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Active Tax Management

Investing Retirement Funding Insights

Keeping your taxes low is an active process. Here’s how to do it.

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Transcript below:

Welcome back to the 30 Minute Money Podcast, where we deliver action oriented smart money ideas and little bite size pieces. Joining me today, again is Steve Waring from Focused Wealth Advisors, where, uh, we, we know, we know two things that, that life holds for us, Death and taxes. Those are the only two things that, that were sure of. Right.

Those are the two guaranteed things.

That's Right. Two guarantee. And you know a lot about both of those. Well, not so much the death part, but No, But, uh, planning for your future, planning for your retirement and taxes and taxes are have always been an anomaly for me. I mean, obviously I, I, I have so much to learn, which is why I'm sitting here with you, but today we're gonna talk about active tax management. Yes. And which I didn't realize that you could actually manage your taxes in, in that way. I thought it was like, Oh, here it is. You fill it out, you send it in. That's it. Yep. Exactly. So I'm a

Lot, that's how a lot of people feel about it. And, and, and, but, but it can work way better than active death management. So with tax death and taxes, it's too big guarantees in life something we can do about taxes. Yes. So let's do that. But that, but you know, that is, that is a popular misconception a lot of people have, and one of the, one of the differences, frankly, between the really rich people and the rest of us, is that the really rich people really leverage the tax code. Mm-hmm. , they, they're the ones who can afford the really expensive tax attorneys and, and, and CPAs to manage that. But, you know, what I want to tell people is, you know, that a lot of people feel like, um, you know, the tax code is just this big complicated mess, and it's something that's done to us, but it's, it's a set of rules and you can use those rules to your advantage, just like, you know, just like the ultra wealthy do.

And so there are some basic ways that you can actively manage taxes that can get you a lot farther ahead. Because a lot of financial planning, maybe most financial planning is actually tax planning. Hmm. Um, you know, it's, it's setting it, you know, figuring out what your goals are and figuring how much you have to save between now and then to get to your goals. That's not really financial planning. That's excel. That's, that's arithmetic. Right. But, so a lot of financial planning is actually around tax planning. And so if you can use that code, use that big, that millions of words, code to your advantage, then you can get yourself further ahead. And

They're constantly changing it.

They are changing it frequently. Yes. So...

It's, I I've always been in awe of folks like yourself who manage to stay up on those changes and keep ahead of the game for, for all of us who need to  learn it, playing the game better. Well,

You know, for, for, for me it's, for me, it's a game. It's like, okay, this is what the government's gonna do to us. How do I, how do I advantage my clients? How do I, how do I make sure my clients win? Touche shade governments. So we're always Yeah, exactly. Oh, sure. You think you can  pull this one over on us? I'll, I'll find you this deduction here. So, um, yeah, so let's jump in. Yeah. So there, so there, there are some really basic straightforward things that you can do, um, to take advantage of where you are in the tax code and, you know, and reduce how much you pay and, and, and take full advantage of, of what's open to you. Because if you do that a little bit every year, then you can end up a lot farther ahead. Now, before we get too far into it, I, I want to, I want to emphasize that this is really important. Not only can it generate a lot of wealth for you, but what a lot of people don't realize is that we're actually in a relatively low tax environment. And, and a lot of people don't feel that it, it does not feel like we are in a low tax environment. It feels like we're being taxed to death. But if you look back at the history of taxation, it's not the lowest it's ever been, but it's pretty close.

Isn't that changed during the Reagan years? Is that when, when things really changed and got, got Lowered? Yeah. And, and that's why a lot of people, a lot of us who are working now don't really realize this is because it's kind of been similar to this for all of our working lives. Yeah. But if you go back into the Carter administration and the Nixon administration, you know, there were mar top marginal rates like close to 90. So you know, now, wow, very few people are in the top marginal bracket of say 35 or 37% now. But, you know, but the brackets generally were a lot higher in the past. And given how much debt the government has been taking on and how much money the government's been spending, it's almost inconceivable a lot of the people that I watch and follow and read, it's, it's, it's almost inconceivable how we could go much farther into this without the government raising taxes. So that makes active tax management that much more urgent because we wanna take advantage of the tax rates that are low while we have them.

