This is Tax Planning (Ep. 5)

Welcome to Ideas by Mike, the podcast with Mike Milligan, where you will find one-of-a-kind financial planning advice for your one-of-a-kind life. With over 22 years of experience as a certified financial planner, Mike shares experiences and advice on crafting simple, easy-to-understand financial plans based on your values and priorities. He believes that taking a personalized approach is the best way to prepare for the future and give meaning to your finances. So follow along as Mike, and from time to time his guests, explore different strategies and tools that could help you secure your financial future in retirement. Now on to the show.

Hello and welcome to the Ideas by Mike podcast with your host, Mike Milligan. I'm Wendy McConnell. Hi, Mike, how you doing?

I'm doing great, Wendy. How are you doing today?

Oh, good, good. Glad to hear that. So, um, what is the feedback? Are you getting any from the people about the podcast?

Yeah, the feedback's been very interesting, not only from what I'm hearing, but what our team's hearing too. We're hearing that our clients are actually loving what they're hearing, this level of inside knowledge that they're getting on us and about our team. Our prospects are saying that the content's very interesting. Now, we're also hearing that this is allowing people to listen and learn anytime, anywhere, and it fits seamlessly into their daily routine, which is what we want. We want people to be able to pick up with whatever they're doing in their daily activities, just be able to listen so that they can have some dynamic financial planning in their life so that, you know, what they're doing from their financial planning stuff can make an impact not only to them, but the communities and their families that they serve. So, we're loving this podcast. I mean, like, our team's loving it, our team's listening, they're being able to reference back to it for our clients and prospects, and it's very exciting.

Yeah, you got to make it convenient, Mike, right?

You can, right? Because that's, you know, part of being a dynamic financial planning firm. What that means to us, by the way, is there's 5 key areas of financial planning: tax planning, retirement income planning, investment planning, long-term care and long-term healthcare planning, and then your legacy plan. What's dynamic about those 5 areas is that when they're brought together, you really see that that plan is not what's traditionally offered in the marketplace. And when it's put together, it can really make an impact on what people are doing financially.

All right, sounds great. So today we're going to be talking about tax planning. Yeah, so, um, people are always complaining they don't like the amount of taxes they have to pay. So in preparation, we pulled some stats, and in an article, 7 Facts About Americans and Taxes, 56% of Americans now say they pay more than their fair share in taxes. Which is up from 49% in 2021. So are you hearing from your prospects the same type of frustration?

Yeah. Yeah, Wendy, I am. So, and it's just not our prospects, it's also our clients, is people are, people are, they don't feel like they're getting what they pay for. And any time somebody feels like they're overpaying for anything in life, There's a high level of frustration and taxes are no different. See, what taxes should pay for is, you know, infrastructure, it should pay to make our communities better. And I don't want to go political on, you know, this podcast, because that's not what we are. But the frustration is real, because what the biggest frustration that our prospects and clients are saying is, why don't I get the same tax breaks as some of the super wealthy people? out there. You know, why, why doesn't the tax code work for me like it does for billionaires? What can I do to be able to put what I have saved and what I earn in the most tax-favorable way possible? See, the, the 3 things that Middle America hears about taxes is that this year, try to pay the least amount of taxes as possible. And often what that means is they're pushing the tax bill out into the future. The other thing they hear is that, you know, pay quarterly taxes, you know, that'll help you avoid penalties. And the same— and the other thing they hear is that history tells them that tax rates will always go down. But what we know is that Tax rates are at the lowest they've ever been now. And so the frustrating thing is that they feel they're not getting the same breaks as the super wealthy. But what they also don't know is the frustration's really going to boil over in the future when our government increases tax rates because they have to. And so, yeah, there's a lot of frustration that's happening in the market right now.

Might be time for another Boston Tea Party, right?

Could be, right?

So, um, we know that you're a professor at Old Dominion University, and when you teach your tax planning as part of the financial planning process, what are some of the things that you tell your students to help give them a little more understanding about taxes?

