WCI #366: Tax Questions

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White Coat Investor podcast number 366 tax.

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All right, let's get right into your questions today. Our first one comes off the speak.

Pipe From Diana hi Dr. Dali. I'm currently a physician working full time and my spouse is a stay at home parent. My question is, are his traditional IRA contributions still tax deductible? Even if we make more than the modified adjusted gross income limit for a married couple filing jointly? The way I read it, it appears that they would be. However, my backdoor Roth or traditional Roth to backdoor conversion obviously would not be tax deductible. Let me know if you think I'm interpreting this correctly. Thank you so much.

All right, this is actually an incredibly complicated question and it's hard to remember all the rules and keep them all straight. Before we get too far into it, I just want to point out that maybe this is just a good opportunity to just do a backdoor Roth IRA for your spouse too. That's always an option, right? Whether that IRA contribution is deductible or not, you can still do a backdoor Roth ira, right? If you get a tax deduction for the contribution, well, you pay taxes on the conversion. If you don't get a deduction on the contribution, you don't pay taxes on the conversion. It all works out the same. So that's always an option, is just.

Do a backdoor Roth IRA for your spousal ira.

For those who don't know what we're talking about with the spousal ira, there actually is no such thing. There's not a special account called the spousal ira, it's just an ira. Remember, IRA stands for Individual Retirement Arrangement not account, interestingly enough, individual retirement arrangement. But the first word is individual. So this is always something that is the persons.

Right? You don't have joint IRAs.

There's your IRA is your spouse's IRA. So that's all we're talking about, is your spouse's IRA. But there's a special rule that allows somebody to contribute to an IRA using their spouse's income. So you don't actually have to earn money to contribute to a spousal ira.

If you are married, you can take advantage of your spouse's income to contribute to your ira. Now obviously if they're making an IRA.

Contribution, they have to have enough income that it's more than both of your IRA contributions combined with.

But that's what's unique about it.

So you can't do this for your domestic partner.

Right?

It's a spouse sole ira.

You have to be married.

All right, so what are the contribution limits? Well, it depends how much income you earn together, right? Technically, a modified adjusted gross income, the age of the spouse and how the couple files their taxes. So if you're under 50, the maximum spousal IRA contribution is the lesser of $7,000 in 2024 or the total amount of earned income by the couple minus the non spousal IRA contribution. If you're 50 plus, you get catch.

Up contributions obviously for the spouse, that is 50 plus both of you. If you're both 50 plus.

Now let's get to your question, which is how much of it can be deducted? And again, the answer here depends. It depends on two things. The first is whether the working spouse now is covered by a retirement plan.

Through their employer, like a 401k or.

403, and how much income the couple earned together. If neither spouse is covered by a retirement plan, then both spouses may fully deduct contributions to their IRAs, no matter what their income. If one spouse is covered, the ability for the spouse without a retirement plan to deduct their contribution has a phase out and it goes up each year with inflation. So I ought to find this current one. It's an IRS Pub 590A. It's Table 1 3, last time I looked it up.

Let's see if we can find table.

Dash 13 in the current publication.

So I don't give you information from a prior year.

All right, here it is, Table 1 3. It's on page 14 of Pub 590A, the effect of modified AGI on deduction. If you aren't covered by a retirement plan at work. Okay, so let's go through this table. If you're single, head of household or head of household, and your modified AGI is any amount, then you can take a full deduction if you're not covered.

By a retirement plan at work.

Remember, that applies to everybody in this table. The second one is if you're married filing two jointly or separately with a spouse who isn't covered by a plan at work, any amount of income, you get a full deduction. However, if you're married filing jointly with a spouse who is covered by a plan at work and your modified adjusted gross income is less than $218,000, you get a full deduction. If it's $228,000 or higher, you get no deduction and it phases out in between those amounts. And if you're married filing separately with a spouse who is covered by a plan at work, you get a partial deduction if your income is under ten grand and no deduction at all if.

It'S ten grand or more.

This is actually what catches A lot.

Of people don't realize they need to do a backdoor Roth IRA when they're filing married filing separately during residency to.

