Next Level 259: Saving on Your Taxes is Sexy with Candace Galiffa

If your bookkeeping isn't in place, I can't even do the cool tax planning with you. I can't even talk to you about tax strategy. I can't then implement sexy tax strategies because there's nothing to. I don't even know.

Welcome to the Next Level Income show, where it's our goal to take your income, your investments, and your life to the next level. I'm your host, Chris Larson. If you haven't yet, get a copy of our book for free at our website, nextlevelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On today's show, we have Candace Galifa. Candace has been a CPA for over a decade. After studying accounting at the University of Pittsburgh, Candice began a career in public accounting at Price WaterhouseCoopers and then held various leadership roles in corporate accounting, finance, and investments. After nearly a decade in corporate America, she decided to focus on her entrepreneurship roots. She founded New Way Accounting to serve small business owners and entrepreneurs, as well as provide modern accounting solutions and outsource CFO resources to corporations. And today, Candice and I are going to talk about how. Candace, welcome to the show.

Thank you so much for having me, Chris.

Yeah. Great to see you. Yeah. So people are. People might be like, saving on your taxes is sexy. I, you know, I, I gotta tell you, after we got connected, Candace, I looked. I. As we were on the phone or as we were. Yeah, I think we were on the phone at the time. I looked up your Instagram and I was like, I was laughing because your marketing team's phenomenal. Like, the things you guys, you guys come up with with writing off for taxes is hilarious. And I think I forget if it was like sex toys or condoms or what it was, but I was like, wow, this is. This is catchy. So you guys got a phenomenal marketing team over there.

Candice, you do a great job. I can't even take credit for it. They're the ones that come up with the creative stuff. I'm just the boring cpa. That was a good one. I think the one that you may have seen was like, funny tax deductions because IRS released an announcement saying that, hey, condoms are considered a medical expense.

So you can really like for HSA's.

For HSA, if you buy condoms.

That makes sense. There you go.

So there you go. So of course they were like, well, we have to put this out into the world. So sometimes my Instagram is a little, is a little unhinged.

I mean who's, who's spending enough money that it even makes that big of a dent in their taxes on condoms? I guess. But I know, right? Yeah. Anyway, but yeah, so it's your, your marketing team's great for, for those that, that don't know, you share a little bit more about your background New Way Accounting and how you got here.

So I love it. So I, yeah, I'm a, I started my career in public accounting. I was at PwC. So the soul crushing auditor hours, the whole thing. Moved into corporate accounting at Independence Blue Cross in Philadelphia. Was there for almost a decade in accounting and then financial planning, analysis, cash and investments, the whole, the whole nine yards. But when my husband and I decided to have our first daughter, I knew I didn't want to do those corporate crazy hours with a baby at one stay at home mom thing. And so I started New Way Accounting. And honestly Chris, I thought it was going to be like a cute side hustle, you know, like a cute little hobby on the side by the baby napped to keep my mind sharp to do some small bookkeeping and taxes on the side and it just totally exploded. So fortunate. Within a year it was actually my husband, he quit his full time job and he became the stay at home.

Wow, look at that.

Yeah, I know, it's really amazing. Now we have a team of 20, we work with hundreds of business owners and yeah, we specialize in bookkeeping, financial reporting, tax strategy for business owners and it's just been such a cool journey. Very excited.

Yeah. And we're, we're one of those business owners you work with and your team's fantastic. You know, I think in, in today's world, you know, it's, it's, it's hard to have people that are responsive, that have personal touch when they do that. And your team, your team has been fantastic to work with and a lot of listeners on our show, they've heard me say this before. So if, you know, if you're listening, you've been listening a long time, you probably heard me say this, especially if you've gone through our course. But there is a difference between your, call it your strip mall box accountant that you take your receipts in the shoebox as we used to versus what you all do. And when I was actually doing my, my mba, I went and I took a tax course from a retired IRS agent.

And I mean that's cool to me. Chris.

