overall, most of us are going to get a tax reduction between the higher standard deduction and the lower tax rate should have a positive effect on most of us out there.
Tim Baker: Yeah, and I think, you know, the number of brackets, again, like it would be nice to pare those down. I think essentially, though, moving forward with this tax plan, I think it is going to be better from a taxpayer perspective. Most people’s taxes are going to be lower. So that’s something to consider as you plan, you know, for the future. And that’s a good segway into kind of our next discussion is, you know, the difference between tax planning and tax preparation. So Paul, for you, how would you separate those two things?
Paul Eikenberg: The preparation is just more mechanical. We’re taking what happened last year, plugging it in, selecting maybe a couple options, whether itemizing or standard deduction works best for you, should you make an IRA contribution up to April 15 that you didn’t make before the end of the year. But you know, that’s working in the past with a lot of things you can’t change. Tax planning is really taking a long-term strategy, kind of matching your personal goals with your tax strategy. So you know, if your goal is to pay off student loans now, you may not want to defer as much retirement income as somebody without that. It’s just kind of putting all those pieces together and, you know, when we look at planning, like a mid-year plan for somebody, we’re going to look at where you are now, have you had enough taxes withheld that you won’t have a surprise come April? And are you taking advantage of the HSAs? Are you definitely getting the matches in your IRA, in your retirement programs?
Tim Baker: Sure.
Paul Eikenberg: You know. If you have a business, rental property, are you doing everything you can? Are you planning out your expenses for those to mitigate your taxes as much as possible?
Tim Baker: Right. Yeah, and the way I look at prep versus planning, tax prep versus tax planning is the prep I think is the very reactive in nature. You’re like, ope, this is what happened for 2018. Let’s plug in the numbers and see what pops out. And sometimes, it’s a surprise, you get a refund. And sometimes, it’s where you’re writing Uncle Sam a check. And that can’t be fun.
Paul Eikenberg: I know from preparing a lot of taxes that the most painful thing is to be doing your taxes, waiting and being surprised with a big tax bill instead of a small refund you were expecting.
Tim Baker: Yeah, so maybe the approach we take is maybe self-preservation too because it’s tough to sit across the table and say, ‘Hey, you owe a lot of taxes.’ So obviously, what we’re trying to do from a tax planning perspective is get out in front of it, be proactive, and actually, you know, don’t let really the tax situation control you. You’re controlling your — whether it’s, like you said, deferring the taxes or avoiding the taxes, whatever that looks like.
Paul Eikenberg: If you’re proactive, you have a lot more options.
Tim Baker: Yes. Yeah. And for some people, you know, we talk about having funds set aside, whether it’s for home maintenance, emergency fund, a vacation fund, a lot of people don’t have a tax bill fund that they can just write a check and say, ‘Here you go, Uncle Sam. I didn’t pay you enough over the year, so here’s a sum of money.’ So that definitely could be painful. So Paul, let’s break down. You kind of talked through it a little bit, but when you sit down and you do a tax review with a client, what does that look like? How does that play out?
Paul Eikenberg: Let’s say we’re doing one for you now. You know, what I’d want to see is the most recent paycheck stubs. You know, we’d want to look at your last year tax return, and we’d really take your payroll statement and look at where you’re earning are, what type of retirement program you’re in, what other type of health insurance — are you pre-tax, HSAs — and project all the contributions through the end of the year for earnings and withholding, withholding taxes, and pre-tax contributions. From there, kind of review the tax return from last year, look for other sorts of income, deductions, project those, and then we’d sit down for a half hour conference and kind of go over the assumptions that I make projecting your situation through the end of the year, be sure that if you had capital gains last year, rental income, any of those other type of items, that we’re working on the proper assumptions.
Tim Baker: Right.
Paul Eikenberg: You know, are there estimated taxes or anything we’re missing that you’ve already paid Uncle Sam. And from there, we kind of project what we expect your tax bill to be, what your withholding’s going to be, if nothing changes, are you going to have a refund or owe money? And then we kind of walk through your options. To me, the HSAs are a great tool. Everybody should be getting their matching retirement, whether that’s pre-tax or a Roth 401k. If your employer’s matching it, that’s something you want to be sure you’re taking advantage of. And we’d kind of walk through your options of is there anything you should be doing to mitigate the taxes? Have you had too much withheld? Should you lower it? Have you had not enough withheld? Do you need to increase it? You know, are you going to be subject to penalties if nothing changes? Maybe you need to make an estimated tax payment. So there are a lot of things we look at.