Play some games with their student loans, try to maximize their pslf. If you're doing mfs, you almost surely are going to need to be doing.

A backdoor Roth ira.

But I think to answer your question, if your spouse is covered by a plan at work, the working one is covered by a 401, then you need an income under $218,000 to take that deduction. If it's over $228,000, then you do.

Not get any deduction at all.

Hope that's helpful. Sorry the answer's so complicated.

I don't make the rules, I just tell you what they are.

Our next question comes from Mike. Question about FICA Taxes Hi Jim, this.

Is Mike from Ohio. I have a side gig where I make around 250,000 per year. @ my main job, I make in the low seven figures. My wife does not formally work, but she does help with bookkeeping and other tasks. With my side gig, would it be worthwhile for me to add her to payroll so she can contribute to the company 401? If I did add her, would I need to pay the approximately 15.3% FICA tax on her entire salary or just the portion that isn't put into the 401k? Since I've already hit the Social Security wage limit at my W2 job, I would only need to pay 3.8% FICA tax. And since we anticipate being in a high tax bracket now and in retirement, I'm not sure if it's worth paying the 15.3% FICA tax now to give her access to the company. 401. Am I missing something here or do you think it's beneficial to add her to payroll?

Okay, I've got a post that's going to be published soon on this topic.

And I've written on it in years past as well.

But there's this weird idea idea out there that somehow you're going to save a whole bunch of money by hiring your spouse. It's probably a bad idea. Now, keep in mind, hiring your kids is usually a good idea. If your business is not a corporation and the only owners are their parents and they're minors, you don't have to pay payroll taxes for them. They probably won't earn enough that they have to pay any income tax. And you can put everything they earn into a Roth ira. That's a pretty slick move. Obviously you have to pay them a fair rate and do all the paperwork.

And all that and get all that right.

Hiring your kids can be a very savvy move. Hiring your spouse, usually not the case. Now, if you need your spouse to work in the business, fine, hire them, right? But don't expect to be some sort of huge tax break. And here's the reason why. I mean, there are some benefits, right? I mean, obviously you get their help, that's a benefit. They also get to increase their Social Security benefit because they're going to be paying FICA taxes on what they earn. And so that increases their Social Security. And of course, as you mentioned, you can make a 401k contribution for them. So it's not a dumb thought to think about this because obviously there are some benefits, but it's a bad idea most of the time.

And let me explain why.

And I think you're recognizing that based on your question, it's the FICA taxes, right? You're making seven figures. Congratulations, by the way, you have a fantastic income. When I hear about a side gig.

Making a quarter million dollars, I know you're killing it.

Congratulations on that. But the point is, you've maxed out.

Your FICA taxes, right?

You've maxed out your Social Security taxes.

You haven't maxed out your Medicare tax. There's no max on that.

So whatever additional money you earn, you just have to pay Medicare tax on.

And of course your income taxes.

Well, if your spouse makes money Your spouse also has to pay Medicare tax and income tax the same rate.

You would have to pay it if.

You earned that money instead. But in addition, your spouse has to pay Social Security tax on the first. It's about $160,000 this year. You have to pay Social Security tax on that. And if you're self employed, that's not an insignificant amount of Social Security tax.

Right.

6.2% employee, 6.2% employer. That's 12.4% of $160,000.

Right.

What's that work out to be? That's like 20 grand in taxes that if you earn the money you wouldn't pay. If your spouse earns the money, you're going to pay 20 grand.

Right.

There's got to be a huge benefit for using a 401k that is worth paying 20 grand in tax that you don't get back, except possibly as a Social Security benefit down the road. So in general, the math does not work out. Don't hire your spouse just to get.

An additional 401k contribution.

It just costs you too much in.

Social Security tax to be worth it.

Now, if your spouse already has another.

Job and they're maxing out, you know.

Their Social Security tax there, maybe it makes a little bit more sense. But even then, you know, particularly if they're on a K1, but if they're a W2 employee, well, what ends up happening is you end up paying the employer half of Social Security when you hire your spouse. So if they come on as a partner, that's not necessarily the case. They come on as an employee. It just doesn't mix well to have two employee jobs because you end up.

