Episode Transcript
Daniel Wrenne: As you guys join in on the live show, we've been doing one-on-one guests sort of format.
Daniel Wrenne: So today we are planning to talk about some of these end of year planning strategic tax type strategy moves to think about. So what I thought would be a great thing to do today was to bring in our whole team. So right now we got the power team.
Daniel Wrenne: Collectively we have a serious amount of financial geek power right now between the four of us.
Jen Quire: There's a lot of nerdiness present
Daniel Wrenne: here.
Daniel Wrenne: So we're gonna try to stay out at getting too geeky with this stuff and hit the high points. But anyway, we're excited to talk through some of these end of year tax moves and hopefully you can get some nuggets or two that you can use in your situation.
Daniel Wrenne: The plan today was to talk through some of these tax strategies that you can think about using around this time.
Daniel Wrenne: Even if it's not the end of the year, and you're listening to this on the recorded version. These are the types of things you can really do anytime, but if you haven't done 'em and it is the end of the year, it's definitely something to really think about. We'll also talk about some of the housekeeping stuff to think about.
Daniel Wrenne: And then wrap up with some of this prepping for the new year. So things to think about as we start to plan for what we want to accomplish next year.
Daniel Wrenne: That's always a hot topic as we're recording this, it's December. We're right in the stretch of the holiday season, and we're getting down to the last 10 days of the year. So everybody's thinking about what are we gonna accomplish next year?
Daniel Wrenne: So let's jump into some of these tax topics. There's a bunch of these that we can talk through, but I wanted to talk about some of the minimization strategies first. So, maybe we could start with Jeff.
Daniel Wrenne: So let's talk about the Back-Door Roth IRA, IRA, HSA. All that stuff. I know it's not exactly a deadline to have this done by the end of the year. But I feel like it's something people should be think about doing before the end of the year.
Jeffrey Wenger: We've got the Back-Door IRA and the health savings account are two to be looking at as we get to the end of the year here.
Jeffrey Wenger: One reason I guess, if again real basic if you don't know the Back-Door Roth IRA is a way for the high income earners to be able to get some money into a Roth IRA. There are income limits for both deducting on the regular IRA, and then there's income limits for contributing to a Roth. The back door is the way that we do this to get around that and still get some tax-free money.
Jeffrey Wenger: The actual deadline to contribute to an IRA for 2022 will be the tax filing deadline, which I believe is the 17th this year coming up maybe the 18th. Normally it's the 15th. But that's coming up.
Jeffrey Wenger: But if you wanna make it just a little easier on yourself as far as the tax filing goes, or your tax preparer, if you make that contribution by the end of the year, there's one less line or couple less lines you actually have to fill out on your tax return to get that right be on Form 8606.
Jeffrey Wenger: But, yeah, you can do up to $6,000 for an individual that's per individual. So if you have 17 IRAs out there, you can't make 17 different contributions of $6,000. And then the HSA is another one to look at. Maybe of your last pay stub already.
Jeffrey Wenger: You can look and see if you've been contributing through work. Did you hit that maximum? And then if not, you can go ahead and make an individual contribution there to top off the account. But, good time to be reviewing how much has gone into those accounts just to see
Jeffrey Wenger: where we're at.
Daniel Wrenne: Yeah, the HSA and Back-Door Roth those are some of the best tax shelters out there. So for sure first thing is making sure they're getting funded and ideally they're funded both in the calendar year. But if you get down to the stretch, you can fund both of those last minute, right before taxes are filed.
Daniel Wrenne: so then there's the 401K, 403B, 457. And so those have a little bit different timing rules. Those do have a hard deadline. So, Hugh, you wanna talk about funding, making sure we're funding those appropriately. The 401K, 403B, 457. All those work retirement plan?
Hugh Baker: Yeah. So at this point those are funded through payroll. So at this point in the year, if you're not on base to max out for the year, that one's probably gone. But you can look forward to next year and make sure you get that set up. So $22,500 is the annual max for the 403B and the 401k for 2023. So yeah, now's a good time for those types of accounts to make sure you're on pace to max out for next year.
Daniel Wrenne: What are some of the things... I mean, I know I've working with families a lot of times we'll ask the question, "Are you funding those plans?" And the answer is yeah, "I'm maxing it out". But oftentimes, when we kinda look at the pay stubs, it's not being maxed out. So what happens? Maybe if you're listening, it's probably best to verify that, right?
Hugh Baker: Yeah. So you're gonna wanna look at your pay stubs to see what you're on pace for. So $20,500 is the annual max for 2022 for those types of accounts. If you're not maxing it out, most people if you're an Attending Physician, you're probably gonna be in a lower tax bracket in retirement. So gonna make sense to defer any, as much income as possible during your main working years.
Hugh Baker: So yeah, that's the main benefit missed out there. But also if you're going for public service loan forgiveness, another reason to make sure you're maxing those out to lower that income or whenever those payments do come back, who knows when that will happen, but if you're on an income driven repayment plan, that's another way to maximize that benefit.
Daniel Wrenne: Yeah, I think the issue that happens, with a lot of these things is we put it on autopilot and we forget to check on it. So it's like, "Yeah, I'm maxing it out". But I started it in 2008 or something.
Hugh Baker: Right. Or you know, we'll see. Yeah, I'm maxing it out and yeah, you hit $19,500, but that was the max for two years ago. .
Daniel Wrenne: Yeah. Or like $17,000 whatever right. So the max changes every year. And so speaking of that, what are the new limits? We got new limits on all this stuff too. So maybe Jen, you want to go through the new limits for the IRA HSA?
