tax strategies

YFP 343: Getting Ready for Tax Season with Sean Richards, CPA

Posted on January 25, 2024January 24, 2024 by YFP Media

Tim Ulbrich and Sean Richards, CPA, discuss the tax preparations listeners should be considering ahead of the 2023 filing.

Episode Summary

In this episode, Tim Ulbrich and Director of YFP Tax, Sean Richards, CPA, discuss the tax preparations listeners should be considering ahead of tax season and the 2023 filing. Whether you DIY your taxes or work with a professional, there are documents that need to be on hand to file your taxes. Sean shares essential tax moves for the year, emphasizing the significance of being proactive for the 2024 tax season. Sean also discusses the value of a year-round approach to taxes and the in-house services by episode sponsor, YFP Tax, showcasing the value of personalized, holistic tax planning.

About Today’s Guests

Sean Richards, CPA, received his undergraduate degree in Corporate Finance and Accounting, as well as his Master of Accountancy, from Bentley University in Waltham, MA. Sean has been a Certified Public Accountant (CPA) since 2015 and is currently pursuing his Enrolled Agent certification. Prior to joining the YFP team, Sean was the Senior Treasury Manager at PRA Group, a global debt buyer based in Norfolk, VA. He began his career at American Tower Corporation where, over 10 years, he held several positions in audit, treasury and accounting. As the Director of YFP Tax, Sean focuses on broadening the company’s existing tax planning and preparation operations, as well as developing and launching new accounting offerings, including bookkeeping, payroll, and fractional CFO services.

Key Points from the Episode

Tax preparation for 2023 with a CPA. [0:00]
Tax moves for 2023 and preparation for 2024. [1:11]
Tax planning and preparation strategies for individuals and businesses. [8:56]
Tax season preparation and changes. [13:59]
Tax planning and goal setting for next year. [16:56]
Comprehensive tax planning and year-round approach to taxes. [22:25]
Year-round tax planning and personalized service. [27:24]

Episode Highlights

“And the big thing I’ll say about extensions is that the one of the things I’ve been noticing over the past few years is that there’s just this stigma about extensions, and how you know, a lot of people have never done it before. And it seems like it’s only something you can do if your situation is complicated. And it’s only something you can do if you are working with a professional and they need to do all the work for you and everything. But really extensions just give you and give your preparer more time to get things figured out, make sure that you are taking advantage of all your deductions and credits and everything.” – Sean Richards, CPA

“As Tim Baker would say, when it comes to extensions, right over rushed right over rush, right.” – Tim Ulbrich

“Yeah, I would be, you know, thinking about your own kind of general financial goals and then try to think about as you’re going through this whole tax filing process, how does your tax situation align with those goals?” – Sean Richards, CPA

“With comprehensive tax planning, is just looking at your taxes kind of throughout the course of the year like I’ve been alluding to throughout this whole conversation. And one big thing there is will be kind of what you were just saying that filing taxes. It’s not always really the finish line and might also be the starting point for somebody else.” – Sean Richards, CPA

“But with holistic plan, you have your tax return that you start with whatever is etched in stone sent to the government. And then from there, you’re able to sort of do whatever with testing out different types of scenarios and projections and looking at, hey, let’s take a look at our paychecks year to date, let’s see where are withholdings are at, let’s see what we expect our side income to be and our rental income. And oh, we’re going to have a kid this year congrats and, oh, we’re buying a house, let’s see how all these things play into our tax situation in the middle of the year.” – Sean Richards, CPA

“So there’s just so many different opportunities to, you know, maximize your efficiencies with your taxes, you know, take advantage of all the things that are out there. And if you don’t have a year round kind of approach to it, and you’re not looking at it in a cyclical kind of way, you’ll miss those things, you’ll come to filing, and you’ll be kicking yourself saying, let’s do it better this year, let’s do it better this year.” – Sean Richards, CPA

“So the name of the game with those is energies. Definitely still the big biggest thing. Energy efficiency, green initiatives. So people typically immediately think of EVs. I mean, that’s that’s a great example. And that’s one where the credits are sort of just getting better every year, there’s, more available to you” -Sean Richards, CPA

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week YFP Director of Tax and CPA Sean Richards joins the show to discuss getting ready for the 2023 taxes. Yes, it’s that time of year tax season is officially upon us. And you probably started to receive various tax forms in the mail that are piling up if you haven’t already done so now is the perfect time to switch gears and start getting ready for the 2023 taxes. If you aren’t sure where to start, we’ve got you covered with a free checklist to help you along the way. In this free checklist we cover three final tax moves that you can make for the 2023 tax year, four ways to start prepping for tax season, and three key items that you can be doing now to plan ahead for this tax year and beyond. If you’re ready to take action and set the stage for a successful 2023 taxes, you can download this free checklist at yourfinancialpharmacist.com/taxchecklist. Again, that’s yourfinancialpharmacist.com/taxchecklist.

Tim Ulbrich 01:09

Sean, welcome back to the show.

Sean Richards 01:10

Thanks. Thanks for having me. And thanks for allowing me the chance to get on here before I disappeared. And hopefully I can spread some knowledge to folks again before I kind of go into my hole for the for the spring and start getting into the fun stuff that I live for.

Tim Ulbrich 01:26

Tis the season, hard to believe here we are and end of January thinking ahead to tax season. And we’re really excited about the work that you and the tax team are doing. We’ll get into that as we get towards the end of the episode. But we want to use this time of the year really as an opportunity to make sure that our community, our listeners are focused as early as they can on getting prepared for the tax season, whether they’re hiring a pro, like YFP tax, whether this is a DIY type of solution. You know, this is the season where we start to see those forms showing up in the mail, we put them aside on the desk. And then we want to do everything that we can to get ready. So we’re going to talk about in this episode, Sean, some some final tax moves that folks can make here. Even though we’re in 2024. We’re doing the 2023 filings. So some final moves that they can make. We’ll talk about getting ready for the tax season, how they can be prepared to make sure that the filing goes as smooth as possible. And then we’re to start the conversation about – as we’ve highlighted many times before on the show – we want to be as proactive as possible. So how can we be thinking ahead to the 2024 tax filing here in the beginning of the year, again with that proactive strategic approach. So before we jump into the meat of each of those sections of the podcast, Sean, just remind us of the deadlines. I think folks are probably familiar overall. But you know, we see more people in our community extending. So I think it’s worth talking about that as well. What are the deadlines that folks need to be thinking about this time of year as it relates to tax?

Sean Richards 03:01

Yeah, I mean, the big deadline that people typically are familiar with his tax day, and that’s usually April 15, which is this year, sometimes it falls on holidays, or, in fact, sometimes I’m from Massachusetts, and it often falls on a Massachusetts specific holiday. So we get a little bit of an extra push there that other states didn’t get but not not afforded to that anymore. But that mid-April date is typically the the regular sort of Tax Day date for regular individual filers, assuming that there’s no extension that’s filed. And the big thing I’ll say about extensions is that the one of the things I’ve been noticing over the past few years is that there’s just this stigma about extensions, and how you know, a lot of people have never done it before. And it seems like it’s only something you can do if your situation is complicated. And it’s only something you can do if you are working with a professional and they need to do all the work for you and everything. But really extensions just give you and give your preparer more time to get things figured out, make sure that you are taking advantage of all your deductions and credits and everything. And that bumps your regular tax deadline from April all the way to October. It’s six months. And it’s a guaranteed thing, basically. I mean, almost every state falls the Fed. And if you do the extension with the Fed, it’s guaranteed as long as you make a payment against any, you know, expected bills you’re gonna have. It’s just it’s worth doing. We do it for all of our clients proactively. That’s something we’ve been rolling out over the past couple years is just getting ahead of that, get it filed. And that way you don’t have to worry about it. You know, you can take your time figuring out if you think you’re going to owe any money, make an estimated payment, and then spend however much time you need to just dot all the i’s and cross the T’s and get everything figured out. You know, it’s what we see a lot of folks doing nowadays, it’s the way the industry is heading. So those are the two big individual deadlines. And if you’re a business owner and you actually have to file a business return, basically shift that up a month. Yeah. On March 15, and September, if you extend out.

Tim Ulbrich 05:03

As Tim Baker would say, when it comes to extensions, right over rushed. Right over rush, right. So I think when we look at tax season, you know, there’s a lot of work crammed in a short period of time, and we want to make sure that we’re doing it right. And that we’re, you know, optimizing the tax situation the best that we can. So let’s jump into the first section, first part of our discussion, which is some final 2023 tax moves that our listeners could make may or may not make sense, obviously, depending on their individual plan. So Sean, even though we’re in 2024, calendar year, there are some actions that can still be taken for the 2023 tax season. What are those key ones that our listeners should be thinking about?

Sean Richards 05:47

Yeah, and it’s one of those things that you always want to try to be doing things in the calendar year if you possibly can. But there are things that you aren’t going to be able to do by the end of the year. You know, some of these things with retirement contributions and stuff, you’re gonna want to know what your AGI is, or what you expect it to be. Or you might have to find out kind of what kind of cash flow you have available for yourself to make some of these different types of contributions and things. But right, so the IRS actually does allow some actions to be done after the tax season, when typically, if you’re a cash basis, taxpayer, it’s sort of whenever you get that cash, that’s the year that it happens. And so the big ones are retirement contributions, IRAs, specifically, those go out to your your regular deadline. So typically, it’s going to be April 15. For folks, the one I’ll mention there is that aside, for some exceptions, with some solo plans, 401K’s that’s typically a year end kind of thing. So if you didn’t max out on that, you probably don’t have much of an opportunity there. But again, you do have the opportunity to contribute to an IRA. So that’s something to look into. And I mentioned a solo 401K, but if you’re doing anything like that, or a sep IRA, those actually can be extended out if you have an extension. So another reason to file that extension, by yourself six more months to figure out where you’re gonna land, what kind of cash you have available to make a contribution towards something like that. And then the other big one is HSAs, very similar IRAs, it’s it goes to your your April deadline. So if you didn’t hit your max, or if your company contributed, but you still have some room to hit the max there, definitely tried to hit that that the HSA, I say it all the time, but it’s one of the few things that has the triple tax benefit of tax free contributions, tax free distributions, and tax free growth. So big one there. And then the other one is it. So it’s a little bit more, I don’t want to say complicated, but it’s, you know, not typically something that folks that are just having a regular kind of basic W2 job experience. But I was alluding to it before when I mentioned extensions, and that’s making estimated tax payments. So if you’re on a quarterly cadence where you know, your withholdings aren’t covering off on your tax bill, at the end of the year, whether you have side gigs, or it’s by design, you should be making estimated payments, those actually would have been due on the 15th of January. So hopefully, if anybody’s listening in, they’re supposed to make q4 payments and didn’t this will be a little reminder to go do that. But the other thing to keep in mind there is that even if you’re not making estimated payments, if you’re expected to have a balance due in April, you’ll want to make a payment against that before that date. So even if you do extend out, you know, get a rough number, do the math say hey, I think I’m going to owe approximately $1,000 make that payment now or any time between now and April. And then like I said, take the time, get your return figured out maybe that 1000 becomes 800. And you get to 200 of it back or, you know, you just buys you that time to really get things figured out. But you have the ability to make payments early anytime now for the 2023 season.

Tim Ulbrich 08:56

Yeah, and I think it’s really important. You know, for those that have been at this for a while they’re they’re probably well plugged into, hey, I can make IRA contributions after the first of the year, right before the deadline. I can make HSA contributions, but especially for, you know, our listeners that are relatively new at filing their own taxes or working with someone they may think which would be common sense that hey, calendar year is over. Therefore, opportunity’s gone. And as you’ve highlighted, that simply isn’t the case. And Sean, I also want to put a plug in when it comes to estimated tax payments -you mentioned this being a little bit more nuanced – and I think especially for those that have some more complicated tax situations, we’ll come back to this at the end. You can feel overwhelming in terms of you know, how do I determine that what’s the amount am I doing that correctly? What what changes are happening? And so I think this is a spot we’re really working with. Someone can be really valuable to feel comfortable and confident that you’re making those estimated tax payments. Yeah, in the correct way.

Sean Richards 09:50

We send out reminders to everybody that’s on that cadence and it might as well just be a reminder back to me because you know, all of our clients basically just say, I pay But we have the tools to go in and just you know, we have that number already figured out ahead of time. Usually it’s a little back and forth of hey, yeah, everything’s still the same, business still doing the same, you know, any changes on things, and we update our projections and get those numbers. But yeah, if you ever if you expect a big tax bill, or really have any kind of income, that you don’t have withholding for, that’s something you really should be thinking about. And if not working with a professional, at least having a plan to know what that number is going to be for yourself.

Tim Ulbrich 10:26

I get that email too from you, Sean. And then I say, hey, Sean, well, why don’t What is that supposed to be? So….

Sean Richards 10:31

I always push back a little bit to Hey, Tim, tell me about this.

Tim Ulbrich 10:34

Yeah, that’s right.

Sean Richards 10:35

He’s telling me to go check the books, so we go back and forth.

Tim Ulbrich 10:39

Awesome. So that’s the first part we want to talk about is making sure that we use this window of time right to make any of these 2023 tax moves before we file. The second part is getting ready preparing for the 2023 tax season. So Sean, we preach and teach proactive tax planning. And we’ll talk about that here shortly. Most of the focus this time of year is getting ready to file for the previous year. What are some things that our listeners can be doing should be doing to get organized, and be prepared for filing, whether they’re doing it themselves, or again, they’re hiring a tax professional.

Sean Richards 11:15

Yeah, whether you’re doing it yourself or hiring a tax professional, you’re gonna need to gather the documentation and either have it for yourself or give it to somebody. So that’s the big name of the game right now. So knowing when you’re going to get things, you know, a lot of that is you’re sort of at the mercy of whatever businesses you’re working with. So if it’s a bank, and you have interest income, there’ll be sending out 1099s. If you work for a company, and you get a paycheck, there’ll be sending W2s, the deadline for most of those is January 31. So folks are probably starting to get them in the mail now, if they have a little bit more proactive payroll companies. 1099, typically, they’re due on the 31st are most of them are and you’ll see those right around the 31st. Because those are a little harder to get out. But there’s other things that you can be gathering now to that may not actually have sort of deadlines that are going to be issued by a company, but things that you can pull together yourself. So if you have a rental property, you know, have you been taking income and expenses and have all that stuff figured out? Or if you work with a property management company? Do you know how you can go get that? Do you have a side business? Have you been tracking income and expenses there, you know, if you bought a house or sold a house this year, you’ll probably have the closing documentation and everything and that stuff that you’ll need or again, your accountant will need. So one good way to start is to just look at what you did last year and kind of figure hey, I needed all these things last year, I’ll probably need those again. And then think what did I had as a change this year? And you know, what could that possibly bring up? Having a system in place is great, you know, if you’re a client of ours, we have a tax questionnaire that I’m sure listeners are rolling their eyes saying, Oh, no, not again this year, though. I do promise it’s a lot prettier than it has been in the past. I’m really excited about some of the changes we’ve made there. But you know, it really guides folks through Hey, did you have this happen? Did you have this happen? Things that you might not think about. Hey, Oh, I did. I forgot I sold that stock in January of 2023. Right, of course. So just kind of understanding what situations you had in your tax life for the year, what forms may or may not be needed from that. And then when you’re going to be getting them and who you’re going to be getting them from. And sometimes it’s not even things that you’re going to be getting right now. Like I mentioned, if you have a business and your partner with that a business or an S corp or something, you might not get your K1 until September 15 when that extensions due. So there’s a lot of things for planning purposes, you know, if you know that you are a shareholder of a business, you’re going to want to file that extension now because there’s a good chance you’re not getting that until the summertime or something like that. So it’s a lot to think about. It might be overwhelming for folks. That’s why it’s you know, really good to have a system or work with a professional. But starting with last year is always a good place to start.

Tim Ulbrich 13:58

Yeah. And I found that to be really helpful. I use a combination of what you said. So I have a Google Drive, you know, folder for personal, for business, and I separate it by year. And then as those forms come in, you know, I’m scanning them, I’m dumping them into a folder just to kind of get them out of my mental space. And then exactly what he said, right, so I’m going through the tax questionnaire, which is super helpful to not only, you know, remind me of, okay, what were the forms last year that maybe I haven’t yet gotten or, you know, whatever, I need to look into that further. And then also asking those questions of are there new things that happen this year, and things that I need to be nudged and reminded of that might not have been represented in the documentation from the previous year? So I think a combination of the factors that you said, but that questionnaire I really like because that’s kind of the force point of are not only answering the questions, but then that’s the cue to upload all my tax forms and make sure that we have every documentation that’s needed, according to the questions that are being asked.

Sean Richards 14:59

Yeah, and like I said people are probably rolling their eyes. And I don’t mean that because the questionnaire itself is bad. It’s more that people are probably thinking, Oh, no, I have to gather those documents again. But unfortunately, everybody has to do that regardless. So you might as well have something that’s going to guide you through and remind you. It’s nice because like I said, our system is battle tested, we’ve had it for years now. You can put things in and save it and come back. So if you say, Ah, right, I forgot I had that transaction in January of 23. I mean, we’re already a year past that, when you’re filing, we might be a year and a half past. So it’s always good to have that little reminder to go back and get things.

Tim Ulbrich 15:36

As we’re talking about getting ready for the tax season. And the filing that’s coming up whether you know, that’s going to be the standard date or an extension. You know, the other thought I have here, Sean, is what new tax changes have been happening that folks, maybe or maybe not plugged into. And I feel like in years gone by, there’s been a lot more activity than than there was this past year. But talk us through some of the things that you’re seeing with our clients that our listeners might want to be tuned into.

Sean Richards 16:04

Yeah, I would say ’23 wasn’t the craziest year. I mean, it could just be with the election kind of coming up, maybe a lot of waves didn’t want to be made. But it also obviously comes down to Congress having to get things passed and making it through all of the checks and balances in the system. So we did have a lot of changes with the Inflation Reduction Act a couple of years ago that are kind of starting to roll out over the course of time. So I’d say that those were probably the biggest, year over year changes as far as actual real changes of like, Hey, this is a new creditor, this is a completely extended credit that used to, you know, phase out at $500. And now it’s 30%. with with no limits. So the name of the game with those is energies. Definitely still the big biggest thing. Energy efficiency, green initiatives. So people typically immediately think of EVs. I mean, that’s that’s a great example. And that’s one where the credits are sort of just getting better every year, there’s, more available to you. But even things that folks might not be thinking of. So if you had worked done on your house, there’s a pretty good chance that whatever you did was considered energy efficient by the powers that be and may qualify for at least some type of credit. So it’s worth at least thinking about, hey, I did this project, I replaced a window or I, you know, did some roof work or something like that, even just to ask the question of, Hey, can I get something for this? Worst case scenarios the answer is no. But you know, maybe next year or something. Aside from that, like I said, there weren’t a whole lot of crazy changes, there was a lot of increases across the board, just due to inflation with things like the standard deduction, and all of the kind of income brackets and everything. That’s not, you know, unusual, but it was a little bit more than it has been in the past, just given some of that inflation. And then there’s some new reporting requirements that know people are definitely getting fired up about. 1099k is a big one that gets thrown around a lot. So that’s with third party processors, if you work with like, Venmo, and things like that, and it scares people, because the question I get a lot is, hey, I, you know, send my dad 50 bucks every month for my cell phone bill, am I is he gonna get a 1099 at the end of the year for something like that? And the answer is probably not. The idea behind that is that third party payment providers, credit cards, Venmo, things like that are supposed to be identifying business transactions, because you know, you have that little button, you can click if you’re in Venmo, this is a business or purchase. And it gives you the insurance and everything, but it’s more intended for things like that. That’s not to say that you may get a 1099. Or it might come out of something like that, if you did give your family member $6,000 for something over the year. But that doesn’t also necessarily mean that it’s going to be income to that person. It’s just the company letting the government know, hey, this is the money that moved between these people. So a lot of things are getting thrown around. And you know, companies are trying to get people excited. So they’ll, you know, listen to their services and things like that. But I don’t want folks to be scared about these things. But definitely, you know, be inquisitive, ask your accountant, ask whoever you’re working with, hey, does this apply to me or you get something in the mail, ask them about it or you know, run it by somebody, don’t just say, Hey, I don’t think this applies to me. I’m not going to worry about it and deal with it later.

Tim Ulbrich 19:26

So thus far, Sean, everything we’ve talked about is really for the upcoming filing, again, whether that’s April or whether there’s an extension in October, so let’s shift gears to talk about thinking ahead to next year. So the 2024 tax filing. And again, even though we haven’t yet filed for 2023, we’re making decisions right now that are going to impact that filing. So we want to be thinking and planning as proactively as possible. And this is a great time of year to be doing it. So what are some of the areas, Sean, that folks should be thinking about here for next year’s filing in 2024.

Sean Richards 20:00

Yeah, I would be, you know, thinking about your own kind of general financial goals and then try to think about as you’re going through this whole tax filing process, how does your tax situation align with those goals? Or does it and if it doesn’t, should it and can we kind of shift it that way. So it could be something of, hey, I really want to pay off my student loans this year, that’s my my number one thing is that that’s what I want to do. So you might be more inclined to, you know, get more money in your paycheck in a particular year, in order to take that money and pay it against your debt, versus somebody who’s saying, hey, my number one goal by far is to lower my taxable income. And if that’s the case, you know, you don’t care about having your student loans paid off, or maybe you don’t have student loans, you just want your taxable income as low as possible. So we’re gonna max out 401K, we’re gonna max out HSAs or kind of, you know, do any of those types of things. So this is the time to really figure that out. Set goals for your tax situation that apply to your financial situation and overall strategy and also kind of come out of your tax return. Did you do your tax return and say, Oh, crap, I have a huge bill this year, I don’t, I don’t want that to happen. Or vice versa, oh, my goodness, I am getting a huge refund, I certainly could use that $1,000 a month back over the course of the year. This is the best time to identify those types of things and set those goals. And then from there, you can start to make changes, you can you know, if your goal is to not have a big tax bill at the end of the year, you can adjust your withholdings now and have 12 or 11 months of that to take effect. And by the end of the year, you’ll probably be in a good place. Or again, if you want to get more cash back to pay off your student loans, you can adjust your 401k or vice versa you want to lower your taxable income as much as absolutely possible, max out 401k. And now you have 11 months of that to go through. So it just a really good time to kind of get those goals set in place. Think about how you’re going to get there work with somebody who will build out a roadmap to get you there. And then just start checking in throughout the course of the year. It’s one of those things that once you file your taxes, I know everybody wants to say that they’re done. And it certainly is something you should celebrate. But it doesn’t mean that you should put it aside and not think of it till next year. Get those goals figured out now. And then, you know, constantly check in and make sure that you’re still on track.

Tim Ulbrich 22:25

Yeah, I like to think and we’ll talk about this with the services, we offer at YFP Tax. But I like to think about the filing is really the start line and not the finish line. Right. And, you know, as we talked about, in the very first section of this episode, there are some things that are calendar year deadlines, right? So we want to make sure that we’re taking advantage of those here in 2024. If it’s suitable for your plan, so that we’re not chasing it, you know, a year later, right, we’re able to really take advantage. And I think, as you mentioned, and highlighted well: it all starts with their goals. And this is why I’m so excited about the combination that we have of CFP and a CPA. When when you’re doing financial planning, and you’re doing that one on one and you have a CPA in your corner. That combination is really powerful as we can look across the financial planning and the strategy there, and then make sure we’re doing it in as tax efficient manner as possible. And just as a reminder, as I mentioned at the intro of the episode, we’ve got a checklist to kind of help guide you some of the things that we’ve been talking about, you can get a copy of that free checklist at your financialpharmacist.com/taxchecklist. And we’ll link to that, again in the show notes. Sean, let’s shift gears as we wrap up and talk about what we do at YFP Tax. Why we do it. By we I mean you! The philosophy, the philosophy, the philosophy behind this service and I think it’s it’s such a good thread to what we’ve been talking about. Yes, we’ve got work to do. We’ve got to file the IRS says we have to do but we also want to be thinking ahead and thinking proactively so we’re really excited. We’re now more than a year in of the shift we’ve made to offering comprehensive tax planning what we call CTP in-house. Tell our listeners, what is comprehensive tax planning and what does that offering look like at YFP Tax.

Sean Richards 24:16

Yeah, I’m excited too. It’s been you know about a year like you said of kind of having this as the flagship offering that we have on the tax side and it you know, I love where it where it’s been and where it is now and I love even more where we’re planning on taking it this year. But yeah, comprehensive tax planning, is just looking at your taxes kind of throughout the course of the year like I’ve been alluding to throughout this whole conversation. And one big thing there is will be kind of what you were just saying that filing taxes. It’s not always really the finish line and might also be the starting point for somebody else. It also is you know, could be the sort of middle of the year depending on what you have going on. Not everybody is on this exactly perfect cyclical cycle of hey Q1 of the year, which is this January, February, March, I’m going to be doing my full tax filings. And then mid year I’m going to be, you know, everybody, depending on what you have going on might be at different points in their individual tax cycle at any kind of point in the year. If you’re a business owner, you might not be filing your taxes until September, October. And then you know, you can’t be thinking about filing at this time of year when you’re going to be six months away from it. So comprehensive tax planning is really just having kind of a year round approach to your taxes and really catered to what you have going on. So again, where you’re at in the year, if it’s if it’s tax filing season, that’s what we’re focused on. If it’s more of that, you know, six months away from tax filing, we’re doing what we call tax projection. So we use a tool called holistic plan that we really use for our end to end tax process, which is amazing to have it all kind of in one place that we can carry over year after year. But with holistic plan, you have your tax return that you start with whatever is etched in stone sent to the government. And then from there, you’re able to sort of do whatever with testing out different types of scenarios and projections and looking at, hey, let’s take a look at our paychecks year to date, let’s see where are withholdings are at, let’s see what we expect our side income to be and our rental income. And oh, we’re going to have a kid this year congrats and, oh, we’re buying a house, let’s see how all these things play into our tax situation in the middle of the year. So we don’t come to whenever we file and say, Ooh, you know, I covered off on 75% of my stuff. But I kind of forgot about this whole other 25% here. So like I said, I love the projection process, I’m really excited to get into returns now and see exactly how accurate we were with them. And, you know, areas for improvement too. And not necessarily that we might have made mistakes or anything but looking at, hey, last year, we were really focused on the side income, but you know, you had more of an opportunity to be putting money toward your 401k and your W2 job that you had on the side there. So there’s just so many different opportunities to, you know, maximize your efficiencies with your taxes, you know, take advantage of all the things that are out there. And if you don’t have a year round kind of approach to it, and you’re not looking at it in a cyclical kind of way, you’ll miss those things, you’ll come to filing, and you’ll be kicking yourself saying, let’s do it better this year, let’s do it better this year.

Tim Ulbrich 27:24

I think he’s you articulated so well. We’ve really designed the service to match the philosophy we have right, which is tax is not one and done. It’s something we need to be thinking about throughout the year to really optimize this part of the financial plan the best that we can and I think the service does that incredibly well. And we do recognize Sean, that CTP comprehensive tax plan. We recognize that it’s not for everyone, right. So you know someone who is listening that, you know, is single, they’ve got one W two income, that withholdings are clean set correctly, there’s not a whole lot of changes, they probably aren’t in need at least yet. In terms of year round tax planning service. So with that in mind, who are you seeing with the clients that you’re working with YFP Tax that are getting the most value out of this year round service?

Sean Richards 28:11

I would say overall, you know, if you have a kind of a basic situation, that’s not typically the client that we’re seeing coming on and getting the most value out of it. That’s not to say that we don’t have plenty of people who want comprehensive tax planning, just to be able to say, hey, I don’t want to think about it. I just want someone’s hand on the wheel. And I want someone to take a look at my paycheck at the middle of the year and say, Hey, we’re still on track to have a $0 balance. And you know, we’re all good thumbs up and everything. There’s plenty of those. But I will say that the majority of folks are probably those who have slightly more of a complex tax situation or more of a complicated tax history or a little bit of both. So complicated tax history, think of things like big refunds or big bills, like I mentioned before, like, Oh, crap, you know, I’ve had a couple of years where I had big surprises that I wasn’t happy about, or I had that side gig and I completely forgot about that little thing called self employment tax, things like that. And then, you know, more complicated things. So real estate investors, tons of our clients have real estate, and there’s lots of opportunities to take advantage of tax laws there. And I don’t mean take advantage in in a shifty kind of way. There’s just so many different opportunities available to real estate investors out there. Folks with student loans, that’s obviously huge in the pharmacy space, stock purchase programs in restricted stock units. Another thing that’s huge in the pharmacy space, especially with our friends in the industry. So you know, those are definitely the biggest and then of course side hustlers and side gigs and stuff. But you know, I would definitely say that those are probably the biggest areas where we see people kind of proactively looking for that assistance. And like I said, just because your situation is uncomplicated doesn’t mean that you can’t benefit from having that year round look at it or if you anticipate it’s going to get more difficult getting ahead of that now, as opposed to, again, having that revisionist history and saying, Ooh, let’s hopefully not have that happen again, you know, to any extent you can get ahead of those things, it’s always a good thing in my mind.

Tim Ulbrich 30:14

Great stuff. And for those that want to learn more and determine, hey, is this a good fit for me, now is the time, right? So here in a little bit, we’re going to kind of shut down the doors and say, we’ve got to focus on really serving those clients well, so if you’re interested in learning more to determine, you know, for this year and beyond, can wifey tax add value to your tax situation, you can simply just go to YFPtax.com. From there, you’ll see an option to learn more and book a free discovery call that call will be with Tim Baker. And from there we can determine what the path is. That makes sense. And you know, Sean, just to be clear, you know, there are folks, as you mentioned, that might have some more straightforward situations, but want to know that someone has a hand on the wheel and want to know that they have someone in their corner year round, and that’s okay. But we aren’t and we’re not shy about it, we’re not trying to compete with big box solutions that are, you know, running commercials these days. 24/7 for, you know, free returns, right, very different apples and oranges, in terms of the level of service, the year round nature of it. And what we believe is, is really high touch as well. So again, learn more yfptax.com, you can book a discovery call, and we’d love to have the opportunity to discuss further. Sean, thanks so much. We’ll see you back in the spring perhaps when you’ve come out of hibernation well, not hibernation, because you’ll be working hard.

Sean Richards 31:30

It’s the opposite of hibernation. I’m not quite sure what the opposite exercise to that is. Yeah, yeah, hopefully I will emerge and not see my shadow or however that works. I will, I’ll see you in a couple months.

Tim Ulbrich 31:42

Awesome. And at that point, we’ll recap some of the things that you’ve probably been seeing throughout tax season and how people can be thinking again more proactively and strategically ahead. So thanks so much, and we’ll catch up later.

Sean Richards 31:53

Sounds good. Thanks, Tim.

Tim Ulbrich 31:56

As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on podcasts, opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the date published. Such information may contain forward looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists Podcast. Have a great rest of your week.

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YFP 341: 5 Financial Moves to Make in 2024 with Tim Ulbrich

Posted on January 4, 2024January 3, 2024 by YFP Media

Tim Ulbrich, YFP CEO, shares 5 key moves for financial success, emphasizing automation, proactive tax planning, document organization, and continuous learning.