Paying extra tax on it. The employer does.

You can get back the employee portion of Social Security tax that's paid at the second job, but you can't get.

The employer half back. So it just doesn't make sense for the most part.

So good idea. I would not do it and just hiring them as a contractor, you know.

It doesn't really work as well because.

If they're a contractor, they're in business for themselves.

And again, they're going to be paying.

Payroll taxes on what they're earning. So hire your kids, not your spouse. That's the bottom line if you're looking.

For a tax break.

All right, thanks. For those of you out there, I know we try to optimize our financial.

Situations around here in the white coat investor community and try to make more money and save more money and invest it better and not waste our Money and keep it protected and all that.

But at the end of the day, what really matters is what you're spending your day doing. I had a couple of shifts the last couple of days. Today's all WCI work. The last couple days I was in the er, and it's a good reminder.

For me to go in there.

Do I enjoy it? Yes. But a lot of that work is what I call number two fun. It's fun afterwards. It provides purpose.

I'm glad I did it.

I like what it does for me personally and in my life.

I think it makes me a better person to continue to work in there. But is it, like, super fun? No, it's not. You know, endorphins, like playing a video game or going and playing ice hockey or something. I don't like it like that, but it is enjoyable and it reminds me that I'm just incredibly blessed in my life. See the difficult situations people are in. I had a whole row of rooms yesterday of people with suicidal ideation. They are feeling so terrible about their lives that they've either already tried to hurt themselves or are thinking about it. And, you know, and it just always reminds me that I've got a lot of things to be grateful for in my life. And I bet you do too. But thanks so much for serving those who are struggling with whether it's mental health or physical health or an injury or illness or whatever. Thanks for what you do each day.

All right, another tax question. This one from Jeremy.

Let's talk about quarterly estimated tax payments.

Hi Dr. Dali. My name is Jeremy. I'm a pediatric hospitalist from the Northeast, longtime listener of the podcast and reader of the blog, and I'm so appreciative of all you have done for my family with regard to financial literacy. My question for you is regarding quarterly estimated tax payments. I haven't been able to find the answer to this on your blog, and I don't remember hearing about it on the podcast, but may have missed it. My wife and I are W2 employees, so this is not about payments related to job income. But as our taxable account grows, the dividends will also continue to increase. And while there is an estimate on the account about what the dividend might be for the upcoming year, it certainly is not always going to be right. What do you see as being the right way to approach estimating this in order to avoid penalties? I certainly understand the rule of simply paying 110% of our prior year's taxes as an easy answer, but I don't want to reflexively just give the government an interest free loan either. Any thoughts you would have on this would be much appreciated. Again, thanks for all you do.

All right, well, the 110% rule works really well for the self employed. It doesn't work very well if you have W2 income where taxes are being withheld from it. If you're all self employment income, you just go, what did I owe last year? I owed $110,000 or $100,000 in taxes. So I'm going to multiply that by 110%, that's $110,000 and divide that by four and pay $27,000 every quarter and call it good. Right? Super easy. If that's your situation when you have.

Got money being withheld, it's just more complicated.

A lot of it's guesswork. Let's be honest, it's guesswork. If you're not having that much in dividends, you can just decrease or increase how much is withheld at your job. No big deal. Just say, you know what, withhold an.

Extra $500 every pay period and that'll get you there. And you can do that. And that works really well.

If you're starting to get a lot of outside income.

Maybe you can't quite do that as easily, but that's the first thing I do. If you just have a little bit extra income, you find yourself having to.

Write all these checks coming as it gets bigger, maybe you do actually start.

Making quarterly estimated payments.

It's no big deal. You make them April and June, September and January 15th. The one that always gets me is the June one, right?

Because there's only two months between April and June. So it always feels like you're making two payments pretty close together. And that can stress cash flow for a lot of us.

But it's no big deal.

To make those quarterly estimated payments, you fill out a 1040s which is like, I don't know, eight or 10 lines on it.