Like for example, we know tax rates are going up, they're gonna go up January 1st, 2026 because it says so right in the tax Cuts and Jobs act of 2017, and it's written right into that law that its sunsets at the end of 2025. So we have the next couple of years. Now, it's not gonna go up dramatically in 2026, but it's going up mm-hmm.  and given that we've, you know, not long ago crossed over the $30 trillion mark, um, of federal debt and interest rates are going up, which makes government, you know, which increases the interest expense for the government. You know, it's the, the, the, the money that's gonna be flowing out just to pay the federal debt, the interest on the federal debt, again, it's only a matter of time, but before they really have to come, come back to us and, and significantly raise our taxes. So actively managing those taxes is a time sensitive message. And so this year, next year, the following year, we need to do everything that we can to make sure that we take advantage of all of the opportunities that are in that tax code.

I've always been kind of, uh, interest in the whole tax bracket idea because I never exactly knew what tax bracket I was in, but I always hear that term thrown around like, Oh, you're gonna knock me into the next tax, tax bracket. Right. It's gonna mess me up. Uh, how much does that factor into to what you're talking about today?


Like it's all of it, right?

Well, yeah. So it's, um, well, brackets can be confusing because if you are in the 22% bracket, that doesn't mean you pay 22% of everything you make. Um, it means that you pay 22% on the next dollar that you make because it's not smooth, it's not applied uniformly. So at the, at the, you know, at the very beginning, you pay 10% up to a certain point, and then when you hit that bracket, you go to 12% and you pay 12% on the next bunch of money that you make until you hit the next bracket of 22%. And then you pay 22% on those additional dollars. So your, what we would call your effective rate is almost always lower than your marginal, your, your, you know, the marginal rate, your bracket, but, you know, we, we wanna be sensitive to what the bracket is because the bracket tells you how much tax you're gonna pay on the next dollar of income that you make.

And that's, that's, so that's where the decisions come in is, you know, what do I do with the next dollar? That's why we talk about those brackets. One of the big opportunities is, is leveraging the bracket that you're in. So if you are in, for example, the 12% bracket or the 22% bracket, even the 24% bracket, if in, if tax rates are going up in the future, then I want to take advantage of, you know, 24% even. Sounds pretty good to me, it sounds like an okay deal if you're in the 22% sounds even better for you're in the 12%. Sounds great. So we wanna take advantage of that as long as we can take advantage of paying a little bit of tax now so that we can save money on tax later. So we'll take a little detour here. You know, you, again, most people hear from their financial people just defer, deferred for cram as much money as you possibly can into that.

And, but, but let's walk through the thinking on that. The reason that we do that is because we're making a bet. We're making a bet that the tax bracket we're gonna be in later is lower than the tax bracket that I'm in. Now, if I'm gonna be in exactly the same tax bracket later, it doesn't matter if I pay tax on it now and sit on it or let it build up tax deferred and pay tax on it later, if it's the same bracket net, I end up with the same amount of money. Does that make sense? Sure. So if, if, if I, if I paid 22% on, on, on income now, but then I have it and it's after tax, I don't have to worry about that and I let it grow. Or if I put it away into an IRA and let it grow and it grows from, you know, $10,000 to a hundred thousand dollars and I pull it out at then and, and I'm in the same tax bracket it's there, it's, I'm gonna pay a lot more tax, but I'm gonna end up in the same place.

