038 Top Year End Tax Moves

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Hey there. Welcome to this episode of the Affluent Entrepreneur Show. This episode, we're going to talk taxes. Oh, my God. Taxes. But we're going to talk about how do you reduce your taxes. So it's a good thing. Stay tuned.

This is the Affluent Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent entrepreneur.

Hey, there. Welcome to this episode. This one's going to be an interesting one. We're talking taxes. Not a great subject for most people to sit back and say taxes, but what we're going to talk about is figure out how do we reduce your taxes before the end of the year. You know, as this thing airs, there's literally just a couple weeks before the end of the year. And there are things that you can do now to reduce your taxes, but after the first of the year, at least in the US you're done. You can't do them. So let's give you some ideas to consider and see what we can do to try and reduce your taxes. Put more money in your pocket. But before we do, I want to read the review. And this review comes in from Almost Fit Foodie. I like that. I love that name, Almost Fit Foodie. And her headline says, where have you been all my life? So she says, Mel, wow. So grateful to have stumbled upon you. In the last two days, I've listened to your podcast with James Wedmore, signed up for your free training, watched your YouTube video with Alison Prince. Amazing content. In just the last 24 hours, you have inspired me to absolutely change the way I look at money, my new business and my family's future. Thank you. If you can help me to do this in 24 hours, I can't wait to see what other insights and empowering gems are to come. Thank you for sharing and your treasures of knowledge and affluence. Well, Almost Fit Foodie, congratulations. Thank you. Thank you so much for those comments and for being on this journey with me. That is the epitome of why I do the show. To give you the seeds of wisdom, to give you the path, to give you the opportunity to see something different for you, for your family, for your children, for your grandchildren and do it the right way. So here's the deal. Since I read your review on air, Almost Fit Foodie, you get a chance to have a one on one conversation, a laser coaching session with me. So do me a favor, reach out to me. Either DM me and let me know that I read it on the air or send an email to successailabraham.com and we'll get you all set up. I look forward to having a chat with you. All right, now if those of you out there haven't left a review yet, go ahead and leave a review. Give me a review, honest review. And you too can get a one on one laser coaching session with me when and if I read it on the air. So let's make it happen. All right. All right. Let's get to the show now. Here we go. So here's the thing. Taxes are coming. There is one certainty, two certainties, I guess in life, that is death and taxes. We're not going to talk about death because we're about living. We're going to talk about taxes here, but we're going to talk about what are the 10 things, the 10 tax moves that you should be considering and doing before 2022. Now this is my CYA, this is my cover, my rear end type of thing. I am not your tax advisor unless we have a one on one relationship and you've hired me to do so. So this is for informational purposes only. Consult your tax advisor because each person's circumstances and facts are unique. Okay, I think I did that pretty good. All right, here we go. So here's the first step. I'm going to go to my iPad and so the first thing to do is this. Review your income. In other words, Whether you're a W2 employee, whether you're a business owner, contractor or something, take a look at your income. Okay? Now here's the thing. When I say take a look at your income, that doesn't mean that you go look at your bank account and say, how much money do I have in the bank? I mean, how much money has come in? Now, let's be careful here. We want to make sure that you've accounted for all your income. That means cash, that means check. That means credit card, that means venmo, that means PayPal. That means crypto, if you accept it. Because here's the thing. If you don't account for all your income and you do a return without all your income on it, that can be construed as tax evasion. That's a bad thing. All right? So we want to make sure that we account for all income. But the reason we want to review our income now is to understand how much income I have. What do the taxes look like on that income? Because without knowing where we're at, we can't make a plan for where to go. So I want you to know very specifically how much money you've made this year, okay? Because then the second thing that comes into play with this, that's number one, is review your income. The second thing is to review your expenses. So when we talk about taxes, and in fact, I'm going to go back, I'll write this out for you. It's important for you to understand how this plays out, is that at least in the U.S. here we go. You have income that comes in, okay? That is all the money you make. Now, here's another thing. Even if you barter, the value of that barter is considered income under the Internal Revenue Code, okay? So if the value of the barter is $1,000, it's as if you had $1,000 in income, okay? They tax you on everything unless it's excluded. So you have income and you subtract out your expenses. Now, it's not all expenses. It's only deductible expenses. And the deductible expenses are defined by the Internal Revenue Code. In your business, it's typically considered ordinary necessary expenses, okay? Ordinary necessary expenses. And you got to document it. And so that gets us to this thing called taxable income. And I'm doing this in a very elementary way. And then you'll pay tax. You'll pay some sort of percentage tax on that taxable income. So it's important for us to know specifically, okay? To know specifically what your income is and what your expenses are that are deductible. So you can then understand the income number you're going to pay tax on. Now, here's the planning objective here. You might be able to. And there's some limits here. Defer income until 2022 and accelerate expenses into 2021. Okay. So you may be able to accelerate your expenses. Now there's some things to think