Tim Baker: Yeah, and it’s great stuff. What I really like about kind of your review is that, you know, you take the pay stub — and it’s funny because when I used to work for a company, I would get paid with a paper check, I’d rip the check off, I’d deposit it, and I’d throw the pay stub on a pile. And I’d never really look at it. But actually, there’s a lot of good information, a lot of good nuggets on the pay stub about what you’re actually paying into. And it could be your retirement fund or long-term disability or whatever that is. And what I really like about your system is, you know, you use that information to kind of set up where we’ve been throughout the year and then extrapolate that forward to where we expect you to be. And what I like is is that you generally say, ‘Hey, if nothing changes, you’re going to owe $2,000. Or you’re going to get back $2,000.’ You’re going to be basically equal. You won’t owe or get anything back.’ And then if there is an imbalance, then we kind of discuss some of the levers that we can pull. So you know, you mentioned the HSA, increasing a contribution into your 401k, whatever those things are. And I think another one that probably we could talk about is just, you know, changes to your payroll withholding, the W4 form. A lot of people, when you begin a new job, you fill out the W4, and you don’t really look at it. But that W4 form basically dictates to your employer how much tax should be withheld from your paycheck. And then if you owe more taxes than what is withheld, then that’s when you actually have to write a check to Uncle Sam. So it’s kind of important to really understand that form itself and what that does. And sometimes just changing that is one of the levers that we pull. So instead of paying at the end of the year, you just pay a little bit more throughout the course of the year. So these are I think levers that I think are important to look at and go through and be able to, again, be more proactive in your tax situation than just say, ‘Well, this is what happened last year. Cross my fingers, hopefully I don’t get any surprises,’ and go from there. So Paul, are you still doing the reviews for this year? I know we’re into October. What does that look like?
Paul Eikenberg: Yeah, we’ll probably continue doing them until the Thanksgiving holiday is the plan right now.
Tim Baker: OK. So I think, you know, for listeners out there, if you’re interested, some people, you know, really enjoy to do a great job of analyzing your own tax situation. But if you’re not one of them, and you can think of a million other things to do to spend your time, you know, we can definitely help. Paul can definitely help. I think he does a great job with my clients. So you know, if you’re interested, sign up for the Script Financial tax review, and it basically includes a lot of the things we talked about, you know, analyzing your current pay stubs, you know, doing an income projection, you know, for the rest of the year, reviewing last year’s returns to see if there’s any discrepancy. So you know, if there’s big changes like you got married, you bought a house, you had a baby, those are going to affect, you know, obviously your tax situation. And at the end of the review, really to project out kind of your year-end tax status. And with that, basically Paul delivers that in a 30-minute video conference where, again, you review all the assumptions and projections and kind of go over the steps that you need to take to kind of, you know, pull the levers and say, ‘If we want to get money, this is what we would do. If we want to not owe the government money, this is what you should do.’ And I think it’s of great value. So normally, a tax review like this, it would be priced at $99. Between now and Nov. 20, so this episode will be released on Oct. 18, so about a month, we’re running basically a promo for 20% off. So that just brings it down to $79. So if you go to YourFinancialPharmacist.com/tax and use the coupon code YFP, you’ll get that 20% off the $100 price. So it’s YourFinancialPharmacist.com/tax to get that — to sign up for the review and use the coupon code YFP for the discount. So Paul, you know, good stuff today. We kind of talked about changes to the 2018 upcoming tax year, changes to the 1040, it looks like we’ve added some numeric schedules, the standard deduction has increased, and we talked about some of the changes with, you know, with the new tax code with deductions and credits, and then really what you can do for your own tax situation to kind of get in front of the ball and make sure that you have really no surprises for, you know, this upcoming tax season. So Paul, anything else to add before we kind of sign off here for the day?
Paul Eikenberg: Yeah, one more thing to think about that we think we’re going to see a trend with this year with the standard deduction going up. In the past, people have tried to pay their property taxes on December 31, made charitable donations so that they got those in in time to be deductible in the current year. I think the trend’s going to be that a lot of the people will be doubling up on those. They’ll be looking at their tax situation and instead of making donations in 2018, they may make twice as many in 2019. And think about your property taxes as to whether it makes sense — like in Maryland, you’d pay your property taxes from July to July and you have an option of breaking it up. So it may make sense to pay more in one year and then take the standard — alternate your itemized deduction one year to the standard deduction the next year. So that is one of the things we anticipate being a good strategy for quite a few people out there.
Tim Baker: Yeah, and I think just a tip in kind of the direction of doing some proper planning and being as efficient with your tax situation as you can. Like I said, if the listeners are interested in working with Paul and doing a tax review, it’s YourFinancialPharmacist.com/tax and use the coupon code YFP for the 20% discount. So Paul, good stuff today. Thanks for coming on the podcast, really appreciate it. And to the listeners, thanks again for listening. And we’ll catch you next time.
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