Oh, it was, it was cool yeah, it's, it's like, okay, because, you know, everybody loves to talk about investing and, you know, growing their money and doing that. But when we talk about our next low income strategy, we talk about how to make more money, how to save more money, keep more money, and then how to grow your money. Because if I can save a dollar on taxes, that's right to my bottom line. And a lot of people don't realize that if you plan properly for your taxes, you can utilize the IRS code. It's not scary. It's a playbook. It's like the instructions to Monopoly. It teaches you how to structure your income. So if you wouldn't mind share a little bit about how you all are different in terms of, of your accountant, that you just send your receipts in the following year and do that. How is tax strategy different than that?

Yeah. And you said it perfectly. Right, Right. So you basically how generally speaking, when it comes to tax accountants, you've got your tax preparers and you're going to visit them during tax season, you're going to bring them their documents. And if they're a good preparer, they may ask them additional questions. They may make sure they're maximizing actions, especially for business owners. They may be making sure that some of those additional forms and schedules are completed. Quite frankly, there isn't a whole lot we can do during tax season. Right. It's almost too late. It's too late. Most tax strategies have to be implemented during the year. So those tax preparers are awesome. We need them. Right. Most Americans have to do a tax, and it's great to have a professional doing it. So we need those professionals doing it. But that's not our jam. Right. I am so uninterested in working with someone just once a year, giving them unfortunately, potentially a large tax bill and being like, godspeed. Right. What we love to do is work with folks year round on a monthly basis, because that's when actually implement the strategies, have some planning in place to then save money on taxes. Right. Not a ton we can do during tax season. So that's what we love to do. We love to work folks during the year to plan accordingly, looking at their books on a monthly basis for those business owners and implementing strategies during the year. So then when it comes to tax season, it's really just compliance. Now we're filing the return. There shouldn't be a crazy tax bill. Right. And there shouldn't be any surprises.

No, I love that. And you know, it can be as simple as deciding like, which Car to buy, you know, do I, do I buy like I bought an SUV a couple years ago and I real, I realized if I bought, you know, Model S versus Model A, I actually got a better tax savings when I did that. And there's all these rules around it now. I'm a business owner and you know, that's the other thing, you know. And I know you have strategies around W2 owners, so maybe we start with that. So you know, there may be somebody listening and they're like, oh, I, I, you know, I work in a corporate job, I get paid, you know, W2, so does my wife or my wife stays at home or vice versa. My husband stays at home and you know, my taxes are taken out. And I always love when people say, oh, I'm getting a tax refund. I'm like, that's terrible. Like I don't want a tax refund, I want to owe, I want to owe taxes because I don't want to give a tax or a interest free loan to the government. So let's hit both those. So you know, let's talk about W2W2 employees versus business owners. Can you even do anything for like a regular W2 earner there?

There definitely is. And so first I'll start with the super boring ones and then we'll talk about the ones that are way more complex. Right. But frankly the simple ones that don't really, that don't require a large cash outlay. You've got basically two, three things depending on where you live. You can make IRA contributions and again if you're a high earner, you may be phased out of that anyway and you won't even get the deduction. Depending on if your employer, officer, 401k. You can always contribute to an HSA. So if you are a part of a high deductible plan, you can contribute for your family about 8,300 bucks and that's a direct write off. I love the hsa. I think that's a great strategy because number one, it goes in tax free. You get the deduction and you then yeah, when you pay for the condoms, anything you need and even like acupuncture, like there's really a lot of things now are covered supplements. Supplements, yeah. Any co pays, obviously prescriptions, contacts, you know, stuff like that. So I feel like it's very easy to get through especially if you've got kids. Like I feel like it's very easy to get through that 8, 300 a year and when you use them for them, it's also tax free. But even if you didn't use it and it's just like invested in a money market account, it also grows tax free. So it's like a triple win. I love that. But it's still smaller. Right. We're not getting any more than an $8,300 deduction. And the last one is depending on the state you're in, 529 contributions for the kiddos education. That can also be deduction depending on your state. And that's, that's it. A straightforward, simple, traditional.

Oh, sorry to interrupt. Yeah. So what 529. Just explain what that is, what a 529 is.