It's basically just your address and name.

And Social Security number and how much you're sending them.

And you can actually make the payments. You don't even have to do that. You make the payments on the EFTPs system online.

That's how I make my quarterly estimated payments. And it's really not that big a deal.

Now everybody's stressed out about this for some reason. I don't know why. I understand there's cash flow planning that is tricky, but for the most part it doesn't matter if you underpay or you Overpay.

Right?

You settle up with the IRS next April 15th. That's the way our tax system works. It's supposed to be pay as you go. And if you pay a little too much, well, they send you a check back. If you don't pay enough, you send them a check.

Okay.

If you really don't pay them enough, you have to pay penalties. Right. And this sounds like some sort of terrible thing.

Oh, no, I'm getting penalized. Well, what is the penalty really?

Basically, the penalty is the interest you should have earned on the money that you should have paid the IRS earlier in the year.

Right.

The penalty is not like some huge number. It's basically just interesting. You should have paid it to him last September. You didn't. You had the money for an extra seven months. So it's about as much as you would earn on interest in a good.

High yield savings account or a good money market fund.

That's what the penalty is. So it's not some huge amount.

You just got to write a check for a little bit of extra interest because you were supposed to be paying as you went along. It's not like they come to your house and put you in jail and you know, or that it's, you know.

I mean, there are terrible penalties in the tax code if you fail to file your 5500EZ every July 31st.

Terrible penalty.

Forget to take out your RMD at the end of the year. Terrible penalty. This is not a terrible penalty. It's like a little bit of interest. The lower the number that you missed your actual tax bill by, the lower the penalty is, the shorter the distance of time from the time you should have paid it until you paid it.

The lower the penalty is.

So it's not the end of the world. I'm paying penalties every year.

Quite frankly, I think I filed in 12 states last year and I probably had to pay a penalty in three or four of them. And it's just not a big deal. It's a few dozen dollars, or in my case, because I just didn't owe much to these states. But even if it's a more significant.

Penalty, you had the money, right? So you benefited from the use of the money for six months or nine.

Months or 12 months or whatever.

So it's not like you didn't get anything for paying that penalty. So basically you're just giving that interest.

You earned to the irs. Not the end of the world.

Try to get it right, but don't stress over this.

People stress over this way too Much. And after having trying to guess how much I owe on taxes every year, I stopped stressing over this. It's just not worth it.

Do the best you can and call.

It good at that point.

All right, let's take a question now from Rob.

This one's asking about working in different.

States in a single year.

Hey, Dr. Dali, this is Rob from Chicago. My question is, are there any tax or other financial considerations for soon to be graduating residents or fellows who will be living and earning income in one state for one half of the year in a different state for the other half of the year? Regarding my circumstance, I will be graduating residency in Chicago in June and completing a one year fellowship in Minnesota starting in August. My wife and I currently own a home in Chicago and plan to return to it after fellowship. My sister in law will be renting our home from us during my fellowship year. My wife works for a marketing agency that is based in Chicago and and she will be continuing this job remotely from Minnesota. Thanks so much for your help.

All right, good question, Rob. You got all kinds of things going.

On in your financial life right now.

There's not going to be a huge tax arbitrage. You know, Illinois is kind of a high tax state and Minnesota is kind of a high tax state. So a lot of times when people change from one state to another, there's opportunities to save taxes by trying to get income assigned to the new state.

You know, the new low tax state.

Instead of the old high tax state. If you're moving from Illinois to Florida or something, you might be trying to.

Work that sort of a thing out.

And obviously you can't be fraudulent. Money earned in one state has to.

Be taxed in that state and money earned in another state has to be.

Taxed in that state. But if you can delay income until you're in the new state, you could justify that being taxed at a lower rate. Those sorts of strategies keep in mind. Also, there's often a chance to get better prices on your disability insurance as you change states.

New York and California in particular have.

Pretty high prices for disability insurance. So if you were leaving one of those places and going to a new one, you might wait to buy your disability insurance at the new state or vice versa.