So the decision to defer is essentially a bet that I'm gonna be in a lower tax bracket later. So rather than pay a high rate on it now I wanna pay a low rate on it later. And for years that was true. But the problem with that was we kind of forgot why we were telling people to defer. We just got into the habit of saying, defer, defer, put money, put money into that 401k, put money into that ira. Now we're at a point where we're in a relatively low tax environment and there's a really high likelihood the taxes are gonna go up later. So there's a pretty good chance that you'll be, you could be in a higher tax bracket in retirement than you are now. And if that's the case, it does not make any sense to defer more than you are. It may not even make sense to defer as much as you are now.

And so that's why we wanna take advantage of the bracket that we're in now, because if I can pay tax at a low rate now and then Congress increases tax rates later, I win. Mm-hmm.  cause I've paid it at a lower rate. But one, one of the things that I, that we encourage people to do is to leverage that bracket. So if you are in a 12% bracket or a 22% bracket and you, and we go past December 31st and you're not the, at the very top of that bracket, then you've wasted some of that bracket because you can't go back and get it once December 31st goes by, you're done. We have to, we start all over again. Does that make sense? Yeah.

So that's why you're, you're talking about to jump ahead of that Curve and Exactly. Exactly. So let's, let's say that you're in the 22% bracket and you take a look at your return from last year and the, the, the difference between your total taxable income and the top of the 22% bracket is $20,000, let's just say. Mm-hmm. . Well, if you let the end of the year go by and you just end up in the same spot, you've just wasted $20,000 of a 22% bracket. And so one of the things that you can do to actively manage your taxes is to, is to do things like Roth conversions, do things that are gonna cause you some tax now, but potentially let you put it into a tax free bucket where you will never have to pay tax on it again. And so if you are in that 22% bracket and you've got $20,000 between where you are and the top of that 22% bracket, well, we might take a look at converting $20,000 from a Roth ira, I'm sorry, from a regular traditional IRA into your Roth ira, put it in that tax free bucket.

So we pay the 22% tax on it now, but it can grow like crazy until you need it. When you take it out, there's no tax on it. If you pass away with it, it goes to your heirs without any taxes and there's never a required minimum distribution. So unlike an ira, you're never forced to take it out. They don't care if you take it out. There's nothing in it for them if you do. So, that's what I mean by leveraging your bracket. So if you are not taking a look at where you are in your bracket and making sure that you're making the most use of it, if you're in a relatively low bracket, that's, that's one of the things that we encourage people to do. So

We talked about, uh, Roth conversions. What about capital gains?

Yeah, so that's another opportunity. Um, capital gains are taxed at a different rate, but they're also, you know, attached to your total taxable income. And, and so the, the bracket that you're in, you'll get taxed at a different rate for capital gains, but it's similar brackets. So, you know, we've talked before about tax loss harvesting. So if you've got a loss and a security, you can sell it and have that loss that you can use to offset capital gains. But I like to talk about tax gain harvesting as well. And so what that means is, if you are, if you are still in that 12% bracket or 22% bracket, and you might be at a 0% capital gains rate or a 15% capital gains rate, take some of those gains now and pay a, pay nothing on 'em, or pay a very low amount on it and just capture those gains. Um, rather than letting it build up and having to potentially take a bigger gain later, that might force you into, into a higher capital gains bracket. So besides Roth conversions, another way of, of managing that bracket is by taking a look at what gains you've got built up. And in addition to taking, um, harvesting tax losses, you can actually harvest some gains and pay a low rate on those, um, while you are still in that low bracket.

Okay. So you touched on capital gains. What about maximizing the standard deduction?

Yeah, that's another opportunity. So, um, the standard deduction is an amount that you get to essentially deduct from your income to lower your tax rate. And they just raised that standard deduction a few years ago. It used to be that you could itemize you, you, you, you've probably heard the term itemized deductions mm-hmm. . And so it was pretty common for when people filed their taxes that they would fill out a schedule where they would itemize all of their deductions. And so they would have state and lo local taxes, they would've mortgage interest, they would've charitable contributions, they would've a whole bunch of things that they could use to deduct against their, against their taxes. But when they increased the standard deduction, a lot of that got a lot less valuable because they raised it to a point where they were, where they were equaling what a lot of people were deducting.