Yeah, sorry. So 529 plan is basically an account for your kiddos for education. So you can make contributions to a 529 plan. It grows tax free and then take it out for school. Either any type of university or college or secondary education costs or up to $10,000 a year for like high school, other private school, it's tax free when it comes out. So you put it in, you maybe get a state deduction, which is nice. Depending on your. It grows tax free. And then as long as you use it for those education expenses, it also comes out tax free.

So if my son goes to a private school and we spend $2,000 a month to send him there during school, I can, can I put my money into a 529 plan, take it right back out that same year and still save on taxes. So that's a great. Yeah, so that's a great. Because I've always thought of a 529 for college. And I, you know, I struggle with this. We've had guests on talking about whether college is worth it. I don't even know if my sons are going to go to college. Although my older son wants to play lacrosse in college, my younger son wants to be an engineer. So college is probably in their future going to happen. Yeah, so that's, that's probably a good, a good option. But there's a lot of limits around that. Like you can't, you know, you can't invest in all the things that you want to invest in.

It's really hard and also depends on your state program. So like some states actually have their own investment or they allow you. Like my state allows me to invest it basically how I want, which is nice, but I keep it in just a target fund. But it's so hard, Chris. It's, it's such a. So first, you don't know if Your kid's going to go to college, right? So my girls are 6, 4 and 3. So like, I have no clue and I want to do something, but I don't want to overshoot it for sure. Because while your 529 can transfer to another beneficiary, so I can definitely move mine around between my three girls or, you know, let's say none of them use it, then it can go cousin, it can go to whomever you. Also, there's a limit on how much you can. Then if it's not used at all for education.

Right.

You can start to move some out. But only the amount that's allowed for a Roth, like a Roth contribution or an IRA contribution. So right now that's 7,000 a year and it's maxed at 35,000 right now. And of course this is not changed because it just, it just changed, you know, a couple years ago. And that changes all the time. Yeah, it changes all the time. Which is why now the private schooling, the high school any is now include that $10,000 limit. There is now included, but it could change again. So it is. I, and I don't have insight on that is if it's worth it. How much is worth it. I can just tell you the tax advantages around. But it is, it's such a hard thing to judge.

Yeah, but that's, that's great. I mean, if you're not utilizing that strategy, it's certainly something to look at. You know, the other thing is I remember the accountant I worked with about 15 years ago said the optimal tax setup is having like a W2 employee that has benefits and corporate benefits and those sorts of things. And the other spouse has a business. So can you talk a little bit about that? Because I know we're going to transition to business owners. But what if you have. So I worked with a lot of surgeons in my career, and if you're a neurosurgeon that's on call, you're working sometimes seven days a week, all hours of the day and night. It's almost impossible to have both spouses. And I had some surgeons I worked with. Their spouse was a physician and they ended up staying at home. And one of one, one of my favorite examples, he's, he's. He's still a personal friend of mine, his wife, they started a real estate business and, you know, he took advantage of a lot of those things. Can you talk about how, you know, some people that if you have a W2 or maybe you convert some of your income or you convert, you know, from a, like you said, you know, from working for a big corporation to your own business. Like how can, how can listeners take advantage of that if they have that sort of sit.

Well, it's. I definitely, I love the idea of a. And we'll definitely talk about real too because that's, that's the, that's the big one that is around deductions for a W2 employee, right? That's, that's the big one where you get the biggest bang for your buck. But it's not always easy. So yeah, I mean the big thing is if, if you have a spouse that has some type of hobby, side hustle, etc, I mean that's fantastic because what then can happen is all those actions where we can't take as a business owner, we can then potentially take through that business, potentially even create loss that offsets that active income. For example, a simple one, right? If you're an employee of a W2 employee and you work remotely and you work from an office at home. If you're W2 employee we deduct that home office. But as a business you can. So depending on how that's structured, you could really pump some losses through there or when. I love that, you know, in my situation we take advantage of here is, you know my, my husband's a stay at home dad and he's quite handy. Real estate, right. So love investing. And again like so your neurosurgeon who's working a billion hours a week, any of these types of things are going to be really hard. But if you have someone at home to help implement these other items, it's fantastic. And what you said earlier has really resonated with because again these strategies aren't going to work. Just if you're making a lot of money you need to also be able to keep that money because these strat like real estate strategy. Some of the other tax savvy investments require an outlay of cash, right? They require an investment. Let's use an easy example here, right? Let's talk about purchasing real estate and that could potentially save you in taxes even as a W2 employee. So first thing to note, right that most rental income is considered passive. I we clients coming to us all the time. I bought a short term, I bought a, I bought a property this year. It's rented month to month. Shouldn't I get a huge deduction? Well, unfortunately most rental property income is considered passive income which the passive loss can only offset passive income. So your passive loss from this property can't offset your W2 income or even your business income. So how do you purchase real estate and make that real estate investment active? Well, there's two main ways of doing this. One, the harder way is having someone in your home be a real estate professional. And that means they're spending 7, 750 hours a year on real estate. And that's a lot. That's like 15 hours a week in real estate. The other option, which is more likely potentially is you purchase a short term rental property, meaning that it's a more of a vacation rental property and you're, you're renting it out seven days or less. So a week or less and some, and you, or you know, your spouse are managing that property, you're materially participating. You don't hire a property manager. You're the one doing the most of work, even if you have it on Airbnb, et cetera.