If you are moving from a low.

Cost state to a higher cost state.

You might make sure you buy it before you leave.

That would be another consideration. There are also some rules on if you are going away temporarily to work somewhere else and the cutoff for that is 364 days you mentioned you're going.

To do a fellowship for a year.

There are some people that only go do a fellowship for 364 days in order to be able to write off those expenses as essentially travel expenses, business.

Expenses to go out and do that. So that might be worth looking into. But it sounds like you're going to rent out your home anyway and you're really moving. It's hard to justify if you're putting somebody else in your home while you're gone. It's a little bit harder to justify that as business travel expenses, but that might be something to look into as well.

Otherwise, I don't think you're going to.

Have a lot of complications of this situation. You're going to be, presumably you'll remain a resident of Illinois and so you'll.

File your Illinois taxes as a resident and you'll file your Minnesota taxes as a non resident.

I guess you could do part year residence for both of them. But the way you'll probably do is an Illinois resident the whole time and then file a Minnesota non resident tax return.

That should give you a tax credit for the taxes you pay to Minnesota.

When you go to file your Illinois state income taxes. I don't know. That's all I can think of that would apply to your situation. I hope that's helpful to you, Rob. Have a great fellowship and I'm sure the people of Illinois will be very glad to have you back there. Illinois is one of those places a little bit like Northern California that I wonder why there are any docks there. You know, it tends to be lower.

Pay for docs, higher taxes and particularly.

In the Chicago area, you know, fairly high malpractice risk. You know, you don't have to drive very far away from Chicago to dramatically lower your risk of malpractice lawsuits. A little bit like Dade County, Florida that way.

Okay, for those of you who are not aware, we have a whole bunch of social communities everywhere you are on the Internet. We probably have a community. We've got an Instagram, it's growing like crazy.

We've got a Facebook group as well.

As a Facebook page.

We've got. We're on Reddit.

Check out our subreddit. It's one of the fastest growing parts.

Of White Coat Investor will probably pass.

Up our Facebook group in a year or two at the rate it's going to. I think there's almost 70,000 people on our subreddit now on X, formerly known as Twitter. We've got tens of thousands of followers there. We even have TikTok if you're into TikTok. Hopefully the advice you get there is better than most TikTok tax advice out there. And of course the WCI Forum has.

Been around for many, many years and is really a high knowledgeable, in depth community that can answer your questions.

So ask your money questions to others in the White Coat Investor community or help others out.

There's almost 100,000 in that White Coat Investor Facebook group.

It's pushing 70,000 now for the White Coat Investor subreddit.

And of course you can find us ycoatinvestor on all channels. Should mention the YouTube channel as well. It's growing like crazy.

All right, let's take a question from Ashley who's trying to help Grandma with taxes.

I'm trying to help my 85 year old grandmother with her taxes. She is well taken care of thanks to her late husband, but has six sources of required minimum distributions between Social Security, 401k annuity, pension dividends and DFAs. So she's using less than 10% of her current income for her budget, but she's paying 22% of her income in taxes. Most recommendations to decrease taxes I can find refer to HSAs and Roth IRAs, which I believe she's too late for. So we are looking into switching her annuity to an IRA and just paying taxes for that conversion so she can do charitable donations. But I was wondering if you had any other ways of moving her money around to make it more efficient for her. Thanks so much.

All right Ashley, great question. Thanks for helping out Grandma.

It's very kind of you. By the way, Grandma has enough money. She can hire a professional tax advisor if she wants to.

Clearly she's doing great.

She's only living on 10% of her income.

This is the classic person that complains.

About their RMD problem because they're paying all this money in taxes in retirement.

Well, the RMD problem is the greatest.

Tax problem in the world to have. Nobody ever complains about having too much income during their working years. But apparently once you're in retirement, having.

Too much income is worth complaining about. You hear it all the time from retirees. Oh I hate these RMDs because I got to pay taxes on them. Well, I assure you there are plenty of people out there that would love to have your RMD problem.

40% of Americans are living on nothing but Social Security in their retirement, so this is a great problem to have.