about here, okay? If you believe one, that income taxes are going to go up in 2022, which I think they are, we'll see if they get something passed and what that looks like. It's not going to. I don't think it's going to be as egregious and aggressive as. As they once proposed. But if we think that we're going to pay a higher rate in 2022, maybe we say we don't accelerate the expenses into 2021 because I need. They'll be more valuable in 2022. Here's what I mean. Let's assume that the maximum rate is 20% this year and 30% next year. Accelerating $1,000 expense this year gives me a $200 savings. That's 1,000 times 20%. But if I wait till next year, the thousand at 30% gives me $300. It saves me $100 more, 50% increase. So. But you want to be conscious of this. All of this is all about being aware and intentional with what you're doing. Now that you understand what your income and expenses are and whether you're going to accelerate or defer them based upon where you think you're going to be, then the next piece that you need to look at is, is to look at reviewing your withholdings and estimates. In other words, have you paid enough taxes in already? Have you overpaid? If you overpaid, maybe you don't need to pay anymore. If you've underpaid, maybe you should pay a little bit more so you don't get hit with a huge bill. The fact of the matter is there's certain criteria where you're supposed to have a certain amount paid in of taxes. We want to make sure that you've paid around 100% of the tax from the prior. So that's 2020, which will keep you out of a situation where you would get paid. You would have to pay underpayment penalties. Now I've got some clients that say, I don't care, I'll pay the penalty. Cause I want to use the money, invest the money. I can make more money that way. Okay? But I just want you to be cautious now. You just want to know your withdrawalance. And I hear this all the time when I say, you know what, my tax bill went up and therefore I'M paying more taxes. See, your taxes, a combination of these, it doesn't mean that you paid more taxes. You could have withheld less, you could have paid in less. So think about this. You have income, you subtract out the deductions. That's the taxable amount. You have a percentage of that. That's your tax, okay? So your total taxes are a percentage of your taxable income. Then you subtract out what you paid in in estimates or withholding, and that tells you whether you owe more or you get a refund. That's it. And when someone says to me, well, my refund went down or I had to pay more, well, it may not have to do with the fact that you're paying a total amount of taxes more. It may have to do with the fact that you didn't withhold or pay in the same amount or you paid in less. So it's not always the taxes that are the issue. We just gotta look at it in that proper way now. So that's the income, expenses and withholdings. That leads me to this next little piece. Number four is max out your retirement account. Okay? Max out your retirement account. What are the maxes here? Because I think we need to get this into the system in the sense that if you're not investing, I want you to get in the game. I want you to start investing, I want you to get in the game. Okay? So let's just talk about the limits. An IRA account. An IRA account, the limit is $6,000 if you're under 50. If you're over 50, you get an extra thousand dollars. So it's $7,000. So you can max that out. Okay? If you have a 401k, okay, the limit is $19,500 if you're under 50. If you're over 50, goes up to $26,000. Okay? You get another $6,500. This is all 20, 21 numbers. 20, 22. Some of this changes. Okay? If you have a 401k that has a profit sharing element to it, which is a kind of a bolt on, then your limit goes to $58,000. And if you're over 50, it goes to 64,500. So what does this mean? That means that if you have high income in this year, you might want to look at, can I put a solo 401k in with a profit sharing element to it? And I can put 60,000 or 60,000 plus dollars away, shield it from tax, get it invested in the market and do it that way. Okay, So I would look at how do I max out my retirement account in making that happen? Then number five, Number five, I know I'm going fast on these, but number five is all about maxing out your hsa. Okay? Health Savings Account, that's what HSA stands for. Now, Health Savings Account, you have some very specific criteria. You may not have a Health Savings Account, and you may not be eligible for a Health Savings Account. But in order to have a Health Savings Account, it must be a high deductible medical plan. So if you have a high deductible medical plan that is eligible for a Health Savings Account, then you can maximize your contributions to the Health Savings Account. Now, I love HSAs if you have the availability of them, because watch what happens with this. This is the one thing, the one account that is triple tax advantaged. Okay? So let me walk, walk through this. So on an hsa, it's a Health Savings Account. You can put in, if you're single, you can put in $3600. If you're married, you can put in $7200. Okay? Now the, that money is meant to be used for medical expenses, for qualified medical expenses. Here's the beautiful thing. One, you get a tax deduction for it, okay? So it's tax deductible when you put it in. Okay. Two, if I withdraw it for medical, it's not taxable, okay? So if I withdraw it to pay qualified medical expenses, I don't pay tax on the money. But here's the beautiful thing. Here's what I would do is I would make the. If, if you're eligible, I'd make the $3,600 or $7,200. And then inside that account, you get to invest it. So you put it and invest it in, into whatever investments you want. A low, low fee index fund, etf, something that's going to grow over time. And, and you leave it sit and you do it year after year and you keep making these contributions. They're tax deductible, almost like an ira. Okay? And in the meantime, you pay for your medical expenses out of pocket and you keep all the receipts, okay? So, yeah, you're going to fund the hsa. You're going to keep the receipts for the medical expenses. You're going to invest the account. Now the account's going to grow beyond your contribution. So all of a sudden you've got another investment account that's growing tax free. Tax free.