Jen Quire: I hope I have 'em all right in my head. I don't have lists pulled up.
Jen Quire: New 401k, 403B, 457 limits is $22,500. New IRA, Roth IRA is $6,500. New HSA $7,750 for family and then half that for individual. I think all catch up contributions are staying the same. Is that right, team?
Jen Quire: It's $6,000 for 401K is $1,000 yeah, so I think that's all the same. So main thing we encourage people to do is just make sure you're still on track.
Jen Quire: If you're a percentage, divide that $22,500 by your expected income. Make sure that percentage is on track to get you maxed out for the year. Make any adjustments as needed. One thing we also caution people to do is sometimes things can get funky with 401k plans if you overfund it. And your plan doesn't have certain features on it, you can miss out on contributions.
Jen Quire: So usually we recommend spreading that out over the year as much as you can. And then just reach out to us if you have questions. If you're not sure how to do it, just shoot us an email and we can help you figure it out.
Daniel Wrenne: If you're working with us. If you're not, you can feel free to reach out. Yeah, feel free to reach out.
Daniel Wrenne: We won't know your situation, so we're gonna be like, "I don't know".
Daniel Wrenne: All this stuff depends on your situation. And Jen I think you're referring to the true up thing with the 401ks. Yeah. Yeah. So I think the TSP doesn't have a true up, right?
Daniel Wrenne: I don't think the government TSP has a true up.
Jen Quire: I don't remember off the top of my head, but that sounds right.
Hugh Baker: I think they do it by Per Pay Period is their technical language. So if you are maxing it out by November, you're gonna miss out on that match for December.
Daniel Wrenne: Yeah. So that's one. While we're talking about this, everybody, if you haven't checked on this, especially if you're not working with us, we check on these things on our end. But if you don't have this true up, say you're like a super overachiever or saver and you just want to, you've heard that it's best to save it as fast as possible, get it maxed out early, which kind of in itself is a good thing.
Daniel Wrenne: But if you're in the TSP for example, once you max it out, they stop matching. So in future pay periods, you lose the match. If they don't have this true up feature. So a lot of companies don't offer. In fact, our 401k doesn't have it in this company, in our planning business.
Jen Quire: Surprise!
Daniel Wrenne: By the way. No, because it's kind of like an extra feature you have to add onto your plan document. We use guideline, just fyi, like their 401K provider and they're very like automated. And so they're not gonna be able to add special features like this. So a lot of 401ks don't have the true up feature.
Daniel Wrenne: And if that's true with yours, you have to make sure you're maxing out right at the end of the year. Otherwise, if you're maxing out early, you're gonna miss out on matching dollars. And the way to verify it is just to look at a paycheck, or pay stub, and do the math and see like kind of calculate like what point in the year you're gonna max out.
Hugh Baker: Yeah. In common times or scenarios where you might end up maxing early and didn't really try to do that is maybe you're a second year attending. And maybe you weren't getting RVU bonuses in that first year. But the second year it's a lot more than you expected. Well, hey if you get that in July, you might want to look at what percentage you're contributing and make sure you're on pace to hit it at the end of the year.
Jen Quire:
Jen Quire: Yeah. So if you have an option, a lot of times we will encourage people to do, some 401k let you do a dollar amount, some make you do a percentage. So if your income is variable at all just to kind of help protect against that, try to do a set dollar amount if you can.
Daniel Wrenne: Yeah, that's ideal. A lot of 'em don't let you, which is unfortunate, but so you gotta do more math and tweak it.
Daniel Wrenne: It gets a little trickier if there's opportunity, but it also has a lot more gray areas when you're self-employed. So if you're funding, say you have a side hustle, like independent contractor doing like locums work or something, and they're paying you as an independent contractor. Or you just have any side business income where you're actively working, in some cases you can open up your own 401k.
Daniel Wrenne: Now the rules in whether or not you can open that are pretty complicated in itself. So if you work with us, talk to us. If you don't work with us, talk to your financial advisor, tax advisor, all the advisors about this, 'cuz it's a pretty complicated subject.
Daniel Wrenne: But assuming you are funding that as well, like a self-employed 401k. The rules for funding it are a little different because you're the employee and the employer. So you can fund same thing with the 401k, 403B, 457 on the employee portion. Typically you need to fund that by the end of the calendar year.
Daniel Wrenne: And then another side note on that, you can't fund that twice by the way. Like you can't put in the employee portion two times. So that's a calendar year deadline. And then on the employer side, that deadline is tax time. So that is a separate deadline, separate contribution amount. And so that's for you self-employed folks to think about and I think it's good to zip that up, like the plan for it by the end of the year. Just 'cuz there's two different options to fund it.
Daniel Wrenne: And then along the lines of self-employed, like maybe we could talk about some of the end of year things to think about for self-employed. For sure you want to be cuz that's a little bit unique tax wise.
Daniel Wrenne: But I think the one thing I would emphasize is making sure you're keeping track of what are your business expenses, and having that organized and having a conversation if you're hopefully you're working with an advisor or tax advisor, whatnot, and having a conversation around this time of year about, am I doing it the right way? Am I organized? Am I maximizing the tax shelters that are available? What's gonna happen next year with all my tax and business and everything. And then what's this year looking like? 'Cuz in some cases there's some opportunities to shift things in the next year versus in keep it in this year.
Daniel Wrenne: But that gets really personalized to your situation. I mean, all this stuff is dependent on your circumstances, but that's especially specific to your circumstances. So I just wanted to throw that out there as well as for self-employed folks or if you have your own business.