Could you simplify some things? Absolutely. I'm not sure why there's money in a 401 still at 85.

Very few people still have money in a 401.

It's got to be a very special.

401 to still have money in it at 85. Most people will have rolled that over to an IRA at that point. So that might be one simplification that you could do.

I don't know where this annuity is either. Is this an annuity inside a retirement account, AKA a qualified annuity, or is.

It a non qualified annuity?

Now, if it is an annuity in a retirement account, I guess you could get the money out of the annuity while still leaving it in the retirement account and then do QCDs with. Sounds like Grandma's pretty charitable. Well, that's cool, because there's lots of cool things you can do with taxes when you're charitable, like give it away. You give your money away, you get a tax break for that. You can give up to $105,000 this year. And that number is now indexed to inflation to charity via a qualified charitable distribution. So that would take care of the RMDs from the 401. Unless they're more than $105,000 a year.

Maybe they are.

Grandma's doing really well, but that would be an option. Even beyond that though, you can still take the money out, pay taxes on it, donate it to charity, and take a deduction for what you donate.

If you're donating cash, I think it's.

60% of your adjusted gross income you can take a deduction for. So Grandma could certainly give lots of money to charity.

That's the main deduction probably available to most people in her situation. And since it's something she wants to do anyway, it sounds like it would work out great. I would take advantage of that sort of a thing.

As far as these other sources of income, a pension, there's not much you can do there.

You know, your dividends in a taxable.

Account, you're going to pay taxes on that.

The good news is you're paying them your dividend tax rate.

If you can lower your other taxes, you might even get into the 0% dividend bracket.

I'm guessing not, given her success.

You mentioned at the end DFAs.

I don't know what you're talking about with that.

There's a DFA company that does mutual funds. You know, Dimensional Fund Advisors. They do mutual funds and now ETFs. There are also DAFs, which are donor advised funds, but I don't know why they would be giving your grandma any.

Sort of an income distribution or rmd.

So I don't really know what you're.

Talking about there, nor of any angles you can take that.

On the Social Security, your grandma's probably only getting about 15% of that tax free.

The other 85% is probably fully taxable for her. There's probably nothing she can do about that.

So for the most part, I think.

All grandma's going to be able to do here is give more money to charity to get a tax break for that, which is fine.

She's only living on 10%. I guess what she really needs to do is figure out what she wants.

To do with the rest of that money. Now.

Maybe she's so well to do that. She has an estate tax problem? I'm guessing not. But if she does, it's certainly worth.

Seeing an estate planning attorney in her.

State, see if there's some ways she.

Can save on estate taxes. But I'm guessing she's not quite that wealthy, especially since most of these sources of income will go away at death, like the pension. And if it's an immediate annuity, that'll go away at death. And of course, Social Security goes away at death. I don't know what these DFAs are, but that's the way I'd think about it.

I wish I had some super secret.

Way to lower our taxes.

Everybody's looking for that one crazy tax trick the IRS doesn't want you to know about to lower their taxes.

But for the most part, that sort of thing just doesn't exist. When you make more money, you pay more money in taxes.

All right, our next question comes from Alan.

Let's take a listen.

Hi, Jim, this is Alan from the Midwest. For your average boglehead, asset allocation really isn't an issue. But when it comes to tax planning, that is where I have some questions. When thinking about who to discuss tax planning with, what different things would a financial planner provide versus just your run of the mill cpa?

Seems like a CPA would have a.

Better understanding of the intricacies of the tax code, but I often hear financial planners offering tax planning services as a major selling point.

Good question.

You know the typical tax preparation? Well, the typical CPA doesn't do a lot with tax preparation. Let's be honest, there's lots of CPAs out there. They're accountants, they're not doing tax preparation. So, you know, if you're just going to a cpa, you may not be getting good advice at all. As a general rule, most tax preparers, whether they are a CPA or an ea, an enrolled agent, do tax preparation. They don't do any sort of proactive.

Looking forward tax planning.

Everything they do is retrospective. Maybe they give you a tip or two at the end of the year.