And somewhere down the road, it could be 10 years down the Road, you take all those receipts for those medical expenses and you reimburse yourself. But watch what happens if we just play this out. Okay, let's just, let's just look at, at how this plays out. If I go into this and I put in $7,200 over 10 years and there was no changes to the limits. So that's $72,000 that I contributed. I have $72,000 in account. Except remember I said invest it. Well, that $72,000 could potentially turn into $150,000 invested over 10 years. So now my HSA account has $150,000. Let's say I have $15,000 in medical expenses. I can pull that out of the 150 to pay my medical expenses tax free and 150 minus 15. Guess what? I still have 135,000 left in the account that I can use. Here's the other thing.

Once you get to retirement age.

I can actually draw the money out of the account without penalty, even if I use it for no medical expenses. Now, there'd be tax on it at that point. But what I'm saying is that this is a beautiful way to get a triple tax advantaged account tax deduction on the inside, going in growth tax free, tax deferred. I can take it out tax free to pay medical expenses or I can use it for retirement down the road. All right, It's a beautiful account that you can use. This is funding your hsa. That's something that I would look at on this. Now that leads me to number six. Number six. Number six, bundle your donations. Here's what I mean by this. They've raised the standard deductions. So there's a lot of people that can't itemize their deductions. So what we try to do is bundle their deductions into one year. So if you know that, for instance, in 2020, my wife and I sold one of our properties. So there was a whole lot of stuff that we got rid of. So we bundled all of the donations. Whether it's the desk, the chairs, the tables, the plates. We bundled them all into one year. So we had this really large donation deduction. Instead of putting them into different years, we did it all at once. So I would bundle my donations. The other thing that I would bundle is your cash donations. Let's assume that you tithe to your church or your temple, or you make regular cash donations. You might not make enough donations to get a real deduction for it. So here's what you can do is you go to your church or your temple and say, here's how I want to do my donations. I'm going to make a double donation this year. So in 2021, I'm going to make a donation for 2021 and 2022, and then I won't make a donation in 2022. I'll make a donation in 2023, for 2023 and 2024. So you double up your donations, you bundle them, take the deduction this year because you made the donation this year, and make sure that you let the folks that you're donating to understand why you might not make a donation next year. Okay? So you maximize your deduction that way. And there's also another way to do donations and charity and charitable legacies if you want to do that. And this is something that you'll see that's called a donor advised fund. A donor advised fund. So if you're charitably inclined, and maybe you had a windfall this year, maybe you, you did a launch, maybe you got a signing bonus, maybe you've got a big windfall of stock, maybe you have appreciated stock. Okay, I sit on. There's a couple of stocks of mine that have appreciated tremendously. I've got one that I got at $17, and it's over $300 a share. Okay. So there's this big gain in there. If I sold it, I wouldn't pay a lot of money in taxes. So one of the ways to do this. But you sit back and say, well, I have a charitable inclination, but I am not sure what I want to do with it yet, and I don't want to do it all today. So you can set up what's called a donor advised fund. You can do it at Fidelity Vanguard. I mean, most of these brokerage houses, they're cookie cutter things, they're easy to set up. And let's assume that you got this big bonus of $100,000, or you have appreciated stock or Bitcoin or something that's gone up in value so much that if you sold it, you'd get hit with a huge tax. But you want to make charitable donations, you can donate that stock. You can donate cash to this donor advised fund. You then get a deduction for it this year. So let's pencil this out. I want to jump back to the iPad. I know that this is a lot of information, but I think that this is important for us to start thinking in these terms. Let's assume that you purchased stock in. I don't know Tesla and you bought it at $200 a share. It's now $1,100 a share. That means there's a 900 per share gain.