Yeah, so taxes, um, you have to historically look at taxes. It's funny that you mentioned the Boston Tea Party, right? Because That was really the beginning of the American Revolution, right? Because our country was founded because of undue and unjustly high taxes. And, and so here we are today, and like, to understand— so I teach the history of taxation. Like, for instance, the highest our individual tax rates have ever been in the history of America occurred after World War II. It was a very patriotic time in our country. We had just come off of defeating Nazi Germany. We'd come off of the battle with Japan, and we had lost so many patriots. So many people had passed away. So the patriotic thing to do at that time was to pay taxes to repay the debt that the government incurred. And so see, there's that value, right? Back after World War II, people were willing to pay higher taxes because of what cost we had used or we had accumulated the debt for. And at that point in time, tax rates got as high as 92% for the super wealthy. Well, over, over the period of time, you know, taxes being the primary— and we're talking about federal taxes. Taxes are the primary source of revenue for our federal government. And so if you come forward in time past World War II, we get into a period of time where our government started realizing that they needed taxes today, but they also needed taxes in the future. And so when I start teaching this at, you know, when I'm teaching the financial planning curriculum, I point out that the 401, which is an investment vehicle that people use to save money for retirement, it didn't come into existence until 1978. And when it came into existence, it was actually— the name of the bill that created the 401 was actually the Tax Revenue Act So the 401, a retirement savings vehicle, was actually a tax revenue creation bill for the federal government. And that was that whole idea where the government could have taxes today, but they could also have taxes in the future by getting people to defer their money out into the future, let it grow, which means the taxes would go— would be paid in the future. And so when you understand the historical side of it, and then you come forward even a little bit further into the '90s, 1996, under the Taxpayer Relief Act of 1996, the Roth IRA was created, which allowed the government to collect some taxes at that point in time, and then that money for the individual grow tax-deferred forever and withdraw it tax-free. Ironically, when Roth IRA was created back during President Clinton's term, it was the last time we had a balanced budget in the United States. It was the last time we took in more revenue than what we paid out in expenses. And ever since then, we've been running at a tax deficit. So when you look at taxes from a historical perspective and see that, you know, People will pay for what they value. This goes back to that original stat by Pew Research where people just feel like they pay more than their fair share because it's not valued. Well, if you understand the history of taxes and then you put it into the practical, you know, into a practical financial planning situation of now and the future, you start looking that— you start realizing that planning Individually is how somebody in Middle America can get tax relief like so many of those who are billionaires. And so those— the, the 3 major things that we teach in tax planning is that explain the past, look at the present and see where we can avoid or legally reduce taxes, while also looking to the future and seeing where tax relief can come in the future. Now, here's the one thing about taxes when you're talking about the future that I still teach. You know, I still have on my professor hat now. And while I'm wearing that professor hat, when you look at the future, the one thing that you always have to keep in mind, this is what we tell our students when we're teaching this graduate-level course, is that tax rates in the future are unknown. We just don't know what they are because by the stroke of a pen and the gavel of votes by our House of Representatives, our tax rates can change and go up at any moment. As a matter of fact, history, a historical bill, the Tax Cuts and Jobs Act of 2017, reduced taxes temporarily, but in 2026, with no action by our Congress or our executive branch, tax rates are going up to where they were before 2017. And so historically, historical knowledge about taxes combined with the present leads to what, you know, people need to know about paying taxes and how that impacts their retirement and how that impacts the life that they want to live. And so, like, from a professor standpoint, history is the guide on where we go in the future with taxes. And it's so true in any academic environment. And so often people, you know, they want to bring practical knowledge into their real-world situation. But if you don't have academic knowledge and try to apply it to what they're doing in their everyday life, if you don't have the academic knowledge, you can't really put a plan in place that's one of a kind, that is for you, and that helps you get the same benefits that many of the millionaires and billionaires get in this world.

I have a question about what you had mentioned earlier, that the tax rate used to be 92%.

Yeah.

So that meant that people who were making, you know, money from a business or corporation, they literally only got 8% of their profit.

Yeah, it— that's exactly what it was. Now, remember, that was a— it was a— that was a period of time in American history where patriotism was as common as, you know, as like air you breathe, right? We were, we were so, our, our, the people of this country were so thankful and grateful for the sacrifice. Remember, this was like coming right out of D-Day, right? Where we turned the tide of the war from, you know, being really a Nazi, Japanese-controlled world to being where freedom rang louder than it ever had in previous history. And so we were— we had this feeling in the— in our— in our country that we owed more of what we made for the sacrifice that was made by the hundreds of thousands of men and women who went over. So yeah, people were willing to work. You know, very wealthy Americans were willing to work And give back 92% of their taxes and live off of a smaller portion to help America get out of debt and become, you know, a great country, a great superpower that we've, you know, we've been ever since that point in time. Now, what's interesting about that, do you know the generation that did that, Wendy? You know what they're called?

Baby boomers.

Yeah, but they're also called the greatest generation. They are literally called the greatest generation that ever lived.

I thought that was the generation before.

It was, but that's it. But those 2 generations combined right there, right? The parents, the parents, and then the kids of those 2 generations, that's who repaid the debt.

Okay.

Right. Those are the ones who sacrificed. Those are the ones who gave their life. And then those are the ones who repaid the debt.

Right.

