Year-End Tax Strategies

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast and what business owners should recognize is that they often wear two hats. One is that of an employee of a company paid to do a job and the other is as the owner and the investor of a business. And as the owner you can take profits as a dividend, which can often carry a more favorable tax rate and can lead to some significant tax savings over time. Foreign.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion.

And the whole teaching there is about preparedness and being ready.

There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. As the year draws to an end, I thought it would be appropriate to share a few of my thoughts and ideas with you about year end tax planning. This idea of tax planning really does mean different things to different people, and the suggestions that are floating around online are not usually all that helpful. So I'm dedicating a show to try to offer some of my thoughts and opinions. At this time of recording this, I just had a conversation with my CPA to review my plan and make sure that the planning that we set out to do is on course and determine what needs to be addressed before the year end year comes to an end because once your year is done, your options dry up. It leaves you with kind of like a photograph of your situation. People often refer to getting their taxes done like it's a time of discovery, a time to learn whether they owe money or have a big tax refund. If that's you, then you really want to stay tuned because the truth of the matter is that tax Planning isn't an April 15 activity the tax return itself is just a scorecard. Tax planning is January through December of the year you're in. I'm referring to the intentional thought of how you plan to allocate resources and the process you intend to follow as money flows in and out of your life over the course of the year. By the time you have a tax return prepped, the time to do any planning is behind you. So to design a well thought out tax strategy, you need to operate within the current year. It requires proactive thinking and helping minimize tax liabilities. That is what today's show is all about. All in all, what I hear about most regarding taxes revolves around two things, spending more to deduct more or defer taxes into the future. I'm sure both of those sound familiar, and sadly, this is the approach many people take. Otherwise it wouldn't be considered mainstream or common knowledge. I find that CPAs and many other tax preparers routinely make these recommendations in an honest effort to help you reduce your tax bill for the given year that you're in. But this approach shouldn't be considered a plan. It's more reactive than it is proactive. And while these things can provide a temporary fix, the result is often not without side effects. When it comes to spending money in exchange for a deduction, you can overspend on things you don't really need. Or perhaps you kick the tax can down the road into a retirement account to only have to deal with the same tax issue, only potentially larger again at a later date. This is what my firm spends a lot of time doing, helping people unraveling their tax deferrals. And when it comes to business owners, we know that there are advantages to being able to write expenses off as it pertains to the business. Much like the idea of deferring taxes. The idea of spending more to reduce taxes has some contradictory math. If you have expenses to run your business, the spending of course makes sense to receive the deduction. But seeking out expenses to reduce profit and save 30 cents on a dollar doesn't make too much sense to me. I really see that as a loss of 70% if it isn't a necessary expense that you would need to make anyway without any tax benefits. But I routinely hear business owners talk about their tax preparer recommending they buy vehicles or equipment to save tax. And that line of thinking may be costing you money, not saving you money. What is being overlooked is the opportunity cost you have when approaching your business like this. If you make a year end purchase of, let's say a hundred on something you may or may not need. You're reducing the $30,000 of tax exposure. But what has to be considered is the long term loss of making that decision. That $70,000 that was net of those taxes could have been invested and could have nearly doubled in 10 years with a fairly modest rate of return. And when I think of this, I think of the scene in the TV show the Office where Ryan is asking Pam if she would rather have $100 today or $5,000 a year from now. She says $100 today. The scene of course was funny and how it plays out, but it reminds me of how people often think about money. It's instant gratification to see an immediate benefit. As far as tax deferral into retirement accounts, I've recorded many shows and have written many articles explaining why I'm not a big fan of tax deferrals. So I won't get into all the math and reasoning, but I will share this. I am personally in the highest tax bracket and yet I don't defer taxes into retirement accounts. Now that may sound crazy to some of you listening who strive to max out their accounts each year, but when you spend nearly every day working with people who have millions of dollars tied up inside of these plans and who are desperately wanting a way out of the pending tax bill, you would know that from my perspective, the juice isn't usually worth the squeeze. I will say that these plans have helped people accumulate money that they may not have otherwise saved. So I do think from that perspective it's a great thing. And I spend a lot of time working with clients though, helping them to unwind. All that tax deferral and it just isn't easy. The result is seldom what you envision when you are making those deposits each year. The bottom line is a tax deferral isn't a tax savings, it's a deferral. And I really wish my friends who prepare taxes would not necessarily frame it as a tax savings. I'm fine if people understand it as a deferral, and that can be useful for some situations when you're managing tax brackets. But it shouldn't be as overused as it is being used. I have physician friends and they often will talk about the over prescribing of painkillers and antibiotics. You may have heard that story before. They explain that they are very beneficial and they can save lives, but they are too often used for things they shouldn't be prescribed for. I see these tax deferred accounts in a similar way and just ask you to use caution, to think carefully before you're deferring tax liabilities. There needs to be more thinking around this as what's happening when you contribute to a retirement account such as a 401k or these other tax codes that are available. In my opinion, for a strategy to be a tax savings, it needs to actually save you taxes. A tax deferral is not a savings. The word defer gives it away. An example of tax savings would be, for instance, having a brokerage account or a piece of property or some other asset that has experienced a loss. Well, if you have assets that have experienced a loss, there's a good fair chance that you also have assets that have gains. So a real simple strategy is to use something called tax harvesting. This technique involves selling an investment that has underperformed to offset capital gains that you're realizing in that current year. Tax loss harvesting does need to be well thought out and planned out to ensure the losses are utilized effectively without triggering something called a wash rule, which could get you in trouble and nullify the intended tax benefit. But all in all, that is a good strategy. Of course, I would be remiss if I didn't state an obvious fact that there are tax free options available to help build wealth and not have future tax liabilities. And to me, this can make a lot of sense, primarily