That might help you, but for the.

Most part they're not meeting with you in advance and making suggestions on what.

You can do to lower your tax bill.

Those people are actually fairly rare. They are out there. We have a list of them on our website.

They call themselves tax strategists for the most part.

Some of them will help you set up retirement plans at your practice.

Some of them will, you know, make.

Other suggestions, meet with you throughout the.

Year to try to lower your taxes, that sort of a thing.

It's not necessarily cheap. Sometimes it costs more than what a financial advisor would charge you to do.

Financial planning and investment management. I've seen a few people that they.

Routinely charge five figures a year to do that service. So whether that's worth it or not, I suppose is up to you. You know, it seems to me that a lot of things you can learn.

About taxes you can pay for once.

And then you know it and don't have to keep paying ongoing fees for it.

But I'll leave that up to you as to how much that sort of a service going forward is worth.

Typically, the more complicated your financial life, the more value they can add.

You know, if you're self employed, if you got 20 K1s, if you're got.

If you're building a real estate empire.

You know, you may want someone who.

Also has a real estate empire as your tax preparer and your tax advisor.

And they can advise you on getting.

Real estate professional status and how to use depreciation best and how to do cost segregation studies and those sorts of things.

And I think that can be really valuable.

If you're a W2 employee and you.

Do a tiny bit of moonlighting and you got a taxable investment account, there's.

Not a lot of advice they're going.

To be able to give you that's going to save you a ton of money, right? There's just not that much you can do because your situation's not that common.

Now financial advisors, they're not always the best with taxes, but at least they usually think about the tax implications of investing stuff, right? So if you're doing 401 contributions and HSAs and managing your taxable account in a tax efficient way, if they're a good financial advisor, they'll be taking a.

Lot of that into consideration. But whether they will advise you to hire your kids at your non corporation.

Business to try to lower your tax.

Bill, I don't know that I'd necessarily expect that degree of advice about taxes from a financial advisor.

So it really depends on how much you're willing to spend, what kind of advice you're looking for. You might start with our recommended tax strategist list.

You can find the whitecoatinvestor.com and see if that doesn't meet your needs. But I agree, taxes and tax preparation can be a heck of a lot more complicated than just managing a portfolio of index funds.

Our quote of the day today comes from Rob Arnaud, who said investing what is comfortable is rarely profitable, and that's often the truth okay, let's talk about K1s and tax preparation. This question from Aaron can you tell all these questions today came in just.

Before the 15th of April?

Keep in mind there's a delay. It takes us a while to make these podcasts, so if you're asking questions that you want answered before April 15th, you got to ask them way before April 15th if you want to hear them on the podcast hi Dr. Dali.

I have a question regarding interpreting K1s and tax preparation. As a background to this question, I've invested in several local real estate syndications over the past several years. The general strategy of each of these syndications, which include individual apartment complexes, LLCs, is to buy the property at an assumed discounted price, renovate and restore the units within the property, and then rent the units out at a higher price within market value. The subsequent plan is to perform a cash out refinance in three to four years, returning the initial investment and then selling the property in eight to nine years with distribution of the returns. My question involves the K1 at tax season and how to prepare. For example, for one of the syndications in year 2, the K1 shows my individual percentage share box 1 with ordinary income of 0 box 2 with a loss of around 6,000, box 19 of net distributions of around 2,000 and about 9,000 in box 20 N. The K1 also shows a capital account analysis in box L. How do I interpret these numbers? Given the distributions I have obtained, do I need to start making estimated quarterly payments or do I wait until my initial investment is returned for full disclosure? I do hire a tax preparer each year. However, would like some more information to understand this myself. Thanks for everything you do.

All right Aaron, a lot of great questions there. The two things that tend to drive people to professional tax preparation are, number one, K1s like you described, and number.

Two, if they're managing a portfolio of direct real estate investments and they're having.

To do a bunch of Schedule E's.

And figure all that out, it's just really complicated.

It's just not the same as Putting.

In your W2 and uploading your 1099 consolidated return from Vanguard and, you know, and putting in a K1, maybe from your partnership, that sort of a thing.