Let's assume that you bought, you know, 100 shares. So what is that? $20,000 you spent? But at 100 shares, this is going to be $110,000. Now, I hope I'm doing the math right on the fly. Okay, that means you've got a $90,000 gain. It would cost you about $30,000 in tax if you sold it. So here's what you do. You can take the Tesla stock, donate it to a donor advised fund. This gives you a tax deduction of the $110,000. Now, the donor advised fund can hold the stock or they can sell the stock. There's no gain on it. There's no tax on it. And now over time you then define, you now manage the donor advised fund. And over time you might say, hey, I want to make a thousand dollars donation to, oh, I don't know, animals, some animal cause, because I love animals. Okay, and then maybe you want to make another thousand dollar donation to. I do a lot of stuff against abuse and violence, against women and children. Okay, so domestic violence. So whatever it is. But here's the thing, that $110,000 is invested, it will continue to grow and you can keep telling it where to go as long as there's money in there. But you took the deduction this year, so you get the $110,000 deduction. And you can now make charitable. You can decide where it's going to go. But you made the charitable donation this year, you get the big deduction this year. There are some income limits, so talk to your tax advisor around this. But it's an easy way for those that want to create a charitable process, a charitable giving where you're not necessarily writing a check every year. You can put it into a donor advised fund, especially if you have a windfall. If you had a big pay off of something, you can put 100,000, 200,000 into it, take the deduction this year, and then you can disperse it out over years. Okay? And here's the other side. You can control what happens after your death, so you can create a charitable legacy beyond your lifetime. So there's a lot of benefits of this. It's something that you can use to make that happen. That is number seven. I'm going to take you to number eight. Eight. Now, I know I'm going fast. Let's go to Number eight, let's see what that is. Number eight, that's lost harvesting. Okay? You might have heard this term, lost harvesting. What this means is that, look, in this past year, in this past year, you've had a stock market that has gone way up. So you might have some big gains.

That if you sold the stock, you would have to pay a tax on. Now, the capital gains rate, currently the capital gains rate is 0%. If your total income is less than $80,800, okay, it's 15% up to $501,600. And above $501,600, it's 20%. So the maximum capital gains rate is 20%. And it's based upon how much income you have. So you'd have to pay income tax and capital gains tax on any sales of stock. If your income is over, call it $81,000.

But if you have a capital gain on a stock, selling a stock, you can offset it with any losses from the sale of stocks. Now, you have to match short term with short with short term. You can't use short term against long term. There's some rules around it, but this is where lost harvesting comes into play. You say, maybe I have a portfolio where I have some stocks that I want to sell at a gain, and I have some stocks that I have a loss. I don't really want to sell them, but I don't know if it's going to come back. So if you sell the stock at a gain and you sell the stock at a loss, they offset each other. That's called loss harvesting. And you pay a lower tax. Here's the warning. They don't give things without asking for something in return. There is something called the wash sale rules. So if you sell a stock at a loss.