So when you combine those 2 together, historically speaking, I'm not sure that we'll ever have a wave of patriotism in America again, especially when it comes to taxes, right? That I want to pay tax. You know, now we're, now we're, you know, corporate-based where we're trying to make as much profit and get as much wealth as we possibly can. And, you know, one way to get wealth is to have really good tax planning.

So I'm just trying to make sure that I understand this properly. Who was paying 92% tax rate? Everybody or—

No, no. I'm glad you asked that. Right. Our tax rate system has always been a graduated tax rate where the lower, you know, the lower your income, the less you pay in taxes. So the 92% was paid by the wealthiest Americans. So that graduated schedule, just like we're on now, like our tax tables today, the lowest tax bracket is 10%, and the highest tax bracket's 37%. The more you make, the more you pay in taxes in the United States. And it was the same then, right? So the wealthiest Americans were paying 92% tax, right? But at— during that same period of time, middle-class Americans were still paying, you know, 47%, 52%, and 57% in tax. taxes to be able to supplement and pay the debt back that was owed.

So, so what are the wealthiest Americans paying now when it comes to tax rate?

So the wealthiest Americans are paying 37% in taxes. That's the highest federal tax rate now. In 2026, when tax rates go back to what they were before, you know, before we had the Tax Cuts and Jobs Act, It's going to 39.6%. Now, those taxes do not include state income tax, which varies between— like the state of Florida doesn't have a state income tax. And then we have some states like California who are almost double digits. And then if you live in New York City, for instance, you not only pay the state tax, but you also pay a New York City tax. And so the federal tax rate's 39.6%, but we have many wealthy Americans that live in some of the highest tax rates in the country, paying over 50% today when you add state and city taxes to what they're paying.

Okay, well, thank you for clearing that up. I appreciate that.

See, Wendy, I'm glad you asked those questions because that's what prospects ask, right? They want to know, and, you know, Most prospects don't know what to ask until we start giving them the historical context of where tax rates were. Because if you don't know how high rates have been in the past, you don't really know how to plan for your future. Because when you look at tax rates today, in context of where they've been in the past, They're on sale, like they're, they're much lower than they were. And so if you have the ability to pay some tax on money today that you would never have to pay tax on again in the future, that is what tax planning is, is the ability to pay less taxes over your life versus not just this year.

Yes, that makes sense. So What do you and your team do to help with this tax planning?

So, so it— I think it's the foundation of all real financial planning is having— is understanding that major expense in your life, which taxes are the biggest expense anybody will ever pay in their life. If you really think about it from a percentage standpoint, So as the foundation of all real financial planning, you have to understand what you're currently paying in taxes and what your options are to legally, ethically, using the tax code, reduce your lifetime taxes. So we— I mean, the tax code is hundreds of thousands of pages, right? It's not something one person could ever comprehend. when they're trying to do it themselves, much less one company like Ideas by Mike. So we have to obviously use a partner that understands and has decoded the tax plan. And we use a solution and we've partnered with, for our prospects and clients, we partner with HolistaPlan, which is a computer-based platform that scans your tax return. It doesn't matter if your tax return is 6 pages or 200 pages, right? Like many wealthy people, they have multiple schedules and multiple supplements to their tax return. Well, it scans that tax return and through their analytical research, their support, Ideas by Mike, they bring back a report that shows where either you have been overpaying, overreporting, In losing out from a standpoint of paying too much in federal and state taxes. Holistic plan then will take our analytics and the planning that we do from retirement income, investment, long-term care, and legacy planning, and put scenarios in place that if we were to do things like Roth IRA conversions, If we were to do things like gifting strategies to the next generation, if we were to purchase long-term care health insurance for your life, what that would do for your lifetime tax bill. Does it reduce it, and by how much? Does it help you reduce your effective tax rate? Does it give you relief from the overburdens that taxes can be on your full retirement plan? So, Holista Plan is our partner at Ideas by Mike to use that. And it's the only way to get to them is by working with a firm like us. It's not a solution package like TurboTax or H&R Block that anybody individually can buy because it has to be interpreted. It's got really good language on their reporting system, but it has to be interpreted from a scenario basis from a Certified Financial Planner. And that tool is available to all of our clients and all of our prospects who are seeking that foundational tax planning as part of their one-of-a-kind financial plan.

Well, that sounds great. Sign me up. I'm ready to go.