It's just more complicated.

It's harder. It's harder.

What finally drove me to get professional tax preparation is I couldn't figure out which states I had to file in.

And so I ended up paying money to a tax preparer. And that's a lot of money.

My tax preparation is not cheap. And I have to really think about that mentally as I subtract the returns from the things I'm doing that make my taxes cheap.

So complicated as I consider that this.

Is one of those reasons why it doesn't make a lot of sense to have a whole bunch of syndications if.

You don't have much money invested in them, because you're going to be paying.

A whole bunch of extra money to.

Get your taxes figured out, whether it's.

Your time or you're paying for somebody else's time. And it's just not worth it unless you're getting a certain amount of return.

Out of those things.

So there are explanations of the K1.

In the IRS publications, and maybe it's worth walking through through those that might help you to better understand a K1.

But we can pull up a K1.

And walk through it a little bit here and see if that helps you.

All right, so we go to irs.gov, schedule K1. This one's off a partnership, so it's a 1065 K1. There's also 1120 K1s for S Corps. But you'll see box one is ordinary business income. And this is a cool one in that at least through the end of 2025, ordinary business income is often eligible.

For the 199A deduction.

And so we made a change a few years ago, my physician partnership, so that our income did not come as guaranteed payments, aka box 4 on the K1, and instead came in box 1, ordinary business income.

It allows you to take the 199A deduction on it for some of our partners. Not me, actually, because I make too much. But if you were working very part time and that was your only income, and you might have qualified for that.

Deduction 2 is the net rental real estate income. And with these syndications you're describing, for most of the years that you're going to own this syndication, this number is.

Going to be negative.

Basically, it's depreciation overcoming all of the taxable income coming out of this investment.

To give you a loss.

And that keeps you from having to pay taxes on it. So it's great. A typical syndication of the income you're getting from it is $2,000 a year you mentioned is basically coming to you tax free. Now that depreciation gets recaptured when it gets sold, but it gets recaptured at a lower rate, et cetera. But for years until the property's sold, this keeps you, as a general rule.

From having to pay taxes on that income.

So that means you don't have to.

Make some big quarterly estimated payments on it because you're not getting taxable income.

Box 3 is other net rental income.

Some other boxes you'll often see Money in is 19.

That's just distributions. That's just what they sent you money in. Might have sent you $10,000, but it's not all taxable, right?

So that's just distributions, but it's not really taxable income. The IRS doesn't care as much about that.

In box 20, you often have lots.

Of other interesting stuff like your 199A deduction and those sorts of things.

There's a code that's often assigned to that.

It's usually a letter. And you can go through the instructions for the K1 to see what the letters mean.

But trying to figure all that out.

Especially if you got like a 60.

Page K1 sent from this syndication, is tough.

And that's what drives a lot of people to go, hey, I need a professional to sort this out. And they're right. You know, at a certain point, it's.

No longer a do it yourself project.

And I'm a guy who did my.

Own taxes for many, many years, but.

Doing 20k1s in multiple different states was just too much. I'm like, I can't figure all this out. I need someone that this is what they do all day. And so I got somebody and they.

Actually fired me after a while. They said, your tax return's too complicated for us. And so I had to go find somebody else that kind of specializes in those complicated returns.

And of course I have to pay them more money than I was paying the first one.

So hopefully that's helpful to you. I think you're probably okay not having to make quarterly estimated payments until these.

Things start by being sold.

But that's a pretty typical strategy, a value add strategy. Cash out, refinance if you can, and.

Then sell the property after eight or nine years. Lots of syndicators do that.

It was very successful for the last 10 years. These days Multifamily is struggling a little.

Bit, so I would expect not to.

See as often those cash out refinances.

And I would expect to see maybe some lower returns than what people might have had in the past on some of those now.

Maybe things that are being bought right.

Now, you're getting enough of a discount on them that it's still going to work out great. But properties that were bought in, you know, 2021, 2022, they might not have nearly as good a return as some of the stuff from the past.

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