And buy the stock back or something substantially similar to that stock within 30 days, you will not be allowed to use the loss. It's called the wash sale rule. So if I sell a loss stock and I want to own that stock, still, you got to wait 31 days before you buy it. Okay. Otherwise you're not going to get the ability to use the loss against the income. Okay. Hopefully that makes sense and helps. Let that leads us to number nine. Number nine, let's go back to here and number nine is maybe this is a time to look at converting some of your IRAs or your retirement accounts to Roth. Okay, Roth conversions. So what does that mean? So you have what's called after tax accounts and pre tax accounts. When you make a contribution to your Retirement, you can make it out of your income and get a deduction for it. That's what a typical IRA is or a 401k is. You get a deduction and you don't pay tax on that. But it then grows tax deferred and when you take it out at retirement, you pay the tax then. Many folks like this, especially because they believe that they're going to pay taxes at a lower rate if they believe they're going to pay taxes at a lower rate down the road. But they came out with this idea of a Roth IRA or Roth retirement where you don't take the deduction now and it grows tax free. And when you take the money out at retirement, you pay zero tax. Now you might have money that you put in and took a tax deduction for. You can convert that. So you don't pay taxes down the road, but that means you pay tax today. So why would I do this? I would do this if I believe that income tax rates are going to go up substantially. I would do this if in order to now allow it to grow without taxes. There's some estate planning reasons to do that. So, so my heirs can inherit the IRA without tax down the road. So you might want to look at your retirement account and say, does it make sense this year to convert it to a Roth type of account? Okay, talk to your tax advisor. There is a limitation here. If you convert to Roth, If I take $100,000 of my retirement account and convert it to a roth retirement account, one, I'm going to pay tax on that 100,000 DOL at today's rates. Two, the money that goes into the Roth I can't touch for five years. So I need to let it weather for five years. So if I need that money within five years, we can't do a Roth conversion. So it's got to sit in there for five years. Okay, that's number nine. And that leads me to number ten. Okay? And that is this. Update your trust and will for life events. Things might have happened. This year, for instance, I became a granddad. This year, my little granddaughter, the little princess Emily, she is three months old now. Okay, a life event happens. Marriage, divorce, birth, kids off to college, kids out of college, kids are now grown. Life events happen. Which means that if you have a trust in place, and most everyone should have a trust in place.

It might need to be modified, it might need to be changed to take into consideration the new life circumstances that exist and making sure that everything's in place to make that this is a perfect time to do it with that. So those are my tax moves for 2022. These are the things that I want you to start to look at now, before the end of the year. Because after the end of the year, some of these you don't have access to. Some of these tools you don't have access to. Now, depending on your circumstances, depending on the facts around you, you actually might find that there are some other elements that you can consider because of your specific circumstances. I don't know your circumstances. It's important for you to have a tax advisor. It's important for you to have a proactive tax advisor, someone that is looking forward and saying, here's how we can structure this to take the most advantage of the tax rules. Now, I'm not talking about doing things that are inappropriate, illegal, or stretching the boundaries. I'm talking about everything that is legal within the law that you have a right to do. Okay? You have an obligation. In my opinion, you have an obligation to pay tax. You don't have an obligation to overpay tax. So why not take all the legal deductions that are available to you? Now, some people have in recent time argued and said, oh, people are taking advantage of the tax code. Well, the tax code was drafted to allow people to do certain things. If you don't like that, change the tax code. Don't blame the person. We're following the rules, so follow the rules. Don't get yourself in trouble. Remember this, pigs get fat, hogs get slaughtered. I'm not talking. Do not ever cross the line to be over aggressive. Follow the rules and reduce your taxes to whatever is legally possible. All right? So hopefully this helps. Hopefully this will give you some food for thought. By the time that this episode comes out, you still have a handful of weeks before the end of the year. Get with your tax advisor. Be proactive, because after the first of the year, you will lose some of these options. All right, I hope this helps. If you have questions, if things come up for you, do me a favor, send me a dm, send me a note, send me a question, post it in the affluent entrepreneur Facebook group. Let's keep the dialogue going. This is all about you. This is all about your financial liberation. This is all about keeping the money in your pocket so it'll grow, create the legacy you want, give you the financial independence you deserve, and take care of your children, take care of your grandchildren, take care of your legacy, the movements and the missions and causes that you want to get behind. So with that let's sign off. I hope that you enjoyed this episode. If you haven't done so one more time, go ahead, give it a review. Let me know what you think. Maybe I read the View the review on air and you get a one on one strategy session. And I look forward to seeing you or talking to you in another episode of the Affluent Entrepreneur Show. And until then, always, always strive to live a life that outlives you. Cheers. Bye.

Thank you for listening to the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building your Money Machine where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.