Daniel Wrenne: Roth conversion, so that's another one who wants to tackle Roth Conversion?
Daniel Wrenne: This is a big topic, but maybe we can hit the high points. Jeff, you look like you're eager to talk about Roth Conversion.
Jeffrey Wenger: Man. Who doesn't like a good Roth Conversion? So, yeah, basically a Roth Conversion, if we're playing catch up here on what it is, is when we have some sort of pre-tax account, so usually that's in an IRA. Perhaps you have a 401k or a 403B that is pre-taxed and allows you to convert within it. That's a little bit more rare than just being able to do your own IRA and convert that. But when you contribute to the IRA, it's pre-taxed. But when you take it out, it will be taxed. And so the Roth it's gonna be tax free forever, assuming that you're taking qualified distributions, which once you have it in the Roth isn't too hard to do.
Jeffrey Wenger: But the idea is when is this a good time to make that change from an IRA to a Roth? Because when you make that change, you are taxed on the amount that you switch or you convert from the IRA to the Roth.
Jeffrey Wenger: And so a few different scenarios where that might make sense right now. Number one is when the market is down, is a good time to convert. One reason for that being you convert it and you pay taxes on a smaller amount now that it's gone down. And then later on we assume it's going to grow again. And hopefully it grows a lot more because the market's down.
Jeffrey Wenger: So we get that into a Roth IRA so that all that growth is now tax free. And it just so happens that the market's been down this year. Is that right? Anybody heard that?
Jen Quire: Once or twice.
Daniel Wrenne: Not too bad though.
Jeffrey Wenger: But there are a few other pieces of this that.. So the market down being down is one option or one component that makes it attractive.
Jeffrey Wenger: But there are a few other places where this might, you know, maybe that's one piece. But to personalize it, should I do it or should you do it? Maybe would anybody else like to share some of these scenarios that kind of play into that?
Hugh Baker: Yeah, we have a fellow. So she's in fellowship this year in a lower state income tax state, planning to move when she graduates next year to California. ESLF is not in the cards. So as far as like increasing her income for this year's tax return, it's not like a huge hit.
Hugh Baker: That's not a consideration. So yeah. We're essentially rolling old 403B into Roth IRAs. And going to use the brokerage account to pay the tax on that. Another thing I guess to keep in mind, if you're doing Roth conversions, you have to have something outside of those accounts to pay the taxes due for that. So just keep that in mind.
Jen Quire: So like Hugh was saying, it's a really good idea when you're moving from a state with low income tax to a state with high income tax to go ahead and recognize that before you move. Otherwise, you know, say you live in Tennessee or somewhere with 0% and California is like 9% or 10%, there's good savings there. And did you say they were in transition as well from fellowship to practice?
Hugh Baker: We'll be in fellowship this year. Next year we'll graduate and come will quadruple, 5x. So there you go. Much different tax bracket.
Daniel Wrenne: That's when it's a home run typically,
Jen Quire: That's like two . In one.
Daniel Wrenne: Yep. Low market and low tax bracket now with high tax bracket future. And state change that's like the ultimate Roth Conversion. I've had most of my good Roth conversion examples were physicians in training.
Daniel Wrenne: We also work with kind of a little bit skewed younger age group. And that's a common time is like when the income is the taxable income, like your tax bracket is lower. But there's another segment that it happens in time when, if you retire early. The classic scenario is you retire early before these income streams start coming in. And you have this gap time where you're not earning any realized income. And you can play with which bucket you take from first. So in that scenario, a lot of times you can time these Roth Conversions to where you basically fill up the low tax brackets. And it can be like a home run tax move. They're trying to limit the rules on the Roth Conversion or we're trying to, I guess they maybe still are trying to limit the rules or put some limitations on the Roth Conversion, especially for high income.
Daniel Wrenne: So for now the strategy's still alive and well. But where you can just convert as much as you want and it's all good. But, I wouldn't be surprised if they chip away at this. And it becomes like, but who knows? For now it's good to go.
Jen Quire: We'll see, like they've been threatening our Back-Door Roth and our Roth Conversion opportunities for a while.
Daniel Wrenne: Yeah, same with Back-Door Roth. And I think some people argue for doing these now. Back-Door Roth and Roth Conversion now because it's on the chopping blocks and to get it over with, I've heard less of that argument since it's kind of died down. But if you're worried about those going away, it might be a reason in itself.
Daniel Wrenne: The only other reason all throughout for Roth Conversion is if you have an IRA that's pre-tax and you can't do anything about it. Like you don't have a 401K to move it into. And you want to do Back-Door Roth, it's gonna cause problems doing a Back-Door Roth. It's just like a complicated tax situation and you end up having to pay tax on it.
Daniel Wrenne: So a lot of times people just go ahead and convert that IRA to Roth to clean up to zero out the IRA bucket so that they can do Roth Conversions in the future. So that's plenty of Roth Conversion for today.
Daniel Wrenne: What about savings plans? So particularly 529 plans, there's some tax benefits there.
Daniel Wrenne: So, Jen, you want to talk about funding those before the end of the year?
Jen Quire: Sure. So some states have tax benefits for 529, some don't. If you're in an unfortunate state like Kentucky who doesn't give you a tax, that's great for contributing to a 529. This does not apply to you. But if you live in a state that gives you a tax break, I would typically, as cashflow allows us as goals allow for. Put in as much as you can up to that tax break.
Jen Quire: I think it's South Carolina, that's unlimited. And then most states have like 2, 4, 8,000 pretty round numbers that you can put in per beneficiary. And that's a pretty easy Google, if you're not sure, just Google Minnesota State 529 tax.