Episode Summary

In the first episode of the New Year, YFP CEO and financial educator, Tim Ulbrich, unveils a financial roadmap for 2024, emphasizing five key moves for achieving financial success and living a rich life. Tim highlights the pivotal role of automation in financial planning, proactive tax planning, the importance of organizing financial documents and the significance of continuous learning. He shares his personal financial goals and the systems he uses to organize and prioritize his financial goals. Tune in to gain insights and actionable steps for mastering your finances in 2024.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

Financial moves for 2024, including saving and automation. [0:01]
Balancing financial goals with living a rich life today. [3:04]
Proactive tax planning for financial success. [8:21]
Common tax mistakes and planning for tax season. [12:19]
Organizing financial documents for peace of mind. [14:43]
Automating financial planning for maximum profit. [20:19]
Prioritizing sinking funds for various financial goals. [25:21]
Prioritizing savings goals using a systematic approach. [28:24]
Financial moves for 2024, including automation and learning. [34:36]

Episode Highlights

“I get excited with the turning of the page into the new year. Not as a complete reset, but as an opportunity to really look more closely at the priorities that have determined to be most important to me, personally and professionally.” –Tim Ulbrich [02:22]

“Now tax in my opinion, is one of the most under appreciated and overlooked parts of the financial plan.” –Tim Ulbrich [08:27]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRO]

Tim Ulbrich 00:01

Hey everybody, Tim over here. And thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week I kick off the new year by covering five financial moves that you can make in 2024 to jumpstart your financial plan. So whether your plan is humming or you’re looking to get refocused and back on track, my hope is that this episode will challenge and motivate you as you set your own goals and plan for 2024. During the show, I talked through why it’s important to set a plan that includes both saving for the future and living a rich life today, I discuss an often overlooked part of the financial plan that perhaps needs more love and attention, why automation should be a key part of your financial planning strategy, and much more. Before we jump in, I want to let you know about a free webinar that I’m hosting coming up on Monday, January 8, at 8pm/Eastern, it’s gonna be a party, and I don’t want you to miss it would love to see you there. During this webinar, master your money in 2024. I’m gonna cover my playbook going from $200,000 in debt to becoming a seven figure pharmacist. Specifically, I’m going to cover how to get clear on your vision for living a rich life, the system and money management routine that we use to get out of debt and save our first million, how to automate your plans, so you aren’t wondering if you’re on track to reach your goals, and how to determine your retirement numbers. If you can’t make it to the webinar live, no worries, we’ll send out a replay to those that register. But if you do attend live, you’ll have a chance to enter a giveaway where two live attendees will be selected for one of the following: $100 Amazon gift card or a YFP bundle including YFP tshirt, YFP pullover and your book of choice. You’ll learn more about the webinar and register your yourfinancialpharmacist.com/2024. Again, that’s yourfinancialpharmacist.com/2024. Alright, let’s jump into today’s episode, five financial moves that you can make in 2024.

Tim Ulbrich 02:03

Hi, there, Tim Ulbrich here and Happy New Year! I’m so excited to be kicking off 2024 with you here on the YFP podcast. Thank you so much for listening and for joining the show. I hope you had some time over the last several weeks to reflect on 2023, think about what’s ahead for 2024, hopefully unwind and spend some time with loved ones as well. I get excited with the turning of the page into the new year. Not as a complete reset, but as an opportunity to really look more closely at the priorities that have determined to be most important to me, personally and professionally. And to make sure that the schedule and activities align accordingly. And I hope the same is true for you. And as we talk about that turn into the new year, as it relates to the financial plan, I’m going to cover five financial moves that I think you should consider implementing here in 2024, if you’re not already doing so, in your own financial journey. We’re going to talk through each one of these in detail. I’m going to talk about how I’ve implemented this in my own life as well as why I think about each of these five areas really is core to your long term financial success.

So let’s kick things off with number one, which is making sure that our financial goals strike the balance between living a rich life today, as well as planning and saving for the future, right? We need to be thinking about tomorrow, we have to be planning and saving for retirement, making sure that we’re focused on moving our net worth in a positive direction, net worth being our assets, minus our liabilities, making sure that we’re taking care of our future selves saving for retirement filling those investment buckets, all of those things are a priority. And I hope you have some plans and goals around those in 2024. But let’s not lose sight of those goals that help keep us focused on living a rich life today while we’re planning and saving for the future, while we’re planning for tomorrow. So perhaps for some of you listening, you’ve long dreamed about a certain experience that has taken a backseat to the busyness of life. Maybe that’s as small as a weekend getaway. For those that have young kids, I know how difficult that can be. Or perhaps for some of you this is a big stretch goal, may be something as big as a year off, traveling the world having those lifetime types of experiences, those bucket list type of experiences that are most important to you.

You know, I think back to Matt and Nicky Javert that we featured on the podcast that traveled the world. Nick Ornella that took a year off from his job as community pharmacist to travel the world. We’ll share both of those episodes in the show notes. So no matter where your experience or goals live, there is no right or wrong. Each of us are on our own journey. Perhaps it’s something that’s experienced focus that hasn’t been a priority that you’d like to make a priority in 2024. But how about those interests, or hobbies that we used to long for and prioritize that have gotten lost again and that busyness of life and work? So for me in 2023 This wasn’t a financial expense, but it was something that brought great joy. One of the activities that I wanted to pursue was getting back into playing volleyball, something I had done competitively throughout high school, something that the busyness of life, other priorities and work just fell by the wayside. And I did that through a local rec league and that brought incredible joy to me throughout the winter. Or what about that side hustle business or project that you’ve been dragging your feet to take the first step on, or perhaps volunteering or giving opportunities that have gotten lost in the shuffle of other priorities of the financial plan.

So let’s make this year the year that we move the needle on both yes, those long term savings and investment goal saving for our future selves, while also prioritizing living a rich life today. Now, here’s the reality when it comes to setting and achieving our goals, many of us probably need to simplify and clarify our goals to put them in focus. There’s lots of competing priorities, regardless of the stage of life that you’re in. And so I would encourage you to put them down on paper, something that we’ve been doing inside of the YFP plus community last month in December of 2023, was writing down our goals in a measurable time oriented way over the next one year, two to three goals in each of the four areas that mean most to us and our own wellness, of course, finance here, we’re talking about one area of wellness, and sharing that out with one another as a mechanism of both accountability to do the activity, as well as hopefully encouragement and accountability and achieving those goals. So put them down on paper, identify two to three financial goals that you want to achieve over the next year. And again, yes, we’ll have some of those objective things, right saving for the future, investing in 401Ks and IRAs and all those types of investments. But I would challenge you: do you also have components of your financial plan that are aligned with living that rich life today? So we’re not talking about being specific, I’m referring to having a what, to having a when, and to having a why. To having a what, a when, and why. So for example, for us in 2024, one of the experiences we’re hoping to achieve is to go out west to visit some of Jess’s family in Montana in the summer of 2024. We know that’s an expense, right? Traveling from Ohio to Montana, we’ve got four young boys, whether we fly whether we drive, experiences along the way, that’s going to be a large expense. So when it comes to us, that might look like something that hey, by June 1 of 2024, we will allocate $5,000, so that we can take that trip out to Montana, and have that experience with our boys and be with our family, though that’s out there, right? We’ve got a what, we’ve got a when, and we’ve got a why. When we have a what, when and why, we can start to not only make that goal come to life, but we can implement that in a monthly plan to see what it’s going to take for us to be able to achieve that goal. And we’ll talk more about that later on this episode.

So again, before you set your goals for the new year. Get clear on the why right? Do your goals motivate you do your goals inspire you and for those that are you that are doing this together with a significant other, a partner or spouse, starting with the goal, starting with the vision, starting with the dreams and getting aligned in those areas, is going to really help the rest of the financial plan to flow. So that’s number one on our list of five financial moves that you can make in the new year, making sure that your goals include and strike the balance between living a rich life today, and planning and saving for the future.

Alright, number two is taking your tax strategy to the next level taking your tax strategy to the next level. Now tax in my opinion, is one of the most under appreciated and overlooked parts of the financial plan. And I want you to think about tax as a thread that runs across your financial plan, perhaps one that maybe you’re not thinking enough about that. Ideally, we are proactively considering and evaluating when we are making our financial moves. Now this sounds so obvious, but I historically previously have viewed tax very much in the rearview mirror, right we have to file by April 15, or thereabouts each year to meet the IRS requirements. We don’t want the IRS coming knocking at our doors. And when we do that we are accounting for what happened in the previous year. Now thankfully, because of our tax team, because of our attention and focus on this topic, I’ve become much more proactive in my tax planning as a part of the financial plan. But in years gone by, we would file our taxes and then we’d hold our breath right? Are we going to get a refund? Or are we going to have taxes that are due do we do we do our withholdings correctly based on differences in charitable giving from one year to the next right all of these factors?

I didn’t have a great picture on come that time of tax filing, what was going to happen, right, and that is less than ideal when it comes to optimizing this part of the financial plan. It’s so again, we need to shift our attention from tax preparation to tax planning. One is proactive. One is reactive right again when we go to file and we complete that paperwork whether you do that yourself whether you hire professional that is looking backwards if we start to think more proactive, hopefully at the point of filing, yes, we’re going to do that work, we have to do that. But we’re then looking ahead to say, hey, based on that information, based on the rest of our financial plans, based on our personal situation, based on changes that we know are coming or goals that we have, what can we be doing strategically in advance throughout the rest of the year, to make sure that we’re paying our fair share of taxes, but no more. So if you don’t already know your key tax numbers, I’m referring to things like marginal tax rate, effective tax rate, adjusted gross income, let’s make a commitment this year to get started and to learn more.

Now, I would love if you would get out the IRS Form 1040, we’ll link to it in the show notes. And just spend 10 to 15 minutes to make sure that you understand the terminology and the flow of dollars. I get it. It’s nerdy, right. And whether you like this subject, or you don’t you do it yourself, you hire someone else. Understanding these numbers and understanding the flow of dollars, and what those terms mean and how it ultimately affects your marginal and your effective tax rate is going to be really important as you think about the strategies, and you’ll be able to directly see how certain strategies you can implement in the financial plan are going to have an impact on the overall taxes that you pay. So as one example, AGI adjusted gross income has huge implications for those that are going through student loan repayment, right income driven repayment calculations, especially for those that are pursuing the Public Service Loan Forgiveness strategy, your adjusted gross income is directly tied to the monthly payment that you’re going to make under student loan. So if we understand that, we can then start to think about, well, hey, are there strategies I can use that can perhaps reduce or lower my AGI adjusted gross income? Not by making less than one do that, but by making contributions to things like traditional 401 K or traditional 403B accounts? Or how about health savings accounts? Right? These are types of things that can reduce our taxable income, therefore reduce our monthly student loan payment, which is a great thing, especially for those that are pursuing tax free loan forgiveness, all the while we’re accruing tax deferred savings into the future. Just one example of how important the proactive planning can be.

Now on episode 309 of the podcast, we’ll link to that in the show notes. Our CPA and Director of Tax Sean Richards covered the top 10 tax blunders that pharmacists make. So whether you have a negative net worth, or you have several million dollars saved, I think you’ll find a lot of value in that episode. Sean, reflecting on the recent tax filing season, where he filed he’ll correct me if I’m wrong, I think over 200 something returns for the different clients that we worked with. And what he saw as the most common mistakes that pharmacists were making. Some of those things, including having a surprise bill, or refund due at filing, probably the most common thing that we see, including some of the surprises that are causing that issue, right. And so what we want to be doing ideally is we’re shooting for zero, we don’t want to have an interest free loan that we have out to the government. And we also don’t want to have a surprise bill that’s due that we’re not ready for. So what are the common things that cause that refund or cause that bill so we talked about that on that episode. Another common mistake he discussed was pharmacists not employing a bunching strategy for charitable giving. So for those that are giving, especially giving at a significant level, and aren’t following the standardized deduction, Is there perhaps some strategy in the in the bunching of charitable contributions that can reduce one’s tax rate. He also talked about a common mistake he saw a new side hustlers and business owners not planning for taxes.

So earning income and being surprised by not paying estimated taxes along the way. We talked about under estimating the power of the HSA, the health savings account and an oldie but a goodie, not factoring in public service loan forgiveness when choosing tax filing status as married, filing separately or married filing jointly. So make sure to check out that episode episode 309. And easy to see as you hear some of those common examples why having a proactive tax plan is worth its weight in gold. Now, as we turn the page into the new year, this is a great time to be planning, right? We’re getting ready to go into tax season that mid April deadline that we talked about. So now is the perfect time to be thinking about the upcoming tax filing season. Our tax team is ready to help, yes with the filing, but also as I discussed here, with proactive year round tax planning. We do that through our comprehensive tax planning service you can visit YFPtax.com to learn more, and to see whether or not those services may be a good fit for you. Alright, so that’s number two on our list of five financial moves to make in the new year. Take your tax strategies the next level.

Number three is button up your financial documents. Button up your financial documents. Now getting organized with your financial records, I believe plays a significant role, not necessarily in terms of moving the needle on your net worth, but in making sure that you and others have access to all of the information that you need to make informed decisions with the financial plan. So think for a minute about all the financial accounts that you have out there, all the different documents, insurance policies that touch a certain part of your financial plan, the list quickly grows to one that is overwhelming. And the more you operate in your own system, the longer time goes by where you’re operating in your own system, the easier it is for you to navigate, but perhaps harder for others to navigate and unravel, should they need to do so in the future. And that’s where this concept of buttoning up your financial documents comes in. That’s where this concept of a legacy folder comes in. I first heard of that idea of a legacy folder, when I took Dave Ramsey’s Financial Peace University probably 10-12 years ago at this point at our local church. And I remember walking away thinking, wow, that is so simple. So obvious. Why haven’t I done that yet? Why haven’t Jess and I done that yet, as a part of our own plan. So essentially, the idea of a legacy folder if that’s a new concept to you, whether it’s a physical folder, and electronic folder, or a combination of both, it’s a place where you have all of your financial related documents. So in the event of an emergency, others would be able to quickly access your financial situation and not just access but be able to pick up and understand what’s going on and to be able to make key decisions in your absence. So we just went through updating this and shifting everything to an electronic version. So that in the event of something that happens to Jess and I those caring for our boys, along with the financial planning team at YFP have access to all of the necessary information. So here’s how we have organized it certainly not the only way to do it. But here’s how we have organized it in a combination of Google Drive, and a safe at home that has a passwords, all of our passwords stored in a One Password account. So we have nine different sections, I’ll describe them briefly, this sounds overwhelming, it did take a commitment of time to get started. It takes a commitment of time to update. But I will say there’s an incredible feeling of peace and momentum that comes from having this done.

So section one for us is what we refer to as important documents, okay, birth certificates for us, for our kids ,social security cards, marriage certificates, passports, all of these we have in a fireproof safe at home. And we have them just referenced as being there in the electronic version that we share with the financial planning team as well share with those that would take care of the boys in the event of our absence. So that’s section one important document.

Section two is all of our insurance policies and information – auto insurance, homeowners insurance, umbrella insurance, health insurance, long term disability, term life insurance policies for myself, for Jess, for the business, etcetera.

Section three is estate planning documents. So we have a hard copy of these in the safe that have been notarized and electronic version that’s uploaded in the Google Drive. So these are things like the revocable trust agreements, health care power of attorney living will last will and testament.

Section four is the car titles. Now, I’m not sure how valuable these are given our current condition of our Swagger Wagon, but they’re there nonetheless. So section four is the car title.

Section five is our home ownership documents. So this is the deed to the home, our home equity line of credit or HELOC information, we have another copy of homeowners insurance policy here just so it’s all contained in one section.

Section six is a summary of our financial accounts, our net worth tracking sheet, as well as our Social Security statements. So I’m going to talk about more of this in the webinar on January 8, and actually kind of show you the system that we have set up. But here I just have a quick summary, think of it as a table of contents of all of our financial accounts that are out there. So for example, we use Ally for checking and savings accounts, where we have our treasury bonds, where we have our different investment accounts, 401K’s, IRA accounts and so forth. So it’s just a quick summary of what is the account type, where’s the account. And then as I mentioned, we store all the passwords in a separate secure One Password account. We also have in this section, a net worth tracking sheet. So each month, we track all of our assets, all of our liabilities, we add those up assets minus minus liabilities equals net worth. And we’re tracking our progression of net worth over a period of time. So it’s a way that Jess and I can just quickly look at a 20,000 foot view of where’s our overall financial health whereas the overall trajectory of the net worth.

Section seven is our tax returns for personal and business tax returns.

Section eight is all of the records related to the business. So a summary of the different entities, legal documents, operating agreements, buy/sell agreements, etc.

And then section nine is just a miscellaneous so information about utilities and other accounts that don’t fit in the previous sections. Again, it takes time to get that started, but it’s something that you can act upon pretty quickly in the new year, and I encourage you to set an annual recurring reminder, whether that’s the turn of the new year, perhaps it’s daylight savings time or something else, that you just remember to update those documents as needed periodically.

Alright, so that’s number three in our five financial moves to making 2024, button up your financial documents. Number four is my favorite. This is the area that I think has moved the needle the most for Jess and I, in our financial plan over the last decade or so. And that is automation, making sure that you have a system and ideally a system that is working for you. Now, when it comes to automating your financial plan, again, I think just like the legacy folder concept we talked about, it’s so obvious, so effective, so easy to implement. But many people I don’t think are optimizing this. So think of automation, as the mechanism by which your income is working for you. And it’s automatically funding the priorities that you’ve already set, and determined to be most important in advance. Now, I know I’m not alone, when I say that I was feeling for some time that there are multiple financial priorities that are occurring at once that are swirling around in my head. And it can be overwhelming to think about what are those priorities? In what order? And how do we allocate the limited resource of limited income that we have to those? Should we focus on one? Should we focus on two? Should we focus on three? And so much of the stress around the financial plan, I believe, is from all of that unknown, and anxiety swirling in our heads, right? If we can get that down onto paper, and if we can start to put some numbers and a plan to it and prioritize it, we may not always like the outcome of how fast we may or may not be able to achieve those goals. But once we have a plan, once we articulate it, once we know we thought about it, we prioritize it, I think there’s a lot of clarity and momentum that can come from that. So automation helps put those goals into action. It takes the stress out of wondering whether or not they’re going to happen. So whether it’s saving for an emergency fund, whether it’s saving for a vacation, paying down debt, whether it’s student loan debt, consumer debt, auto loan debt, mortgage debt, whatever type of debt, whether it’s saving for retirement, saving for home, saving for investment property, automation helps identify and prioritize these goals and assign your income accordingly. Yes, it takes a bit of time to set up, perhaps not as much as you may think, because you hear about it. But once it’s set up, it provides a long term return on time benefit, but also better yet, as I mentioned peace of mind and feeling of momentum knowing that you’ve thought about prioritize and have a plan in place working itself to fund your goals.

Now, Ramit Sethi talks about this in his book, I Will Teach You To Be Rich, he does an incredible job of teaching automation credit to him. And he says that automating your financial plan will be the single most profitable system that you’ll ever build. And I remember hearing that and thinking, Man, that’s a big, big promise, right? But it is 100% true. Automating your financial plan will be the single most profitable system that you’ll ever built. So if you’re not already doing this, I want you to imagine a future state. Imagine a future state where your financial goals and priorities are clearly defined. You’ve determined how much of your monthly budget is available for these goals. And you have a system in place to automatically fund these goals every month so you get paid and your money is being distributed automatically. Paycheck comes in dollars are being funded to the goals that you’ve already determined and prioritized to be most important. Okay, so what does this look like? Here’s how Jess and I are currently implementing this. Now, previously, we adhere to a zero based budget, which I think really did help us laser in and focus on our expenses and account for every single dollar that we earned. That’s the premise of a zero based budget. I think that method works out really well, especially when you’re getting started or feel like you need to get back on track. But over time, we’ve loosened this up knowing that once we account for all of our monthly commitments, right, our monthly commitments, being mortgage insurance, property taxes, giving, groceries, subscriptions, utilities, etc. Once we account for those, and those are largely fixed, outside of some variation in utility payments, we have a certain amount of funds after we account for those things that we know can be allocated in two general buckets with several options within those two general buckets. So what are those two general buckets? General bucket number one is what we call everything else. So this includes things like gas, miscellaneous trips to the store, family experiences, family entertainment, eating out, et cetera. And we track this, Jess and I track this, in a shared Google Sheet. And I’ll talk more about this in the webinar on the eighth and what the system looks like. That just helps us make sure we don’t overspend this category. Okay, so we started with our total income. We define our total take home income. We then define, as I mentioned, all of those fixed expenses and aren’t really shifting too much from month to month – mortgage, insurance, property taxes, giving, groceries, subscriptions, etc. And in days gone by that would also have been debt payments. And then what’s left over, we’re going to allocate into two general buckets and what I’m talking about is this first general bucket of everything else.

The second general bucket is what we think of as our sinking funds. It’s the second bucket of funds that we want to predefine prioritize, set allocation amounts, and then set up auto-contribution of funds. So what do I mean by the sinking funds? Okay, so for us in 2024, the areas that we’re focused on are funding an HSA, I’ll talk about each one of these more detail, finishing our basement, funding that 2024 vacations, as well as saving for a summer vacation 2025, funding our Roth IRAs, funding the next car purchase, and then thinking more about the boys 529 funds for college savings. So for us in 2024, as we sat down and thought about what is the greatest priority, those are the things that rose to the top that we wanted to fund with these bucket two funds that I’m referring to, right, the sinking funds. So in this scenario, and within our discussion of automation, we would look to estimate the available pool of funds per month or per year divided by 12, we would then prioritize the list, determine the allocation order in the amounts. And then as I mentioned, we would automatically fund those and set up a recurring contribution. So for example, let’s walk through this let’s say that we assume that for the year, let’s assume we have $3,000 a month, or $36,000 for the year available to disperse across these bucket two goals. So again, I’m not talking about the expenses that we know we’re going to fund every month, we talked about that mortgage, insurance, etc., property taxes. I’m not talking about that everything else bucket that we know a certain amount for family experiences, for gas, other trips that we may take out. I’m referring to this bucket of sinking funds.

So let’s assume we have $3,000 a month or $36,000 a year to put towards the sinking funds. Now for some of you listening, you may think, Hey, we’ve got a lot more. That’s great, right? We want to be intentional with that. And for some of you, you may be thinking, Wow, we got a lot less, right? And so we have to focus on again, everyone is on their own journey. So how do we take this $36,000 a year? How do we take this $3,000 a month if we use that as an example, and disperse that across the different goals I just talked about: HSA funds, finishing the basement, Roth IRAs, car fund, etc. So for us, the HSA is really a top priority, not just because of the triple tax benefits. I know we’ve heard about that on that on the show before. But since we have a high deductible health plan, and we have four active boys, right, so we really need to minimize our risk there. And we’ve got a really high deductible as well as a high out of pocket max. So we know that we want to max that out and 2024. That’s $8,300 a year as a family contribution. And so we were going to do that as priority number one. So once we fund that HSA< again, we started with $36,000 a year, we fund, fully fund the HSA $8,300/year, we’re now left with $27,700. So working down the list, what’s priority number two? So for us priority number two is finishing the basement. Now we’ve been planning for this for years. And we’ve decided that based on this phase of life we’re in we’ve got boys ages 12 to four, it’s a great time that we want to make the most out of the space and we want to really make this project happen. For us, it’s the example I’ve referenced in financial move number one, right? Finding that balance between saving for the future and living a rich life today. Now, does finishing the basement financially make the most sense, right? Does does it objectively may make the most sense when we compare it against other types of things like Roth IRAs, or 529 funds, and be able to save and invest for the future? The answer is no. Right? It doesn’t objectively rank higher, any money that you’re going to save and compound over time is going to beat any expense, right? That’s just an objective fact unless that money loses a significant amount as you invest it. But as we step back, and as we look at for our family, finding that balance between living a rich life today, as well as planning for the future, as we look at the progress we’ve already made towards retirement savings, we’ve decided that in fact, we’re going to make this a priority over some other investment and savings accounts. Now, to be frank, I wish we would have done this sooner. And so we’re going to pull the trigger and make this happen in 2024. So for this example, let’s assume that it’s going to cost $25,000 to do the project. And let’s assume we already have $15,000 saved so we need $10,000 more to get the project done. So again, we started with $36,000. We fully funded the HSA at $8300. We’re going to now add another $10,000 in the basement. So we’re left over with $17,700.

Moving down the list of priority number three. So continuing this theme of finding that balance between living a rich life today and tomorrow, we want to prioritize two family experiences in 2024. One being a summer trip to the Fingerlakes that we take with my family. We’ve done this for several years. And another being a trip out west to Montana, I mentioned that a bit earlier. So let’s assume for both of those, that’s going to cost a combined $7,000. So after we subtract that, we now have $10,700 left.

Moving down the list. Next up for us is Jess’s Roth IRA, that’s going to cost $7,000 to fund and max that out and 2024. After we do that, we’re left with $3700, then let’s just round this out by assuming we’ll allocate the remaining amount to my Roth IRA to do a partial fund. Now, you can see this system and process that we worked through right, we identified the total estimated annual amount, you can do the same thing, divide that by 12 for monthly. We listed out the goals, and we match those up to prioritize accordingly.

Now, here’s the disappointing part. Or perhaps, depending on you look at it, it may be exciting is as I do. In this example, we have fully funded several goals, right? We fully funded the HSA, we fully funded finishing the basement, we fully funded to 2024 vacations, we fully funded just as RIA, we partially funded my Roth IRA. But we had several things that I mentioned that were left unfunded, okay? The kids 529 accounts and the summer 2025 vacation, as well as the next car fund. So we have a couple options here. We can go back to the drawing board and redistribute right, lower some of the other ones and partially fund some, and then have others that we are able to partially fund. Or we can stay as is knowing that if additional funds become available, right, whether that’s in the form of for us additional income, it could be tax refunds, although hopefully we’re doing a good job planning and that’s not the case. It could be side hustle income for some of you. It could be picking up extra hours, it could be gifts that you receive, whatever might be the additional income, we know that we have a system and a list that is prioritize that if that income comes in, we know exactly where we’re going to allocate that. And that is the power of automation. That is the power of having a system.

So one step further, what does this practically look like for us in terms of implementation? And I’m going to show much more of this during the webinar on the 8th, I’m really excited about that. So we use Ally for all of our online banking. Now, this is not a commercial for Ally. We really liked them. We’ve used them for several years. I like the capability they have with saving buckets and other features. But you can build a system like this, and many different types of savings accounts. So for us direct deposit from work income goes into Ally, goes into a checking account. And since we know the amount required per month to allocate to the goals we decided upon, there is then a bucket labeled for each of these goals inside of Ally. So the transfer of funds goes from checking account where the direct deposit comes in to savings account. And then within the savings account, we have a predefined bucket. So essentially what this looks like is you’ve got a certain amount of dollars, let’s say $30, or $40, or $50,000 in a savings account. But once you click into that, you see all these different sub-buckets for things like vacation, for a basement remodel. And again, you can do a multitude of different buckets, I think you can do up to 30 or so inside of Ally. In the case of for us, the IRA, the Roth IRA and HSA savings, you know, we could put those in the bucket as well inside the savings account, but we’re gonna set those up to be an auto contribution directly into the investment account, right? We want those dollars working for us as quickly as possible. So again, imagine that flow you get paid, right, we’ve identified the buckets that auto contribute into the buckets, because we know we’ve already accounted for it inside of the rest of the bucket and rest of the budget. And then that’s working for us once we have the system set up. Now depending on when you get paid for us, it’s the first of the month. But for you it might be two times a month. But regardless, once you know when you get paid and once that’s consistent, we know that anytime after the first so we get paid around the first of the month, as well as the 15th. But we use the first as our metric for when we’re going to auto fund these goals. So anytime after the first it could be the third, it could be the fourth, I think I have most of them set up on the fourth, we can have that auto transfer established to go from checking to savings to the bucket leaving only in checking what is left to pay off the credit card each month. And so that all other dollars, they have a purpose, right? They’re being defined and allocated towards a goal. That is the system of automation. And I’m gonna talk more about that in the webinar on the 8th. I’m gonna give you some visuals and show you how to set up so you can make the most of it for your own financial plan. So that’s the fourth financial move. I think the one probably that can move the needle the most. Automate your financial plan have a system in place.

And finally number five is set your learning plan. Now when it comes to personal finance, I believe strongly that there is no arrived with the financial plan. Right? This is constantly evolving. It’s constantly changing. And a commitment to ongoing learning and having the humility to understand that there’s much to learn, and that mistakes are inevitable, is really key to long term success. So next week episode of the podcast, I’m going to feature ten personal finance books that I think you can/should read in 2024 that have had a profound impact on my own journey. So make sure to tune into that episode. I don’t want to spoil the goods here. But it’s important that you define that learning plan and path that works best for you.

One of the greatest advantages that we have of living in the 21st century is that we have access to learning just about anything that we want. And often we can do it at a low or no cost, right. Thank you very much to our local public library. So whether it’s reading books, great to have at it! If it’s podcasts, blogs, videos, there’s many options out there, find the learning path, that means the most to you and has the significance and really engages you in the learning process. And I would encourage you -learning is one thing, right? But learning plus action plus accountability is really where things start to happen. So that’s number five of our five financial moves to make it 2024. Set an intentional plan around what you want to learn in this new year. And then determine what are those resources, what are the blogs? What are the books? What are the podcasts that are going to help you get there and I hope YFP will be an important part of that journey.

Alright, before we wrap up today’s episode, I want to remind you of that free webinar I’m hosting on Monday January 8 at 8pm/Eastern: Master your Money. This webinar, Master your Money in 2024 and a cover my playbook going from $200,000 in debt to becoming a seven figure pharmacist. Specifically I’m gonna cover how to get clear on your vision for living a rich life, to make sure we had that vision in place, the system and money management that I’ve used that we’ve used Jess and I, to get out of debt and save our first million. How to automate your plan. I’ll show you step by step process for automation. So you’re wondering if you’re on track to achieve your goals, and how to determine your retirement webinar. As I mentioned before, if you can’t make it live, no worries, we’ll send out a replay afterwards. But if you can make it live, we’d love to see you there and you’ll then be eligible for a chance to enter a giveaway. Two live attendees will be selected to either receive $100 Amazon gift card or a YFP bundle including a YFP t-shirt, YFP pullover and a YFP book of your choice. You can learn more at register at your yourfinancialpharmacist.com/2024. Again, that’s yourfinancialpharmacist.com/2024. Cheers to a great New Year. Have a great rest of your day.

[DISCLAIMER]

As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. information to the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists podcast. Have a great rest of your week.

[END]

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YFP 333: Small Business Owner Tax Savings Checklist

Posted on November 9, 2023November 8, 2023 by Tim U

On this episode, sponsored by First Horizon, YFP Director of Tax, Sean Richards CPA, EA, summarizes a tax checklist for pharmacy entrepreneurs and other small business owners.

Episode Summary

Too many of us are caught in the trap of only looking at taxes during tax season. As a small business owner, missing the tax mark can have significant consequences in the form of surprise payments due, missed deductions and credits, and constantly wondering if there is something else you should be doing. So whether you are a seasoned business owner or just starting, on this week’s episode, sponsored by First Horizon, YFP Director of Tax, Sean Richards, CPA, EA walks us through a small business owner tax checklist including eight key areas that demand your attention. He touches on the fundamentals of bookkeeping, qualified deductible expenses, the benefits of financial projections to make estimated payments, the significance of S Corp status, insights on determining your owner’s compensation, and much more.

Key Points From the Episode

A warm welcome back to the show to YFP’s Director of Tax and CPA, Sean Richards.
Why record keeping is vital for a smooth tax season.
The separation of church and state when it comes to personal business.
Why you shouldn’t fear registering your business as an LLC.
When to consider working with a professional and what to expect from the relationship.
Understanding the basics of bookkeeping.
Defining deductible expenses and why it’s important to understand this term.
The difference between tax planning and tax preparation.
Projections and estimated payments: making sure that you’re setting the right money aside.
How to determine if the S-Corp is the right fit for you.
Discussing payroll and how to establish your salary as a business owner.
Diving deeper into Section 179 deductibles.

Episode Highlights

“Working with a professional will not solve any challenges or problems you have with disorganization.” — Tim Ulbrich [0:16:01]

“Having a strong understanding of how your business is doing financially is one of the best things that you can do as a business owner.” — Sean Richards [0:17:44]

“Paying yourself an equitable salary is not only the right thing to do by the eyes of the IRS, but it also really helps you think about where the business going and growing.” — Tim Ulbrich [0:45:48]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.8] TU: Hey everyone, I’m Tim Ulbrick, and I want to express my gratitude for you tuning in this week to the YFP Podcast. Each and every week, we’re dedicated to providing inspiration and support on your journey towards achieving financial freedom.

On this week’s episode, we have a special guest joining us, that’s YFP’s director of tax and CPA, Sean Richards, here to dive into a crucial topic, a tax checklist for small business owners. Whether you’re a seasoned business owner or just starting out, we’ll explore eight key areas that demand your attention. We’ll touch on the fundamentals of bookkeeping, qualified deductible expenses, the benefits of financial projections for estimated payments, the significance of S-Corp status, insights on determining your owner’s compensation, and much more.

Before we dive into this insightful conversation, let’s take a moment to thank today’s sponsor, First Horizon. Afterward, we’re jumping to my conversation with Sean Richards.

[SPONSOR MESSAGE]

[0:00:53.6] TU: Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meeting that saving 20% for a down payment on a home may take years.

We’ve been on a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower down payment and are happy to have found that option with First Horizon. First Horizon offers a professional home loan option, AKA, doctor or pharmacist home loan, that requires a 3% down payment for a single-family home or townhome for first-time home buyers, has no PMI, and offers a 30-year fixed rate mortgage on home loans up to USD 726,200.

