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

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

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

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

• YFP Tax
• Join the Waitlist for the 2022 Tax Filing Season
• YFP 165: The Power of a Health Savings Account
• Why I’m Not Using my Health Savings Account to Pay for Medical Expenses
• Inflation Reduction Act of 2022
• Email Sean Richards: [email protected]
• Your Financial Pharmacist Disclaimer and Disclosures

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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