Jeffrey Wenger: Yeah, I think you've got a really good point there is that these states are very different on what they allow. And so it's definitely specific. A few. Ohio has a little deduction. I'm from Ohio. You can see I got a lamp back here, but a few that stick out to me or that I've seen recently, Pennsylvania gives you a deduction up to the gift tax limit, which is for 2023, let's do 2022 'cuz that's the year we're in which is 16,000 this year.
Jeffrey Wenger: And if you're married, you could actually do that from each spouse. So if you're really looking to superfund it, you could do quite a bit in Pennsylvania. And Pennsylvania's not a low tax stain either, so you might actually save some money as well. And then Virginia, I believe is another one that is interesting where you can do it per beneficiary. And you can set it up so that.. If you're really looking to get a lot of money and save on taxes, that way you can set it up kind of creatively to get a lot of money funded early on.
Jen Quire: Oh, like a per parent, per beneficiary one. So like each child can have one per parent. Yeah.
Jeffrey Wenger: Yeah. So, well, I could set it up. One for Daniel. One for Jen. One for you. None of you guys are my kids, but you're a beneficiary the 529 plan or something. And then that's a little bit weird, but
Daniel Wrenne: You're taking this too far.
Jeffrey Wenger: Change the beneficiary down the road to my kid. So you've gotten, anyway. That's a really creative,
Daniel Wrenne: Consult your advisor for that one yeah.
Daniel Wrenne: Most of us don't need that much, but if you have several kids or several, you know, a couple of parents or grandparents or something like that, that wanna help out, that's a way to look at it in some.
Daniel Wrenne: So the states are unique is what I'm trying to say.
Daniel Wrenne: Yeah. Yes. My favorite one is Indiana. Because they have a credit. I think they call it a credit tax credit officially. But basically if you give 5,000 or more to a 529 in Indiana, you get a thousand dollars tax credit.
Daniel Wrenne: Which is like the best. I guess that's like the best bang for your dollar or return on your dollar for tax credits. So if you're in Indiana, I would definitely look into that. And the other thing too that we commonly see, just while we're talking about this, is it's one of the most commonly missed things on your tax return. Like, even if you have superstar or CPA or whatever, it's just regularly missed. So I think a best practice is when you fund it, email the accountant or whatever, just so you can, or if you have a place where you track all your tax stuff, write that down. That's kind of goes in the spreadsheet.
Daniel Wrenne: I live in Kentucky so I don't get a tax deduction. But if I did, I have this spreadsheet that I keep track of things to share with accountant. So that would be a thing to go on, on that list. So how about FSAs and HSAs? Let's talk about FSAs and HSAs. Hugh, you want to talk about the differences of those?
Hugh Baker: Yeah, so the FSA, I call it a use it or lose it type account. Some do allow you to roll a small amount to the next year, but in most cases, that's one you're gonna want to use up by the end of the year. Difference is with the HSA that's an account that you don't, I guess the most tax efficient way that we have counseled clients to use it is to, if possible, not tap that for health expenses. So continue to max that out. Invest those dollars. Let them grow. Save receipts, especially for, any big medical expenses you have. Most platforms will allow you to upload a PDF and kind of store it on their platform. And you can reimburse yourself from that HSA at any point. You could invest the money, reimburse yourself 20 years from now unless they change the laws and that way you get a lot more bang for your buck.
Daniel Wrenne: Yeah, so I always emphasize FSA, I would say is flex spending account, like spend the money before the end of the year. And then health HSA is health savings account. So you can truly build wealth in a HSA. And I would consider it the best tax shelter really, you know, the average person at least has access to.
Daniel Wrenne: And so it's often like much better just to use your own savings to pay for healthcare, like he was saying. And let that HSA it's kinda like the golden egg of your tax shelters and let that thing build up. And wait till you're older to use it. Especially if you're young, let that thing build up and invest it. But sometimes they get confusing. It's like you think you have an HSA but it's really an FSA so check to see exactly what you have. It depends on what your company offers and even your health insurance is. So make sure you understand which you have first of all. And if you have the FSA it's like, use that thing, make sure you use every penny of it.
Daniel Wrenne: But it's the reverse. If you have the HSA, don't use it and throw away the debit card. That's what we were always like, don't even send me the debit card 'cuz they always send you a debit card and you get an HSA. It's like, no, no, no.
Daniel Wrenne: This was a challenging thing, like my wife and I we it probably took three years for us to get on the same page with the HSA. Cuz they send the debit card every year and she's like, "Oh, it's a health spending account."
Daniel Wrenne: I'm like, no, no, no.
Daniel Wrenne: Health savings account. But they send you a debit card, which is confusing 'cuz that means you take it to the doctor and the doctor's like, "Oh yeah, yeah, yeah, we use that."
Daniel Wrenne: So, anyway, we've talked about HSAs a lot in prior episodes, so if you're interested in check those out, maybe we can link to some of those in the show notes as well.
Daniel Wrenne: So let's talk about charitable. So charitable giving, there's a lot of tax moves to think about before the end of the year. That can save quite a bit or strategies to think about. I think the big thing about charitable giving to talk about first, or think about first is, first of all, you still have to want to give charitably.
Daniel Wrenne: It's not like there's such a good tax strategy that it makes it better than you... Like you don't make money. I've heard that confusion out there before. It's like, "Oh, I'm gonna give charitably because it makes me better off." From a tax standpoint, no, it makes giving better, but you still have to give money, I guess is what I'm trying to say.