The pharmacist home loan is available in all states except Alaska and Hawaii and can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed. To check out the requirements for First Horizon’s Pharmacist Home Loan, and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[INTERVIEW]

[0:02:04.9] TU: Sean, welcome back to the show.

[0:02:06.5] SR: Thanks. Thanks for having me, yeah. Feels good, we’re through all the extension deadlines, business and individual and now we can hundred percent focus on next year.

[0:02:14.2] TU: Hard to believe, right? We’re already talking about next tax season. You just had a webinar this week kicking off the beginnings of at least thinking about tax season. I know, many of our listeners, really, this comes to life in January, February, we’re trying to get people to think a little bit earlier, more year-round, and today, we’re focusing on really small business owner tax considerations and what are some things that people will be thinking about, planning about.

Essentially, a checklist of sorts, and whether people are just getting started with a business or maybe they’ve been at it for a while and they can go back and see, “All right, maybe there’s some holes in the crack in the foundation that they need to go back and fill in.” We really hope that this can be an episode that people will come back and reference into the future as well of something they need to be thinking about as a small business owner as it relates to their taxes.

And Sean, we’re going to talk here and weave in some of our own personal experiences of how these things became obvious that we need to be doing as we’re growing the business but also, Sean, in the work that you’re doing and advising and working with other small business owners as well.

[0:03:15.2] SR: Yeah, there will be anecdotes from real life, with our own accounting of our own businesses and some of the people that we worked with and everything, yeah. There’s a lot in this one, I think it will be a good one to reference back to, I agree.

[0:03:25.9] TU: I know pharmacists like checklists and I know they like to know where we’re going. So, we’re going to cover eight different areas, we’ll go through these one by one and they’re really going to flow into one another, and so I think we’re going to start, maybe a little bit broader, Sean, and then we’ll get more narrow of considerations that folks should be thinking about.

Sean, number one on our list is record keeping. I think that anyone who has been in a business for any time or even if they’ve been thinking about starting, they’re being advised, maybe that’s – some advice have been given is, “Hey, you have to keep records,” But that can get lost, right? You’ve got an idea, you’re running things, it can be busy, tell us about record keeping, why it’s so important, and what people should be thinking about here.

[0:04:02.5] SR: Yeah, like you said, these will kind of flow into each other, and honestly, it’s – you kind of can’t have one of these items without what’s before it, and it all comes back to record keeping, really, at the end of the day. And that makes sense if you’re thinking about taxes and accounting just the way that they are. It’s generally, it’s the nature or say, looking back at something, it’s a historical look.

So, you’re going to need to have references of the things that you did to be able to do something like that, but there’s just so many things that go into just being able to make decisions about your business when you’re filing taxes at the end of the year, when you’re doing tax planning, which I’ll get into a little bit later about the differences between tax planning and tax preparation.

It all comes down to having good data, and having good data goes back to having good sourced data and inputs and everything. So just saving down everything that you can, related to the business, and I don’t mean that in the sense of just holding receipts and throwing it in the shoe box and just keeping all of the junk, but just making sure that if you’re doing financial transactions, you’re keeping them in a bank related to your business, you’re running down reports at the end of the month.

Hopefully, you’re using some kind of ledger system like a QuickBooks or even Excel or something like that but even if not, just being able to say, “Hey, this is the money that I made this year, this is the money I paid this year.” And then even some of the ins and outs that you might not think or something that will directly relate to your taxes or business but might, if you ask your accountant about it, right?

So, things like loan agreements and any type of employment agreements you have with folks. So, things like that. Just really, anything that you think at any point in time, “Hey, would my accountant ever possibly ask me about this?” or “May this possibly come into play when I’m doing my taxes in the future?” Bear to error on the set of caution, just keep everything.

That being said, there’s actually some rules in some areas. So, generally speaking, I’d hold on to everything for at least three years. Some states have even longer record retention requirements but generally speaking, hold on to things for at least three years. Just get some cloud storage or a hard drive or something like that so you don’t have to take a physical space and just keep an eye on everything.

[0:06:08.1] TU: Yeah. And we use, at YFP, we use Google Drive for everything. So that becomes our system of – as you mentioned Sean, it’s not just receipts, right? It’s going to be the financial statements, whether someone’s producing those for you or you’re working on that yourself, and it might be a very basic Excel template that you’re starting with and then that will evolve over time.

But it’s not just the receipts or the financials, it’s also the contracts, right? Things that you’re – you know, W9. I mean, just the – a lot of things that you’re going to be building over time.

[0:06:37.0] SR: Right, and even things that you might not think about. So, like, say you or you have an office space at home that you’re working out of. You can take a deduction for that and there’s a simplified way to do that with a square footage. But there’s also a way you can take actual expenses and generally, you’re going to want to do whatever is the most beneficial.

So, now we’re talking about, okay, mortgage interest and utilities and stuff but even on top of that, depreciations. So now we’re saying, “Hey, how much did you pay for your house 10 years ago?” or something. That might not be something that’s top of mind for folks but if it’s, again, even if it’s tangentially related to the business, there’s a chance you’re going to be able to possibly get a tax savings for it.

Better to just hold onto it and ask somebody about it, “Hey, can I get a deduction for this? Is it worth me keeping this data, these records here?” And then just have someone tell you, “No, you don’t need that anymore.” And then you can get rid of it.

[0:07:26.2] TU: Yeah, perhaps I should have said this at the beginning, Sean, but I know we’re going to have some people that are listening that maybe have been at this for a while and they’re kind of realizing as we’re going through these eight things like, “Oh, my gosh, like, this is a hot mess” right?

[0:07:35.9] SR: Right.

[0:07:36.6] TU: And that’s normal. You joked about the receipts in the shoe box but there’s a fine line here between, “You can’t predict everything you don’t know yet.” And the system’s going to evolve over time. You don’t want to become paralyzed by all these things but also, you want to be thinking ahead as much as you possibly can, or working with someone that can help you anticipate, that has experience working with others as well.

[0:07:56.6] SR: Exactly.

[0:07:57.4] TU: And I think an important part of that record-keeping, Sean, has been moved to number two on our checklist is this concept of comingling personal and business and really wanting to separate these out and ideally, we’re doing this from jump street, right? So we can have clean records and again, this isn’t always done, whether someone’s anticipating where they’re going to go or maybe they’re confused about how to incorporate or do they need to set up an LLC.

Lots of things to consider here, but talk to us about the importance of separation of church and state when it comes to personal business.

[0:08:29.5] SR: I was going to say the separation of church and state but I wasn’t sure if that was alright. So, I’ve used it before but I held off for a minute. Yeah, I mean, that again, it’s going back to the record-keeping thing, and being able to produce data and produce useful information about your business. So, if you need to say to yourself, “All right, how much money did I make this year or how much did I make, how much did I spend in expenses to my vendors?”

If you have to then go and start pouring through and combing through bank accounts and picking out, “All right, well, this was related to my kid’s school stuff but this was related to the business trip that I went on” and everything, just the notion of even having to do that from the beginning is – it’s just stressful to even think about. There were legal sides to it too. I mean, if you have an LLC and you set up a separate business, it’s always kind of there to keep things separate.

[0:09:15.8] TU: Yeah.

[0:09:16.0] SR: Then it begins to become something where, like you said, you might not know at first, “Hey, I’m starting something out, it’s just a little side project, I’ll use my regular account for now and kind of keep track of things on paper.” Then all of a sudden, things expand and get bigger and hey, maybe you’re incorporating or bringing on partners and stuff, and then you start getting into things, which I won’t really go too deep into because I’ll put the audience to sleep.

But you start talking about your basis in a partnership interest or something like that or your basis as a shareholder in a corporation, and if you’re sharing funds or borrowing things from here and putting it in this pocket and using your personal home equity line of credit to fund the line of business that you’re doing, it just, it muddies the waters too much from the beginning.

So, to any extent, you can keep that stuff separate. That’s the recommendation. That being said, number one is, if you’ve already done some things where, “Hey, I’ve put a couple of expenses on this card” it’s not the end of the world, it’s just being able to identify those things. So, if you can go back now and start to be able to put a report together where you’re chipping away the personal stuff and you have the business stuff ready now or towards the end of the year and not in April or March actually, if we’re talking about business returns.

But the other thing is that you don’t have to necessarily hold yourself to that a million percent. And I know this is offering up not a best practice but there will be times when I have people come to me and say, “Hey, if I go put this big credit card or this big flight on my personal card that I just opened up, I’m going to get myself a huge refund back from my credit or big reward, then I’ll be able to put back in the business” or something like that.

Those things will happen and it makes sense, you have to do it. It just goes back to the record-keeping thing. Let your accountant know or keep track yourself. “Hey, this was a loan from me as a business owner to the business and now, I’m going to actually pay myself back that amount from my business account.” Just keep track of it that way. Don’t completely handcuff yourself but make sure you try to keep things as separate as you possibly can.

[0:11:19.3] TU: Yeah, that’s great stuff. I think too, there’s – you mentioned some of the legal piece, which again, we’re not lawyers but that’s an important consideration of keeping things separate and where the liability protection ends. I think the other thing I see here, Sean, often, is the idea of starting, setting up a business, registering with the state, getting your employer identification number, opening a bank account.

That seems big and scary, which I think can be intimidating to people that are on the front of it but it’s really not that difficult nor is it that expensive. And so I think, as early as you possibly can, once you’ve got that bank account and the business’s name that’s really going to help you with the record-keeping being separate. The other thing I would just say is from a visibility and a cleanliness as an owner to understanding where your business is at.

Like, we don’t want to muddy those waters as you talked about, right? So, I want to be able to quickly see, how’s the revenue, how’s the expenses, where are we at? And obviously as you grow, you’re going to look at this period versus another period and what’s the growth or not the growth. What do we need to change?

So, I think really having good insight into what’s the health of the business, the separation helps. And then the other thing I would add, which is a little bit more in the mindset side of things is sometimes when we are just starting, we have some of that resistance and devastation of like, “Well, this is just kind of small and I’m not sure where it’s going to go and so, I’m just going to do it with my personal.”

Like, believe in yourself, right? Where are we going? And worst-case scenario as we dissolve the business, we shut down the banking account and we move on, but I think really establishing the goals that you have for the business as well.

[0:12:49.4] SR: Right, and we’ll talk about it in a little bit more later but the LLC thing, again, neither of us are lawyers but a lot of people get scared by that because they think, “Oh, it’s a new entity, it’s going to open up this whole separate tax thing.” But most of the time, if you’re a sole proprietorship and you open an LLC, it’s just going to land on your personal tax return like kind of a regular side business anyways. So don’t let that notion of things scare you too much.

[0:13:12.1] TU: All right, number three on our list, Sean. Number three is working with a professional. You’ve alluded to this a couple of different times. Some people, as it gets started, they may work with a professional right away, they may wait, and that could either be an accountant, bookkeeper, both, we’ll talk about bookkeeping basics here in a little bit.

This was one of the first areas, Sean, that we actually outsourced at YFP, as we were looking at growing the business. We had times where that perspective was very helpful and times where we’re like, maybe not. So, I think this is a challenge where, “You know what? I’m going to hire someone that can really understand my business and advise me.” And I often had this feeling of, “I don’t know what I don’t know”, right?

So, I’m looking for someone to kind of guide me, rather than just being there when I have questions. So, talk to us about the working with the professional. Maybe the “When”, as well as, what are we looking for in that relationship?

[0:14:01.8] SR: Yeah, and like you mentioned, we’re going to go into bookkeeping basics, but I think having this n your checklist of where you’re in the end of the year, and really any point in the business year is trying to make that determination, “Hey, am I going to do this or not?” You don’t even necessarily have to go down the path of understanding all of the ins and outs of the bookkeeping if you’re going to decide off the bat, “Hey, I’m going to pay somebody to do that for me.”

Not that you shouldn’t get the basics and stuff, but if you’re going to say, “Hey, I want to outsource this now and have somebody run that whole show”, you don’t necessarily even have to get yourself in the weeds from the beginning. But I think it’s just one of those things that you have to decide, like you were saying, where do you want to be spending your time and your energy and where are your strengths and your weaknesses, right?

So, if maybe you have a finance background and you say, “I can put a couple of hours towards this and it’s not a big deal, I got a pretty good handle on things and I can run it myself.” That’s perfectly fine but you might be saying to yourself, “Hey, I know a lot of people who just absolutely hate everything to do with numbers” and that’s okay too. If number scare you and you hate numbers, that’s fine but they’re not going to go away.

So, ignoring them or trying to just say, “Hey, we’ll get there at the end of the year and figure it out then.” I mean, that is one way to do it but it’s certainly not the best way to do it. So, I think it’s just something where you have to really think about where you’re at, what your strengths and weaknesses are, and also what do you want to do when it comes to tax season, right?

If you’re talking about a sole proprietorship then that’s going to land on your personal return, that’s probably something that you can handle. But if you’re getting into partnerships and corporations, now you’re filing different returns and they’re a little bit more than a regular person’s probably used to with HNR block or whatever. So, that’ might begin to necessitate having a tax professional just sheerly out of expertise.

So, there’s a lot of different things. I always use the accountant cop-out answer that Tim Baker uses of, “It depends.” But it really does depend. But I think having that decision early on in your process will help plan out the rest of everything else that we’re going to talk about in a minute.

[0:15:57.6] TU: And this is worth saying, and maybe saying again and saying again, which is working with a professional will not solve any challenges or problems you have with disorganization, right?

[0:16:07.7] SR: Correct.

[0:16:08.6] TU: They can advise, they can help, they can – we talked about things like record keeping, but they’re not there from an organization standpoint. I think this is something, again, no judgment, right? People that are just getting started in the business, you’re focusing on the business, you’re growing things, you may not be thinking about organization and records and all that, but at some point, that’s got to become a priority. And if they’re working with someone the first time, that may not be something that is top of mind, so.

[0:16:32.7] SR: Yeah, but a professional though also can, on the flip side and again, it’s not going to be – it’s not going to solve disorganization problems but can definitely help advise with, “Hey, you’ve been struggling keeping track of all these things. Why don’t you get a QuickBooks subscription, we’ll connect all your bank accounts and then I can handle things from there and keep track of things as they come in.”

And now, all of a sudden, you’re not panicking every month or every year with the thousand transactions. You have a bookkeeper who is going in every week or every month and categorizing things and sending you reports, so.

[0:17:01.9] TU: Yeah.

[0:17:02.1] SR: Again, it might not solve your problems with a wave of a magic wand but they can definitely get you there.

[0:17:08.7] TU: So, let’s go to number four on our small business owner tax checklist, and Sean, that’s bookkeeping. We’ve danced around this here a couple of times so far but whether or not someone is working with a bookkeeper, there are things they have to be ready for and make sure that they’re tracking. So, talk to us about those items that they have to be ready to report on, whether they’re doing it themselves or whether they’re working with someone that they hire.

[0:17:30.5] SR: Yup, like you said, and like I was just saying before too, even if you have somebody who is doing this for you, reporting on it, and kind of explaining it all to you, you still have to generally be able to understand what they’re talking about, right? I mean, you can only break things down in layman’s terms so much, and having a strong understanding of how your business is doing financially is obviously, one of the best things that you can do as a business owner, I think.

So, if you take a look at – and I’ll talk about the entity types in a little bit – but if you look at the three main, or at least in my mind, tax returns that you’ll have for small businesses typically is a schedule C on your 1040. That’s just your regular kind of sole proprietorship. It can be an LLC, cannot, but just a regular person side gig kind of thing, and then you have a 1065 which is a partnership.

So that’s the default if you have an LLC and you have more than one person, and then S-Corp, I’m sure a lot of people have heard of that say, 1120-s. Those are the three main forms that you typically see for filing business returns at the end of the year. If you look at the three of those, the main front of the forms, they’re all basically the same thing. You have your revenues, your, “Hey, what were my sales, what was my service income if I had any other kind of income, and what were my expenses?”

And you’ll see that all three of them have generally the same categories for expenses. Like advertising and travel and mortgage interest and things like that. So, it’s pretty similar across the board and you’re going to really have to be able to report on that stuff, no matter what kind of business you run, you’re going to have to know what your revenues are and you’re going to have to know what your expenses are.

Revenues, I’m not really going to spend a whole heck of a lot of time on. I mean, I think people generally kind of have a feel for that, it’s cash in the door. The one thing I would say there is if you’re doing service revenue, it might be a little bit harder to track when you’re actually performing a service and getting paid versus actually selling a good. So, a little bit more keep eye on there but honestly, again, people typically have a good feel for that.

It’s more the expense side that I think things can kind of trip people up on. You typically think, “Hey, whenever I’m spending cash out the door that’s going to be an expense for the business and I can probably deduct it.” And generally, that’s true, but there’s a lot of things that come in that can mix that up a little bit. I mean, property is one thing. I was mentioning before, depreciation, right?

So, you probably think, “Hey, I’m paying for this office space and I have a mortgage on it. My mortgage, I should be able to write that off, right?” Mortgage interest you can but the mortgage principle, you don’t. You get that back via depreciation but again, that’s something you might not be thinking about or might not really have insight into, or vehicles for example. You can have a billion different ways to write off vehicle expenses.

Whether you’re taking actual expenses or like a standard mileage rate. It all depends on how much you’re using the vehicle for business purposes, there’s all sorts of depreciation rules and stuff. There’s just a lot when it comes to expenses. So, that’s probably the biggest area on the PNL at least, the profit and loss statement to really have a good handle on when it comes to basic bookkeeping stuff.

[0:20:25.4] TU: Sean, as you’re talking, it’s reminding me of – sorry to interrupt you, it’s reminding me of Schitt’s Creek episode where Johnny Rose –

[0:20:33.4] SR: Yeah. I already know where this is going.

[0:20:35.0] TU: You can’t just buy things for yourself and deduct them as an expense.

[0:20:39.8] SR: It’s a write-off, it’s just a write-off, exactly.

[0:20:42.1] TU: It’s a write-off, just a write-off.

[0:20:43.4] SR: And hey, a lot of times, and we’ll talk about what’s a deductible business expense. A lot of times, if you’re spending money on a business, it is but you’re correct, you can’t just be like David Rose and just go buy everything.

[0:20:54.3] TU: Oh my gosh.

[0:20:55.7] SR: From the blouse barn. So, that’s the PNL. The balance sheet is kind of – I don’t want to say, it’s the ugly stepchild of the financial statements but it’s the one that people generally have an actually have a pretty good understanding of it without even really knowing what a balance sheet is just because of the nature of two of the biggest components of it. So, your balance sheet is going to be your assets, it’s kind of one-half of the calculation and then the other half is liabilities and equity.

So, assets are pretty much what you think. If you look up the book definition of an asset, it’s kind of what it is for a business. It’s kind of what it is for a business. It’s basically something that’s expected to generate money for you, it’s a positive sort of resource that you have so cash, receivables, things like that, property, equipment. Again, things that people probably have a pretty good handle on.

“Hey, I have this much cash in the bank, Johnny owes me this much money and I own all these cars” right? Liabilities is the other side, on the other side. So, that’s the opposite of the asset basically. It’s like, “Hey, loans, do I have debt, do I have credit cards, do I have a mortgage? Do I owe my vendors?” Things like that.

So again, people typically have a pretty good handle of that, whether they’re really thinking about it or not, you usually know, “Hey, what are my credit card balances, what’s my line of credit balance?” whatever. Equity is the piece that is sort of – it always just ends up being the plug piece but it’s really important when it comes to taxes. So, if you think about – I was alluding to before, you were in a partnership.

You have a basis in that partnership and again, if you’re not an accountant, you might be thinking like, “What in the world is that?” It’s something that, I don’t want to say it gets overlooked but if you’re not really thinking about it from the beginning and again, getting back to commingling funds and stuff, basis is something that really matters a lot in the tax calculation. But can get muddied very quickly if you don’t have a handle on things.

And that really comes into play, equity is really where that kind of lands and I’ll caution that, if you look on the balance sheet, you look at equity, that doesn’t mean that that’s your basis or if you have multiple partners and stuff, it doesn’t necessarily equal that. But being able to have a handle on what your equity is, it really is a value of your company if you think about it. It’s your assets minus your liabilities. If everything right now came due and you had to pay off all of your vendors and everything, what do you have left?

That’s the value for your business. So, like I said, it’s the one that’s overlooked a little bit and it’s not as easy to maintain. Typically you don’t have to report a balance sheet if you have a small business and you’re doing like sole proprietorship or something, but it’s something that if you can get somebody to keep those books for you and be able to have a handle on it.

[0:23:28.2] TU: So, as you mentioned, assets equals liabilities plus equity or we could change the equation around assets minus liabilities equals equity, right?

[0:23:35.6] SR: Again, exactly right.

[0:23:36.6] TU: So, is my high school math still good?

[0:23:38.4] SR: Yes, that would be algebra. Very, very good.

[0:23:41.2] TU: So, let’s talk more within the bookkeeping basics here. Let’s talk more about the deductible expenses, right? This is probably one of the most common questions that we get you alluded to before that – especially early on the journey, people may have this perception of, “Hey, I can buy anything for the businesses and it’s a deductible expense.” So, define that term just a little bit further and why that’s important, and then some of the most common areas or deductible expenses that small business owners should be thinking about.

[0:24:06.8] SR: Yup. Sure. So, deductibility, it really comes down to the main things. So, is it ordinary and necessary? So, that basically means, if I have a business, is that expense something that actually makes sense in the course of a business? So, if you own a financial education company and you’re buying courses for your employees to take to learn about education and finance and stuff, that’s probably an ordinary expense.

If you’re buying tickets to – I was going to say, the Phillies in the World Series but they’re not really there, I guess. So, if you’re buying tickets to a baseball game or something, that’s probably not an ordinary expense, right? So, sorry for the low blow. I actually was rooting for the Phillies this year, that wasn’t meant to be, it just popped in my head first thing. So, ordinary necessaries, number one. Reasonable, which is in the same kind of vein but similar sort of thing.

So right, if we go back to that example I was just giving in, your employees are purchasing education, financial education courses, right? If those courses cost USD 500, a thousand dollars or something, it’s probably reasonable. If those courses cost USD 250,000 each, that’s starting to be, “Hey, you know, what’s going on there?” In fact, it’s probably not started to be, it’s definitely unreasonable but I think you get what I’m saying.

[0:25:19.3] TU: Yeah.

[0:25:19.3] SR: And then the third piece is paid during the year or if you’re on the accrual basis incurred during the year. But generally speaking paid but as the case is with everything, there is a lot of exceptions to these rules and with expenses in particular, those exceptions come out quite a bit. So, when we think common deductible expenses, cost of goods sold is going to be the most common or easy to identify if you’re a retail business or you’re selling goods.

And then the flip side of that, of the analogy I guess is if you have a service business, it’s not as easy to say, “What’s my cost of goods sold?” because you’re not selling a good but being able to determine, “Hey, what are my direct expenses directly related to the services that I’m providing?” So, it’s typically labor, contract labor, things like that. Compensation, so that’s one that is usually is a deductible expense.

However, it very often is not something that’s a deductible expense if it’s for an owner-employee of whatever this is. So, and you know, I’ll get into a little bit of specifics in a bit with some of these different entity types but if you’re a sole proprietorship and you are paying yourself and it is a little bit contradictory to what I was saying before where you want to be able to kind of keep good books and keep records of everything.

So, you’re probably saying, “All right, I’m working 40 hours a week on my business. I am paying myself 50 grand a year” whatever it is, that’s a salary expense to me, and then you write that off. But as an owner of a sole proprietorship, that’s not something that’s a deductible expense and that comes into play if you’re S-Corp. Some of those, some of the compensation that you’re getting.

If it is a salary expense, that will be deductible but then if you’re taking profit distributions, it’s not. So, there is a lot when it comes into compensation. If you’re paying contractors, separate contractors that aren’t yours generally speaking, that will be deductible but more just trying to give the caution flag here of, “Hey, if you are paying anybody particularly yourself, keep an eye on that.”

[0:27:15.7] TU: That’s really good, Sean. I think that can evolve, right? So, somebody may start as a sole proprietor, they may then have partners or not, they may or may not become an S-Corp. So, this topic of owner’s compensation and a deductible expense is one that may be ongoing.

[0:27:30.3] SR: Oh, absolutely. It’s something – and we’ll talk about the S-Corp thing in a little bit – but exactly right. And that’s not something that is going to be set in stone and even something like not necessarily related to deductible expenses, but even something like setting aside money for taxes. I mean, you might have a rate in your head that, “Hey, I’m going to put aside 15, 20%” that can change drastically year to year depending on what things are happening with your business or your personal.

[0:27:52.9] TU: Yeah.

[0:27:53.3] SR: So just another thing that as with everything else, a lot of these rules and things to keep in mind aren’t necessarily set in stone for any particular point in time. On the subject of compensation, health insurance is another big one. So, that’s one that again, you got to really want to be careful about. I can’t get into all the rules now but the big thing there is really if your spouse is eligible for health insurance through whatever company they work for.

If it’s unrelated to your small business that usually makes it nondeductible on your side, so just something to keep in mind in there. Again, I won’t go into everything but there is a lot of rules around health insurance. Travel, a lot of rules around that. So, if you’re going on business and you are spending time overnight and the primary purpose is for business, most of those expenses generally speaking will be deductible.

But if it’s for leisure, probably not and the big one with transportation and travel is commuting to and from your office is never deductible. That’s the big one there that people will say, “Well, what if I work from home sometimes but then I have an office space that I go to?” If that’s a primary office location, probably not going to be a deductible expense, so that’s a big one to keep in mind.

And that’s huge too when you’re thinking about, if I am buying a vehicle and I’m taking these depreciation deductions and stuff, the mileage that you’re commuting to and from your office does not count towards business mileage, so very important to keep in mind.

[0:29:14.6] TU: You’ve reminded me of that many times, which is good.

[0:29:17.5] SR: Yeah, yeah, probably in a good way, right?

[0:29:20.2] TU: Yes, yeah.

[0:29:20.9] SR: And then you’re rolling your eyes at me kind of way.

[0:29:22.5] TU: Yeah.

[0:29:23.2] SR: So, one item I’ll mention as far as the exceptions to the rules I was talking about with being paid during the year is rent. So, I know a lot of people will say, “Oh, perfect. December, I’ll prepay next year’s rent and just be able to take a nice deduction this year for it.” IRS caught onto that one pretty quickly, so rent they actually specifically say, “Hey, if you prepay it, you can only take deductions for the time that it applies to.”

And then a big one that I mentioned before is the business use of home. So, if you are using a home office space and you’re – it’s dedicated and you’re using that for your business, you usually can’t take a deduction for that and there’s two methods, a simplified, “Hey, what’s my square footage?” and you’re taking five bucks a square foot or you’re taking a percentage of your actual expenses for your home.

The big thing there though is that I think that I kind of alluded to, it has to be strictly dedicated to that business. So, not like a half office half bedroom kind of situation. It needs to be fully for the business and really –

[0:30:20.4] TU: Which is important with work-at-home transitions. I’m thinking about where people have bedroom office type of set up, so.

[0:30:28.0] SR: Yeah and I mean, really, I mean I hit a couple of the big ones there as far as the expenses that are nondeductible that people often think might be. It’s really just; think of the opposite of what I just said, right? So, if you are you’re on and it’s for personal purposes, if you’re driving to and from your office, you’re going to baseball games, entertainment expenses aren’t deductible.

Federal income tax too, that’s another big one that people think, “Hey, it’s a tax.” Alot of taxes are deductible, property taxes, estate taxes, but the Federal one itself it’s – that would be a circular reference.

[0:31:00.3] TU: Yes, they were in.

[0:31:00.8] SR: That they were able to, right? So, if you get that one, then your math’s definitely working nice.

[0:31:05.0] TU: Yeah. Well, I think this is an area and obviously, I’m biased, Sean, we’ve got a team that does this, and your expertise on our team knows how to do small business accounting and bookkeeping and fractional CFO and TAx 4. Obviously, I’m biased there but I think you have to ask yourself as a business owner like this is just a lot to have on your mind, right?

So, could you learn all this, could you DIY this, could you record keep, could you bookkeep? Like technically the answer is yes.

[0:31:31.8] SR: Right and it’s possible.

[0:31:33.2] TU: But as you think about your capacity of attention and where you need to be focusing your energy, there is a point where there’s just so many nuances and here we’re really talking more on the side of let’s make sure we’re not calling something deductible that’s nondeductible. I think really the next level is more of the, what can we be doing strategically to optimize our tax situation? And that’s a huge value of having someone in your corner.

I do want to pause for a moment, I will be remised Sean, if I didn’t explain the Phillies reference to our listeners.

[0:32:05.6] SR: Okay, all right, that’s fair.

[0:32:06.8] TU: So, if our listeners don’t know, Sean’s in New Hampshire but he’s a huge Boston sports guy, and just in the past week, Tim Baker’s Phillies were eliminated from the NLCS and I assume as a Red Sox fan, that’s just beaming with joy, right? You’re a Red Sox fan.

[0:32:23.6] SR: You know, I am a Red Sox fan but honestly, with the Phillies this year, I kind of thought it was a team of destiny sort of thing, I’ll root against a Philadelphia team if they’re going up against the Boston team because I mean it’s the in-law sort of thing. And you know if it’s the 76ers, I don’t like because they’re in conference and stuff but the Phillies, it’s NLAL, I actually was pulling for them. So, I was rooting for them by that one but at the same time, it’s a little bit of win-win.

[0:32:50.4] TU: But the other thing why Sean is having a good week is I think the listeners know me, I’m a huge Buffalo Bill’s fan, and the New England Patriots miraculously beat the Buffalo Bills this week so.

[0:32:58.8] SR: Yes, which the term miraculous wouldn’t really have made sense for the last 20 or so years but now, it definitely does. So yeah, it’s been a good week but I think I’ll be crashing back down to reality this weekend, so we’ll see.

[0:33:09.5] TU: Only the Buffalo Bills hand, Bill Belichick a milestone win, so I’m going to leave at that. All right, number five on our list is projections, estimated payments, making sure we’re setting money aside. I’m guessing if we have listeners that have been at this for a while, they’ll probably remember maybe an early part of their journey where it’s like, “Oh, I didn’t think about that” right?

Didn’t know how to make estimate payments, didn’t think about how much I should set aside, and how I should project that. So, who needs to be making quarterly payments and talk to us about the process of determining that and then setting aside those dollars in planning?

[0:33:43.8] SR: Yep, so I mean doing a projection, it all kind of comes back to what I was talking about way the beginning of this saying the difference between tax planning and tax preparation. So tax preparation, I actually always use the same analogy, I’ll use it again but I always think of tax planning as being like a film director who can sort of see things as they’re going with the actors and change course and say, “Hey, cut, re-film that, do this over.”

And then tax preparation is the film editor who gets all the stuff and still plays an important role, works their magic, makes it all look nice. But it’s all stuff that’s already been done and you can’t turn back time and re-film any of those things, right? So, all of the kinds of theme of this entire conversation has been the idea of tax planning and actually being able to project what you think your liability is going to be at the end of the year.

And that’s where you start to get into what you’re just talking about, now we’re not talking about, “Hey, what is and what isn’t deductible” but now it can look at, “Hey, where do we have opportunities to take advantage of tax code and make a purchase and take advantage of accelerated depreciation or change our entity classification or something?” But in order to do that, you need to be able to do a projection.

In order to be able to do a projection, you need to have books and in order to have books, you have records. So, you see how it all kind of works itself up, right?

[0:35:00.9] TU: Yeah.

[0:35:01.4] SR: But yeah, I mean, a projection, I think the biggest thing there, so it all comes down to what your tax classification is. So, if it’s Schedule C, you’re kind of looking at what you expect your profit and loss to be at the end of the year and you’re building that into your 1040 and then similarly, if you’re a chair holder of even an S-Corp or partnership or something, you’re going to get your distributed share of that income on a K1 at the end of the year.

That’s going to come into your tax return, so it’s a little bit of – most of the time it’s thinking more about the tax on your personal side and less so on the business side. A lot of small businesses actually are passed through entities, where the business itself was not paying the tax, it’s actually the owners or the shareholders. So, when I say tax planning for your business, it actually is really a little bit more tax explaining on the personal side.

But how does my business play into that and the biggest piece there is that usually small businesses will be subject to self-employment income, number one. And number two is that almost always business income won’t have any withholdings associated.

[0:36:00.4] TU: Yeah.