because you're moving the control of the future tax environment into your control. I mean, we don't know what the future tax rates are going to be, and the idea of trusting politicians to work things out in our favor is just not something I have a lot of confidence in. For business owners, one of the essential elements of effective tax planning is recognizing the delicate balance between receiving income and the broader advantages that come with owning a business. Many business owners often prioritize a paycheck, viewing it as a primary measure of success and capital spend within their lifestyle. However, it is crucial to delve deeper into the various forms of compensation that business ownership offers you. While ordinary income may seem attractive, this form of income is also the highest taxed income in our tax system due to payroll taxes. And what business owners should recognize is that they often wear two hats. One is that of an employee of a company paid to do a job, and the other is as the owner and the investor of a business. And as the owner, you can take profits as a dividend, which can often carry a more favorable tax rate and can lead to some significant tax savings over time. Many tax preparers, I don't think properly educate their customers on how to balance this and they end up overpaying their taxes. I just see it all the time. There's a delicate balance with this, but this is an example of what you don't know could be hurting you. Another thing I see clients doing is running a business, receiving an income, then making charitable contributions from their personal account. For many people, this can result in overpaying on your taxes because of the standard deduction that everyone receives. Many individuals tend to overlook this and default to the standard deduction, which, while convenient, often leads to a missed opportunity for substantial tax savings, particularly for those who make significant charitable donations. The standard deduction has increased over the last several years, making it more challenging for tax preparers to itemize their deductions and fully realize the tax benefits of their charitable contributions. Business owners should consider whether it's important for them to be charitable as individuals or as a business, because a charitable business doesn't have a standard deduction, only expenses to offset income, and the more expensive business has to write off the less income that flows to a personal return and is subject to tax. This strategy can help overcome the standard deduction threshold, allowing for a greater tax advantage. This approach is particularly useful during high income years or when executing transactions such as Roth conversions, which can have tax implications that necessitate careful planning. Other things, like investments in oil and gas, also represent a compelling avenue for accredited investors looking to diversify their portfolios while also establishing a passive income source. These investments often come with a unique tax benefit that can often offset various types of income, not just capital gains. For instance, deductions related to exploration and production expense can lead to significant reductions in taxable income. This form of investment not only provides potential for income, but also enhances the overall tax efficiency of an investor's portfolio. Additionally, the passive nature of oil and gas investments can appeal to those seeking to balance their income streams without the demands of active management. There's also the opportunity to accelerate charitable gifts in a particular year, allowing for a tax benefit while still having control over the money to distribute each year to charities. It's called the Donor Advice Fund. I've talked about these before and they are good in select situations. Can be helpful tool to help you when you're dealing with some taxes and trying to control your giving. Everything being discussed here is what I would consider a low hanging fruit that I find many people either don't know is available or they view it as too complicated. Regardless of the reasoning, it could be money being left on the table. The default approach for many people is to receive a salary, defer money in their 401k, pay down debt, and approach retirement with hands off the wheel. You can view it as like taking a long road trip with the sun shining, windows down, hair blowing in the wind. With the cruise control set at 70, it's a pretty easy ride. But as you get closer to retirement, you begin to see the storm clouds forming and the wind picking up. You may even find yourself in a storm with little if no visibility that forces you to pull over and call for help. I just encourage you to formulate a team to get a plan in place, if for no other reason, to just know you're doing everything you can to keep more of your money in your pocket. There's no perfect remedy to any of this, and we must realize that if you make money, there's going to be taxes to manage. Any strategy you choose to deploy should be done legally and ethically, but there is nowhere in the tax code that says you have to pay the max amount in taxes. I had a CPA tell me once that there are around 6,000 pages of tax code, and while about 30 pages explains how to pay taxes, the remaining, I guess 5970 focuses on ways to legally reduce the tax bill through deductions, incentives and credits. They're always adding to the tax code, so I don't really know how many pages are there, but you get the idea. There are many things that can be done, but you must have the right team guiding you through how to do things correctly and learning what applies to you. It's never a one size fits all approach. I believe that you should be vigilantly learning about what is available to you while keeping a pulse on regulatory changes and how they may impact your strategy. Tax laws evolved and being informed about these changes can lead to better decision making, and I know that's not something that a lot of people are overly excited about, but it is costing you money. For instance, the introduction of the new tax credits, deductions or changes and thresholds for existing benefits can all play a role in how you approach your planning. It should go without saying, but it is essential to maintain accurate and comprehensive records throughout the year. Good recordkeeping not only facilitates easier tax preparation, but it also helps you identify opportunities for deductions and credits that may otherwise be overlooked. No CPA likes their tax clients to walk in with a box of receipts and then they start sorting them at the desk. By having a team of professionals written out, plan in place, and staying organized, you can help yourself ensure that you're taking full advantage of the potential opportunities afforded to you. This should be viewed as an ongoing and strategic process that transcends the simple act of making large expenditures to reduce taxable income or deferring taxes and retirement account. It requires a thoughtful examination of income structures, a proactive approach to charitable contributions, and a means of learning about opportunities that offer tax benefits. And by embracing these strategies, you can navigate the complexity of tax regulations while optimizing your resources. So as the year concludes, take the time to engage in comprehensive tax planning. It can make a meaningful difference in both short term savings and long term financial health, allowing you to capitalize on the full array of benefits available to you. I'll leave you with this if you're an accredited investor with 1 million or more in investable assets and would like to learn more about what I'm talking about here, you can visit scriboniafinancial.com that concludes today's show. I am Brian Scribonia. Thank you for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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