So a lot of people just stopped filing itemized deductions. They would take the standard, but you can use that standard deduction to your advantage. So if you are a married couple, your standard deduction is about $25,000. If you don't have $25,000 in deductions, then there's a good reason to avoid those incurring those kinds of expenses this year because you're not gonna be able to make use of it. Your standard deduction covers it. But if there are things that happen every year, you can time it out so that you can make the most use of a standard deduction this year and then itemize next year. So for example, let's just throw one out there that you can use and that is charitable contributions. So let's say that every year you give a certain amount to your church, you give a certain amount to certain charities, and you know, all together it might come up to $5,000 or $10,000.

Well, if you did that in one year and you added up the other deductions that you had, you probably wouldn't be able to overcome that standard deduction. So what you do is you give twice as much to those organizations this year. So you can push yourself well above that standard deduction and just let those organizations know, Don't get too excited guys, because I'm not gonna do this next year. I'm gonna do twice as much this year and then take next year off. Well, that means that you can, uh, make enough of those contributions that you can itemize deductions and take more than the standard deduction off of your taxes. And then next year you will not have the cash going out because you gave to 'em this year, and you'll be able to make the most use of that standard deduction. So, bunching deductions, putting those things together and skipping ears gives you a way that you can really leverage that standard deduction and make the most use out of it.

So we're talking about using your, your bracket, leveraging your standard deduction. What else?

There's one other thing I wanted to mention. It's not, it's not technically managing your bracket, but if you're in a relatively low bracket and you have earned income and you can make an IRA deposit, think about making a a Roth IRA contribution, uh, before the end of the year. Um, it it, it enables you to take some money from a taxable account, put it into a tax free account. You're not gonna lower your taxes by it, but it is a way of taking advantage of a, of a relatively low bracket and, and gradually moving money from your taxable accounts into your tax free account. So it's not technically managing your bracket, but it's another thing that you can do to lock, you know, to, to make use of the bracket that you're in Now.

Your retirement is at risk, not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner, Steve Waring and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family and keep it away from the the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life, how to move tax savings into a tax-free environment. The Widows Tax, the Secure Act, the secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today

And to wrap up our section about taxes, 30 minute action items.

Yeah, Active tax management. Here's your 30 minute action list. Look at last year's tax return and see where you are in your bracket. See if there is this year, if there's likely to be some space that you can make use of and take a look at, uh, what kinds of, um, what kinds of deductible things you may be able to, um, to leverage for this year. Um, yeah, so 30 minute action item. Look at last year's tax return to see where you are on the bracket and how much of the bracket do you still have to fill up. That's your action list.

So that's all the time we have for today and a 30 Minute Money podcast where, what's going on this week?

This week, like every week we offer a taxes in retirement webinar. It's free. Just go to focus wealth advisors.com/webinars and you can sign up. We do 'em every Tuesday. So sign up, find out how you can set yourself up for a low tax or even a no tax retirement. Um, it's an hour long. It's, uh, it's free. Lots of good ideas. Come see us there

And it's free. So it's definitely worth it because there's so much to learn just here. So you can imagine doing a free webinar as well. If you want to reach out to me and for any, uh, production podcast help, it's rocvox.com. Thanks so much for joining us. We'll see you next time.

Thanks for listening. If you like the show, leave us a review on Apple Podcast or like the Stephen Wershing CFP Facebook page. And feel free to leave us a suggestion for what topics you would like to hear discussed on the show. Securities offered through registered representatives of Cambridge Investment Research Incorporated, a broker dealer member FINRA, S I P c Advisory services offered through Cambridge Investment Research Advisors, Incorporated a registered investment advisor. Focus Wealth Advisors and Cambridge are separate entities. Discussions in this show should not be construed to specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.