So my wife, we have two Airbnbs. So my wife manages that now. She has her own business too. But let's say she didn't hypothetically in this scenario. So she manages those Airbnbs. And that can involve, you know, posting on Airbnb, responding to clients, organizing or cleaning.

Yeah.

Purchasing products. The travel involved with all that is all that. Am I following with that?

Absolutely. Right. Long as she's spending the most time managing this property more than anyone else. Like even the cleaners. Right. You can have cleaners in this. You just need to be the one doing those work. It doesn't work when it comes to a short term rental. Making it active doesn't work if it's in like another state. Right. You, we need you to be able to get there and work if, if you hire a property manager. But if you, even if you have cleaners though, it's fine. But if you are doing most of the work, then we can generally say, depending on some threshold. Right. That it's an active income producing property. And so what we then want to do is create an active loss to offset that W2 income. So do we. How do you do that? Right. So when you purchase a property, you can do this thing called cost segregation analysis. Right. I'm sure you and other folks on your team have talked about it many times before.

We do it with every single property. Absolutely. Yeah.

As you should. Right.

Wonderful.

And because what happens is you get to accelerate depreciation. So if you didn't do that, your talent, we would be able to take the property by 27 and a half years. And that's the amount that we basically get to take as depreciation each year. But if you do a cost segregation analysis, which all of that is, is bucketing assets of the property into different accounting classes and it allows us accountants to accelerate depreciation. And so a lot of this depends.

On pull it forward. So when we say accelerate depreciation, we say if we have $1 million property and the depreciation is $750,000, whatever it is, we may be able to pull say 500,000 into the first year, potentially.

That seems like a lot, but yes, something around that 250.

Yeah, well, when there was, well, when there was 100% depreciation, we were seeing, we were seeing numbers like that a few years ago with the, with the 2017 tax.

Yeah. And I mean, quite frankly, we may get that 100% depreciation again this year. Right. We're all like fingers crossed, hoping that happens. But yeah, I mean, I like to tell people, you know, a safe estimate would be around 20%, but it totally depends on a lot of factors. But, you know, so in this case of buying a property for $500,000, you could potentially that year get $100,000 deduction.

Example. Yes.

I like to, you know, the CPA me likes to be a little conservative. So that's, that's a great way again, but it takes work and it takes cash outlay. Right. And then of course, there's other investments that are tax savvy. Right. You people have oil and gas partnerships to invest in. Again, I'm not, I'm not advising on if it's a sound investment or not. Your well could be dry. But that generally gives you a 70, 80% deduction on that investment in that year because of the intangible drilling costs. There's also movie production investments. Right. That gave sometimes a 4 to 1 deduction as well. And that takes no investment at, or, I'm sorry, no work at all, but just the investment.

So when you say a 4 to 1 deduction. So if you invest a hundred. So we talked about a $500,000 property having potentially a $200,000 PAT loss on that. So you're saying if you invest $100,000, it's 25,000 or 400,000.