Daniel Wrenne: And so, I think it's important to hit on that first. It's like if you have any level of charitable inclination, these are I think, things to be thinking about and it can make it even more efficient, once you add on these tax strategies we're gonna talk about. So if you're thinking about that, definitely keep these tax strategies in your back pocket.
Daniel Wrenne: The first one all throughout is, and I'll kind of cover this one. I think this is something you see less commonly for younger folks. It's typically a strategy for, you know, as you get later in life. So if you have an IRA that requires you to start taking money out of it, that's called like an RMD
Daniel Wrenne: So if you have an IRA that's requiring you to take money out or requiring RMDs, you can opt to take the RMDs and give it to a charity using, it's called the QCD role. So you can send that money basically directly to the charity. And so that is a valuable tax strategy, especially if you're taking the standard deduction on your taxes because you don't have to take the income on the withdrawal from the IRA 'cuz you normally would have to take income when you take the withdrawal from the IRA.
Daniel Wrenne: But when you do it this way, you don't have to take the income on the withdrawal and it's just like a neutral thing. And you're able to give it to... so in other words, you get a tax benefit by being able to take it outta your IRA and not get tax on it and still give it to the charity.
Daniel Wrenne: So it's especially valuable for people that are taking RMBs. And that are taking the standard deduction on their taxes, which is pretty common for people that are retired. So that's the least commonly used strategy for at least probably a lot of you all listening. I'm gonna let Jeff talk about the more commonly used strategy.
Daniel Wrenne: Let's talk about stock, like giving stock. Why would you wanna give stock?
Jeffrey Wenger: Well, first of all, I was not expecting you to bring up RMDs.
Daniel Wrenne: I know. I just, I have show drew off.
Daniel Wrenne: But yeah, you got me all riled up about RMDs and qualified charitable distributions. So you're right. If you're giving and you're in that age range, that's 70 and a half. You can still do that for the charitable distributions. But I've not seen a scenario where it's not a good idea to do that instead of itemized because it never hits your income that way.
Daniel Wrenne: So it's fantastic.
Jeffrey Wenger: I mean, if there's something that people don't like less than taxes, it's Medicare premiums. So the less income you can have hit your tax return at all, even if you deduct it later, the better. So I will get off that soapbox.
Daniel Wrenne: Thank you for the reinforcement.
Jeffrey Wenger: So anyway, to the point though, was giving from just investments. Is that what you said, Daniel?
Daniel Wrenne: Yeah. Like why? I mean, most people give cash, right? The average person, like I would say.
Jeffrey Wenger: Yeah, giving from your investments is really probably the lowest hanging fruit. And one of the best reasons to even start a tactical investment account, if you are charitably minded anyway, is to get ahead and have investments that are flexible and not in a retirement plan.
Jeffrey Wenger: But the reason for doing that Is that, if you have an investment, so you pay a hundred dollars for, I don't know, gimme a good company..
Jen Quire: Apple.
Jeffrey Wenger: Let's use Apple cuz people love Apple. So it doesn't matter which one, by the way. So I put a hundred dollars by a hundred dollars worth of Apple stock let's say in two years that has grown to $200. Wow. Great return Apple. And if I were to sell that, then I would not be taxed on the first $100 because that's the amount I paid for it.
Jeffrey Wenger: But then above that, I would have to pay capital gains on it, which would usually be 15 or 20% depending on where we're at. So, I would pay on those gains. So $200 in gains. 15% of that 30 bucks. All right. man, we gotta talk in bigger dollars for anybody to care. Multiply that times a thousand. But anyway, the point being, I'm taxed. So now at the end of the day, if I sell that, I paid a hundred dollars, sold it for $300, I have 270 left.
Daniel Wrenne: So you don't get the 300.
Jeffrey Wenger: I don't get the 300 cuz the government gets 30. The government taxes. So that's one thing. But if you were to actually donate that when it's at $300. And it has to have been there for at least a year.
Jeffrey Wenger: Right? We need a long-term gain. So you had to have held that for at least a year. But the charity gets $300. You do not get any, have to pay any taxes on that. And it is all gone. So you've only had to pay a hundred dollars to give 300 long term, basically, and no taxes. And so that is the primary reason that that's an efficient way to give it because you let it grow and you pay no taxes.
Daniel Wrenne: Another way to look at it is would you rather have a thousand dollars of cash in your checking account or a thousand dollars worth of Apple stock that you paid whatever, a hundred dollars for or something. If that's the choice, cuz you could give that Apple stock away and have no tax impact.
Daniel Wrenne: You could just buy the Apple stock back with your cash. I'd rather have the cash cuz the cash doesn't have a share with Uncle Sam. Like there's no unpaid tax liability with cash. Whereas that a thousand dollars of Apple stock or whatever that any stock that's gone up in value, that there's a share of it. That's a slice of the pie that's gonna have to go to the tax eventually.
Daniel Wrenne: And so it's worth less than it actually is because that unrealized tax bill. So when you can give it away, if you're already gonna give the money anyway, that's a home run. If you can give something like that, that has that unrealized tax bill without incurring any taxes. And keep your cash and then just buy the thing right back. 'Cuz that's what a lot of times happens with our families we work with. We're like, let's give the whatever Apple stock, for example, and then we'll just buy right back, you know. We'll get the Apple stock with the unrealized tax liability off your plate and then buy it right back.
Daniel Wrenne: That's kind of the strategy. So it's a great way to give stocks. But what happens when the charity doesn't accept stock? I think I'm kind of...