[0:36:00.8] SR: So, that’s when you need to start thinking about, “Do I have to make estimated payments? Should I be setting money aside at the end of the year?” So, there’s ways to do that, I mean again, doing a projection and really kind of you know, projection is kind of what it sounds like, you’re basically building a tax return now just with what you think it’s going to end at the end of the year.

So doing that is good and then that will get you, “Hey, this is what I think my tax bill is going to be and this is what I think my withholdings are going to be” and everything and if you think you’re going to owe more than a thousand dollars, you should be making estimated payments, that’s the general rule. There’s something called the safe harbor, so the easy calc there, the easiest way to do it and being ultra-conservative as accountants tend to is take last year’s tax liability and multiply it by 110%, 1.1.

And as long as you pay that in by the end of the year through withholdings and/or estimated payments or some kind of combination, then you won’t have any penalties. You can also do that with this year’s 90% of this year’s tax. But if you can – what I’m getting out with that, that’s not a known number, your last year’s tax liability is on your –

[0:37:04.6] TU: More conservative, yeah.

[0:37:05.5] SR: This year’s tax liability, you probably have a good handle on it but it could change, right?

[0:37:09.8] TU: Especially if you’re growing or there – just thinking about variability and this is another example, just a peak behind the curtain, Sean, of, you advising us here at YFP, this is something we’re looking at you know evolving into the future. So, you know we’re big believers in the Profit First methodology. We’ve talked about that before on the show, great book, great resource.

There is a recommendation there for X percent of all revenue should go into a tax account. But what we found for us is that wasn’t a perfect number, because of just our personal situation as well as some of the tax benefits of being in the great State of Ohio, you know?

[0:37:09.8] SR: Right.

[0:37:43.5] TU: And then, so there’s – that’s one example where things are unique, and then we kind of evolve to our own calculation, which I would say is probably closer to maybe the general rule of thumb that’s out there of, “Hey, take 25%, set it aside” and then we realize, “Hey, that’s got some holes because tax situations are different.” You know, how many kids you have, what’s the total household income, all of these variables, right?

So, I think the projection piece along with what you’re suggesting on the safe harbor is so important, right? As you’re planning for the business because you want to find yourself in that situation where you don’t want a bunch of money sitting in an account that as a growing business, if you didn’t have to make that much in tax payments you could have utilize to grow the business.

There is an opportunity cost there but we also don’t want to be surprised and put a stress on the cash flow of our business that we go to file in April and we’ve got this big tax bill due.

[0:38:33.9] SR: Exactly, it’s a push-and-pull kind of thing.

[0:38:35.6] TU: Yeah.

[0:38:35.9] SR: So, being able to – at any extent that you’re able to nail that down as close as you can, like you’re saying, it’s better that way, right? You don’t want to loan the government any more money than you have to but you also don’t want to end up owing a ton of money that you may or may not have or on top of that, have any penalties where I think is associated with it too, so yeah.

[0:38:52.8] TU: Number six on our checklist, Sean, relate to the S-Corp status, I would pursue maybe outside of, “Hey Sean, can I deduct this expense?” maybe the second most common question or pretty close to the top is, “Should I be a S-Corp?” It’s one of those things that people just throw out there of, “Hey, there’s tax benefits of being an S-Corp status.” Tell us more about what that means and when people may be asking or should be asking that question.

[0:39:14.8] SR: Yeah, and I mean again, the theme of the whole thing is that you’re kind of looking at these things and at least at one point in the year, hopefully around now, but actually more ongoing, but at least at one point in the year saying, “What is my tax classification now and is that what it’s going to be next year or does that make the most sense next year?” So, before I even do S-Corp I’ll give the three like I had mentioned earlier in the call.

The three most common ones that I would think of small businesses as a sole proprietorship, one person that’s what you see on your schedule, see they call it, and if you – and the biggest thing with this is that for all of these different classifications, LLCs can be any one of these. That’s the thing, if people will say, “Oh, I’m an LLC” any one of these, an LLC is a legal entity distinction versus these are tax classifications.

You can be an LLC and classify in any one of these, as long as you fit the right requirements. So, that’s one thing to keep in mind. Again, people hear that, they think it means something different or, “Hey, my taxes are going to be different.” It doesn’t necessarily mean the case. So, sole proprietorships are the most common. If you file an LLC for a single person, that’s the default.

The biggest thing there is that, that is subject to self-employment tax, and then again, that does not have – there’s no withholding. So, you’d want to make sure that you’re keeping track of any estimated payments and stuff. Partnerships is the default for an LLC with two plus people. So, if you and your friend or you and your sibling or something go start a business and you start an LLC, the default for that one is a partnership and that actually is a different tax return and everything.

So that’s where again, it begins to become a little bit more than just, “Hey, I’m starting this little business.” Your share of ownership income from a partnership is subject to self-employment taxes. So, when you get your K1 at the end of the year from your partnership, that is subject to self-employment tax, which basically is just the employer portion of FICA that you don’t have because you don’t have an employer, it’s you.

S-Corps is the more kind of exciting piece. So that is, you can have any number of owners but that is where you’re actually incorporating your business and you’re basically – it’s being taxed like a corporation now. And the biggest thing with that is that you don’t have the self-employment tax portion for what you get on your K1. So, if you were in a partnership today and you and your partners each got a K1 and reported that income, there’s self-employment tax on it.

And then you become an S-Corp tomorrow, effectively that same stuff that’s on that K1, that same income is not subject to self-employment tax. Now, you’re probably thinking to yourself, “Wow, that sounds too good to be true.” It’s not that it is, it’s just that there are catches associated with it and the biggest catch is that when you make that jump to S-Corp, you have to be able to pay yourself as an owner a reasonable W2 salary with the FICA withholdings and everything, AKA, self-employment tax on top of any profit distributions that you’re going to be making, and that right there is the deciding point.

Well, what people will probably say is, “Okay, well, what’s a reasonable salary and when can I make that?” and there comes my cop-out accountant answer of, “It depends” and it really does depend because you can think about a million different things. “All right, hey, I am starting a small business and I am going to be the CEO and I’m a pharmacist who is going to be providing advisory on pharmacy things.”

Okay, is your salary a CEO salary? Because I’m sure if I Google CEO salary, the average is probably 10 million dollars or something. Is it pharmacist’s salary? Is that, I mean, are you doing mostly pharmacy-related things? Well, you’re probably will also going to be doing some bookkeeping and administrative stuff too, right? So, is it kind of an admin salary? Figuring out what that is, there really is no science to it.

It is more of an art than a science. You have to be able to say, “Hey, this is a job that I’m doing, you know, these are comparable salaries of people that are making” and you have to be able to pay yourself, “Hey, this is what I feel and I truly believe isn’t a reasonable wage per my industry per the work that I’m doing and everything”, and you need to be able to do that again before you make that jump to S-Corp.

And in order, once again, to determine if you can do that, you need to be able to say, “Hey, where am I in the books? Where do I expect my profit to be this year? Do I think I’m going to have a ton of profit on my K1 or I’m going to have a lot of self-employment tax? I don’t want to pay that self-employment tax, so now can I switch to S-Corp?” Well, let’s see. Do I have enough room in my profits from last year to cut myself a salary that the IRS will think is reasonable compared to other entrepreneurs that are doing the same sort of thing?

I don’t know. I mean, I really would have to look at your finances and we’d have to talk about a lot of things. It’s a very, very long conversation but it’s a very important one because it can save you a lot of money in taxes. But it all kind of comes down to – my questions back to you will be, “What’s your expected profit and loss look? What have you been taking as distributions so far?”

And if you can’t answer those questions, then we can’t even have this conversation. So it’s a lot of it depends but it all once again comes back to being able to have the numbers to even start to have that conversation to begin with. So, if anybody is still awake, I hope that kind of explains that.

[0:44:27.8] TU: It’s good.

[0:44:28.1] SR: I’m sure that put quite a few folks to sleep.

[0:44:30.6] TU: No, it was good because this comes up so much, right? We’ve talked about this internally a lot of what’s the right amount of paying ourselves and how do we determine that and it’s so subjective, right? And number seven on our list was going to be payroll and paying yourself enough. So, you did a nice job of covering on both of those in one.

[0:44:45.2] SR: Yep, exactly.

[0:44:46.0] TU: And you know, just for some insights and how we have handled this, not to say this is advice in any way, shape, or form, and I would reference people. There’s a book called, Simple Numbers, Straight Talk, Big Profits! that is written by Greg Crabtree that I think does a nice job of addressing this issue.

[0:45:01.6] SR: Yes.

[0:45:02.1] TU: Not just from a, “Hey, the IRS is going to be concerned” if you’re kind of applying like a stockless salary, but also I think what’s important about this is, are you thinking about your salary in the context of what the business is and potentially is worth? So, what I mean by that is let’s say Tim Baker and I decided that at some point we want to wake up and sell our business.

Well, if somebody buys it, they may not want to operate it necessarily. Maybe they do but if they don’t, they’re going to be asking themselves, “Hey, what does it cost to replace Tim or what does it cost to replace Tim?” And so if that answer is X and we’re paying ourselves a lot less than that – because then you could argue, are we really giving ourselves a true look at the profitability, the actual profitability of the business?

And I think paying yourself an equitable salary is not only is the right thing to do by the eyes of the IRS but it also really helps you think about where is the business going and growing. Now, there is a balance there, right? If you don’t have to pay yourself USD 200,000, you can save on taxes and argue you’re paying yourself a reasonable salary, then obviously you want to do that.

So, good resource and reference I think about with that book I mentioned. Sean, number eight on our list, which is our last item on the small business owner checklist, is seeing about some of the big purchases. We talked about deductible expenses but specifically want to dig a little bit deeper around Section 179 deductible expenses. Tell us more there.

[0:46:26.1] SR: Yeah, that’s so – that’s really when you think about deductible expenses, the IRS basically says, “Hey, nothing is deductible unless we tell you that it is pretty much.” And when they start to incentivize larger purchases it’s because that’s what they want people to invest in. So, Section 179 is effectively the government’s way of saying, “Hey, typically you have these big things like vehicles and other equipment type purchases that you’d have to pay for upfront now but then only be able to take a little bit into depreciation every year.”

“That’s not fair to small businesses, we want to encourage folks to put money to the business. So, we’re going to let you if you buy things that fit these bills, take that money on the first year.” Which is awesome to be able to do, especially if you have to make these purchases and it makes sense for your business. But the biggest thing by far that I would say and once again, it rolls back into everything is you really want to make sure like, “Hey, do I have to make these purchases at some point now or in the near future or am I just doing this so I can get a deduction this year?”

Because yeah, it’s great to get a tax deduction but that’s really only a percentage. It’s not a credit, it’s not a dollar-for-dollar savings, it’s really only a percentage of a savings. So, if it’s something that you have to spend, “Hey, I’m going to have to buy a car next year anyway and I have all this profit this year and I can take that depreciation and offset those profits,” cool, but you need to be able to figure that out and if you don’t have good numbers, you can’t do it.

[0:47:43.5] TU: Yeah.

[0:47:43.5] SR: And if you look at your numbers and saying, “Hey, I’m going to break even right now and I don’t need a car,” then you probably shouldn’t be going out there and trying to take advantage of the Section 179 file.

[0:47:51.0] TU: Yeah, great stuff. We’ve covered a lot, Sean, on this and we’re going to come back to these topics in the future on the show but we want to have this one episode that we could point back to and say, “Hey, small business owner” again, whether you’ve been established and you want to go back and look at some of these things or you’re just getting started wanting to build a strong foundation, we wanted this episode to be that resource.

So, looking forward to building upon this in the future as well. If folks want to learn more about the tax and accounting services that we offer, that Sean and his team offer at YFP Tax, you can go to yfptax.com. We’ll link to that in the show notes as well. You can book a free discovery call to learn more about those services, we’ll learn more about you to determine whether or not there’s a good fit there.

For business owners, we offer everything from business tax filing, bookkeeping, all the way up to fractional CFO services, payroll, so depending on where you’re at in the journey, it might be, “Hey, we need all of that” or “We just need a portion of that” and we could grow together over time. So, Sean, thanks so much again for your time.

[0:48:47.3] SR: Thank you, Tim, have a good one.

[END OF INTERVIEW]

[0:48:48.9] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacists Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists on the YFP community have taken advantage of First Horizon’s Pharmacist Home Loan, which requires a 3% down payment for a single-family home or townhome for first-time home buyers, has no PMI on a 30-year fixed rate mortgage.

To learn more about the requirements for First Horizon’s Pharmacist Home Loan and to get started with the preapproval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[DISCLAIMER]

[0:49:33.4] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 309: Top 10 Tax Blunders Pharmacists Make

Posted on May 25, 2023October 5, 2023 by Tim U

Sean Richards, CPA, EA, outlines the ten most common mistakes he saw pharmacists make throughout the most recent tax season. This episode is sponsored by First Horizon.

About Today’s Guest

Sean Richards, CPA, EA, received his undergraduate degree in Corporate Finance and Accounting, as well as his Master of Accountancy, from Bentley University in Waltham, MA. Sean has been a Certified Public Accountant (CPA) since 2015 and received his Enrolled Agent certification earlier this year. Prior to joining the YFP team, Sean was the Senior Treasury Manager at PRA Group, a global debt buyer based in Norfolk, VA. He began his career at American Tower Corporation where, over 10 years, he held several positions in audit, treasury, and accounting. As the Director of YFP Tax, Sean focuses on broadening the company’s existing tax planning and preparation operations, as well as developing and launching new accounting offerings, including bookkeeping, payroll, and fractional CFO services.

Episode Summary

The tax filing deadline is behind us so time to sit back and relax, right?! As YFP Director of Tax, Sean Richards, CPA, EA, tells us today, it’s important we are keeping tax front of mind year-round to avoid common blunders that show up during tax filing season. During this episode, Sean outlines ten of the most common mistakes he saw pharmacists make throughout the tax season including his thoughts on how year-round planning can help mitigate these mistakes.

Key Points From the Episode

Sean gives us his tax-season rundown.
The award for the most difficult state for tax returns!
Sean takes us through ten of the most common tax mistakes made by pharmacists.
The cause of the ‘unwelcome surprises’ and how to avoid them.
Not taking advantage of tax laws: energy credits.
Underestimating the power of the HSA; a grossly underutilized tool of the financial plan.
A good reminder about over-contribution.
Having someone in your court to help you avoid taking nonqualified IRA distributions.
Not saving for taxes when earning additional income.
Also for our side hustlers: not expecting the FICA tax on self-employment income.
Some of the mishaps and mistakes that have to do with employer-dependent care.
Not factoring in PSLF when choosing a filing status.
Reporting implications: overlooking considerations with cryptocurrency.
A bonus mishap: education around extensions.
How year-round strategy planning can help pharmacists optimize their tax situation.

Episode Highlights

“I know, taxes aren’t something that people love to think about and want to be excited about but it’s one of those things where if you sweep it under the rug, it’s not going anywhere, it’s only going to grow under there.” — Sean Richards [0:6:55]

“If you’re making money that’s outside of a W2, whether it’s investment income, capital gains, whether it’s a side hustle, really anything where you’re not seeing that federal income tax withheld line, you better be putting taxes aside or being ready to pay that at the end of the year.” — Sean Richards [0:21:45]

“Crypto is treated like an investment as far as the IRS is concerned. It’s like a stock.” — Sean Richards [0:31:39]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrick here, and thank you for listening to The YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

On today’s episode, I welcome the director of tax, Sean Richards, back onto the show. Now that he has had a chance to take a breath from the last few months, working toward the tax filing deadline, I pick Sean’s brain about some of the most common blunders that he saw pharmacists make throughout the season and how year-round planning can help individuals not only avoid these mistakes but also optimize their tax situation.

If you’re looking to learn more about how YFP’s comprehensive tax planning service can help you and your tax situation, go to yfptax.com. Again, that’s yfptax.com Okay, let’s hear it from today’s sponsor, and then we’ll jump into the show.

[SPONSOR MESSAGE]

[0:00:48.3] TU: Does saving 20% for a downpayment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a downpayment on a home may take years. We’ve been on a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower downpayment and are happy to have found that option with First Horizon.

First Horizon offers a professional home loan option, AKA, a doctor or pharmacist home loan that requires a 3% downpayment for a single-family home or townhome for first-time home buyers, has no PMI, and offers a 30-year fixed-rate mortgage on home loans up to USD 726,200. The pharmacist home loan is available in all states except Alaska and Hawaii and can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed.

To check out the requirements for First Horizon’s pharmacist home loan, and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[INTERVIEW]

[0:02:00.2] TU: Sean, welcome back to the show.

[0:02:01.8] SR: Thanks for having me. Yeah, it feels like it’s been a while but I think that’s just because tax season tends to you know, slow time down for some of us over here.

[0:02:09.7] TU: You look much more rested than I saw you just a few weeks ago. So here we are on the other side of the tax filing deadline. We’re going to talk all in this episode about some of what you saw this season with the hopes that pharmacists can prevent some of those mishaps as they work throughout the year on their taxes but looks like you’ve been – haven’t had a chance to maybe recharge and refresh on sleep. So how are you feeling post-tax of mine?

[0:02:34.3] SR: Yeah, I’m feeling great. I’ve been catching up on some of the things that have been put on side burners so to speak but definitely getting a little bit of sleep, catching up with the family and stuff. It feels good. I’m well rested, there are still some things to tie up from last year but ready to move forward and look ahead to next year and like you said, try to hopefully get some of these ideas in people’s minds so they can plan now and not have any of this kind of hiccups or roadblocks come up next year.

[0:02:59.5] TU: So give us the rundown. I know there’s still work to be done with some of the individual and business extensions and some of the more complicated returns but how many returns did you and the team do thus far?

[0:03:09.2] SR: We did over 200 federal returns and a similar number on the state side. So I mean, if you think some folks have multiple states, some people are in states that don’t have taxes so you know, you kind of, they work themselves out there but yeah, over 200 federal returns. We did a fair number of extensions, there are some business returns mixed in there, so it’s kind of all over the place but that’s the rough number between the few of us here.

So definitely, it feels like quite an accomplishment here but yup, I mean, definitely have some of those more complex returns that we want to give a little bit more TLC to, those are still hanging out there. So now that we’re past the big push, we can really focus and try to maximize savings for those folks. So excited.

[0:03:48.1] TU: Which state, Sean? Which state wins the award for the most difficult state when it comes to returns?

[0:03:53.3] SR: Boy, I don’t know if I’m going to be getting a misery love company or if I’m going to be jading people because I feel like a lot of our listeners kind of land in this territory where our headquarters are but I had to say, Ohio, probably gets the cake, Pennsylvania right up there, close second but yeah, those two are probably the worst I’d have to say.

So again, hopefully, people aren’t sitting there saying, “I love those states” and if that’s the case, you know, all the power to you but not for me.

[0:04:20.8] TU: Yeah and one of the opportunities, challenges, depending on how you want to look with it, you know, we’ve got tax clients, financial planning clients all across the country, which is a unique opportunity and challenge when you think about all of the nuances that happen, especially in the tax side, right? On a state basis or even here in Ohio, we have the RITA, Regional Income Tax Authority, did I get that right Sean?

[0:04:43.1] SR: Yup, you got it right.

[0:04:43.9] TU: Which provides another wrinkle. So it’s fun to hear you and the team complain about Ohio and PA and you know, some of the other states perhaps are a little bit easier. So let’s jump into the most common mistakes Sean, that you and the tax team so far is just making and we’ve compiled these on our website, yfptax.com. If you want to download these and read a little bit more information on each one, please do that.

So we’re going to go through this one by one and again, the hope of this is that we really want to shift the perspective around taxes that the only time we think about taxes are April, when we’re filing, right? This really needs to be proactive year-round planning. We’ll talk more about that at the end of the show and that’s why we thought, “Hey, here we are in the month of May, tax season is over but this is not a, ‘Put it up on the shelf, worry about it ‘till next year.’”

This is the prime opportunity to really be learning from the season that just was and looking at the opportunities ahead of how can we best optimize the situation before we get back into the filing next year. Again, If you want to download a copy of the guide where we talk about some of these mistakes, you can go to yfptax.com and do that. So number one on our list Sean, perhaps the most common, I would presume, you can tell me if otherwise is folks that got a surprise bill or a surprise refund when they got to filing.

So my question here is, tell us more but what is the usual cause of these unwelcomed surprises?

[0:06:14.7] SR: Yeah, I would say that’s the most common and it’s probably purely because if you take a lot of these other things that we’ll talk about, they all sort of work their way into that at the end of the day. You know, if you’re making a mistake, somewhere along the way, you’re probably going to end up with either a large bill or a large refund, so it kind of encapsulates everything.

Yeah, and just to kind of go back to your point before, this really is the best time to be looking at these things. I mean, any time of the year is good but when you’re coming off tax season, you might be disappointed or looking at things saying, “Oh, that didn’t go the way I hoped it would, I had a bill or I had the refund.” You don’t want to just kind of say, “Oh, finally, I’m done with it, we’re passed the 18th, I’m filed” and sort of shake your hands off and say because what’s going to happen is you’ll be in the same spot next year.

I mean, I know, taxes aren’t something that people love to think about and want to be excited about but it’s one of those things where if you sweep it under the rug, it’s not going anywhere, it’s only going to grow under there. So yeah, the surprise bills and refunds, I mean, that can really be a litany of different things that can cause it. The biggest thing I would say probably by far is really just simply not withholding correctly at your job.

And this one frustrates a lot of folks and I don’t blame people because you know, people will say, “Hey, I’ve been at the same company for a while now” or “You know, my situation’s not that complex, how can they not be withholding properly?” and I have to say as a tax accountant, I don’t love the new W4 that the IRS rolled out a few years ago. If anyone working for the IRS is listening to this and they want to give me their opinion on it, feel free, my line is open because you know, I’m a tax accountant.

[0:07:43.0] TU: I don’t think we have many pharmacists that are IRS agents.

[0:07:44.7] SR: Oh hey, you never know, there’s a little bit of overlap here. You don’t have to be a pharmacist to listen to the pod but no, I mean, with that one, I just, I really wish there was a way as an accountant to be able to say “Hey, withhold 18% from this client, please. Just withhold 20% from this client” but it’s not that simple. I know what they’re trying to do, they want to make it more user-friendly where folks kind of can’t mess that stuff up, or if they don’t know how to come up with that number, it’s supposed to kind of guide you through it.

So I think the biggest thing there is that the W4 is sort of designed to try to pick up everything else that’s going on in your financial life aside from just that one job that you’re working and typically, what will happen is folks will get married and they won’t update their filing status or they’ll get married or maybe not even get married but say, they already were married, their spouse gets another job.

They have a side gig and these are all things that you know if your company – your system doesn’t really know that that’s happening, right? So if you’re making money off to the side, doing another job, you work multiple jobs, your spouse works multiple jobs, you know all those things factor into what your tax bill is going to be at the end of the day and if your company doesn’t know what’s going on then it can’t withhold properly and I say, your company, the payroll company was kind of doing all that stuff behind the scenes.

So that one is tough because there’s not a perfect answer. Really, the best way to do it is to take a look in the middle of the year and say, “Okay, where am I at, where was I at last year?” You know obviously if you had any kind of issues last year, you can submit a new W4 and how to change that but doing a projection midyear, take a look at what you’ve already withheld, what you withheld last year, and try to tweak that now, that’s definitely the best time to do it.

[0:09:19.1] TU: Yeah, and we’re going to come back to that topic Sean, of a mid-year projection, why it’s so important on the tax side as we get into the summer months. So stay tuned for more. Again, we’re going to be talking tax all throughout the year as we think it’s certainly an important part of the financial plan. So that’s number one, would be a surprise bill of refund at filing.

Number two Sean, not taking advantage of tax laws. This makes me think of some of the recent changes that you’ve talked about before on the show surrounding the inflation reduction act, and the electric vehicle credits. I know this seemed to cause a fair amount of confusion and concern this year during tax season, and maybe some surprises as well. So what are you referring to here as it relates to not taking advantage of the tax laws?

[0:10:00.8] SR: Yeah, and with that in particular, I mean, we keep kind of harping on the energy credits but that’s where the tax law tends to be going now. I mean, all these things that are coming out, there are changes sort of across the board but the biggest piece and where the biggest dollar savings are tend to be these renewable energy credits, improvements to your home that are energy efficient, things like that.

And yeah, at the end of last year, the inflation reduction act went in and there was a lot of confusion as to which credits change when those credits change. So some of the electric vehicle stuff happened at the day that the law actually went into effect, whereas some of the other energy credits like home improvements like I mentioned, windows and things like that, didn’t really increase until this year, 2023 going forward.

So there were folks who spent money last year and were expecting a larger credit for their taxes in 2022 and didn’t see that. So it’s really just, you know, it’s difficult to stay on top of the tax law, especially if you’re not a tax accountant or aren’t familiar with those types of things and especially if you want to stay out of politics too but it’s really challenging because it’s one of those things where if you’re not spending the money in the right timeframe, it’s not something you can go back and change after the fact.

You know, if you put windows on your house now that’s a 2023 event. When we’re doing your taxes in 2024, we can’t say “Hey, I wish you had not done your windows because they’re already done.” So it’s something where it’s really important to make sure that if you’re spending money, thinking that you’re going to get a credit or you’re hoping you’re going to get a credit, really understanding when those things go into effect, what the dollar value is, and what the limits are.

That’s another thing that some of these things, they’re increasing their limits but they do still exist. So you know, if you spend, USD 50,000 on an improvement, you’re not necessarily going to get a USD 50,000 credit.

[0:11:42.6] TU: Yeah, and we’ve got some info on this, yfptax.com, we’re going to be updating this throughout the year as well so make sure to check out the information there and Sean, this is just another testament to why the year-round planning is so important, right?

If we’re looking at this in the tax year, so here we are, now in 2023, obviously, next spring, spring 2024, we’ll be filing for 2023. At that point, right? Decisions have been made in terms of what happened during that year.

So are there adjustments that we can be making mid-year or are there tax laws and situations like this that we can make sure we’re up to speed or at least have the right understanding before we make some of these bigger purchases that may or may not have the impact that we’re hoping they’re going to have.

So that’s number two, not taking advantage of the tax laws. Number three, Sean. I have to say this one pained me a little bit because we’ve talked so much about this on the show.

[0:12:34.4] SR: So much.

[0:12:35.1] TU: Which is, underestimating the power of the HSA, the health savings account. You know, we’ve continued to emphasize how this – only has tax advantages but we still see this as an utter underutilized tool in terms of the financial plan. So tell us more about what you’re seeing here.

[0:12:51.8] SR: Yeah, I think with the HSA, it’s one of those things where people think, “Oh, I need to have a lot of medical expenses to take advantage of it. If I’m putting money there and I don’t use it, I’m not going to get the full advantage of it” but really, you need to not have that mindset and really think of it as a secondary retirement vehicle basically where if you do have expenses that you need to take advantage of it, it exists for you.

But if you think of it almost as a second IRA or something like that, then it kind of shifts that mindset of, “Oh, I need to have these health expenses” but yeah, HSAs, I know, ad nauseum we talk about it but they have the triple tax benefit. You get the deduction for your contributions, you get tax-free growth and you get to take it out tax-free. So you rarely see that triple tax benefit. This is one of those ones where there is a little bit more flexibility.

I just mentioned some of those credits and having to get the dollar spent during the year. You have a little bit of flexibility with the HSA where you usually have up until the filing deadline to actually make contributions or on the flip side and we saw a lot of this is people who work multiple jobs or got married in kind of weren’t talking to their spouse and over-contributed. So you want to make sure if you did that, you pull that money out so you avoid any penalties there.

And again, you have a little bit of flexibility after year-end to make those changes but to any extent you can avoid that, obviously, it makes sense but yeah, the limits are going up next year. I think 77.50 for a family plan, you have to be on a high deductible plan but if you are and you’re not taking advantage, you’re really just losing out on that benefit honestly.

[0:14:15.5] TU: Sean, I’m glad you mentioned the over-contribution mishap that might happen here and I think it’s a good reminder. Tim Baker was my ear, you know, anytime we talk about backdoor or Roth IRAs, he’s always beaten the drama of you know, really there’s a lot of nuances to consider and we see on the planning side, our planning team works with a lot of folks that you know, are trying to unwind some of the mistakes related to the backdoor Roth IRA contributions.

And I think it’s a good reminder that as there’s more and more information out there, right? We talk about HSAs, it’s readily available, something you can learn about that yeah, we still have to cross out Ts and dot our Is and I think having someone in your corner, right? Financial planners, tax professionals, perhaps both that can help make sure we’re executing this properly, really, really important.

Number four on the list, Sean, taking nonqualified IRA distributions. We are talking before the show, perhaps maybe even a little bit broader than IRAs, tell us more about this one.

[0:15:09.0] SR: Yeah, IRAs are really just kind of retirement plans in general. I know we just mentioned HSA as they’re a sort of a secondary retirement vehicle but just not taking advantage or properly utilizing IRAs. So we’ll start with the IRA piece, there are a couple of different things there. You can get a deduction for traditional IRA contributions.

Folks typically phase out of that pretty quickly and then the next kind of phase-out level will be your Roth contributions and kind of what you were just alluding to is that folks also kind of pretty quickly phase out of that as well and that’s one of those things where you don’t want to end up at the end of the year saying, “Ah, you made too much money but you already contributed this to your Roth.”

So now you’re going to go back and pull it out and then try to do the backdoor that Tim was talking about. So yeah, to any extent, again, you can have somebody in your corner where you can say, “Hey, this is what I’ve done so far this year, does this make sense? Am I going to over contribute, am I going to be in a good spot? Do I have room to contribute more?” Definitely make sense to do and again, you know the IRA limits are going up next year.

Again, the contribution limit. So taking advantage of that makes a lot of sense and the other piece that you didn’t really mention there but we kind of alluded to is just retirements in general. I mean, 401(k)s at people’s businesses, not taking advantage of those. You know, having extra cash on hand and not maxing out your 401(k) whether it’s a Roth to get the benefits in the future or a traditional to get that tax benefit now.

I mean, either way, we saw a lot of situations where folks had a lot of cushion there and could have contributed more and that’s one where that at 1231, you can’t go back. So can’t turn back time, got to get those in before the year and again, having someone in your court to say, “Hey, you know, you’ve only contributed up to 30% of your 401(k) and we’re already in October, you might want to do some catch ups” is really important.

[0:16:47.8] TU: Sean, did you get a feel, I’m just curious, from folks that, if I heard you correctly, it looked like they’re wise margin there. They could have made those contributions or as cash on hand but didn’t. You know is that just a, “Hey, we overlooked it” or do you have a sense of you know, some of the volatility in the market, inflation, what’s going on in the broader economy, that there’s some hesitancy in the contributions into the retirement vehicles and people wanting to hold on to more of that cash.

[0:17:11.2] SR: It could be a lot of different things. I mean, it could also just be an education thing. I mean, I know, even when I first started out at a corporate job coming out of the school, you get all these different paperwork and everything and they say, “Here’s your 401(k), here’s this, here’s that” and you’re just saying, “Okay, I want to get the company match. Great, I’ll put this amount down and everything” and you don’t really realize that you have a limit that you can hit yourself and kind of capitalize on.

So I think it’s really just a matter of maybe not looking at cash flow, like you were saying, potentially not taking a look at that in the middle of the year. I don’t think there’s a whole lot of hesitancy with the market or anything like that. I think it’s more just a matter of, you kind of set it and forget it and you know, you come to the end of the year and somebody says to you, “Hey, did you know that you could have knocked USD 5,000 off of your taxable income if you’d contributed more to your 401(k)?” and a lot of people just say, “I didn’t know that” so.

[0:17:59.3] TU: Yeah, yup. Seeing the numbers, right? I think in help and hindsight and you know, once you see the impact on the tax situation like, “All right, got it, point made, I’ll make that a correction for next year.” Number five, Sean, I think is one we have not yet talked enough about on this show, which is not employing a bunching strategy for charitable giving.

So here without talking obviously about donations and really looking at how to potentially alternate as you look at the standard deduction and then bunching these and those off year. So tell us more about this one.

[0:18:30.5] SR: Yup. So this one is more of a unique scenario. It’s one that we always take a look at but not everybody’s going to fall into this bucket but if you do, it’s something that if you’re able to take advantage of, it can be very, very powerful. So the idea of bunching is really trying to pull itemized deductions as much as you can into one year and then in the next year, not having as many and taking the standard deduction because it just getting higher and higher nowadays.