400,000 for this specific one. And this is something that I don't broker those deals like we have partners, Hidden Wealth Group, you've taught them before that they can broker those deals and we can connect you with them. But yeah, there are investments like that where as, again, as long as you have the cash to make the investment, you could potentially be getting a 4,000 deduction. And so the math you want to do there with your accountant is, well, okay, my outlay's a hundred thousand dollars and My deduction is 400,000. How much does that $400,000 deduction save you on taxes? Because if your tax rate is below 25% in this case, then you're not actually saving money. Right? You're, you're, you get, you get a tax savings, but your outlay isn't the same.

But if your incremental tax rate your.

Your effective tax rate, not your marginal rate.

Oh, gotcha. You're effective. Okay, good point.

Your effective tax rate. But if you're, if, if you're over that, then, yeah, your savings could be much greater than your investment and then it's a win, win. We don't care if this movie makes money because you already got your ROI on the investment. So there's some items like that that always play into it and can, can work again, all very specific to your certain tax situation. And there's loss limits and all types of things. So you don't do anything without talking to your tax accountant first.

No, that's a, that's a great point. And if you're listening, you want an introduction to hidden wealth solutions that Candice mentioned. Shoot. Shoot me an email chrislevelincome.com and just say, hey, would love an intro to hidden wealth solutions, and we'll connect you there so you can learn more about that. But yeah, I think you make a really good point, Candace, which is everybody's situation is different. And I, I hate people that say, hey, I'm just going to go, I'm going to, you know, like, when the Opportunity zones were out five years ago, people were like, oh, if I invest in Opportunity Zone, you know, I'm going to save enough that I don't even have to make money on the investment. And, and I had some friends, I said that's actually not true because they didn't realize that if they were making 10% in another investment, it would actually outstrip that savings potentially. So I think it's really important to work with an accountant that's knowledgeable with your specific situation, these specific investments, to look at the pluses and minuses with all those, which I know you guys are well tuned in, so let's shift a little bit towards business owners. I know that's what you specialize in, Candace.

My jam.

Yeah, yeah, true, Jim. So why is it so great? First off, I got to go on my Soapbox a little bit. Small business owners create basically all the jobs in this country. Most people don't realize that large businesses, they do these acquisitions, they cut jobs. You know, people that are paying taxes fund the government. So if there's a government job, we're funding that, you know, it's. I really, I'm such a fan of entrepreneurs and small businesses, so I think that's. That's really important. But why is being a business owner so great from a tax perspective versus being a W2 employee?

I just love it because, number one, the tax aside, I just. I'm always like an entrepreneurial cheerleader, right? If someone's thinking about it, I'm like, do it. It changed my life. Like, it's incredible. So I love that for everyone. But from a tax perspective, there's just so much more that you can do. And that's the biggest thing, right? Where you're much more pigeonholed when it comes to W2 employee. But with, with business, there's just so much more you can do. And I figured here I'll touch on some of the three bigger ones, right? Because obviously you deduct, deduct your business expenses through your business, right? We all know about, but there's just again, so much more written in the tax code that we can take advantage of. I already mentioned earlier, like home office deduction, right? You can't do that as a W2 employee, but you can for a business. You can't deduct even if you're driving all over the place for to see clients as a business person or working, I'm sorry, in a W2 job. But you can take that file or an actual car deduction through the business. There's just so much more flexibility because again, the government wants to incentivize business owners because we are the ones that create all the jobs. I love that. So what's really important is knowing all the options because there are so many. So the first thing I always tell people, and I know we're. We're supposed to be making taxes sexy on this podcast today, but this is a really unsexy, boring thing.

Tax savings. Tax savings is sexy. Yes.

Thank you. Thank you. I think so too. But the first, first thing, if you're a business owner and you, you need to be doing this. If your bookkeeping isn't in place, I can't even do the cool tax planning with you. I can't even talk to you about tax strategy. I can't then implement sexy tax strategies because there's nothing to I don't even know. I don't care what your revenue is. I need to know what your net profits are because that's what you're taxed on and that's how we deter in tax planning and strategy. So that's the first thing I say to everyone. If you're not doing your bookkeeping, get on it or get someone to do it. Right. And we'd love to, but it's really important. And the next thing you want to look at is entity structure, right? A lot of us as business owners, you've probably heard of S corporations. It's such an amazing way to shelter your business profits from self employment tax. It's huge. Self employment tax is 15% for business owners, which is just Medicare and Social Security and it's on top of income tax. So I'm sure you may have had with you, Chris, in your first year of business, but we have so many new business owners that first year that they're like really making money and they're like, why am I paying like a 40% effective tax rate? I'm like, well you have federal income tax, then you have this thing called self employment tax and that's 15% and then you have potentially state tax.