Jeffrey Wenger: We're outta solutions.
Daniel Wrenne: We just give up. Donor Advised Fund. So Hugh, you wanna talk about the Donor Advised Fund?
Hugh Baker: Yeah, so the main benefit of the Donor Advised Fund, to use Jeff's example, you give the stock that has some gain in it to that Donor Advised Fund. And, you get to then take that deduction in that year that you make that donation to the fund. And the deduction is based on the market value. So not just the amount you purchase the stock with, but it's the market value. And then from there you can distribute money to charities as you please.
Hugh Baker: It doesn't have to be that year. It could be the next year. So another, I guess main benefit of that is if you wanted to batch your charitable giving. So maybe you don't necessarily want to give it all away this year. Now, hey, maybe 2021 was a better year for this, when the market was up. But let's say you wanted to give, you know, $10,000 to St. Jude for the next three years, you can move $30,000 of very highly appreciated funds that you have from your brokerage account into that Donor Advised Fund. And then distribute the money over the next three years.
Daniel Wrenne: Yeah, it's kinda like your own charitable.
Jen Quire: You mentioned batch giving. What's that?
Hugh Baker: Basically, I just mean, bunching the amount you want to give over the next few years into one year with your transfer.
Daniel Wrenne: And that's a tricky one to explain.
Jen Quire: Without a diagram.
Daniel Wrenne: You need some visual. Yeah. We need a visual aid to explain that one, I think, and another 10 minutes minimum.
Hugh Baker: What would you call it, Jen? How would you describe it?
Jen Quire: That's exactly what I would call it is batch giving. To try and explain it. It's the way the standard deduction works now is it's very high. So a lot of people will miss out on the tax benefits of giving. Which, you know, ideally the tax benefits is not the only reason we're giving, so it's not a reason not to give. But if we could batch and use example that $30,000 into one year and get above that standard deduction into the itemized deductions, we get to realize some of the tax benefit on that versus the $10,000 a year may not be enough to bump us above that standard deduction limit.
Jen Quire: So we may not realize any tax benefit from the giving if we don't batch it.
Daniel Wrenne: Yeah, I was looking at a scenario recently with a client for batch giving. I think it was pretty straightforward. They had given a lot already this calendar year, 2022, and they got a big bonus at the end of the year. And they're like, what should I do with it? So it was just cash that they had in their account.
Daniel Wrenne: And so they had already exceeded this standard deduction. So in other words, every dollar they give is a straight tax savings. Normally that's not the case because of this whole standard deduction. If you have no house, no income, and you give a dollar, you don't get any deduction on your taxes.
Daniel Wrenne: So you have to exceed this threshold we're talking about to start to get a bang for your buck. So this person had already given enough to their, where they're getting a deduction for every dollar they give in this calendar year. So they got a big bonus. They're like, what should we do with it? And I'm like, what I would suggest is go ahead and give for next year and the year after because you're already receiving those tax benefits.
Daniel Wrenne: And they we're really close to the end of the year anyway. And then when we looked at next year and the year after and ran the numbers, it was gonna be a much lower savings. Spreading it out over those years because they were gonna have to exceed that threshold again before they started getting a bank for their buck.
Daniel Wrenne: But it's very situational. It's just something to have on your radar if you're giving, is this batched idea. You know, along with the other strategies we've talked about. And sometimes you can use multiple strategies. The big thing though is, I think we talk a lot about like tax strategies.
Daniel Wrenne: I've talked to many people about the tax strategies of giving just because they're thinking about giving, but they haven't even started giving. So I think what I would emphasize is there's a lot of really good benefits of giving non-financial benefits. Like all the happiness, there's a lot of happiness researchers, which is interesting to me that research different financial things you can do and how it translates to happiness.
Daniel Wrenne: And to me, the most fascinating thing, and it's not really that big of a surprise I guess, but it's so interesting, is that they have kind of concluded that the best return on happiness is giving money away. Which is just, I think for some people surprising. And so that I think is an important thing to remember is if you're thinking about giving, like just give it a shot, take a jump. That's the bigger thing is like taking action on it. And then you can circle back to this, the tax strategy stuff. That just amps it up even more.
Jeffrey Wenger: Yeah. And all right, so I was gonna say, anecdotally speaking, this is not research here, but have you heard anybody complain like, "Oh man, I'm just so mad that I gave so much."
Daniel Wrenne: Never. no, I don't think so. No. it's kinda like paying off debt. It's like nobody e ever regrets, they're like, ''Man, I wish I hadn't given so much money.", or, "Man, I wish I wouldn't have paid off that debt so fast."
Hugh Baker: And an asterisk next to student loans though, for that one.
Daniel Wrenne: Maybe that one you had to bring up the exception.
Jeffrey Wenger: On the flip side though, I mean, in conversations we have with families all the time, maybe you can get a quick raise of hands. How many have, you're like, yes, I know it's humming here. How many of you speak to somebody or families that commonly say, " I want to give more.
Jeffrey Wenger: I know I should give more."
Jen Quire: And maybe, yeah, it's usually the should. It's like, I know I should, and I'm trying to come up with a plan for it. And I think that's a lot of it is. You know, we can talk about the tax benefits, we can talk about all that, but really we just need to have a plan for it. And then we can strategize from there after you decide what's important to you and what the level of that looks like.
Jen Quire: We can kind of facilitate things from there. But it should be more based on your values than it should be the tax strategy.
Daniel Wrenne: I think the takeaway there is don't get hung up in the tax stuff we're talking about. These are all like good strategies, but I've also seen people get hung up in them to the point where they almost like, don't give, cuz they're like, how do I figure out how ...