I mean, just the number of folks that we see taking the standard deduction, even though they have things like mortgage interest and taxes that they’re paying for still taking advantage of the standard deduction because it’s so much higher.

So yeah, if you’re looking at it and you say, “Hey, you know, I was USD 500 away from the standard reduction” or “I itemized USD 500 more than the standard deduction this year” and you had quite a bit of charitable contributions, if you’re able, again, sort of pull those in and say, “Hey, if I’m going to do a thousand dollars over the next two years, I’m going to do a thousand dollars this year and maybe not anything next year” and you can do it on 1231 so you kind of the same feel for giving to them that the charity.

But, if you’re able to do that and take advantage of it, it can be really powerful, and that way you’re not losing out. That was one thing we got a lot of is, “Hey, I have a house and I paid this mortgage interest but I am taking the standard deduction. So am I losing that benefit?” and it’s not the best way to look at it but you’re not really getting the full benefit if you’re doing it that way.

[0:19:50.1] TU: Yeah, as you mentioned, this really applies, not to say that everyone, depending on the amounts of folks are giving but especially for those individuals that are giving additional dollars to various organizations, churches, nonprofits, communities, et cetera, there could be some real benefits to the bunching strategy and I’m you know, one who is victim to this in terms of just behavior, right?

Where you might have contributions on an automatic monthly payment or you’re planning for it throughout the year and you just don’t take the time to take a step back and say, “Okay, from a strategy standpoint, I’m going to do the standard deduction this year and then we’re going to do the bunching strategy next year.” So again, just some proactive planning to make this happen.

[0:20:31.6] SR: And it doesn’t always work for everybody because I mean, I talk to people who said, “Hey, that doesn’t match my giving strategy” and that’s perfectly fine.

[0:20:37.8] TU: Sure, yup.

[0:20:38.3] SR: It’s really just if you wanted to help out your financial strategy, there are options out there. I’m not saying you should change the way you give to your charities. It just exists, right?

[0:20:48.6] TU: Number six and number seven are specifically for folks out there that are earning some additional income, side hustling, business income. So number six, Sean, not saving for taxes when earning additional income.

It sounds obvious but we see more and more pharmacists that are dabbling in various side hustles, consulting businesses, so I think this is becoming a more prevalent mistake, probably one that maybe you make once and then you don’t make again but talk to us about what you’re saying here.

[0:21:16.4] SR: Yeah. So I mean, it does sound simple on the surface but again, if you’re not used to it or it’s not something that you’ve kind of done before, it’s not second nature, I guess. So right, if you, you know, you work a W2 job, that federal income tax is being taken out, hopefully correctly, although as I mentioned in the first thing here, sometimes it’s not correct but you know, hopefully, your income tax is being taken out at the end of the year.

You sort of do a true-up and maybe owe a little bit, maybe you get a little bit back but that’s that. If you’re making money that’s outside of a W2, whether it’s investment income, capital gains, whether it’s a side hustle, or really anything where you’re not seeing that federal income tax withheld line, you better be putting taxes aside or being ready to pay that at the end of the year and like you said, typically, that’s one where if you make the mistake, you don’t do it again in the future.

But you know, I think some people are just really excited about making money and they want to pour the money back into their business, which is perfectly fine. You know, we want to encourage people to build their businesses and invest back in but just make sure you’re setting aside enough at the end of the year to kind of make sure you have at least a little bit of a cushion there and having somebody to do that calculation for you.

Because you know, just because you’re going to – you think you’re going to net this much at the end of the year, doesn’t mean that that’s what your tax bill will be. I mean, there’s lots of ins and outs there, different things you can do. So having somebody to be able to take a look and say, “Hey, you know, as of right now, you’ve made 50k of non-withheld income so you’re going to want to put 20% of that aside, 25% of that aside, just be ready for it.”

[0:22:45.8] TU: Yeah, and I think there’s here, a couple of pieces you’re highlighting, right? Which are the mechanics of where do I save it, how much should I be saving based on how much I’m earning, and then at what point do I need to be making quarterly estimated payments and I do this, right?

I reached out to you and say, “Hey Sean, we’re coming up on the Q1 estimated payment.” Like based on what we’re seeing in terms of the financial statements like, what’s the plan, and then we’re saving in a tax account along the way to be ready for those payments. So good thing, right? If you’re paying tax, you’re growing the business.

[0:23:15.0] SR: Exactly and I will admit the IRS estimated payment process, it doesn’t really even feel that natural. I mean, you are kind of doing the math yourself, going onto the website and just saying, “All right, here it is” and they just take it and then at the end of the year, it does. It comes into your play, it’s one of the lines where you basically say, “Okay, what did you withhold? What did you pay in? What did you owe?” and we do the math on it.

But it just feels like you’re sort of sending money out into the abyss when you make the payments. So I kind of understand that folks are a little apprehensive and would rather hold off but again, I mean, I’m conservative. I’m a tax accountant but at the end of the day, I’d rather get a little bit more money back than owe a lot of money.

[0:23:55.0] TU: Yeah and Sean, a separate conversation for a separate day. This is a little bit more to the business strategy but one of the things that I like about withholding at least a quarter of it but at least on your own side even on a monthly basis is it forces you to look at the financials of the business a little bit more closely, right?

So I think there can be a tendency if I am not paying tax and then I get either caught off by a surprise bill or I just wait until the end of the year and pay it, you know, you may fall into the trap of assuming your business is more profitable than it actually is and so really looking at what is the service, what’s the product you’re offering and what’s the true financials if you’re considering the tax.

[0:24:31.1] SR: Not to go too far off but another big thing is that a lot of people kind of just assume that cash and profit are the same thing.

[0:24:36.4] TU: Exactly.

[0:24:37.1] SR: That’s not always the situation, right? So you could have a big profit at the end of the day but if you are pouring that cash back in, you might not have any cash on hand. So they don’t always go one for one and if you get away from that it can really end up causing some problems for sure.

[0:24:51.7] TU: Preach it, Sean. We need to come back and do an episode on that, the difference between cash on hand and profit of a business, so that’s a good one.

[0:24:58.3] SR: Yeah, that one, I’ll make a note because that could be like a double episode but yep, I’ll put that one on the back burner for sure.

[0:25:04.7] TU: So that’s number six, not saving for taxes when you’re earning additional income. Number seven, also for our side hustlers and those that are running a business, not expecting the FICA tax on self-employment income. Tell us more about the FICA tax here.

[0:25:17.7] SR: Yep, so that’s kind of similar varied, similar vein as to what we were just talking about really just having to kind of put that money aside but again, something that’s not second nature. It’s not something that you’d really be typically thinking about until you get into this and potentially make a mistake, hopefully not but right. When you have these W2 jobs and the money is being taken out, you’re withholding for yourself and you’re paying social security and Medicare, which we call FICA for yourself.

Your employer is paying half of that for you whether you realize it or not and when you are self-employed, so you have a partnership or your own kind of business and you are getting that money in, you have to pay that portion of FICA yourself. Now, the benefit is that you get that employer portion that the employer typically would be paying for you on a W2. You do get that as a deduction, so it helps a little bit but yeah.

I mean, that what was it? 15.7% or whatever for FICA is coming out of your bill at the end of the day. So on top of the regular income tax you have to set aside, you should really be saving for that as well. That’s where you’ve heard me say before, you know, 20, 25%, maybe up to 30% depending on what your bracket is, you start to add that FICA in on top of it and you could be looking at quite a bit to be setting aside.

[0:26:27.6] TU: Yeah Sean, this was one I would add to this as well. You know, the surprise of the cost of health insurance. This is one as well, you put those together and you go from a W2 job to running your own business is like, “Oh, okay.” So again, right? You’re looking at the financials in a very different way.

[0:26:44.5] SR: Yep, exactly. Things to keep in mind.

[0:26:46.8] TU: Number eight, Sean, has to do with some of the mishaps and mistakes with employer-dependent care. Tell us more about this one.

[0:26:53.3] SR: Yeah. So there is a lot of different things with dependent care benefits that you can add to dependent care FSA. So it’s a little bit different than the HSA but with that, that one really is a little bit more of the, you know, I was saying with the mindset within HSA, “Oh, if I don’t have medical expenses and I don’t use it, you know it’s not going to be worth it for me.” It turns into an investment vehicle if you don’t use it.

Dependent care FSAs, flexible spending accounts, if you have cash in that, that is more of an “if you don’t use it, you lose it” kind of thing. So that is something where if you’re pushing cash aside, they are pre-taxed dollars. You want to make sure you are using that for dependent care expenses during the year and the other thing is that if you are getting benefits from your company, you want to make sure that you are also putting that and actually spending that on dependent care.

When I say that, I mean a nanny or a daycare or even if it’s a family friend but somebody that you’re putting their social security down and saying, “Hey, I paid this person this much money to watch my children” otherwise, that can become a taxable event. So you want to make sure that if you have kids, you’re getting these benefits, that you are utilizing the cash during the year and not kind of ending up with excess in those accounts at the end of the year exactly.

[0:27:58.9] TU: Number nine Sean, an oldie but a goodie, one that I think has lots of attention given the three-year loan pause and that is, not factoring in PSLF when choosing a filing status. Tell us more about this one.

[0:28:11.3] SR: Yeah and this one, I mean, you just eluded to it. It’s been very, very challenging, especially with the client base that we work with having that ambiguity on what’s going on with the loan system and trying to give guidance on this front because it’s really tough when you’re saying, “Hey, we’re not exactly sure if they’re going to turn back on and how all that looks and when we’re going to have to recertify all these things.”

But yeah, what we’re talking about here is that typically when folks get married, if filing joint tends to be the best approach there and we always do a comparison at least on our side to say, “Okay, you know all else equal from an objective tax standpoint, filing jointly will save you X number of dollars versus filing separately” but when you are talking about PSLF and you get into these income-based repayment plans and are looking at AGI, that can really swing very, very rapidly between what your AGI is as merely filing separate individual versus your combined AGI with your spouse when you’re filing joint.

So this is one where it’s a classic like you just mentioned Tim Baker, the old “it depends” really depends on your individual circumstances here. You’re going to want to look and say, “Hey, what do I have on my side? What does my spouse have on their side? If you separate us, what does that look like? What is my income base repayment plan? What numbers are they looking at?” and really like we just said, “When do I have to recertify these things?”

“When am I going to have these payments?” because it’s a matter of you could save $200 by filing jointly this year but if you are saving $50 a month on your payment by filing separately, that adds up very quickly. So it’s something where there’s a lot of moving pieces but it is something where if you are not looking at those pieces, you can very, very quickly end up spending a lot more money than you think.

[0:29:49.3] TU: Yeah and it is so important. You know, we’re talking about PSLF here but the intersection of student loans and the tax strategy is one of many examples where the financial plan and the tax plan need to be jiving, and this example specifically brings us back to the origins of FYP Tax, right? I remember Tim Baker talking about, “Hey, we would develop these beautiful student loan repayment strategies and plans.”

Then they’d be, “Hey, go talk to your accountant” and not all accountants are well-versed in student loans, which is fair, right? Based on how nuanced they are and right now, how rapidly this information is changing. So shoutout to you Sean, the YFP Tax team, you know working with a tax prepare, working with an accountant that understands student loans. Again, this is just one example but really, the intersection of the financial plan and the tax plan is so important that those are jiving in the same direction.

[0:30:39.8] SR: Yeah and like you said, I mean, not all accountants know about it and I know enough to be dangerous with it but you have to have financial planners that know about that too. I mean, that is something where I could be working with you and say, “Hey, I think from a tax standpoint it looks like this” and you could go bring that to your planner, and if they’re not really thinking about these implications, they can really get away from you quickly, you’re right.

[0:30:58.3] TU: Number 10 on our list of ten common mistakes, mishaps that pharmacists were making during the most recent tax season is overlooking considerations with cryptocurrency. I mean, what would be a tax episode if we didn’t talk about crypto in digital assets, so what do we see here?

[0:31:12.4] SR: Well, this one probably is a little bit different than we’ve seen in the past with crypto. It wasn’t so much that we are seeing people with these big gains that they were necessarily expecting. In fact, if anything it might have been the opposite given what kind of happened with the market and everything last year but in that and what I would say with that is you know, if you kind of take the gain-loss implications aside, the biggest thing I would say here is just the reporting aspect of it.

So cryptocurrency again and I feel like I harp on this all the time is crypto is treated like an investment as far as the IRS is concerned. It’s like a stock, so if you go and you’re doing all these microtransactions all the time and you’re using your crypto wallet to buy coffee down the street, that is effectively saying, “Okay, I’m going to sell X number of shares at this price on this day” whatever I bought it for back in the day that same security.

You need to look at what your basis was and do the math, so if you are doing hundreds and thousands of these transactions every year, the reporting implications are significant and that’s not something where you can say and I am not just saying this because I’m an accountant, I’m biased where you can’t just say to your accountant, “Hey, here is my list of a thousand transactions, you know, figure it out for me.”

You need to make sure that whatever system you’re using can spit that out in a digestible manner whether it is actually getting a form from the IRS or kind of getting a summary and one thing that we have seen is in a lot of these companies and I don’t blame them necessarily but a lot of them will kind of rope you in and say, “Hey, you know it is going to cost you five dollars a month for the basic crypto wallet” and everything like that.

Then you get to the end of the year and all the tax forms that you need will be kind of an extra charge and you are not thinking about it and folks will say, “Well, I have an accountant, they can kind of do that for me” but I mean, again, and I am not just saying that because I don’t want to do it. It really is a matter of an accountant simply can’t take thousands of transactions and stick them onto a form.

It is not a practical thing that can happen. So you want to make sure that whatever you’re doing and again, if you want to do all those transactions, hey, power to you but keep in mind it’s like you’re selling shares. You need to make sure you are getting something out of your system that an accountant can then use and file your taxes with because it’s not like spending money. It’s like selling stocks.

[0:33:19.6] TU: Yeah, I am hopeful Sean, this is another one you know, where you can make this mistake once and you maybe approach it differently in the future, right? I think this is an education where your explanation is spot on. If we look at this in the eyes of the IRS, which is that we’re making a transaction in terms of like we were selling stock and especially if we’re using it to purchase things on a daily basis, right?

A store, a cup of coffee, groceries, whatever like we don’t think about our stocks like that typically and so I think that — not to say people may not transact crypto for purchases just like you would dollars out of a brokerage account but maybe not on the frequency that it’s happening if you are able to think of it in that way and understand the reporting and the tax implications there, so great explanation.

[0:34:04.6] SR: Exactly. I think like I said, that the basis is really the biggest thing and I, you know, people, if you talk to me you’ll hear me say it all the time and you’re probably sick of it but it is really being able to trace back and say again, like it’s like a stock, right? So if I sell XYZ NFT today, I need to make sure I know what I purchase XYZ NFT for in the future, and when you are doing all these things and you’re day trading so to speak, and saying, “All right, I am going to flip this one here and I’m going to go buy crypto with this one” and kind of moving, each one of those things has to be kind of traced back to the origin.

If you don’t have that information, you could end up paying more, honestly. You know, if you don’t have the basis information and you are just going to end up sell, reporting it on your sale price and not have the basis in there, you can end up either paying more or again, reporting incorrectly. Both of those are not what we’re hoping for in our side at least.

[0:34:55.9] TU: So if anyone heard Sean correctly as I heard him, all of your handwritten crypto transactions, your reports, your chicken scratch, you can email those to [email protected]. He will gladly – just kidding.

[0:35:07.8] SR: Yep, I will go through all of it in all of my free time now. Absolutely, I will break it all down for you, please.

[0:35:14.0] TU: Awesome. So that’s our ten common mistakes that you saw pharmacists making throughout the tax season. Can I add one more? We’re going to do a bonus round here for a moment and –

[0:35:22.5] SR: Yeah, go for it.

[0:35:23.2] TU: I think we need to do some education around extensions, right? I think this is an area where I know firsthand the first time I extended several years ago and I have gotten used to that practice now. It can feel uncomfortable, am I doing something wrong, does that mean I’m delinquent? But as you eluded to at the beginning of the show, there are some extensions that are happening with the more complex returns.

We want to make sure that we have the time that we need. The misperception I think, I could be wrong, that’s out there is extension means bad or extension means delinquent but that’s not the case, right? So tell us more about the use of extensions and why they may be appropriate.

[0:36:01.9] SR: Yeah, glad you’re giving me the bonus round. I would have had this as 1-A on my list if I would have thought that you would have actually allowed me to record this podcast if I did that. I thought that I came over the top of that one, we might be deferring this recording out to a future date but no, extensions, yeah. So it is actually kind of twofold. I would say that from who I’ve talked to and this could be clients.

I mean, even family members that I was talking to during the tax season, checking up on how things are kind of going, I would say with the negative connotation, it’s one of two camps. It’s either, “Hey, the extension means bad and delinquent” or extension means, “Hey, I’m this crazy tax guy who has offshore accounts and you know, I make five million dollars and I need to have my accountant spend the extra time to do all of this stuff.”

Those are really the two mindsets that I got a lot of. I mean, like I said, I talk to people that I know, I’ve known for a long period of time who I consider to be financially sound individuals and they said, “Oh extensions, those must be for your big ticket clients, right?” and the answer is not really. I mean, extensions simply give us, your accountant, and you more time to get your things together to allow us to dedicate the time to find you tax savings, get your things right, and not rush them.

I mean, I know Paul, my team who I’m sure you’ve heard talk on this pod before but he’ll always say, I mean, if you have a surgeon who needs to do a thousand surgeries in a year, would you rather him do them all in three months or her do them all in three months or have them do it throughout the course of the year, you know, with X number during each month. So you got me all fired up because you know, extensions are near and dear to me.

But I mean, really what it comes down to is we’re trying to do a lot of different returns and a lot of people have very complex situations but we want to make sure we get it right. We talked about states and local, moving states, and making sure states don’t talk nice to each other even ones that border each other are not – don’t always agree with how things are picked up and everything, and just getting all that information together, making sure we can parse through it, maximize your tax savings and everything, extensions just give you the time to do it.

Now, the one thing I will say is it does not extend your due date to pay. That’s the biggest thing. So what you want to do is get an estimate, and make your payment if you think you are going to owe or in April or even beforehand but after that’s done, it really is a one-click kind of thing. It’s an automatic extension, once you do it, it’s six months. You get until October and that’s that. It really is not for delinquents.

It is not for folks who didn’t get their stuff in on time or like I said, are using offshore accounts to do X, Y, and Z. It’s just simply to give your accountant more time to get it right.

[0:38:41.5] TU: Well, thanks for allowing me to throw some kindling on the fire, so I appreciate that.

[0:38:45.3] SR: Thank you, I appreciate that.

[0:38:45.8] TU: You know, I think it is a good reminder not only in the perception of it but also you know, some folks may hear this and say, “Well, you know there is an opportunity cost that if I am getting a refund” and we don’t file that for three months, four months, five months later, whatever that those dollars could have been used elsewhere. True but my counterpoint to that would have been, one, if we are planning correctly throughout the year, we shouldn’t be expecting a massive refund.

Second to that would be is that most often, extension doesn’t mean we’re buttoned up against the October deadline. It means that maybe instead of April 18th, it’s May 1st or 15th or even the end of April or into later in May or early June, whatever. So you know, it allows kind of that stretching out of the season to make sure that we’re doing the job that needs to be done, be done well, we are optimizing the situation.

I think that certainly for folks that have more complicated returns, I think what we’re seeing in the industry in my perception even with an accountant we used to work with before building our own practice internally was, “Hey, you’re a small business owner. Hey, you own a bunch of real estate” hey, whatever like you’re automatically extended. You know, that’s just kind of the process of what they do to make sure that they have the time to do those returns well.

[0:39:55.5] SR: Right and like you said, the idea of year-round tax planning is you’re working with your accountant throughout the course of the year. You are getting the information, you have rentals, you’re getting them, “Hey, I sold this place in November” and you are giving them the information in November so your accountant can already have that stuff ready to go and it’s not a situation of you’re in March and you say, “Hey, I forgot” or “FYI, sold my house back in January of last year. Here’s the 5,000 documents for it. Can we get this filed next week?”

The answer is, I mean, we probably can but you know if we are thinking about these things ahead of time, we can spend the time that we think it deserves to get everything right, and if you are doing that planning throughout the course of the year, you can get 90, 95% of a tax return effectively done through the conversations that you’re having with your account throughout the year. So yep, absolutely.

[0:40:40.4] TU: So Sean, let’s wrap up by talking through how the year-round planning can help pharmacists not only prevent these mistakes but again, better yet optimize your tax situation. That really is the focus of what you and the team are doing through the comprehensive tax planning, what we refer to as CTP. Again, not just that transactional return month of April, got to get it done but really that year-round strategy and planning.

So you know, what is comprehensive tax planning? What do we offer? Why is it needed and who is it for and perhaps, not for as well?

[0:41:11.3] SR: Yeah. So comprehensive tax planning is designed to really attack everything on this list, right? So it’s where you’re doing proactive planning and thinking about your tax situation now and not at the end or not in the beginning of next year looking back on this year and again saying, “I wish I could have done this” or “How could I have done this differently?” It’s getting ahead of those things now so you don’t have to worry about that.

So things like mid-year projections, “Hey, let me grab your paystub, let me talk about some of those side gigs you’re doing, give me an updated PNL” or even if we’re doing your books for you, I’ll pull down the updated PNL and we’ll take a look. “Hey, you know you’ve withheld this much money so far, your side gig is going to make this much money we think so far. Have you put that money aside yet? Did you make an estimated payment?”

“I think you should make a payment of this much” checking in on those things or being able to have the conversations of you know, “Hey, I just bought a rental property. Tell me about the short-term rental loophole” or “Tell me about what it’s going to take for me to be considered a real estate professional and be able to offset some of my active income with this passive income” or “Hey, I just bought the rental and hearing all about all these tax credits.”

“How does that work? How do those tax credits affect my personal return and then how does it affect my rental property? Are those going to be different? Can I maximize them?” These are the conversations that we’ve been having with folks over the past few months looking back on last year but proactive tax planning is you’re having these conversations now. You are having them in May, June, and July and getting ahead of these things.

So when we talk about March and April that big push, it is really a matter of, “Hey, did we do what we say we’re going to do? Excellent, great. Okay, what are your tax bills? Zero. As expected. Awesome, file? Done. Food to go.” Just really having that phone-a-friend CPA to ask questions for, “Hey, you mentioned bunching when we looked at my return last year. You said I was close to the itemizing. How can I actually employ that now?”

Or “Hey, this is what I’ve contributed in my 401(k) so far this year, do I have room to add more?” things like that. Just getting ahead of it now while there’s room to make changes and not looking back and saying, “Ah, I really wish I did that.”

[0:43:19.9] TU: Great stuff. So you know it’s again, not only that finally and it’s the mid-year projection, it is having an accountant in your corner to make sure you are executing throughout the year, answering those questions as they come up. So folks can learn more at ypftax.com. You can read more about that service, you can book a free discovery call to see whether or not it’s a good fit for your personal situation.

And again, whether you came off the season and you’re like, “Hey, I did that myself and I never want to do that again” or you were surprised by a refund or a bill or perhaps you have a situation that’s changing, right? It could be moving, a new job, dependents, acquiring real estate, or building a small business, all are these I think there’s a few examples of things that we want to be thinking about in planning throughout the year.

So again ypftax.com, you can learn more and book a free discovery call to see whether or not that’s a good fit. Sean, thanks so much for taking the time. I appreciate you coming on the post-tax season and looking forward to having you on throughout the year.

[0:44:15.6] SR: Yeah, thanks, Tim. Glad to be back and hopefully next time, we’ll be able to talk more about some of these backburner items. So I am looking forward to it.

[0:44:22.1] TU: Awesome. Thanks, Sean.

[0:44:23.1] SR: Thanks. See you.

[END OF INTERVIEW]

[0:44:25.3] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single-family home or townhome for first-time home buyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the preapproval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[DISCLAIMER]

[0:45:10.4] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 283: How to Optimize Your Tax Situation with Sean Richards, CPA

Posted on November 24, 2022March 11, 2023 by Rose

YFP Director of Tax, Sean Richards, CPA, EA, talks about how to optimize your tax situation as a pharmacist. He discusses tax basics that every pharmacist should know, the critical distinction between tax planning and tax preparation, and how to prepare for the year-end to put yourself in the position to have a headache-free tax season.

About Today’s Guest

Episode Summary

This week on the YFP Podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, welcomes YFP’s Director of Tax, Sean Richards, CPA, to the show to discuss optimizing your tax situation as a pharmacist. During the show, they cover areas for optimization, including tax basics that every pharmacist should know regardless of their income or stage of career. The discussion covers basic tax terminology, the federal income tax formula, and why we don’t have a better understanding of tax fundamentals in general. Sean explains AGI (Adjusted Gross Income), how to calculate AGI, an overview of deductions and credits, and how they differ in their impact on your tax picture. Sean takes a moment to explain the difference between marginal and effective tax rates, how bunching charitable donations can impact tax optimization and the triple tax benefits that exist with HSA Accounts. Sean details the distinction between tax planning and tax preparation with a comparison that listeners will enjoy. The discussion leads to common tax strategies that many pharmacists currently employ to optimize their financial situation and things to look out for to avoid common mishaps and mistakes with tax. Sean answers a question on the Inflation Reduction act, providing examples of tax benefits that listeners might take advantage of, and closes out the episode with ways to prepare for the year’s end and put yourself in a position to have a headache-free tax season.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRO]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I had the pleasure of welcoming YFP Director of Tax, Sean Richards, onto the show to talk about how to optimize your tax situation as a pharmacist. During the show, we discuss tax basics that every pharmacist should know, regardless of income or stage of career, the important distinction between tax planning and tax preparation, some common tax strategies that pharmacists are employing to optimize their financial situation, things to be on the lookout for where there’s common mishaps and mistakes, and finally how to prepare for the year end to put yourself in the position to have a headache-free tax season.

Now, at YFP, we know that filing your taxes and figuring out how to optimize your tax situation can be stressful and overwhelming, and that’s why YFP Tax is opening up its tax planning services to more pharmacist households this year. Unlike other firms, YFP Tax isn’t focused on just completing your return. Rather they provide value care and attention to you and your taxes. Because they work specifically with pharmacists, they are familiar with aspects of your financial plan that have an impact on your taxes like student loans, benefit packages, side hustles, and more. You can visit yourfinancialpharmacist.com/tax to learn more and to join the waitlist for the 2022 filing season. Again, that’s yourfinancialpharmacist.com/tax.

[INTERVIEW]

[00:01:29] TU: Sean, welcome to the show.

[00:01:30] SR: Thanks for having me. I’m glad to be here.

[00:01:33] TU: Excited to have you officially part of the YFP team, leading our tax team and efforts. I know some folks listening may not be aware of who is Sean and what is he doing, as it relates to the YFP team. So give us a brief intro to, Sean, some your background and the work that you’re doing with YFP Tax.

[00:01:52] SR: Sure, yeah. So I mean, I wouldn’t be surprised that people haven’t seen my face yet. But it’s crazy because I’ve only been here for about three months, and I feel like I’ve met so many people and done so many things. It’s been awesome. But, yeah, I’m Sean Richards. So I’m the Director of Tax at YFP Tax, CPA, EA, my most recent certification there. So for those who don’t know, EA is an enrolled agent. It’s the IRS certification. It kind of gives you a leg up with talking to the IRS.

Like I said, I’ve only been with the YFP team for a few months now. I worked at a large corporate for a while. They’re doing audit, accounting, treasury, a couple of different functions there. I briefly had another job before this. But, yeah, now I’m leading the YFP Tax team. So we have some tax offerings that we focus on, sort of more direct to consumer, where we’re doing prep tax planning, some of the things we’ll be talking about during this call.

Then we also have a completely different sort of bookkeeping, payroll, all the way up to fractional CFO services, if you’re doing more of the side business or small business type thing. So, yeah, I’m really excited to be here and be part of the team.

[00:02:55] TU: Yeah. We also are excited, grateful to have you on board. It’s been fun to see the momentum of the work that you’ve been doing in just a couple months. It feels longer than that and that’s –

[00:03:05] SR: I said the same thing but in a good way, not a bad way. It feels longer but because it’s been a lot of good fulfilling work, not in a bad way.

[00:03:12] TU: You’re going to be hearing a lot more from Sean on the podcast and webinars, probably on the blog as well. As we’ve talked about on the show many times, tax is such an important part of the financial plan, one of the reasons that we’ve brought these services in house, so we can make sure that the financial plan is humming with the tax plan. Because of that, we’re going to be focusing on even more content than we have done in the past, as it relates to tax strategy and tax planning.

The theme of this show today is really how to optimize as a pharmacist your tax situation. Our hope is whether you’re just getting started as a new practitioner, whether you’re mid-career, whether you’re further along in your career, maybe retirements on the rise in that. Regardless, you’ll be able to take one or two things away that you can apply to your situation, right? Whether we like it or not, taxes ain’t going away, right? It’s not like student loans where we pay them off and they’re gone. This is something we need to be thinking about throughout our career and how we can optimize. As Tim Baker says, we want to pay our fair share but no more. So we’re going to talk about how we can best optimize our tax situation.

The first thing, Sean, is really understanding the tax basics. We’re going to talk about some specific formulas and terms that we need to make sure we understand, so we can appropriately prioritize that as a part of the plan. But first off, why are most of us, myself included, deficient in our basic tax understanding, right? We should all, I feel like, have a more foundational understanding, especially since we’ve got to pay these every year. Why don’t we have that?

[00:04:45] SR: Well, we could probably have a completely separate hour-long conversation about lobbying and all sorts of things from that standpoint. But, I mean, I think it really comes down to, I mean, I’m a product of the public school system, and I didn’t learn about taxes in school. I feel like it’s something where it’s just some schools might offer basic finance classes and how to open up a credit card or something.

But taxes is something that doesn’t really come up. It’s one of those things that you just sort of join the workforce, and all of a sudden it’s expected that you’ll know what to do. Or you’ll have a guy or your dad or somebody will have a guy who can do it for you. But, I mean, I went to a business school, and it wasn’t even until my third year or so that I even took a tax class, where you kind of get into some of this stuff.

So it really is something that isn’t fundamental as part of the education system here. As unfortunate as that may be, that’s why I’m hoping that I can kind of give some background to folks, so they’re not completely lost when it comes to the end of the year.

[00:05:35] TU: Yeah. I don’t think it’s a super exciting topic. Even in Econ 101, like we did some fun investing games and other things. I don’t remember learning about tax. Or maybe we did, and I just zoned out. But it certainly isn’t ever present in our educational system. I’m trying to teach my boys a little bit about taxes right now, and I’m having very little success. Hopefully, Sean, maybe they’ll hear your voice and listen a little bit closer.

Let’s start with the federal income tax formula. How do we ultimately get to the final number of what we either owe or we receive back as a refund? Why is it so important that we understand this formula?

[00:06:12] SR: One of the reasons why it’s so important is that a lot of these terms get thrown around interchangeably, or they’re used as buzzwords. You’ll be hearing car commercials, and you hear kind of REITs and all these different things thrown out there. Everything’s sort of used interchangeably. So if you don’t really understand how the basic formula works, you might misinterpret something, or you might think that somebody’s talking about something that they’re not talking about.

The basic formula is you have your income. You take out anything that’s tax-free, so things like municipal bond interest, something like that. Then you have your gross income, so not adjusted gross income, your gross income. Then we have what we call above the line deduction. So some of those would be like IRA contributions, things like that. Those are the what we call above the line because the magic line is what gets you to that AGI.

Once you take out those above the line deductions, you get to what I just referred to, the magic number of AGI, which is an important one, and we’ll get to it in a little bit. But, I mean, that’s something where a lot of different phase outs and things kind of come into play. So that’s a really important number to have in the back of your mind.

[00:07:13] TU: Yeah. I think if folks, Sean, can really look at their tax returns, again not super exciting, right? But if you look at the 1040, if you start to understand some of these terms, and you can visualize like these above the line types of things, all of a sudden, the strategy pieces start falling into play, correct?

[00:07:30] SR: Yeah, exactly. A lot of people just have their tax return. They hand a box to their accountant. At the end of the year, he says you owe this much, or you’re getting this much in a refund. You say awesome, shake their hand, and you’re done. But all the things I’m talking about right now, I mean, your return could be 100 pages long. But if you look at that front page, you’ll be able to see these numbers that I’m talking about to at least give you a better understanding of how some of these things work.