So how does S Corp fix that? Yeah, how does S Corp fix that?

So glad you asked. So let's use easy numbers as an example, right? So let's say your business nets a hundred thousand dollars. You're going to pay income tax on that 100 grand plus about 15% from Medicare and Social Security, aka self employment tax if you elect to be taxed as an S corporation. And fun fact, the S corporation is just a tax election. You keep your llc, you keep your just about. Yep, you're just saying, hey irs, please tax me as an S corporation. And by so you have to become an employee of your company and you actually get a paycheck from your company. And let's say you're a yoga instructor in, in Pennsylvania and on average an average yogurt yoga, yoga instructor. NPA is making, let's say 50 grand a year. We're going to pay you through payroll, an actual paycheck, that's for $50,000 a year. And as a part of that paycheck you have that payroll taxes, aka self employment tax. So that 15%, so $7,500. But that other 50 grand that your company makes you as a sole shareholder can take any day of the week. That 50 grand is not subject to the 15% self employment tax. So that easy math example yeah, if you're netting 100 instead of paying 7, 500 or instead of paying 15 grand in self employment tax, you're only paying 7. So you get some huge tax strategies, tax benefits just from your entity structure alone. So again, gotta talk to a tax accountant.

Yes, no, that's a great point. And yeah, that's something that we went through because you know, I was making a ton of money as a W2 employee 10 years ago and I'll never forget my, my accountant at the time, I'm sitting with him and we're going, we're doing our, our annual review. And he poured me a glass of bourbon and sets it in front of me. And I was like, oh, oh, this isn't good. It wasn't like, hey dude, let's have a glass of bourbon. It's like he poured me one and not him. And he goes, I was like, what's this? He goes, what number are you prepared to hear? I was like, oh, this is not going to be good. It wasn't good. And I was like, we got it. I was like, how can we restructure this? He's like, well, you're kind of screwed in a lot of ways with the W2, which is one of the ways we restructured some things and made it much more efficient. So yeah, I've learned, I've learned the hard way and I've learned over time that, that your accountant can be very good if you are proactive in doing these things. And the example that you just outlined, that's actually exactly what my, my neurosurgeon friend did. They bought five properties. His wife managed them as short term rentals and they got some, some phenomenal benefits from that and they still own those properties that are all profitable. So it's great. So I think the big thing is if you're listening, if you fall into these categories, especially if you're a business owner, what's the best way to learn more about what you do, Candace, and potentially reach out and, and, and learn about if this could be a good.

Fit for them or so check out our website, wayaccounting.com or feel free to email me directly at candaceweighaccounting.com as Chris mentioned earlier, we put a lot of content on Instagram. It's all like educational stuff. Some of it's funnier than others. You'll see my face a lot. Sorry. But yeah, that, that's how you can check us out. But yeah, if you have any questions or you want to connect, feel free to Email me.

No, it's your, your educational content is top notch. I love getting your emails. It's always a lot of emails I just delete or get off the list, but it always, it always teaches me something. It's, it's, it's, they call it edutainment. You know, it's, it's got a little entertaining bend to it and it's very catchy. My son spends a lot more time on Instagram than I do, admittedly. But yeah, you gotta, you got a great channel up there. So if you missed that, it's newwayaccounting.com we'll have the link in the show notes here as well. Also, Candace has a great giveaway called the Ultimate Accounting Checklist for entrepreneurs. So if you're a business owner or entrepreneur, check that out as well. We'll have the link here in the show notes too. Candace is always great to see you. We'll have to have you back as we come towards the end of the year and people are, are really chomping at the bit to figure out what they can do to optimize their tax bill.

Oh, thank you so much for having me. I love joining.

Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.