Jen Quire: Analysis paralysis?
Daniel Wrenne: Yeah, just give. Even if it's cash and then get in that routine. And then you can circle back to the strategy. Or if you're already giving and you say, you should give more, then just do it. Or dial it up.
Jen Quire: There's a pretty easy solution to that problem.
Daniel Wrenne: I mean, take a jump. And it's like you can dial it down if you have to.
Daniel Wrenne: Same thing with savings. That's what I tell people with savings, often it's let's just try it out. Like not the worst thing that could happen is if it ends up that it's too much, you can dial it back down and not the end of the world. And that sort of thing.
Daniel Wrenne: I guess with giving, you don't get, you can't get the money back. Well, probably not, but anyway. We've done this a lot of times we have as financial planners, we've had a lot of experience with people and these sorts of things, and it's extremely rare that, in fact, I don't know of any cases where people have problems with having given or saved too much.
Daniel Wrenne: All right. So as we start to wrap up, I wanted to talk about prepping for New Year and getting ready for strategy with the new year. And then also some of the housekeeping stuff to be thinking about as we plan and then get organized and that kind of thing.
Daniel Wrenne: So into year housekeeping I think is one thing in itself. I think, it's a good time of year to look at withholding and how we're doing on taxes. I've seen it, more than a handful of times where families go to their accountant or do their own taxes April 15th, and then they're completely shocked and surprised by the tax bill that they get.
Daniel Wrenne: Yeah. And to the point it ruins their finances.
Jen Quire: I think a lot of people misunderstand the role of your average CPA. Your average CPA is gonna crunch your numbers and do your tax return. They're not going to reach out to you in the middle of the year and say, "Hey, I noticed that you weren't withholding enough."
Jen Quire: Your average CPA isn't gonna do that. So it's kind of on you to either hire someone who's going to provide that service or use someone on your team. If you have an advisor, if you work with us, if you have someone you can reach out to and just say, "Hey, can we do like a mid-year checkup and see what's going on? Am I withholding enough? Am I withholding too much?"
Jen Quire: Just kind of keep an eye on it throughout the year.
Daniel Wrenne: Especially if things have changed.
Jen Quire: Especially if you have multiple jobs or...
Daniel Wrenne: If you're going into practice or you started a business or somebody got a big pay raise or a big bonus. And like a classic example, maybe we can talk about some examples of why this is important. The classic one I see is like the couple where they both work and one person starts in practice and the other one was already working. And they both are employees, so it's not on their radar to like, they're getting taxes withheld and it's like a standard table.
Daniel Wrenne: So they're like, "Ah, yeah, it's getting withheld. I did the withholding thing and we're good to go." But what happens sometimes is with high income, especially when you have like a one spouse is like a modest income. Say one spouse makes a $100,000 and then the other spouse makes like 300 or $400,000. The problem that happens is the a $100,000 spouse, like the way the withholding tables work is they don't know that there's another spouse making $400,000. In other words, they don't know you're in the top tax bracket. Like when you combine those two together, you're in the top tax bracket, so you have to be withholding a bunch.
Daniel Wrenne: But the withholding tables are not gonna know that. So they're gonna withhold a tiny amount of taxes relative to what they should be for the lower income spouse.
Jen Quire: And I think the W4 doesn't help. I think it's kind of misleading and I think a lot of people understandably so look at the W4 as if it's like an actual tax return. It's all that form does is tell your employer what we want to be withholding. It's not changing your tax filing status. It's not doing anything. You can kind of use the W4 as a puzzle to tell them what we want to withhold. It's not gonna translate to, like, I have a lot of people, I say, "Hey, you need to check the married filing separately or single box."
Jen Quire: And they're like, "Well why would I do that? I've always heard it's better to do married filing joint." So I think there's just some misconceptions in how you fill that form out. So if you do get a new job, you change a job. Make sure to ask for help when you're filling out that form, 'cuz there are just some strategies you can use to make sure we're withholding the right amount and it may not be the what you think it is.
Daniel Wrenne: Yep. All right. Let's talk about getting organized for taxes. What should we be saving or tracking or what can we throw away versus like, what should be going in the important pile? Maybe Jen, I know you have seen both sides of this, so I'd love to hear your thoughts on.
Jen Quire: Well, I would say when in doubt, don't throw it away. You know, worst case scenario, you send it to someone and they say, "Hey, we don't need this.", but we'd rather have that than you throw something away that we actually need. I think most documents start coming out at the end of January, beginning of February.
Jen Quire: So keep an eye out for W2s from your employer, 1099 s if you did any rollovers or Back-Door Roth IRAs. If you have a brokerage account, we run into that a lot. People who are very excited about getting their taxes filed early in the year and they're new to having a brokerage account will file their taxes and then in March be like, "Oh, what's this extra form."
Jen Quire: So make sure to ask if you're not sure. But yeah, I think they can send forms out to you until into March. So keep an eye out for those things. Make sure, like Daniel said, if you can track things throughout the year, especially if you give any transactions you make that you feel like are gonna have an impact on taxes, maybe just keep a document that says, here are things that I should remember when I talk to my CPA. Or I do my own taxes. So, 529 in there, any other giving, any transactions you've made throughout the year. I think those are all good things to just kind of keep organized for tax time.
Daniel Wrenne: Yeah, and I think that's good for everyone. Even if you're just have a simple tax situation now. If you have a business or like any form of like self-employed income, even if you have a side hustled that's just relatively small, that's when it gets a little bit more, I guess, complicated or there's a lot more opportunities. So, we typically suggest having a completely separate checking account and run everything through it. Mainly for the reasons we're talking about an organization.