Once you have your AGI, then we get into deductions. I want to be careful here because this is one of those ones that gets very often thrown around interchangeably. So deductions, which can either be itemized or the standard deduction, depending on which one’s larger in your individual circumstance, are, what, take your AGI and get you down to the taxable income. That’s what actually ends up getting multiplied by your tax rate at the end of the day. So those are things to get you to your taxable income amount.

Then you multiply by whatever your tax rate is. So there’s marginal rates and stuff, which I’m sure we’ll talk about in a little bit. But you take your taxable income, multiply it by your tax rate, and that gets you to what you theoretically will owe or what you’ll get back. Then we get into what we call credits. Those are, again, kind of used interchangeably or often confused with deductions.

Credits dollar for dollar reduce what you owe at the end of the day. Whereas a deduction reduces your taxable income, you’re really only saving 30%, whatever your tax rate is on that deduction amount. So if someone says, “Oh, I’ll write it off,” you’re only really saving the times your tax rate portion of that. A credit is dollar for dollar. So if you’re able to take advantage of credits, you can really have a big impact on reducing what you owe at the end of the day.

[00:09:07] TU: Awesome. So you defined well deduction versus credit. Again, as folks are listening, pull up your tax return. Again, I think as you visualize this, it starts to come to life a little bit more. Let’s break down further AGI, and then I want to come back to marginal and effective tax rates, two terms that you threw around that are important that folks have a good understanding of.

AGI, adjusted gross income, tell us more about that in detail. This comes up all the time, right? You saw this recently with some of the debt cancellation news. What’s your AGI? We talk about it as relates to different strategies with how we invest or how we save. What is AGI and why is it so important?

[00:09:43] SR: So AGI, again, is your gross income. So that would be your income less any of the non-taxable stuff like municipal bond, just like I mentioned. Less those above the line deductions. So that would be things like student loan interest deductions, contributions to the HSAs, traditional IRAs, things like that. That’s what gets you to that AGI. Why AGI is so important is because, like you just mentioned, a lot of different policies or different credits or things like that are based on that number. So they’ll say, “Hey, you’re eligible for this credit if you’re in this AGI range. Or if you exceed this AGI, you’re no longer eligible for this credit.”

PSLF student loan relief is a big one. So they’ll say, “Hey, you’re eligible for this if your AGI is within this range or under this amount.” So that’s why it’s really important to have that number. Of all the numbers, that’s probably the most important one to have, just sort of handy when you’re looking at these different things.

[00:10:36] TU: How about your marginal versus effective tax rates? What’s the difference and, again, why is this important to understand?

[00:10:42] SR: So marginal is – When people say tax bracket, that’s usually what they mean. They mean marginal when they’re talking about that. So that’s where you’re sitting there, and you’re saying, “Oh, I’m in the 25% tax bracket. If I make another dollar, I’m going to be in the next tax bracket. I can’t make any more money. I’m going to owe more taxes.” So it doesn’t really work out that way because for each of these different brackets, you’re being taxed at the marginal rate for that particular bracket. If you average that out, that’s your effective rate at the end of the day. If you take what you actually owe in taxes versus what your income is and do a simple mathematical equation, you get your effective rates of what you truly are paying.

Again, when you’re looking at your marginal rate in your bracket, that’s important for things like deduction. So if you say, “Hey, if I’m going to take this deduction,” if you want to do a quick calculation of what that would be for a dollar value for you, you multiply that by your marginal rate. But if you’re really thinking about it saying, “Oh, I don’t want to make any more money. It’s going to put me into the next bracket,” you got to really think about your effective rate when it comes to something like that.

[00:11:43] TU: Yeah. Usually, we want to be careful about not making more money because of taxes, right? So if we’re making more money and we’re paying taxes, that’s not necessarily a bad thing, right? We want to –

[00:11:52] SR: It’s a good thing.

[00:11:53] TU: It’s a good thing.

[00:11:54] SR: Some would argue that the more money you pay in taxes, the better that you’re actually doing at the end of the day, despite what anybody would say about trying to cheat the system or anything. You tax bill shows how healthy your finances are.

[00:12:06] TU: Yeah. [inaudible 00:12:07] and I wrote a book recently that he makes an argument that your number one KPI, key performance indicator, is the amount of taxes you pay to the IRS each year. I think the point is a good one, right? Obviously, you want to optimize and be as tax-efficient as possible. But if we’re able to earn more money, we’re paying more taxes. Again, that’s not a bad thing. That’s the first bucket here, understanding the tax basics.

The second thing, Sean, is tax planning versus tax preparation. It’s something we have talked about on the show before but I think, honestly, something we can’t talk enough about because we confuse sometimes the filing versus the actual strategic look, as it relates to the tax planning and how we can optimize that as part of the plan. I’ve heard you presented this talk before and give a really cool example of a film director and a film editor, and how that helps highlight the difference between the two, tax planning and tax preparation. Tell us more.

[00:13:01] SR: Yeah. So it’s actually kind of what you were just saying, where you want to pay your fair share. The more you pay in tax at the end of the day, whatever your tax bill is, it kind of shows that you’re doing better, right? But at the same time, you don’t want to pay more than your fair share. You don’t want to pay more than you need, just because you’re not paying attention or for whatever reason.

The way I like to think of it is tax planning is like a film director. So film director is watching the actors. They can affect change as they go. They have kind of an idea of what they want at the end of the day. If something goes wrong, they can say, “Ah, let’s take that back. Let’s change that.” Or, “I don’t like the way that that worked. I have this other vision in my head. Let’s do that.” Whereas a film editor, equally as important in the film production process, but they’re basically getting film that’s already been recorded. They’re saying, “All right, now work your magic and make this look good.” Of course, they can do a lot. They’re professionals. They can tweak it. They can make it look beautiful. But they can’t go back and change what’s already happened in the past, right?

Even though it’s an important piece, that tax preparation piece is really only a historical look back. It’s not something where like the tax planning, the director side, you can actually make changes throughout the course of the year and have those kind of play into the final product. So that’s the way I like to look at it.

[00:14:13] TU: Yeah, especially if you think about the timeline of filing your taxes mid-April. We’re already a quarter-plus into the New Year. So even when we file – Even if at that point, we’re starting to think ahead and more strategically, we’re already beginning to put a dent in that year. So, yes, we’ve got to file, right? Or else the IRS can come knocking on our doors. But better yet, we’re doing some of the strategy, the look ahead, the planning as the year is going on, and we’re being more proactive than just the filing alone. Then we’re not only optimizing but, hopefully, also minimizing any surprises.

[00:14:47] SR: Exactly, yeah. You don’t want surprises. You want to be able to take a look at things in the middle of the year and say, “Hey, where am I going to be come filing time? Or where am I even going to be a couple years from now down the line?”

[00:14:56] TU: I’ve seen you present on this before, where you give an example. Obviously, there’s many ways that tax planning can help optimize, but one example being around how one might bunch their charitable giving to help optimize how efficient that tax is in that given year. So talk to us a little bit further about that example. It’s just one of many examples of how someone might optimize your tax strategy.

[00:15:21] SR: That’s a perfect example to give right now because, like you just said, we’re getting towards the end of the year. So someone might say, “Well, if tax planning at this point isn’t really going to make much of a difference, maybe I’ll start next year or something.” But with something like bunching, that’s something that can be affected at the end of the year, up till the last day. So that’s something where if you’re looking at things and you’re saying, “Well, all right. I’m taking the center deduction this year, but I’m really close to being able to itemize my deductions.” So some people might just do what they’re normally going to do and just take whatever they get, whether it’s a standard deduction or itemized.

But if you’re going to be donating to charity for an example, and you know that you want to give, say, $10,000 over the course of the next couple years, you could break that into 5,000 this year and 5,000 next year, whatever. But if you look at it and you say, “Hey. Well, what if I bring some of these charitable contributions into this year and maybe be able to take advantage of itemizing my deductions? And then in a future year maybe not give that money and take the standard deduction?”

That’s something where you could make that donation on December 31st, and it’s effectively like given 5,000 on December 31st and given 5,000 on January 1st. But from a tax standpoint, it can make a really big impact. So that’s something where that tax planning, that directorial thing really comes into play, where if you look at those things and think about the impacts that will have down the line, even where you don’t change any of the facts and how much money you’re actually going to give, it can make a big difference.

[00:16:43] TU: That’s one tax strategy to employ a good example of where the tax planning can really be helpful the more strategic look ahead versus just the filing alone. Let’s shift into the third area here, which is common tax strategies to employ. Certainly not an exhaustive list, right? There’s many, many, many different strategies. It’s, of course, customized and individualized to one’s personal situation. But let’s talk about a few common ones that we see. Let’s start with the HAS, Sean. What is it? If folks are kind of new to that term, what are some of the tax benefits? Who qualifies, contribution limits? Give us the lowdown on the HSA.

[00:17:18] SR: HSA is great. That’s one where if I had a time machine, I’d go back and tell myself to get involved in those more. It’s something where I just didn’t really hear much about it. Or even if I did, it was something where I’d say, “Well, I’m young. I don’t have a lot of health expenses or anything. I’m not going to really worry about that.” But HSAs are great because they’re one of the few vehicles that have a triple tax benefit. So any of your contributions are going to be tax-free. The growth of those contributions will be tax free. Then when you actually go and make your distributions on it, those are tax-free.

Basically, what it is, it’s sort of like an IRA, where you put money in, and you can take distributions on it. Until you get to retirement age, you can only use those distributions for medical expenses. But it’s something where, again, it’s just a different type of investment vehicle for you. So if you have medical expenses that you can use now, great. If not, well, maybe not great, but it’s a good way to use it. If not, then you let it grow. When you reach retirement age, you take it out.

Anybody can contribute, as long as they’re enrolled in a high-deductible health plan. The limits are pretty similar to IRAs. I think in 2022, it’s 3,650 for individuals, and then double for married folks. There’s no limit based on how much you make. Well, there’s the limits that I just mentioned, but there’s no phase outs or anything like that. So if you make too much money, you don’t disqualify yourself, so definitely a great vehicle to take advantage of.

[00:18:41] TU: Yeah. Sean, we see this a lot with our community, I think, for good reasons. One being you just mentioned, right? So higher income professionals, especially if they have a joint household income, where they may be phased out of other opportunities, this is not one of them. Then depending on what they’re thinking of this, either use of short-term known healthcare expenses so that they can optimize and save a little bit on taxes or using it more in that long-term savings vehicle to also optimize the tax benefits.

We’ve talked about this on the podcast before, but we’re going to keep talking about it because we still see a lot of pharmacists that aren’t taking advantage of this. Given that there’s more and more high-deductible health plans that are being offered that people are opting into because of the rising costs of health care expenses, I think we’re going to see this even more popular in the future than it is today.

So Episode 165, we talked about the power of an HSA. We’ll link to that in the show notes. We also have a blog post, why I’m not using my HSA to pay for medical expenses. That talks more about the strategy side of using the HSA as a long-term investing vehicle. We’ll link to that blog post as well in the show notes.

Next up, Sean, for common tax strategies is the IRA. Talk to us a little bit. We’ve covered this in detail on the show, but just traditional versus Roth and some of the strategy around the IRA side of things.

[00:19:57] SR: Yep. I won’t go too much into this because I’ve listened to the podcast before. I know it comes up often. But basically, the two differences here are your traditional IRA, your Roth IRA. So the traditional is something where your contributions you’re making now, you’re taking a tax deduction on it now. Then in the future, when you take it out, you’ll have to pay taxes on it. Roth is the opposite. So you do not get the deduction now. But then when you go to take the money out in the future, when you reach retirement age, it will be tax-free.

With that, that one’s really one where you want to sit down with your financial planner or whoever is kind of coming up with the financial strategy and really determine where am I going to be in the future? What’s my tax bracket going to look like there versus what’s my tax bracket going to look like now? It gets into that whole planning versus preparation thing I was talking about before. So there’s a lot to unpack there.

Like I said, similar as the HAS, so there’s a $6,000 limit. I think it goes up to 7,000 if you’re over 50. So you get a little bit of a catch up there if you’re older. But, yeah, no, just another one to take advantage of definitely. You should be making sure that with all of these, that you’re looking at what you’re – If your employer has any benefits and stuff and really try to take advantage of all these.

[00:21:01] TU: Yeah. Both of these HAS, IRA are great examples, where if the financial plan is humming with the tax plan, we can really start to think about this strategically, rather than we’re filing taxes here, and then we’re looking at the financial plan over there.

[00:21:14] SR: Yeah. It’s something that definitely should be married together.

[00:21:16] TU: Third area, I want to talk about the common tax strategies and the Inflation Reduction Act. You and I are not here to debate whether or not the Inflation Reduction Act is actually going to reduce inflation. But rather, we’re here to talk about what are some of the opportunities and the credits that folks might be able to take advantage as a part of the Inflation Reduction Act.

So hit us with the highlights of some of the things around the energy-efficient homes or Residential Clean Energy Credit and the Clean Vehicles Credit that folks may or may not already be aware of.

[00:21:44] SR: Yep. So I will try not to use too many of the different names for these because I know that they keep changing. So if I say it now, I’m sure by the time this airs, they’ll have some new fancy name for it. But basically, there’s three areas to highlight. So there’s sort of the more traditional home improvement type energy credit stuff. That’s things like installing new doors and windows on your house that are more energy-efficient, which is almost anything nowadays that’s coming out. But that’s something.

So people might be familiar with the $500 lifetime credit. That’s where that used to kind of sit. Going forward, that’s going to be a $1,200 annual credit on your taxes. Remember, credits dollar for dollar reduce your taxes. So if you’re thinking – And this goes into effect next year, so something just to kind of keep in mind with planning ahead and everything. But if you’re thinking about getting some energy-efficient renovations done on your place, that’s definitely a big one to keep in mind.

Even more on top of that, so if you’re not only thinking about, hey, let me get some new windows or something, but why don’t I throw some solar onto that or get some geothermal heating systems or anything, something like that going, so the Residential Clean Energy Credit, that recently bumped up to 30% of whatever your expenses are in that regard. Again, say you’re putting new solar panels outside. You can get a 30% tax credit on the cost to install that equipment, which is huge.

Especially, again, if you’re planning ahead, you can maybe knock down some of your withholding. So if you know you’re going to have kind of a bigger tax bill at the end of the year, but you have this large project to offset, it’s something really to keep in mind there. Then the clean vehicles one, so there’s a lot to unpack there. I won’t get into too many of the details. But basically, they’ve expanded the credits available for buying electric vehicles or energy-efficient vehicles.

The biggest one that I’d like to highlight there is going forward they’re actually going to start allowing a credit on previously-owned vehicles. So that’s something where in the past, you had to buy a new car, and I’m sure a lot of people want to buy a nice brand new Tesla but might not have been able to jump into that or afford it right away. So opening up that secondary market to be able to take advantage of the tax credits is going to be huge.

There are some restrictions on that. If you’re buying a new car, definitely make sure there’s some restrictions around the car being assembled in North America and avoiding some of the mineral countries and stuff. So definitely go out and take a look. We can link to that in the show notes as well. The IRS has specific guidance on that, but those three are definitely some big areas to look forward to going forward.

[00:24:12] TU: Great stuff. I think there’s been a lot of news and potentially some confusion around that. So awesome, brief summary on what folks may be looking out for and how they can take advantage of those credits. The fourth area, as we continue this discussion on how to optimize your tax situation, is some things to be on the lookout for, perhaps some common mishaps or stumbling blocks along the way.

The first one, Sean, may not apply to a huge percentage of our community listening, but we do have a handful of folks that work in the biopharmaceutical industry or in situations, where restricted stock units or employee stock purchase programs may be a thing, and so it’s worth talking a little bit further about. But what are some of the things that folks should be thinking about if RSUs or if ESPP does apply?

[00:25:00] SR: Yeah. So you’d be surprised. I mean, I’ve done some webinars and some speaking events. Even though it might only apply to a small percentage of people, the people who does apply to it really does kind of nail home because there’s a lot of, I don’t want to say, hidden tax confusion there. But it’s something where you’re excited you’re getting a bonus, you’re getting these restricted stock units, and you want to get in the market. People are all excited about Robinhood and everything. But you have to be careful because there might be some things that you might not be considering.

With RSUs, you definitely want to make sure that when you’re selling your shares at the end of the day, when your shares vest, oftentimes you will actually recognize income when those shares vest. So taking a very, very quick step back, restricted stock units is usually something where a company will say, “Hey, we’re going to give you 40 shares, but it vests over a four-year period of 25% a year.” So when they vest, normally, you’ll recognize income on that. So what you want to make sure is that you’re not double counting that. When you’re going to sell those shares, make sure that that piece has been picked up already, and you’re not kind of picking it up again.

Similarly, with employee stock purchase programs, ESPPs, another great thing to take advantage of if it exists for you, usually, what that is is a company, if you work for a publicly traded company, allowing you to buy into the company at a discount. What you want to keep in mind there is that oftentimes, when you buy it at that discount, that discounted price, say, it’s 15% of the market value, that will often come on your W2 as income as well.

Again, it’s something else that you want to keep in mind. Make sure when you’re paying capital gains on that at the end of the day that you’re backing that piece out. They’ll often be what they call a supplemental form that comes with your 1099. So make sure that you look at that and adjust your basis or work with your accountant. I know I’m probably going over a lot of people’s heads, but make sure you find that piece of paper and give it to your accountant. So they know, hey, I need to adjust this basis and not pay additional on that income that you already were taxed for, right? You don’t want to pay twice in the same money.

[00:26:55] TU: Yeah. This is something, Sean, we see, as you mentioned, a lot of interest and attention, especially from folks that may be doing fellowship programs or others, looking at job offers, trying to understand what do these terms mean, and then how do they strategize around them, of course, the tax considerations that you mentioned.

The other area to talk about, as we continue discussing things to be on lookout for, cryptocurrency transactions. I know this was something that our tax team spent a lot of time on during the previous filing season. We saw rapid growth in folks that were investing in cryptocurrency, making transactions. Maybe that slowed up a little bit, just because of what’s been going on in the market. Maybe it hasn’t. But nonetheless, this is reaching more and more people out there that may be dabbling into cryptocurrency.

So we’re not going to talk about the strategy around cryptocurrency but here specifically about some of the tax considerations. Tell us more.

[00:27:47] SR: Yeah. So the thing to keep in mind with crypto is that – And I just talked about ESPP and RSUs, and that might, to some people, sound complicated. You get into capital gains and all that stuff. Cryptocurrency, the IRS considers that to be property, just like stocks. So if you’re going to the store and you’re buying a coffee with cryptocurrency, you’re effectively, at least to the IRS, going and selling like a share, right? Then buying your coffee. So every time you do that, there’s capital gains or losses associated with it, every single transaction.

It’s something to keep in mind. I mean, I’m not discouraging anybody or giving anybody advice on whether to use it to buy a coffee or not. But something to keep in mind at the end of the year, you’re going to have to report on each one of those transactions. Some of the crypto software out there doesn’t readily print out that stuff for you, so you might have to use a third party to do it.

The other thing to keep in mind is that NFTs are another kind of hot topic. I know that IRS has recently – I actually think that the 1040 this year, right on the front page, is going to have a little checkbox like they did last year with crypto saying, “Hey, did you buy or dispose of any digital assets?” So something else to keep in mind, NFTs are a hot topic, but it’s something that you actually have to record all those transactions. If you had a gain, you have to pay taxes on them.

[00:29:00] TU: Yeah. I wonder if anyone at the IRS 5 years ago, 10 years ago would have predicted having questions front and center on the 1040 about cryptocurrency and NFTs. But here we are, right? So obviously, there’s a lot more attention for good reasons that’s been given to those transactions, and I would say our tax team learned a lot through the tax season last year on this, just working with clients and kind of working through some of these issues. So if cryptocurrency transactions were something that was a part of your planning, something that we may be able to assist with.

[00:29:30] SR: Yeah, absolutely.

[00:29:31] TU: Sean, the last thing I want to talk about here on things to be on the lookout for is something we commonly see, which is paying the right amount of tax throughout the year. Especially important for those that maybe have significant changes in income, changes in dependents, maybe for those that are earning additional income, side hustle, business. Really, what we’re talking about here is whether or not we need to adjust withholdings or set aside some money for tax throughout the year, if that’s not being taken out of our paychecks. So what are some of those considerations around estimating and being able to estimate our taxes due throughout the year, so we’re not surprised come the filing season?

[00:30:08] SR: Yeah. So this goes back to what I was saying before, where you really want to keep the whole tax planning throughout the course of the year in mind. You don’t want to commit to at the end of the year and have a large bill or have even a large refund at the end of the day. I mean, it’s always nice getting cash back. But at the end of the day, it’s an interest-free loan that you’ve given to the government. So you want to avoid that.

One of the things you want to do, like I said, is sort of project it out and see what you’re going to owe at the end of the day and decide whether you need to withhold any additional interchanger withholdings or make estimated payments. So one thing you can do, it’s called the safe harbor. So if you look at last year’s return and look at what you actually owed at the end of the day – Sorry, not actually owed at the end of the day in taxes but what your tax bill was. Your tax liability, I should say.

So whether you had a refund or not, what your tax liability actually was, if you multiply that by 1.1, so 110% of that, and you make sure that whether you’re making payments to the IRS or just having regular withholdings from your W – For your regular paycheck. If you get that money into the IRS by the end of the year, you will avoid having to pay any additional penalties. Now, you might actually owe tax at the end of the day, but you won’t have any penalties. We call that the safe harbor amount saying, “Hey, that’s what I owed last year. 110% of that, we’re good to go.”

One thing – So if you have a side gig and you’re not having money taken out of your paycheck is you might have to actually make estimated taxes. So there’s a schedule on that. It’s a quarterly schedule. But it’s something – Again, you want to take a look at your calculation and say, “Hey, if money is not being taken out my paycheck, I need to put this money aside and actually send it into the IRS on a regular basis.”

So the way I like to look at it is think of your friend who’s the most financially irresponsible. If they didn’t have money taken out of their paycheck at the end of the day, would they be able to cover it at the end of the year? Probably not. So something you want to keep in mind.

[00:31:59] TU: Yeah. This is another reason. I think when you’re working with someone effectively throughout the year and planning and being more strategic, someone can help you with estimating what these payments will be. Obviously, especially for those that are earning additional income, side hustle, business, whatever, we want to make sure we’re doing that, and we’re looking at the overall financials of the business and accounting for the taxes that we’re going to owe.

Sean, as we wrap up here with our fifth and final point, preparing for the year end, great timing as we’re getting ready to turn the calendar into December. Hopefully, it’s the time of year we’re starting to think about our taxes more intentionally. Hopefully, if we’ve done our job here, people are going to be thinking about this all the way throughout the year. So what are some of the year-end things that folks should be thinking about to ensure that they can minimize the stress and headaches that may otherwise come during the tax filing season?

[00:32:49] SR: Yeah. So it’s a lot of the things that I talked about before, right? Especially what I even just ended at, you want to look at your income, your taxes, your withholdings. Kind of project that out and say, “All right, here’s what I think I’m going to owe at the end of the day. Here’s what I’ve withheld. Here are the estimated payments that I made, and am I going to be in a good spot?” Maybe I am. I mean, at this point, there’s not a whole lot you can do from withholding standpoint. But you can change that going forward. You can make estimated payments now. So you want to do that. You want to make sure you maximize your HSA contributions, IRA, any of those types of things. So make sure you’re taking advantage of anything, any benefits that your employers are giving in that regard.

If you’ve over contributed, so those limits I mentioned before, if you’ve gone over that, make sure to correct those. Take that cash back out or re-characterize them for next year because, otherwise, you’ll end up getting penalties on those. If you are able to contribute to charity, make sure you have a conscious strategy regarding that. You can use donor-advised funds, which we didn’t get into. But it’s kind of like mutual funds for charitable contributions. Think about your capital gains, so things I just mentioned. If you’re sitting there going, “Oh, my goodness. I’ve been buying coffee every day with crypto,” you got to kind of think about that, and maybe go back, and take a look, and see what your gains were or your losses might have been on those, and think about how to apply those going forward.

Then just make sure you have all of your documentation ready to go and saved down and everything. Then just decide what you’re going to do, or you’re going to do it yourself. Do you want to reach out and hire somebody to prepare your taxes for you? Or better yet, reach out to somebody who can actually be a partner throughout the course of the year and give you more of that guidance and really align your tax strategy with the rest of your financial strategy like it should be.

[00:34:27] TU: Great stuff, Sean. For those that have listened to this episode or have followed us for some time and this concept of year round planning from a tax standpoint, if that really resonates with you and really aligning your taxes in a more strategic, proactive, look ahead way, yes, of course, we’ll do the filing. But we really want to be a partner with you throughout the year so that we can optimize that situation and employ much of what we talked about here. Really, we just, I think, scratched the surface on some of this as well.

If you’re interested in working with Sean and his team over at YFP Tax, you can visit yourfinancialpharmacist.com/tax. There, you can learn more about the services. You can sign up to join the waitlist for the 2022 filing season. As well, you can also reach out to Sean directly if you have a question, [email protected].

Sean, thanks so much for coming on the show and looking forward to having you involved in future episodes as well.

[00:35:21] SR: Yeah. Thanks for having me. I’m looking forward to it as well and looking forward to getting into tax season, hearing from some of the listeners. So have a good one.

[00:35:28] TU: Awesome. Thank you.

[END OF INTERVIEW]

[00:35:30] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 237: 5 Financial Moves to Make to Crush Your 2022 Goals

Posted on January 6, 2022November 2, 2022 by yfpadmin

5 Financial Moves to Make to Crush Your 2022 Goals

Tim Ulbrich talks through 5 financial moves you should consider making in 2022 to accelerate your financial plan.

Episode Summary

Every New Year is a chance to turn the page and reset. That means this new year is the perfect opportunity to refocus those financial goals and clarify your plan and vision moving forward! This week, host Tim Ulbrich is flying solo to talk through five financial moves you should be making in 2022 to accelerate your financial plan or re-energize and remind yourself of the plan and goals you’ve set up. Hear about the importance of setting quantitative and qualitative financial goals and how to strike a balance between both. Discover some ideas for how you can button up your financial record-keeping systems and use the turn of the New Year as a chance to revisit and update those important financial documents. Learn about the importance of a legacy folder, what it is, and why it’s important to revisit each year. Tim also talks through some considerations on optimizing your tax strategy in 2022. He also takes a quick moment to touch on the end of the administrative forbearance, which is right around the corner, and what it could mean for your student loans.

Key Points From This Episode

How to take advantage of this time to reset, refocus, or create your financial plan.
Finding the balance between your qualitative and quantitative goals.
Tim offers to be your accountability partner.
How to take your tax strategy to the next level.
Updating your important financial documents: what is a legacy folder and why you should get one.
Revisiting your student loan game, plus some great resources to help.
Set your personal learning plan with our top book and podcast recommendations.
A reminder of the YFP services and community available to support your financial journey

Highlights

“Quantitative goals are really important: we need to be thinking about those and planning for those. But let’s not lose sight of those qualitative goals that help keep us focused on living that rich life today while also planning for the future.” — Tim Ulbrich, PharmD [0:04:14]

“Tax, in my opinion, is one of the most underappreciated and overlooked parts of the financial plan. Think of tax as a thread that runs across your financial plan that must be proactively considered and evaluated when making financial moves.” — Tim Ulbrich, PharmD [0:06:00]

“At YFP one of our core values is optimize you. We believe that when we live as the best version of ourselves, we’re more likely to achieve our goals.” — Tim Ulbrich, PharmD [0:13:38]

“Learning is one thing, but learning plus action plus accountability is where things really start to happen.” — Tim Ulbrich, PharmD [0:14:47]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey everybody. Tim Ulbrich here. Happy New Year. Thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom. Hope everyone is enjoying the holiday season, has had a chance to reflect on 2021 and is ready to chart a path forward for 2022. This week, I’m flying solo to talk through five financial moves that you should consider making in 2022 to accelerate your financial plan.

Specifically, I talk through the importance of setting both quantitative and qualitative financial goals, some ideas for how you can button up your financial record keeping systems, and use the turn of the New Year as a chance to revisit and update those important financial documents, considerations for how to optimize your tax situation in 2022. And, briefly, I talk through some of the considerations around student loans considering the end of the administrative forbearance that is right around the corner.

Before we hear from today’s sponsor, and then jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does, in working one-on-one with more than 240 households in 40 plus states. YFP Planning offers fee-only high touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner, may help you achieve your financial goals. You can book a free discovery call at yfpplanning.com. Whether or not YFP planning, these financial planning services are a good fit for you, we know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

[EPISODE]

[00:01:40] TU: Happy New Year to the YFP Community. Let’s jump right in with five financial moves that you may consider in 2022. Now we know that every New Year is a chance to turn the page, to reset. Yes, it’s just an artificial point in time and day that really is no different than any other day except for some tax reasons and for those of you that might have some benefits that are changing compensation and so forth with the New Year. But really it’s any other day of the year, right? However, it’s an opportunity for us that we can take advantage to reset our financial plan, to refocus where we’re trying to go in both defining and achieving our financial goals.

Perhaps for some of you, you’re listening and saying, “No, I feel pretty good. I feel like I’m on track.” This might be an opportunity to remind yourself of the plan that you’ve set, and celebrating some of the success and wins that you’ve had along the way. For others, maybe you’re listening to this, saying, “You know what, at one point, I had a good plan, but I feel like I’m off track for whatever reason.” This is an opportunity, of course, to reset that course and make sure we’ve got that vision clear heading into the year.

Finally, for those that are saying, “What plan?” Rightfully so, for many that – multiple competing financial priorities, perhaps feeling overwhelmed with how to best tackle those individual priorities and to put them all together in one plan moving in the same direction. Today is an opportunity to begin to set that path, to put those ideas, those priorities on paper and begin to have that plan for how we’re going to execute those into the future. Let’s walk through five financial moves that you may consider either making or perhaps for those of you that already doing some of these things to refresh or improve in these areas.

Number one, is setting both quantitative and qualitative financial goals. Shout out here to the planning team at YFP Planning that does an awesome job of finding the balance between living a rich life today and caring for our future self. As Tim Baker says, “It can’t just be about the ones and zeros in the bank account.” As you say, your financial goals for 2020. Yes, let’s focus on those important quantitative things. The things that we talk about often on this show, could be how much you want to move the needle on the net worth or your assets minus liabilities. What we talked about in the book, Seven Figure Pharmacists, is your financial vitals check, or perhaps you’re thinking about how much progress you’re going to make on any outstanding debt, or how much you plan to save and various investment accounts.

Or for those of you that have been thinking about real estate investing for some time, after listening to David and Nate, on the YFP Real Estate Investing Podcast, maybe you’ve been thinking about how much you need to save to pull the trigger on that first property. Those quantitative goals are really important. We need to be thinking about those and planning for those. But let’s not lose sight of those qualitative goals that help keep us focused on living that rich life today while also planning for the future.

Perhaps, we have some newlyweds that are listening, that have a long lost honeymoon to take that the pandemic disrupted? What’s the plan to make that a reality and who is keeping you accountable? Or for some, maybe you’ve been considering making a move to part time or reducing hours for whatever reason. Again, what’s the opportunity here? Have we evaluated that? What’s the plan to begin to see that through? Or how about those interests and hobbies that we used to long for, resuspend time on and prioritized that have gotten lost in the busyness of life and work? How is that going to be a priority and a focus? Perhaps that side hustle business, project that you’ve been dragging your feet on to take the first step on.

Let’s make this year, 2022, the year that we move the needle on both our quantitative and qualitative goals. While goals are good accountability is where it’s at. I’ve seen the power of accountability in my own life, and I want to see you achieve your 2020 financial goals. Here’s my offer. If you email me with one to two of your top goals, perhaps one qualitative and one quantitative, along with your why and motivation for achieving that goal. I’ll reach out a couple times this year to check in, see how you’re doing and perhaps provide some motivation along the way. You can send me an email [email protected], put Episode 237 with your first name in the subject line, so I don’t miss it. I look forward to hearing from several of you.

All right, so that’s number one, setting both are quantitative and qualitative goals. Number two is we have to take our tax strategy to the next level. Tax, in my opinion, is one of the most underappreciated and overlooked parts of the financial plan. Think of tax as a thread that runs across your financial plan that must be proactively considered and evaluated when making financial moves. Now, it sounds so obvious, but I used to view tax very much in the rear-view mirror. Filing each year by April 15, to meet the IRS requirements, and to account for what happened the previous year, and ultimately hold my breath and I would either get a refund aka paid too much throughout the year, let someone else hold on my money for a while, or I’d have a payment due. Less than ideal for obvious reasons, and indicative that I could have done more proactive planning.

So we need to shift our attention from tax preparation to tax planning. A very important distinction, that YFP Director of Tax and IRS Enrolled Agent Paul Eikenberg talked about on episode 233 of the podcast, along with other strategies for how to optimize your tax situation. If you don’t already know your key numbers, things like your marginal tax rate, your effective tax rate, your adjusted gross income. It’s time to nerd out a little bit. Let’s make a commitment this year to start there. These numbers help give us insights in the why tax planning and being proactive is so important. AGI one example, Adjusted Gross Income has important implications on student loan payments, especially for those that are pursuing public service loan forgiveness through an income driven repayment plan and of course, certain phase outs on child childcare credits, IRA contribution, student loan interest deduction, and more.

Some of the common mistakes that we run into, some that I’ve made myself is, number one, having an unexpected balance due on April 15. Less than ideal. This could be due to under withholding throughout the year, perhaps on accounting for self-employment earnings and tax and unique this year would be for those that have been taking advance child credits and making sure that we’re accounting for that, and expecting that, when we go to file in early this spring.

Another common mistake that we see, number two is having non-qualified IRA or 401K, 403B contributions from over contributing. This obviously creates a lot of headaches for both the prepare, as well as for the individual to correct and misunderstanding of the rules around Roth and traditional phaseouts, is often what is causing this problem. Number three in terms of common mistakes, would be missing deductions and credits that are applicable. So of course, beyond these mistakes, there’s opportunities to optimize our situation. HSAs, Health Savings Accounts, we talked about this on Episode 165, in terms of the power of an HSA and why from a tax standpoint, this is one of those optimization strategies.

Other optimization strategies we see that is frequent among clients, would be deducting qualified business related expenses for those that are side hustling or for those that own a business. And of course, the many benefits that are available for those that have children or childcare expenses, including the childcare credit dependent care FSAs, child tax credits in 529. As Paul helped me understand some of the strategies for bunching itemized deductions for further tax efficiency. It’s easy to see the value of a good proactive tax plan and why it’s worth its weight in gold. So for those that have not yet checked out Episode 233, Hot Optimizer Tax Strategy, I hope you’ll do that.

Also, we understand at YFP that filing your taxes and figuring out how to optimize your strategy can be stressful. That’s why YFP tax this year is opening up its tax filing services to 125 additional pharmacist households. So you can visit yourfinancialpharmacist.com/tax to learn more, put your name on the waitlist and we’ll be in touch from there. Again, that’s yourfinancialpharmacist.com/tax.

Number three is, button up your financial documents. Not necessarily the most exciting part of financial plan but the New Year is a great time that we revisit things\ like our insurance policies, our savings accounts, retirement accounts, looking at beneficiaries. Is that information correct or do we need to update anything?

I also think here about the concept of a legacy folder. I first heard of the idea of legacy folder when taking Dave Ramsey’s FPU, Financial Peace University class. I remember thinking, “Wow, it’s so obvious, yet so important.” And something that my wife, Jess, and I had not done yet at the time. Essentially, the idea of a legacy folder, whether it’s physical electronic or both, is a place where you have all of your financial related documents, so that in the event of emergency, others would be able to quickly assess your financial situation, get access to those documents and accounts that pertain to your finances. This type of folder could include things like birth certificates, social security cards, marriage certificates, passports, insurance policies, wills and powers of attorney, login information for accounts and so on.

I think one of the benefits of putting this document together is, it also tends to spur good conversation that might allow you to also look at other parts of the plan that have been either ignored or just perhaps need to be updated. Speaking of some of the wills and powers of attorneys, we think about the estate planning side of the financial plan. That’s another part I think, about hearing “Buttoning up your financial documents.” If you haven’t yet, listened to Episode 222, Why Estate Planning is Such an Important Part of Financial Plan. We had Nathan and Notesong from Thoughtful Wills, to talk about the different parts of the estate plan, why that’s so important, who should be considering the estate planning process and how that fits in to the rest of your financial plan. Again, not the most exciting part of the plan to think about, but really important, and using the New Year is an opportunity to refresh or to set that information for the first time.

Number four is, revisit your student loan game plan. Now, what we know as of the first of the year, is that the extension of the administrative forbearance is expiring January 31st, 2022. Now is the time. We’ve got to have a plan in place. We had several extensions of that forbearance dating back to the beginning of the pandemic in March 2020 and all signals are pointing to that, this is the end. Last week Episode 236, certified Financial Planner, Lead Planner at YFP Planning, Kelly Reddy-Heffner joined me to talk about some common questions around Student Loan Refinancing, including who should and should not refinance, how you evaluate multiple offers, some of the considerations for refinance as one of many different repayment options that are out there. And some of the timing questions of when potentially to refinance, as we look at the end of that administrative forbearance period.

This is a great time. I’ve talked many times on this show, as we reiterated last week, that the decisions around student loan repayment – we think about the average debt of a pharmacy graduate today as around $170,000. We think about not only the amount of that debt, but the various options that are available both federal private forgiveness, non-forgiveness, taking the time to understand the nuances of student loan repayment and to ultimately find and adopt the strategy that is best for your personal situation is time well spent.

If you’re looking for more information about which student loan repayment option is best for your personal situation, looking for one-on-one help to make that decision, we have a student loan analysis service that we offer. You can learn more at yourfinancialpharmacist.com/sla. This is a one-on-one service that we have with one of our certified financial planners at YFP planning that will help you inventory your loans, federal and private, evaluate eligible repayment options including loan forgiveness, income driven repayment, private refinancing. And ultimately help you determine the best repayment strategy for your personal situation. Again, yourfinancialpharmacist.com/sla and you can use the coupon code why YFP for 10% off.

Number five is, set your learning plan. At YFP one of our core values is optimize you. We believe that when we live as the best version of ourselves, we’re more likely to achieve our goals, and we believe that for ourselves for our team and for you, the YFP Community. So what are some opportunities to learn? Of course, podcasts, you’re listening to this one. For those that are interested in in real estate investing, I hope you have checked out the YFP Real Estate Investing Podcast that David Bright and Nate Hedrick are doing a great job releasing episodes each Saturday. Bigger Pockets, another great resource if you’re looking at information resources on real estate.

Some of the books that might make it to your reading list in 2022. Some of the classics my favorites, Rich Dad Poor Dad, The Millionaire Next Door. A couple other books that have been favorites of mine over the past couple years, The Compound Effect by Darren Hardy, The Truth About Money by Ric Edelman. Tax Free Wealth by Tom Wheelwright, for those that are looking to date a little bit more into the tax strategy and part of the plan. The Automatic Millionaire by David Bach, The Behavioral Investor, by Daniel Crosby. Happy Money, this one by Elizabeth Dunn and Michael Norton, Looking at the Science of Happier Spending. So just a few ideas of ways that you can learn, in terms of personal finance books.

Certainly learning is one thing, but learning plus action plus accountability is where things really start to happen. My hope is you’ll find a community and you’ll find a coach for accountability and guidance, if you’re not yet a part of the YFP Facebook Group, I hope you’ll join more than 7000 pharmacy professionals across the country that are really committed to helping empower and encourage one another in the financial plan. You can join that group if you’re not already part of it.

For those that are looking at one-on-one planning, YFP planning offers accountability and customization of the financial plan specific to pharmacy professionals, and you can learn more at yfpplanning.com, you can schedule a discovery call today to see whether or not those planning services are a good fit for you. Thank you so much for joining me. Again, Happy New Year to the YFP Community, looking to a great year that’s ahead. My hope is you will take these five financial moves for 2022 and begin to apply them in your own plan.

[OUTRO]

[00:15:41] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment, or any other advice. Information to the podcast and corresponding material should not be construed as a solicitation, or offer to buy or sell any investment, or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the date published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 233: Tax Moves to Consider Before 2022

Posted on December 9, 2021November 2, 2022 by yfpadmin

Tax Moves to Consider Before 2022

On this episode, sponsored by APhA, Paul Eikenberg, YFP CFO and Director of YFP Tax, discusses how pharmacists can optimize their tax strategy.

Episode Summary

As we approach the end of the year and will soon enough find ourselves amid tax filing season, it’s a great time to revisit end-of-year tax strategies and considerations to optimize your tax situation. Today on the Your Financial Pharmacist Podcast, host Tim Ulbrich sits down with IRS enrolled agent and our own Director of YFP Tax, Paul Eikenberg, to discuss how pharmacists can optimize their tax strategy. Paul has supported hundreds of pharmacists in tax filing and tax planning to maximize their deductions and avoid overpaying. Today he kicks us off with the important distinction between tax planning and preparation, as well as why it’s worthwhile to understand key numbers such as marginal tax rates and AGI. You’ll hear him describe common tax blunders he sees pharmacists making and how to avoid them, including realizing an unexpected balance due on April 15. We cover some of the factors that contribute to that making non-qualified IRA or 401(k), 403(b) contributions and missing key deductions in credits, and the listener gets a look into the two exciting tax services we have on offer to help pharmacists looking for a tax preparation and/or tax strategy and planning solution. To top it off, we’ve even got a comprehensive tax checklist for you to get the absolute maximum out of your tax benefits. This is one conversation you don’t want to miss.

Key Points From This Episode

Paul and Tim catch us up with some exciting happenings in the YFP tax team.
Understanding the important difference between tax preparation and tax planning.
Differentiating your marginal tax rate and effective tax rate as a decision-making tool.
Paul explains the implications of AGI and how to arrive at that number.
Touching on the complicated system of student loans and pursuing loan forgiveness.
Some common tax blunders that you should look out for!
Key credits and deductions that you might not be taking advantage of.
What is going to be available moving forward with child-care and dependent care.
Explaining donor-advised funds and a potential strategy around bunching.
Two exciting tax services: reporting only and year-round planning and reporting

Highlights

“Make sure your tax exposure and your tax strategy line up with your financial goals. The biggest thing that tax planning really does is provide some peace of mind that you’re not making mistakes and that you’re making good decisions.” — Paul Eikenberg [0:08:05]

“Our best practices with YFP is to advise people to, instead of putting the money in the [retirement] funds during the course of the year, put it into an investment account.” — Paul Eikenberg [0:23:26]

“The rules on business expenses are, they have to be business-related, ordinary, necessary, and not extravagant. Ordinary is, if someone else is doing the same type of business, they’re going to have the same type of expenses necessary.” — Paul Eikenberg [0:25:09]

“The donor-advised fund makes it easy to [maximize tax benefits]. Then, you can spread that money out and make the donations from the fund you control. It’s like having your own foundation.” — Paul Eikenberg [0:34:36]

Links Mentioned in Today’s Episode

End of Year Tax Checklist

Project your income, taxes, and withholding
Maximize your HSA contribution
Know your FSA carryover limits and spend accordingly
Consider 529 account contributions
Document side business expenses – Mileage Logs**
Have and execute a charitable contribution strategy
Correct any over contributions to 401K/403B/IRAs
Manage your capital gains
Look for IRS Letter 6419 Advanced Child Credit & Notice 1444-C
Have a system for organizing your tax documents
Select & engage your tax preparation method

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week I had the chance to sit down with YFP Director of Tax and CFO, Paul Eikenberg to discuss how pharmacists can optimize their tax strategy. Paul’s an IRS enrolled agent and has supported hundreds of pharmacists in both tax filing and tax planning to maximize their deductions and avoid overpaying. As we approach the end of the year and will soon enough find ourselves in the midst of tax filing season, it’s a great time to revisit end-of-year strategies and considerations to optimize your tax situation.

Some of the highlights from my interview with Paul include him explaining the important distinction between tax planning and preparation, why it’s important to understand key numbers such as marginal tax rates and AGI. Hearing him describe common tax blunders he sees pharmacists making and how to avoid them. Some of these blunders include realizing an unexpected balance due on April 15, and some of the factors that contribute to that making non-qualified IRA or 401(k), 403(b) contributions, and missing key deductions in credits. Finally, hearing Paul’s end of the year to-do list, your notes already prepared and ready to go for you to take action.

Before we hear from today’s sponsor and then jump into the show, at YFP, we know that filing your taxes and figuring out how to optimize your tax strategy can be overwhelming and stressful. That’s why YFP Tax has opened up its tax filing services to 125 additional pharmacist households this year. Unlike other firms, YFP tax isn’t focused on just completing your tax return. Instead, they provide value care and attention to you and your taxes. Because they work specifically with pharmacists, they’re familiar with aspects of your financial plan to have an impact on your taxes like student loans, benefit packages, side hustles and more. You can visit yourfinancialpharmacist.com/tax to learn more and to put your name on the waitlist. Again, that’s yourfinancialpharmacist.com/tax.

Okay. Let’s hear from today’s sponsor and then we’ll jump into my interview with Paul Eikenberg.

Today’s episode of the Your Financial Pharmacist Podcast is brought to you by the American Pharmacists Association. APhA has partnered with Your Financial Pharmacist to deliver personalized financial education benefits for APhA members. Throughout the year, APhA will be hosting a number of exclusive webinars covering topics like student loan debt payoff strategies, home buying, investing, insurance needs and much more. Join APhA now to gain premier access to these educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join and using the coupon code, YFP. Again, that’s pharmacist.com/join using the coupon code, YFP.

[INTERVIEW]

[00:02:54] TU: Paul, glad to have you back on the show.

[00:02:57] PE: Hey, Tim. Good to be here.

[00:02:59] TU: Question, are you ready for another tax season? Feels like we – you, really, and the team just wrapped up things from last year. It’s been a busy year, right?

[00:03:07] PE: That’s how it feels too. We just finished October 15th, the last of our extensions and are trying to build the capacity this year to do all our internal returns and 125 more.

[00:03:22] TU: That’s exciting stuff. In addition to the work that you’re doing as the director of tax and leading that initiative at YFP, the team is also growing. We’ve got some folks that are coming on board. Tell us about those exciting developments.

[00:03:34] PE: Aurielle was coming on board full time this year. She worked with us last year as a contractor and I’ve worked with her in a previous business venture. Really excited to have her come on board, and help smooth out the processes and build capacity to do more returns. Then Ryan Griffin, who’s a pharmacist and loves to do taxes on the side is coming back this year and working with us again. We’ll be adding some – one or two other contractors that we’ve talked to this year are interested in joining our team. It should be a good group to increase the capacity and help us do a better job for more people.

[00:04:23] TU: I know. Tim and I are super grateful for your contributions to what has made the service that it is today for the other folks you mentioned, Arielle and Ryan. We really believe that tax for obvious reasons, we’re going to talk about much that on the show today is such an important thread of the financial plan. That tax planning and preparation is really best if we embed that into the financial plan and can consider that, both looking back in the filing as we’ll talk about, but also in more the planning, and look ahead and the strategy side of it.

That’s the theme for today’s show, how to optimize your tax situation. Great time, as I mentioned in the introduction, end of the calendar year. Some opportunities to wrap some things up, get some momentum in the new year. We’re going to talk through some of the differences of tax planning and prep, key numbers and terms to understand, some commonly made blunders. We’re certainly not going to address all of these. Some strategies and then a checklist of things to do before the end of the year.

Paul, kick us off. I think, really, with this first part which is the theme, as we think of the others, and this really highlights the intentionality of thinking about taxes. Not only looking backwards, and doing the filing, and the preparation, but also more of the proactive planning. Tell us about the difference between tax planning, tax preparation and why that difference is so important.

[00:05:44] PE: Tim, the way I like to look at it, tax preparation is just historically recording what happened last year. We as tax preparers take your information, prepare a return. There’s not much of an opportunity to have an impact on your tax liability. There may be a couple of things we can do when preparing your taxes that you can adjust before April 15th. But it’s really difficult to have much impact on the tax liability during that period of time. You have to understand that when you’re dealing with tax preparation, it’s really deadline driven. When we get into February, March, and April, we’re working every hour trying to complete returns, chase down information, review and file.

There’s not as much time to pay attention to what could have been done, look at future strategies and really think through how to improve the situation. One of the frustrating things on our end is, when you’re preparing a tax return, that’s the time a lot of problems pop up, and are discovered and it’s too late to fix a lot of times there.

You contrast that to thinking about tax planning’s forward focus. For our clients, we do a lot of tax projections in the middle of the year or towards the end of the year. That’s a great time to look for things that can have more impact on tax liability. It’s just like financial planning. If you’re making the right decisions, they compound over the course of years. Tax savings builds, it helps put more money in your investment and savings accounts. It can help you leverage the income you have if you’re making the right tax choices. The best time to do that is not during the tax filing season.

From planning, we help people avoid common mistakes. Make sure your tax exposure and your tax strategy lines up with your financial goals. The biggest thing that tax planning really does is provide some peace of mind that you’re not making mistakes and that you’re making good decisions about how you’re approaching all t he tools you have to mitigate your taxes.

[00:08:27] TU: Yeah. I think our community will appreciate working and living in the healthcare environment, where we see the importance and value of preventative health care versus that that’s more reactive. We think about tax preparation, got to do it, it’s required, right? Or else the IRS is going to come knocking on the door. The tax planning may not have that same priority in terms of that requirement, but so important in terms of that strategy and what that can mean to the rest of the financial plan. As well as Paul mentioned, the peace of mind.

Paul, as we think about key numbers that folks need to know, certainly there’s a lot that we could talk about here. But I think starting off with differentiating marginal tax rate and effective tax rate is really important because these are terms that we throw around. We’ll talk about AGI here in a moment, adjusted gross income. But I think when people are hearing about certain strategies and benefits, or maybe they’ve been told by a preparer before about what their tax rates are, may not have a full understanding of what that term means. And then what the implications are of how to use that or how helpful it is or is not as a decision-making tool. Define for us marginal tax rate versus effective tax rate, and specifically why that marginal rate is an important decision-making tool.

[00:09:40] PE: Well, let’s start with marginal rate. The marginal tax rate, think of it about as the percentage of tax you’re paying on the last dollar you earned and the next dollar you earned. There’s a lot of misconceptions on how the tax brackets work. Most pharmacists are in the 24% or 32% tax bracket. That doesn’t mean you pay 24% on all your income. You’re being taxed at 10% for some, 12% for the next layer, 22% for another layer and then you’re paying 24%. They average out to what’s commonly known as an effective tax rate. Think of effective as the average tax rate.

But the marginal rates, really the number when I talk to people, that’s the number I want them to remember. What is your marginal tax rate? Because that’s your decision-making number. If you want to make a charitable contribution, if you’re in a 24% federal tax bracket, $100, that’s deductible to a charity, you’re going to save $24 in tax. It helps make decisions on traditional versus Roth contributions. You’ll understand what the tax ramifications are.

Today, HSA contributions would save you in taxes. Just having that marginal tax rate, knowing what it is helps make a lot of decisions on earning more money, or how the deduction is going to affect you. When I talk to our clients, that’s one of the most important numbers I want them to remember is where they fall in that marginal tax rate.

[00:11:33] TU: In ballpark numbers, Paul, knowing that, of course, it’s dependent upon one situation, whether or not they live in a state where there is tax or is not. Ballpark numbers, what do you see in terms of many of the clients from a tax perspective of the marginal rate and the effective tax rate?

[00:11:52] PE: When we looked at federal alone, a high percentage of our clients are in the 24% marginal tax rate and see their effective rate in the 17%, 18% area. State taxes, you can live in Florida, Tennessee, Texas and you have zero income tax. California, you see people 9%, 10%. Maryland, when you add in the local tax, you’re up to eight. It’s everywhere between 0% and 10% for the states. You need to calculate that in with the federal for really what your marginal rates are going to be.

[00:12:40] TU: I think the other key number for folks to make sure we’re defining and thinking about the implications would be AGI. When I think of AGI, everyone has likely heard of whether it’s considerations around student loan payments, or phase-outs for certain credits or deductions. Often, those are referenced according to someone’s AGI and the phase-outs based on AGI or adjusted gross income. Paul, tell us what is the AGI. How does that connect to one’s income and what’s subtracted from the income to come up with the AGI and then some of the reasons why that AGI number is so important?

[00:13:18] PE: Let’s talk about what the income is. Gross income, you add all your wages, dividends, interest, if you have capital gains, side business income, any money you’re bringing in, typically gross income. They’re what’s known as above-the-line deductions. The most common things we see are HSA contributions, 401(k), 403(b) contributions. They reduce your AGI. Reduce that gross income, gives you the adjusted gross income. Teachers will see some educator expenses. Residents will see student loan interest that can come off of there. But those are commonly referred to as above-the-line reductions and affect the AGI. You take all that income, reduce them by the above-the-line deductions and you get your AGI.

Now, where we see that really come into effect are student loans, where payments are based on income and will also lower AGI, lowers your payments. Lower payments increase the value of the forgiveness program. They do have a big effect on a lot of pharmacists. It’s a number that we work with people to manage as best they can. Make sure they’re using all their tools to take advantage of those programs.

The other thing you’ll hear a lot are phase-outs. This year, the child credits get reduced when a married filing joint couple’s AGI is above $150,000. You start to phase out there. Child care credits, start phasing out or phasing down. They don’t phase out at $125,000 AGI.

There are a lot of things we see our clients are affected by AGI. There are cases where contributing a little bit more to an HSA or make more into a retirement program can not only affect that marginal rate you’re paying, but can substantially affect some of the credits that would be available to you. The other thing that AGI is a factor in, is your long-term capital gain rates. It’s an important number to manage and work into your tax strategy.

[00:16:03] TU: Yeah. Paul, a couple of things I want to highlight that you said that are really important. Your comment just a moment ago about depending on where you’re at with AGI and some of the phase-outs, it might be helpful to make an HSA contribution, 401(k), 403(b). Obviously, depends on someone’s personal situation. But that highlights what we just talked about a few moments ago of really the differentiation between the preparation and the planning.

If we’re simply going through that preparation and we realize what’s been – and perhaps it’s too late, maybe we make an adjustment for the future. But if we’re planning and proactively looking ahead, we have an opportunity to project where those rates are going to be. And then what are some of those levers that we could pull to really maximize that situation.

The other thing I want to mention to make sure we don’t gloss over, and I think we’ve done so much of this at clients at YFP Planning that perhaps we take it for granted, is that student loans for good reasons, they’re very complicated. Unfortunately, the system is probably more complicated than it needs to be. Tax preparers and accountants may not necessarily be really well versed in student loan repayment strategies, and the intersection of the student loan repayment strategy and tax planning and preparation. We’ve gotten that feedback so many times, of folks that may have talked with someone else and didn’t understand the student loans or got conflicting advice. I think, really making sure for folks specifically that are pursuing loan forgiveness, that you’re really considering how that tax strategy is interfacing with that student loan repayment. Because there are some situations that, filing separately versus filing jointly, that may not be intuitive from a traditional tax planning preparation standpoint, do make sense when it comes to loan forgiveness.

[00:17:41] PE: Yeah. It will almost always cost you more in taxes to file separate. But there are so many cases that we deal with the savings and the benefits on a student loan, just more than make up for it. Substantially more than make up for it in some cases.

[00:18:00] TU: Next thing. Paul. I want to pick your brain on was, some common tax blunders that you’ve seen and things that folks may be on the lookout for. We’re not going to go through an exhaustive list or we’d be here for a long time. But a few things I want to highlight, probably one of the more common things I think we see, and perhaps leads to some headaches for those that are going through the filing phase, is realizing that they were under withholding. Tell us about that, Paul, and why that may be and some of the things that folks can be thinking about to prevent that.

[00:18:33] PE: Yeah. It’s one of the more painful things for both the tax preparer, and the client is when you say, “I know you’ve got a $5,000 refund last year, but this year, you owe $5,000 in taxes.” We see big swings when maybe you got married this year, and your W-2 is now filled out, married, filing joint and it’s not filled out in a way that your employer takes into account your spouse’s income. If you switch jobs in the middle of the year, sometimes the W-4 just don’t match up and you’re under withheld. If you’re working side jobs, if you’re not completing that tax withholding form correctly, you’re employed, both your employers are not taking into account the wages you’re earning at that secondary job.

Multiple jobs, spouse’s earnings not being calculated in are common things. The other items that kind of cause and contribute to that is, maybe you have self-employment earnings and you’re not only got income tax on that, but you’ll have the self-employment tax. If you had capital gains or stock options, sometimes those are going to sneak up and cause a tax liability you weren’t thinking about. This year, you’ve really got to be prepared in thinking about, if you receive the advanced child credits since July, and your AGI is over that phase out, some of that money or all of that money is going to have to be repaid. There’s a chance you weren’t eligible for any of that. You really need to be prepared if you’re getting it and you know your income, your AGI is going to be over $150,000. You should be thinking through whether that might be causing you a problem.

[00:20:36] TU: We’re running out of time, Paul, for folks to opt-out of any of those payments, have they been receiving them.

[00:20:41] PE: December is the only one you can opt-out now, and I believe it’s November 29 that you have to do it by. Just be aware of that one hit. That could cause some unexpected problems.

[00:20:56] TU: Better to find out in November, December than March or April.

[00:20:59] PE: Yeah. That’s what we always say is, if we can identify the issue in October, November, we have six months to be ready for the tax bill. If you find out in March, we’ve got to be ready to pay it right then and there.

[00:21:16] TU: That being a common blunder, unexpected balance due on April 15 as you mentioned, less than ideal for both the preparer and the client. The other bucket here would be non-qualified IRA or 401(k), 403(b) contribution. So tell us more about how this happens and some of the headaches this can create.

[00:21:32] PE: Switching jobs or having multiple jobs is where we’ll see the 401(k), 403(b) contributions go over that 19-5 maximum. A lot of people just put the percentage in. If you work for the same employer all year, they usually stop at the maximum. But if you’ve got multiple employers, they are unaware of what amount the other one has put into it.

Usually, if you discover this before December 31, it’s not that difficult to have the funds given back. But W-2s can be adjusted properly and you avoid some of the more difficult and time-consuming ways to correct it, if you don’t discover it till the end of following season. Knowing that it’s a problem before the end of the year and getting it corrected can save penalties and save you from having to go through the amended returns.

With IRAs, with pharmacists, the phase-outs, it’s more than likely you’re phasing out on your ability to do traditional IRAs. There are limitations on SEP IRAs. There’s a misunderstanding of what the rules are on them. Especially the SEPs, you really don’t know until you do your tax return. How much you can contribute to a SEP is very common. We see people contribute to traditional IRAs. SEPs that are over what they can contribute. Roths as well, and there’s a lot of hoops to jump through to correct it after the fact, where it’s better – our best practices with YFP is to advise people to, instead of putting the money in the funds during the course of the year, put it into an investment account. When we get an exact number, which you qualify for, you’re able to put those in the IRAs up till April 15th and we can deal with actual numbers rather than guessing what you qualify for.

[00:23:53] TU: Then having to correct it later, potentially.

[00:23:55] PE: Yeah. We’ve had people that have had to file two, three years of abundant returns to correct over contributions to IRAs.

[00:24:06] TU: The third bucket of potential blunders would be missing deductions and credits, of course, that may be applicable to folks. There’s lots of deductions and credits to consider, whether that’s childcare credits, adoption credits, tuition deductions, property taxes, charitable contribution. We’re not going to go through all of those. But Paul, are there some of these that jump out of common ones that we see folks overlooking or not taking advantage of?

[00:24:31] PE: Yeah, refis in home purchases. A lot of times when you’re purchasing a home, you’re paying your property taxes in advance and that gets overlooked frequently. Are the property taxes paid at the time of settlement? If you did refi or have a home purchase, you want to have that settlement sheet available to go through and see if it helps with itemized deduction. Side business expenses, if you have a side hustle, document everything you think is a legitimate expense.

The rules on business expenses are, they have to be business-related, ordinary, necessary, and not extravagant. Ordinary is, if someone else is doing the same type of business, they’re going to have the same type of expenses necessary. If you think of it as anything you are spending to get customers or grow how much business they do with you, there’s the argument that that’s a legitimate business expense. Their cell phone, internet cost, some of your continuing education, are all things that can legitimately be switched to a schedule C business. Not all of it, but a percentage of it that you can make a case or business expenses.

Then, one of the things, if you’re not maxing out your HSA, you should be matching out your HSA. People leave dollars on the table with the HSA contributions.

[00:26:15] TU: I think it’s just a good reminder, Paul, as you mentioned, side hustle expenses and the guidelines in the IRS that they have to be business-related, ordinary, necessary, not extravagant. We’re seeing more and more clients at YFP Planning, more folks in the YFP community that are pursuing side hustles or generating additional income from the W-2 income. Certainly, something to be thinking about and planning for, again, hopefully proactively. Which is a good segue into talking about some strategies to optimize one’s tax situation. You’ve already mentioned a couple and we’ve talked about some of these at length on other episodes.

You mentioned HSAs as low-hanging fruit. We’ve talked before about HSAs in the podcast. We’ll link to that in the show notes. You mentioned the side hustle expenses, and we talked briefly about the child tax credit. A couple others that I would like to focus on, Paul, starting with the child care credit, since this was an increase that we saw in 2021 and may be applicable for many that are listening. Tell us about that child care credit and the changes that we’ve seen this year.

[00:27:15] PE: Yeah. This was part of the recovery program. Right now, it’s only been increased for 2021. But you know, we expect that the next legislation that comes through is going – this is going to be a prime factor in it. Child care costs in 2020, you were able to take a credit for up to $3,000 for one child, $6,000 for two or more children. Most pharmacists qualified for 20% credit on those. Two kids, you are qualified to get up to a $1,200 credit. 2021, the amount that the credit is based on it is now $8,000 for one child, or $16,000 for two or more. Maximum credit is $3,200 for most pharmacists this year. For the child care credit, in 2021, you’re going to be looking at probably a 20% credit on $16,000 of expenses, $3,200 hours. Most pharmacists with two children or more. That’s what’s going to be available.

It’s a substantial increase in the amount of credit that’s available and it reflects – it better reflects the actual cost of childcare that we see, then that $3,000 and $6,000 power plant. That’s going to be a good benefit to a lot of the clients we work with. The other thing to look at is the dependent care FSA. That’s a great benefit that we see available to pharmacists that a lot of them are taking advantage of. But you can shift. The limit was $5,000. It was increased to a maximum of $10,500 that can be taken out of your wages and reimburse you for the child care expenses. The advantage of doing it this way, over taking the credit is, if you’re in a higher marginal tax rate, then the 20%. It’s better to have it in the dependent care FSA.

The other big advantage there, two advantages is, it reduces your AGI. The money that is withheld from the W-2 is not subject to the FICA tax. You could save another 7.65% there. It’s a great program if your employer offers it. Not all employers have increased the limit to $10,500. You really need to check what’s available to you through your employer. But if you have it, and you’re paying child care expenses, take advantage of it.

[00:30:09] TU: I’ve heard you say before, Paul, this is one of the more underutilized benefits that we see. Obviously, for those listening that have children, between the childcare credit, the dependent care FSA changes and the child tax credit, lots to consider here. And making sure we’re taking advantage of some of those opportunities.

[00:30:24] PE: Definitely.

[00:30:25] TU: The other thing too, and we won’t go into detail on today’s show, because we’ve talked about it several different times in the podcast related to 529s. But again, on the theme here of children and the context of college savings, that’s another optimization strategy to consider. Obviously, taking advantage of some of the state tax considerations and benefits there. We’ll link to previous content and 529 in the show notes.

Paul, I do want to wrap up this section on benefits talking about a topic that we have not talked about in detail on this show. Tim Baker and I did a question on ask YFP CFP on donor-advised funds, but we didn’t get into the strategy of bunching and some of the nuances of the donor-advised fund. For those that are looking at charitable giving opportunities, tell us more about what is a donor-advised fund and what is the potential strategy around bunching versus not bunching.

[00:31:19] PE: Donor-advised fund is an account you can set up, [inaudible 0:31:26] have an account. There’s a lot of faith-based organizations that have donor-advised funds available. But basically, you make your charitable contribution to that fund. Then you’re the one that controls how it is distributed from there, and it can be distributed over a period of years. It’s tax-deductible in the year you put money in. But it’s an opportunity, it gives you some tax advantages and gives you an opportunity to be more strategic about how you give.

One of the things that it does is, it makes donating appreciated assets easy. I have a fun setup and I can donate stock that I’ve had a significant gain on. When I do that, I’m not paying capital gains tax on the stock I’m donating. Let’s say I paid $5,000 for a stock that’s now worth $10,000. I get a $10,000 charitable deduction when I switch that over. I don’t pay $5,000 capital gain tax. It is one of the best ways to maximize the power of your donations to do more with less.