Daniel Wrenne: And 'cuz what happens is, say you are taking extra shifts and locums work or something, and it's 1099 independent contractor. It might be that there's some stuff you can write off, like continuing education or whatever cell phone and, home office and there's a list of things potentially that you can write off.
Daniel Wrenne: But what happens is you go to do your taxes in April, hopefully sooner. And you can't remember. It's very difficult to remember all that. It becomes difficult to save the receipts. Whereas if you just had one account where everything ran through, you just look at the account. Like all the transactions are, you even have to keep track of your income too. That's the thing people think the 1099s are the tracking. Actually you're responsible for keeping track of your income from your business and expenses as well. So it's way easier to just have all of that run through a completely separate account.
Daniel Wrenne: And if hopefully you don't ever get audited, but if you do, the auditors are very much in favor. Like they want to see a separate account where it's all, I got audited a long time ago. I remember that was one of the first questions they asked. They're like, is this a strictly business account?
Daniel Wrenne: Or is this combined with your personal? Because as soon as you combine it with your personal, it becomes like a train wreck of confusion and a mess. And if you haven't been doing that, January 1st is like the best time to make that transition. All right.
Daniel Wrenne: So last thing I wanted to talk about, let's talk about preparing for the new year. I think this is the most, and people love to talk about this, like this is a fun topic, but there's a lot of goals that people set that they don't end up following through on. So, Jeff, we've been on several episodes talking about happiness and what's most important and that sort of thing.
Daniel Wrenne: In your opinion, where do people miss the mark on this whole New Year's resolution thing?
Jeffrey Wenger: I think a lot of it comes down to good intention but no action. And there are a few different ways that you can hopefully force a little bit of action on some of the, maybe the plans that you have or the good intentions that you set out with. New Year's resolutions are a thing because we all feel kind of this poll to better ourselves, better our lives and live according to the values that we have.
Jeffrey Wenger: And, so I think two things that come to mind right now would be to actually set things up ahead of time that align with your values. So if you have an intention to spend time with your kids, I've seen this on your calendar, Daniel, put a day every month and already block it off, or an hour on their birthdate day of the month that says, " Hey, this is already scheduled. It's already been budgeted for, and I'm going to use that time for what I value for what's important to me."
Jeffrey Wenger: And you can do the same thing with finances too, right? You can set up a, let's say there's a giving fund or a travel fund. Something like that, it gets automated and it just gets set aside in a bucket so that it's ready to be used for that purpose.
Jeffrey Wenger: Our minds love it when we have a bucket set aside for a purpose.
Daniel Wrenne: What if I don't know what my values are?
Jeffrey Wenger: Then you're hopeless Daniel. Come on. I think well, anybody have more to chime in on there. I, it's a topic that I love, but ..
Jen Quire: Yeah, I think one good thing for helping people with their values is that kinder exercise that people may have heard of or may have talked about before, where you evaluate your life in the context of what if tomorrow wasn't promised? Or what if next year wasn't promised? What would you have missed out on? What would you have wished you had done differently or more of or less of?
Jen Quire: And I think that can help you pair back on the, what's actually the most important things. Because it's, you know, when people are on their deathbed, you always hear, I wish I had spent more time with my family. Or I wish I had traveled. I wish I had spent my time doing X, Y, Z. Not necessarily, I wish I had worked more. I wish I had taken that second job. I wish I had bought the bigger house. It's usually more about people and time and quality of life than it is the physical things. So I think going through exercises like that can help you reflect on what are those values, what's actually most important to you.
Daniel Wrenne: Yeah, check out, the episode we had with, Dr. Jordan Grummet. I guess it was probably four or five shows back, but he's the hospice doctor that worked with a lot of people at nearing the end of their life and wrote a book on their regrets. And it was super interesting. And along the lines of what Jen was saying, a lot of their regrets revolve around them not leaning into some of these things that are most important to them and like taking action on them.
Daniel Wrenne: And I think his message is, is that one of the biggest first steps is to gain awareness of it. You know, have that awareness of what is most important and dedicate the time to getting the awareness because you have to have, like, we're all like super busy. Everybody. It's a like thing that people say, you're like, how's it going?
Daniel Wrenne: I'm busy. Everybody's busy. So we don't have much time. And then when you're not busy, you're on your smartphone. So it's like dedicating. You have to carve out an hour or more, or an hour a month to think about what's most important and iron out those values. And then ideally you let that drive the goal setting.
Daniel Wrenne: I think that's where goal setting can really be impactful is when you have it connected into what's most important. And you've made the time, you've done the hard work on the front end of you know, sitting there and thinking about it. But this is all, it's a work in progress too.
Daniel Wrenne: Like you're not gonna be perfect. We don't want to be too hard on ourselves. It's just about making positive steps in the right direction, like Jeff was saying, we all have that drive inside that we want to make positive progress. So, I think we're, right at time.
Daniel Wrenne: This has been a lot of stuff. I think we could cover like, 10 sub shows within each of these points. So I have appreciated all of you all coming on to chat about all this stuff.
Jen Quire: Yeah, this is first live show. Yeah.
Daniel Wrenne: Fun, fun times. And, we'll look forward to catching up again, hopefully next time.
Daniel Wrenne: Hopefully and I guess we're in the holiday season right now as we're recording this. It's December 20th, so hope everybody has a Happy Holidays and, Happy New Year. We'll see you on the flip side.