Donor-advised funds makes that easy and all that money is deductible when it goes in there. Now, that becomes a big advantage when you start talking about a bunching strategy. A lot of people, when the 2018 tax change came in and the standard deduction was raised, are kind of on the edge of being able to itemize or not itemize. When we talk about a bunching strategy, it’s, let’s say bunching charitable contributions in odd years. Instead of making a $5,000 contribution in 2021 and 2022, I’ll make a $10,000 contribution to the donor-advised fund in 2021. I get all of that $10,000 deductible in that 2021 year. That may put me $5,000 over the itemized deduction limit. The next year I take a standard deduction.

It is possible, without changing the amount of money donated in those two years, that I get an additional $5,000 worth of the standard and itemized deduction added together for the two years. Could be as much as $5,000 more than if I donate the money $5,000 one year and $5,000 the next.

[00:34:28] TU: Just by grouping those together, the dollar amount didn’t change, but putting them together maximizes the tax benefits.

[00:34:35] PE: Yeah. The donor-advised fund makes it easy to do that. Then, you can spread that money out and make the donations from the fund you control. It’s like having your own foundation. There are a lot of different options out there. There’s different investment opportunities with the money in it. There can be minimums, some different costs. But you put money in there, the capital gains on money left in there grow without tax. We see people who have stock options that have gone through the roof, can really do an amount of good, and wind up 50 cents on a $1, sometimes, of being able to increase the value of their contributions by that much.

[00:35:29] TU: My hope, Paul as we’re hitting the surface on several different optimization strategies is that folks aren’t feeling overwhelmed, but hopefully an opportunity to say, “Wow! How can I better strategize my tax situation?” I think this again, comes full circle and highlights the benefit of really more of the strategy side of the tax binding in addition to making sure we get that preparation taken care of.

We’ve got a checklist of things that we think you should be thinking about before the end of the year. We’re going to link to these in the show notes. These include much of what we talked about on the show around HSAs, and thinking about FSA carryover limits, 529 contributions, side business expenses, capital gains, preparing for the tax preparation phase, organizing documents. We’re going to put that list in the show notes, which will hopefully help wrap up the year and head into the new year with some confidence. I think that’s a good segue, Paul into what we are offering at YFP tax as two different options to help pharmacists that are looking for a tax preparation, and/or tax strategy and planning solution.

Paul, tell us more about our two options, the reporting only, and the year-round planning and reporting, and what folks can expect from that service and where one or the other may be a good fit.

[00:36:47] PE: We kind of talked about in the beginning, the tax preparation reporting only is just doing your historical tax return and meeting with you and just talking about is there anything you can do that may change the tax situation for the year. The reporting only is good for, if all your income is coming from W-2, if you don’t have a business or planning on having one soon, don’t have real estate income or any substantial retirement or investment accounts, at this point, all your income comes from inside the country, that may be a good fit for you. You’re really not getting the expert advice, you’re getting preparation and kind of basic information on what happened last year and not so much of the future. That’s a fee. We’ll have a base fee, and if you require additional schedules, there may be additional cost if you move from one state to another, maybe some additional costs. It’s more flat lay transaction, we prepare your taxes.

What we’re introducing this year is a year-round planning, which, if you’re self-employed, if you’re thinking about starting a business, have that side business, if you get K-1s from partnerships or LLC, real estate holdings, if your investments have grown and your retirement accounts are nearing that $100,000 mark, maybe there’s things that you’ll have options that somebody else may not. Multiple streams of income, income from outside the US, these are all things that probably point you in the direction of needing a year-round planner.

The expert advice will have a bigger effect on your situation, and having a long-term partner to help you reach your goals. That’s kind of what we’re positioning to work with you on a continuous basis. When we do this, we’ll meet with you, do the taxes and the tax review. We’ll talk about the upcoming years as well as last year. We’ll meet with you during the course of the year to do a projection of where you are and talk about things that we can do in the third quarter, fourth quarter to prepare and make sure we’re ready for the following year. With that, we’ll have a team available when you have questions during the course of the year to answer those questions. That is where we’re geared to have the most impact for clients and pharmacists that want to work with us. I think that we’re well situated and prepared to be a long-term partner and that’s what we’re looking to do.

[00:39:54] TU: Again, two options we have, as Paul outlined, the reporting only and the year-round planning and reporting. More information about both, you can find at yourfinancilpharmacist.com/tax. We’re excited to be opening up the tax services to 125 pharmacist households. First come first serve. Many may already be aware that we do tax planning preparation for those that are clients of YFP planning. We’re going to be opening up these 125 spots to those that are not currently clients as we’ll be doing that work already for those that are clients. Process works and go to yourfinancialpharmacist.com/tax to learn more information. You can join the waitlist.

Early January, we’ll be sending out an engagement letter. You can then upload your documents, complete a questionnaire. We are a paperless tax processing and system. Then from there, there’ll be a completion of a preliminary return and then an opportunity to review that information, sign it and then e-file it.

More information in yourfinancialpharmacist.com/tax. Paul, grateful for your time, expertise contributions on the show and looking forward to the upcoming tax season.

[00:41:02] PE: Thanks, Tim.

[OUTRO]

[00:41:03] TU: Before we wrap up today’s episode of Your Financial Pharmacist Podcast, I want to again thank our sponsor, the American Pharmacists Association. APhA is every pharmacist ally advocating on your behalf to address the issues that are affecting you most, such as PBM, and payment reform, value over volume and provider status. Make sure to join a boulder APhA to gain premier access to financial educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join and using the coupon code, YFP. Again, that’s pharmacist.com/join, using the coupon code, YFP.

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 184: How to Optimize Your 2021 Tax Strategy

Posted on December 31, 2020November 2, 2022 by yfpadmin

How to Optimize Your 2021 Tax Strategy

Paul Eikenberg, YFP Director of Tax and CFO, joins Tim Ulbrich to talk about how to optimize your tax situation in 2021. Paul discusses the difference between tax planning and preparation, common tax planning mistakes he sees pharmacists making, and strategies pharmacists should consider employing to optimize their tax situation.

About Today’s Guest

Paul has supported hundreds of pharmacists in both tax filing and tax planning to maximize their deductions and avoid overpaying. In addition to being an Enrolled Agent (EA) and YFP’s Director of Tax Services, Paul Eikenberg brings skills from his extensive business experience to YFP. Paul has owned franchises, been a VP of Franchise Operations, and a Credit Union Board Chair.

Summary

On this week’s episode, Paul Eikenberg, YFP Director of Tax and CFO, breaks down how to optimize your tax situation in 2021. Although we’re only ending 2020, planning for your future tax situation is a large part of your financial plan as it can have major financial implications down the road.

Paul explains that tax preparation is merely a historical look at what happened last year. On the other hand, tax planning is oriented in the future. The aim with tax planning is to match your tax plan to your goals and financial plan. This can help you make investment and other financial decisions while optimizing your earnings.

Paul shares three tax strategies that you can use to optimize your tax situation in 2021: legal tax avoidance, deferment, and pay now with tax free gains. He breaks down how each of the strategies work and what type of financial moves fall into these approaches.

YFP Planning comprehensive financial planning clients have tax preparation and tax planning as part of our services. This year YFP is expanding our tax services to 50 additional pharmacist households. Learn more about these services and how you can file your taxes with YFP here.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Paul, it’s great to have you on the show. It’s been a long time, way back on Episode 070, and so for our listeners who aren’t familiar with who you are and the work that you have done and are doing with YFP, share a little bit about your background and tell us about that work that you are doing.

Paul Eikenberg: Well thanks for having me, Tim. And you know, it’s an exciting time at YFP. I joined three years ago. And I’m the oldest member of the YFP team, so my background’s a little more varied than everybody else. But I grew up in a small business, and I have started a rental car business as a franchisee, joined the franchise company and worked a few years as the Vice President of Franchise Operations there. So I was involved in a lot of startups with franchisees in one role or another. And career after that was as a franchisee in the computer, hardware and repair business. And did that for 15 years. After I sold that business, I worked as a Vice President of a management service company with a lot of responsibilities for budgeting for our largest clients and their IT planning and budgeting role. And in between all that, since I had a good accounting background, I did taxes frequently in between my different careers. I spent time working with Jackson Hewitt, H&R Block, and when my role a few years ago was downsized, I called my financial planner, Tim Baker, to talk about what should I do now?

Tim Ulbrich: Right.

Paul Eikenberg: And you know, when we talked about financial freedom, I had the financial freedom to kind of choose what I was going to do next. And then one conversation with Tim, I said, “I think I might just do taxes, work real hard part of the year, and not so hard the rest of the year.” And Tim said, “Funny you should say that. I really want to add tax services to my — you know, to the offering.”

Tim Ulbrich: Yeah.

Paul Eikenberg: “That I have as a financial planner.” And from there, I went and took the test for the EA, which is Enrolled Agent, and worked part-time with a CPA firm and part-time with Tim Baker up ‘til last year, when our client roll was large enough that I could just start working for YFP. And I’ve enjoyed it immensely.

Tim Ulbrich: And we are super grateful — I know I speak on behalf of the team — super grateful to have you, your expertise. You’ve provided valuable input to the business. I mean that sincerely. It’s been really a pleasure and a blessing to have you as a part of the team. And as you were retelling that story, Paul, which I’ve heard you say before, the part about working hard during the tax season and then not so much the rest of the year, I think we’ve busted that up a little bit as we needed to lean on you in so many areas for the business, and we’re appreciative of that. And I think some of our listeners may know that we do tax, as you mentioned, as a part of our financial planning for clients because we so firmly believe that we need to wed the financial plan with the tax plan for a variety of reasons, which we’ll talk about here today. But folks may not know that even for those that are not comprehensive planning clients that we do offer tax services. And so we’re excited to give the community a little bit of an inside look into why tax is such an important part of the financial plan, why it’s worth investing in, and how they might consider optimizing their 2021 strategy. And to that point, that’s what we’re talking about here today. We’re talking about considerations to optimize your 2021 tax situation. Now, I know the listeners are thinking, wait a minute, 2021? I haven’t even filed my 2020 taxes yet. And I get it, but we’re here to really tell you and reinforce that tax planning is a big part of your financial plan. And as with any aspect of the financial plan, you know us by now, we like to be intentional — as intentional as we possibly can with it. So that’s what we’re digging into this episode at the end of the year so that you can jump into 2021 with an understanding of options and strategies with confidence that can help you be more intentional with tax planning and hopefully allow you, legally, to bring home as much of your income as possible. And so Paul, kick us off by explaining the difference between tax preparation and tax planning and why both are so important.

Paul Eikenberg: Tax preparation is really the historical look at what happened last year. So it’s required, you have to do it. But it’s really somewhere between January and April, you collect all of the information on what happened last year and report it to the IRS. There’s a couple of adjustments you can make during that period of time, but pretty much it’s a look back at things that have been done and just reporting and paying your taxes. Where I get more excited and I think we’re doing some of the best work at YFP is in the planning portion of it. And that’s where you can have more impact on your financial plan and get into that financial freedom. It’s more future-oriented. And what I enjoy about the work we’re doing with the comprehensive clients is that we’re able to match their tax plan to their overall goals and make decisions based on where you are and where you’re going. So the more complicated the filings, you know, the more helpful it is. And the other thing that’s a huge impact is for people on the Public Service Loan Forgiveness program, how you do your taxes can make a big difference and have a long-term impact. And just that coordination between a financial plan and your tax strategy makes a big difference.

Tim Ulbrich: Absolutely. So the preparation, I think our listeners are very well familiar with that. They either do it every year, perhaps they do it themselves, maybe they do it with one of the Big Box entities that you mentioned at the beginning of the show, maybe they hire a CPA. So I think we understand, we get that. We’re looking backwards. But I think you articulated so well the planning, the proactive, the strategy, the making sure we’re being intentional, looking ahead is so important. And we’re going to give some good examples of that today throughout the show. Now, we could do a whole episode I’m sure, Paul, of mistakes that you commonly see people making regarding tax planning. But we’ve got other things we want to get to as well, so hit the high points for us. What are some of the most common mistakes that you see people making regarding tax planning that our listeners can be on the lookout for?

Paul Eikenberg: Not taking advantage of employer benefit programs. We’ll see people with dependent care benefits that are available to them and not taking advantage of them. Not coordinating between spouses. If you’re not maxing out your retirement programs, is there a greater benefit of contributions to one spouse or the other? Same with HSAs are one of the best tax tools out there. People not taking advantage of the HSAs. Missing a tax credit because they went over the phase out that if they planned a little different, they wouldn’t have gone over the phase out. And one of the common things we see is not so much changing the taxes but not having your W4s correct with the employer and having a surprise balance due in April when you file taxes. So those are a few of the things. And then you see some people making decisions that are based on tax ramifications rather than making financial decisions and understanding what the tax ramifications are. So you do see some errors there with people.

Tim Ulbrich: Great point. And we know there’s a lot at stake here. You know, one of the statistics I like to give pharmacists, especially young pharmacists, as they’re just making that transition into their career but is really good for all of us to think is there’s a lot at stake here. And the statistic I give is that pharmacists on average, using the Bureau of Labor statistics data on salary, using a normal trajectory of career in terms of a timeline of work, on average are going to make $9 million over their career. Obviously, we are assuming for income increases and things that are happening. And $6 million of that, roughly speaking, will actually flow through their bank account. And so the difference there, the delta of $3 million, is in part what we’re talking about here related to tax. And so there’s a lot at stake and a lot that we have to consider. And I would argue the earlier we get this right and the earlier that we invest in the right resources to make sure that we have it right, we’re making decisions appropriately, obviously we’re going to benefit from that throughout our career. So Paul, let’s break down for a moment a couple key terms that I sense will come up throughout our discussion today. And again, we’re not intending for this episode to be all comprehensive on tax, but a couple that I know will come up in the discussion are marginal tax rate and AGI, or Adjusted Gross Income. So define those terms for us.

Paul Eikenberg: Marginal tax rate is to me one of the key numbers people should understand. And your marginal tax rate is the tax you pay on the last hour you earned and your next hour. And there’s a lot of misconceptions that when you jump a tax rate that it goes back to the first hour. It’s a graduated tax system, so when you jump a tax rate, you’re only paying that tax on the dollars above that amount.

Tim Ulbrich: Right.

Paul Eikenberg: So marginal tax rate, federal rates, we’ll typically see pharmacists in the 24%, 22% and sometimes 32% tax rates. And that’s federal tax. And states can be from 0% to 12% in marginal tax rates. So you know, we will have pharmacists typically with that combined and if you take a local tax rate and add it in there if you’re in a city with a local tax, we’ll see typically marginal tax rates from 30-40%.

Tim Ulbrich: Ouch.

Paul Eikenberg: When you add them all together.

Tim Ulbrich: Yeah.

Paul Eikenberg: Yeah. Why that’s important to know is because when you start making decisions on a Roth versus a traditional retirement, max in your retirement versus putting the money somewhere else, making a charitable contribution, if you understand your marginal tax rate, you know the general tax ramifications of if I make $1,000 contribution this year, and I’m itemizing, and I’m in a 35% marginal rate, I’m going to save $350 in taxes. If I put $1,000 more in an HSA than I was planning, I’m going to save $350 —

Tim Ulbrich: Yep.

Paul Eikenberg: In taxes. So it’s kind of a key number in decision-making and understanding what the general tax ramifications are for you. Other key number for a lot of our clients is Adjusted Gross Income. You know, we mentioned Public Service Loan Forgiveness program before. Your student loan payments are based on an Adjusted Gross Income. A lot of the phase-outs, do you qualify for a lifetime learning credit? Can you deduct student loan debt? That AGI is the number you use for the qualifier for a lot of different tax programs. And it’s Adjusted Gross Income. So when you calculate Adjusted Gross Income, it is your wages, net rental income, net business income, dividends, interest, all that kind of gross income goes in and then you’re able to reduce it by what we call “above-the-line deductions.” That’s going to be your HSA, your FSA, your dependent childcare, student loan deductions that are allowed. That reduces the kind of gross wage, gross income, to an Adjusted Gross Income. And that AGI is a key number.

Tim Ulbrich: And let’s hold that thought. We’re going to come back here in just a moment as we talk about tax strategies and even further connect what Paul just said there. So let’s dig into those tax strategies. And we’re going to look at a few different areas, tax avoidance, tax deferment, paying now, and a hybrid approach. And so let’s start with tax avoidance — and I hope it goes without saying that here, we’re talking about tax avoidance within a framework, of course, of following the law. So nothing we’re suggesting is avoiding something that we shouldn’t be avoiding. So Paul, when it comes to avoidance, what are we referring to here? And what is included? What types of financial moves would fall under this strategy? And I know you’ve alluded to a couple of them already with the HSA, FSA and some other things.

Paul Eikenberg: Let’s talk about the HSA a little bit more because that to me is the No. 1 tax tool. If you’re on a health insurance program that allows an HSA, it’s got the most tax benefits too. For a family this year, the limit is $7,100 that you can put into an HSA. That money, if you’re having it deducted from your paycheck, it goes in before not only income tax but before FICA tax. So it goes in pre-Medicare, pre-social security tax. It carries over from year-to-year so you can build the fund there, you can invest it, and that money will grow tax-free. And it is the only tool that goes in tax-free, grows tax-free, and when you spend it on medical expenses, it comes out, it’s never taxed. So it has multiple tax benefits and is really the best tool available to you to get the most out of your money.

Tim Ulbrich: And I would point, Paul, our listeners — before we go onto others in the avoidance category — we feel so strongly about the HSA, we’ve covered it a couple times. We’ve got a great post by Tim Church on the blog. Episode 165, we talked about the power of the Health Savings Account, broke down further what Paul is talking about and spent an entire episode on that. So if you’re wondering more about an HSA and have one, aren’t sure, want to evaluate where it may fit in your financial plan, I’d recommend our listeners check out those resources, which we’ll link into the show notes. So what else beyond the HSA would fall into this category of avoidance, or at least common ones?

Paul Eikenberg: One of the more frequent things you hear is treasury bonds. The interest on those grows tax-free. Municipal bonds, you know, there will be some tax advantages to those. So they’re one tool. Another tool that people sometimes miss is the difference in taxation on long-term capital gains, short-term capital gains. If you’re making money on stock investment, property investment, you’re taxed at a lower rate for a long-term gain — and the definition of long term is 1 year plus debt. You’ll see some people sell a stock, short-term gain, pay ordinary at your marginal tax rate whereas on a long-term gain, most people that we work with are in a 15% tax rate. So there can be a 17% in that by timing how long you keep it. Another area we see people not take advantage of is the dependent care — and again, that’s a deduction if it’s a payroll deduction that comes out pre-social security and pre-Medicare. Other item that we’re seeing some activity on is the home sale exclusion. And this is designed so that if you move into your home for more than two years, you make a gain on it, the gain on that sale is excluded up to $250,000 for a single person, $500,000 for a married couple. If you’re somebody that likes fixing up a home, there’s some great tax benefits that buying a fixer-upper, working on it, moving in it for two years, and then selling it and moving to the next one.

Tim Ulbrich: Especially if somebody’s in a market where, to your point, a fixer-upper may want to buy something knowing the appreciation will be good. It’s an interesting different take on kind of real estate investing than we may think of as buying other properties but rather with this home sale exclusion. And if I understand you correctly, if somebody were married and they bought a home for $400,000 between the two of them, each having $250,000, when they go to sell it, as long as it’s below $900,000 when they sell it, which would be an incredible gain in value and appreciation on that home, that that gain and that growth is tax-free.

Paul Eikenberg: Correct. And you know, while it sounds like in most areas of the country an incredible gain, San Francisco, Seattle, some of the northeast, it’s not as unusual as some of the other parts of the country.

Tim Ulbrich: That makes sense. And I think that one will be of great interest to our listeners. The other one, Paul, which you mentioned and I just wanted you to expand on a little bit more was the childcare bills from an FSA, the 129 Plan. Tell us a little bit more as I suspect that’s something that folks are already taking advantage of or could be taking advantage of going into the new year.

Paul Eikenberg: We see a lot of people not taking advantage of it. There are a lot of people that do, but you know, that dependent childcare employer plan typically lets you have $5,000 deducted from your paychecks and then you can get reimbursed for childcare expenses. And there is a credit available if you don’t take advantage of it. And for most people, it’s 20% of the childcare expenses, up to $3,000 for one child, up to $6,000 for more than one child.

Tim Ulbrich: OK.

Paul Eikenberg: But what the FSA does for you is first, it makes the deduction pre-social security, pre-Medicare. The other thing it does is if you have one child, it’s a $5,000, not a $3,000 plan.

Tim Ulbrich: Right.

Paul Eikenberg: If you’re in the 32% bracket, it’s a much better benefit than if you are taking a 20% bracket. So we talk avoidance, you know, it avoids taxes forever is what we’re kind of talking about avoidance here. I’ll come back to one of my favorite quotes from a tax court judge is that there are two systems of taxation in the United States. One for the informed and one for the uninformed, and both are in league.

Tim Ulbrich: And I’m glad you mentioned that. One of the books I’ve referenced on the podcast before, which I would reference again to our listeners — we’ll link in the show notes — is “Tax-Free Wealth” is one of those resources that really just opened up my eyes to exactly what you just said there and how important it is to be informed of the options. And we’re talking, again, in this first category of avoidance, we’ve already covered a lot. We’re just scratching the surface, but we’ve talked about an HSA, long-term capital gains, we talked about childcare bills and FSA, we talked about home sale exclusion. So again, I think just highlighting the importance of understanding all of the options that are available to you and then the power of working with somebody such as yourself to really customize this and apply it alongside of the financial plan, of course with our great team over at YFP Planning. So that’s No. 1, avoidance. No. 2, Paul, is this tax strategy of defer. So tell us what you mean by this and some common financial moves that fall under the defer category.

Paul Eikenberg: The most common thing when we talk about deferring is 401k’s, traditional IRAs, if you’ve got self employment income, but they’re more of the traditional retirement buckets where you’re putting money in in the current tax year, you’re deducting it from your income, and you’re deferring taxes on that money and the growth of that money, the investments with that money, until you retire and start taking on that. You know, it’s one retirement strategy. And where that makes a lot of sense is when — or has extra benefit to you — is when lowering your Adjusted Gross Income helps you overall in addition to that retirement. There are phase-outs that you can manage sometimes by using the traditional retirement programs. And one of the best examples is if we go to the student loans that are in the forgiveness programs. Lowering that AGI has a tax benefit, but it also is, you know, helping manage what your loan payments are going back and it helps maximize the value of that forgiveness program.

Tim Ulbrich: Yeah, and we spent — by we, I mean our planning team and working with you — spend a lot of time on this topic. And one of the things we are not shy about tooting our own horn on is that it’s not very common that financial planning teams and tax professionals will have a good understanding of student loans. And that’s our bread and butter.

Paul Eikenberg: One of the really interesting things there is from typical tax preparation and planning, you almost never want to file married filing separately. But in the situation of student loans, it’s not unusual where that’s what makes the most sense, even though it’s not a good decision strictly tax-wise, you know, when you do the comparison. It’s an obviously smart move overall financially.

Tim Ulbrich: And that’s a great example, Paul, of making sure you find somebody — especially for those that are facing significant student loan debt and/or strategies which have tax implications, like we’ve talked about here with forgiveness. But that’s not a common tax strategy. But when you layer on the implications with the student loans, you can see where someone may get in trouble if they’re working with somebody that may not be as familiar with student loans certainly. So while you’re talking here about traditional pre-tax buckets, 401k, 403b, traditional IRAs, since we’re heading to 2021, remind us of what to expect on the retirement contribution limits for these types of accounts.

Paul Eikenberg: Typically, 401k’s, 403b’s, right now, the limit is $19,500. If you’re over 50 years old, you have a catchup of $6,500. Those are where you max out on most of the employer programs. IRAs, $6,000, you know, most pharmacists are not going to qualify if they are under a retirement program. There are some strategies for doing back door IRAs and increasing the amounts you can contribute there.

Tim Ulbrich: And we’ll link in the show notes, we have two great resources on that. One of the most common questions we get is on the back door Roth IRAs for the exact reason that Paul mentioned. So we have a post, “Why Most Pharmacists Should Do a Back Door Roth IRA,” and then we also covered it on Episode 096 of the show, How to Do a Back Door Roth IRA. So we’d recommend looking at those resources and of course reaching out to our planning team for additional help. So we talked, Paul, about avoidance. The goal is legally not to pay taxes. We talked about HSA, finding ways to maximize in terms of the long-term capital gain rates and the savings that would come there, childcare bills in an FSA, home sale exclusions. Then we just talked about deferment with the most common being around lowering your Adjusted Gross Income from traditional pre-tax buckets. We talked about the implications there as it relates to student loans. Again, just scratching the surface. So the third area that I want to discuss for a few moments is that you pay them now, you pay the taxes now, but the gains are tax-free. So give us some common examples of things that folks want to be thinking about here.

Paul Eikenberg: Biggest thing is the Roth 401k, Roth IRAs. The strategy there is that you’re putting money in that you’re paying tax on this year but all of the growth of the investments on that are not taxed when you take it out in retirement.

Tim Ulbrich: Right.

Paul Eikenberg: It is your income. You’ve got that income, and if you’re not reporting, it’s not taxable in your retirement. And that helps you in some ways in retirement that’s not reflected in your AGI and not reflected in your taxable income. So there’s capital gains that that can affect in your retirement. There’s dividends that won’t be taxable to the same extent if a lot of your retirement income is not reflected in your AGI, your taxable income. The other advantage now is suppose you’re maxing out at $19,500 on your traditional retirement and you don’t have another tool to put more money in. $19,500 in a Roth IRA, the limit’s the same, but the value of it is significantly more in a Roth. So it really gives you an opportunity to increase — even though the limit is the same, you’re really putting more money in your retirement program in a Roth than a traditional IRA.

Tim Ulbrich: That makes sense. And one of the reasons — you know, we talked about the HSA already — one of the reasons we always say is the HSA, the Roth is kind of low-hanging fruit, and I think you summarized that well. The other thing that would fall in here, Paul, would also be a 529, right? I kind of think of a 529 almost like a Roth for college in that it’s going in with after-tax dollars, growing tax-free, and then you can withdraw it as long as it’s being used for the qualified educational expenses. So it has some more strings attached to it because of the nature of what it’s being used for, but would you put that here in this bucket as well?

Paul Eikenberg: Yes. And you know, 529s vary from state to state. In some states, the state that allows you to deduct it from your income for state tax purposes and has a higher limit, it’s more valuable than, say, if you live in Florida and there’s no state tax. So that one is definitely a good tool and belongs here, but it varies a little more state-to-state and individual situations.

Tim Ulbrich: Great point. And so we’ve talked about avoidance strategies, deferment strategies, we’ve talked about a third strategy, which is just pay tax now, gains are tax-free. And so Paul, I wanted to transition here for a moment. One of the things you talk about, which I love, is this concept of a tax toolbox and you know, really is inclusive of things that folks should be considering that are likely to be most relevant to their financial situation and to their financial plan as it relates to tax strategies and optimization. And we’ve covered a bunch of these already. HSAs, FSA health dependent care, we’ve talked about Roths, we’ve talked about IRAs extensively. What else would you say from your work with our clients at YFP Planning that you would see as major considerations in the tax toolbox?

Paul Eikenberg: One of the things that is looking like it’s going to be more common and really has only come into effect since the 2018 tax cuts and job act increased the standard deduction is bunching itemized expenses. A lot of people who used to itemize aren’t able to itemize anymore. The only deductions we see are charitable contributions, interest, and estate taxes. Estate taxes are now limited to $10,000 on a return. So we’re seeing people start bunching charitable contributions into one year and alternating standard deduction, itemized deduction, standard deduction, itemized deduction as they’re going on. And when you look at it, you know, over a two-year period, you’re able to get a greater tax benefit if you are putting all your charitable contributions in one of those two years.

Tim Ulbrich: OK.

Paul Eikenberg: You have some options with property tax, but really, it’s charitable contributions that make the most difference here. And there’s something called a donor-advised fund where you can make a contribution, put it in a fund that is invested and grows and it’s not taxed. The fund is actually the charity. But a donor-advised fund, you’re able to make recommendations on where that money goes, basically you’re controlling where the donations go. So on December 31, I can put money into that donor-advised fund, and it counts for that year along with any contributions I made. So it’s a great way of still making the donations but grouping them in one year.

Tim Ulbrich: Got it. OK. The other thing too that comes to mind, Paul, is we know many of our community is engaging with or thinking about a side hustle of some sorts that may evolve further even beyond that. We of course feature many side hustle stories on this show. I know many of our clients would fall into this category as well. Not intending this for them to be advice that they’re going to run with, but just general considerations for folks that find themselves in this category of side hustling.

Paul Eikenberg: Side hustles are a great way of generating extra money and getting some of the benefits from a tax side. So to be deductible, an expense for a side business needs to be considered ordinary, necessary and not extravagant. Ordinary means — for a tax definition that other people doing the same type of work are going to have similar expenses to this. Necessary has a fairly broad definition of does it help you generate more business, do that business better, or qualify you, you know, continuing education? Not many side businesses can be done without internet or cell phones today. Conference travel, things to generate new business. There are a lot of expenses there to acknowledge to get supplies, to — there’s times where meals to generate more business or to produce business make sense. So there are a lot of things that are deductible expenses from that side income that have a professional/personal benefit to the business owner. You know, I have a book of a couple hundred pages of ordinary business expenses.

Tim Ulbrich: And I firmly believe — I know I’ve heard Tim Baker say this a ton of times — that for those that are in a side hustle, have their own business, thinking about it, having your own personal financial plan and house in order is so incredibly beneficial to not only what the business will become but also to your sanity and to your peace of mind. And I can say that firmly from personal experience. And so I would encourage you, those that fall into that bucket, that’s an area we’re spending a lot of time with our clients right now. Head on over to YFPPlanning.com, you can schedule a discovery call, see if our services would be a fit for you. And I think making sure you’ve got a strong financial foundation in place is so important to the success of that side hustle or business. Paul, as we wrap up here, you know, I think we have briefly, succinctly, yet also covered a lot in terms of considerations. I know for many folks, it can feel overwhelming. I mentioned at the very beginning that we’re excited this year to be expanding our tax service and offering it — you’ve been leading — for our comprehensive financial planning clients that are a part of our comprehensive financial planning services to those that maybe want to engage with us on that part of their tax plan to see if it would be a good fit for them going forward. So briefly, what can our community members expect if they sign up for YFP to be working on their taxes for the year? What should they expect in working with you and your team?

Paul Eikenberg: We’re offering outside our comprehensive clients, the first step is preparing our 2020 return. We work remotely. We were built to be paperless. So it is a unique thing and business. We basically — the engagement, there’s an engagement letter that goes out, usually in January, to our clients. They sign the engagement letter and you get a secure link where you can upload your tax paperwork. We’ll take a look at your previous year return, and we take that work, go through it, look for any missing pieces of information. You’ll have a questionnaire to answer, all electronically. And we put together a return. If we need more information, we contact you to gather that. Once we have the return, we schedule a Zoom appointment and review the return, have it signed through DocuSign and file electronically. During that process, if there was anything that kind of obvious you were overlooking, should be thinking about, we’ll point it out there. And then with the clients we’ll be doing the returns for — you’ll have an option to engage for us a mid-year tax projection where we can take a look and see if you’re withholding’s on target and if there’s any tax tools you’re not taking advantage and talk about that with them.

Tim Ulbrich: As we wrap up this week’s episode of the Your Financial Pharmacist podcast, I’d like to remind you about our tax planning and preparation service that we’re going to be offering to 50 pharmacist households in 2021. You can learn more about that service, including what’s offered, what’s included, how much does that service cost, what you should expect by going to YourFinancialPharmacist.com/filemytaxes. This is the chance to apply much of what you heard throughout today’s episode and really be able to apply that personally to your individual situation. What a great way to get 2021 off to a great start. So again, that’s YourFinancialPharmacist.com/filemytaxes. You had a chance to hear from Paul on today’s episode, hopefully you got some insights into his expertise, what he’s able to provide, and certainly has adequate experience working with many clients over at YFP Planning. As always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave us a rating in Apple podcasts or wherever you listen to the show each and every week as that will help others find the Your Financial Pharmacist podcast and hopefully benefit from the education and the material that we do each and every week. And of course, I wish everyone a happy and healthy New Year. Looking forward to 2021, and I hope you all continue to join us on this journey as we all strive towards achieving financial freedom. Have a great rest of your day.

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