It's pretty simple. Like, most people don't understand. They say, okay, well, you know, it is great, right? To be able to have that level of planning. And what most people will say, Wendy, is why do you start with tax planning? My advisor at Edward Jones, my advisor at Merrill Lynch, my advisor at Fisher Investments, they have never done this as like the foundational support of my financial plan. Why do you do it first? Because here's the thing, is like, just like you said, sign me up, let me go. Let's go for it. Is when you see the impact taxes have on the decisions you need to make for investing and retirement income, you realize that you may not need to take as much risk as what those firms want you to take with your portfolio. That you could actually live on a 5% or 6% or a 7% return that's steady and stable over time because now you're paying 10% to 12% less in taxes over your life. So that's the real power of making tax planning the foundation of all financial plans. And it's why it's the foundation of everything we do at Ideas by Mike. So, you know, people who are listening to this who are our prospects, for instance, right? Like you, you're on your run, you're out, or you're sitting on the porch listening to us while having a cup of coffee, or, you know, you're spending your lunch hour listening to what Wendy and I are talking about from a tax planning standpoint. If you want like that customary, that custom report for you by Holista Planning Ideas by Mike, it's just as easy as connecting with us. And then our team will work with you to get that initial report done. And then when it's, and then when that report's done, we come back together, meaning you and I come back together to review the outcome of that. And if there is something in that report from a scenario basis where I see over your life you can lower taxes by either doing Roth conversions or lifetime gifting gift strategies with your families or using other avenues or other investments to get there, we'll schedule a time to look at that as part of the other parts of the dynamic financial plan. But get in contact with us because if you're not doing tax planning now, And tax planning is not giving it— giving information to your CPA and then them giving you your tax return. That's tax recording, right? They're just recording what you've already done. Tax planning is taking what you have and looking toward the future and how you can reduce it so you can take control of the future versus having politicians take control of what your taxes are. Because the goal should be every really good financial plan to retire all the debt you have at some point in the future. And that debt includes anything you owe to the IRS. And if you can retire that debt, you know, by getting all of your assets outside of the tax code, man, isn't that a great place to be? Because then politics can never influence the life you and your family live forever.

I like the sound of that. This has all been really helpful, Mike. Now I think people are looking for tools and resources to gain knowledge. So expert guidance, it's not really easily accessible. Like I said, I've been wanting to ask that 92% thing for the longest time. So thank you for that. Now the fact that we can tune in and have access to Mike the Planner and the Professor, well, that's really just good for everybody.

Well, thanks, Wendy. I mean, we, you know, we have so many ways for people to connect with us, either through our YouTube— we have more content on YouTube also if people are looking to learn more from educational opportunities. We, you know, we, we have a pretty dynamic Instagram page if people are looking to again get more knowledge. But also our website is a great path where people can connect to us. To be able to learn more about who we are, who our team is, and then obviously to connect with us to be able to get this tool, HolistaPlan, as part of the foundation of their financial plan. I mean, I say this every episode, but one of the things that my mission, and one of my primary missions in life, is to change this industry. That's the financial planning and insurance industry. Because in the way we do that is to be a dynamic financial planning firm that helps people who don't fit the traditional mold of the financial advisory world so that together we can make an impact. And that impact is going to be to our family, to our friends, in the communities that we live and serve. And, uh, having a tax plan in place is the first step of having a dynamic financial plan.

So how do people get in touch with you then? Tell me all of the places.

So if you want, if you want that educational content, YouTube @IdeasByMike, Instagram @IdeasByMike, on LinkedIn search Mike Milligan CFP. If you want to Google, because there's a lot of videos or other places where I've been like a guest on podcasts, just Google Mike Milligan CFP. On our website, www.ideasbymike.com, you'll be able to connect with us, you'll be able to see our team under stories, you'll be able to see every member of our team and their expertise in being able to help you with this. You're also going to be able to see our strategic partners, of which one of our strategic partners is Holistic Plan. They're the ones that bring our tax planning capabilities to bear for you, and they're the ones who help us lay the cement for that foundation of what we're going to build from a true dynamic financial plan for you. And obviously, you can call directly into our office. Our office's phone number is 757-909-7777. 7151 for those of you who want to immediately get in access, get access to us.

All right. Sounds like a great plan. So thank you, Mike, and thank you for listening today. Please like, follow, and share this podcast with your friends. Until next time, I'm Wendy McConnell.

Thank you for tuning into Ideas by Mike, the podcast, the show where ideas turn into money. If you enjoyed today's episode, Make sure to click the follow button to stay up to date on future releases. For additional information on becoming a part of the Ideas by Mike community, check out our website at ideasbymike.com. Don't forget to take a look at the show notes, and for more financial insights, subscribe to the Ideas by Mike YouTube channel or visit the website to find one of the upcoming webinars. Also, connect on Instagram or Facebook @ideasbymike. Ideas by Mike is an LLC headquartered in Virginia with offices in 42 cities. The company owns an insurance agency registered in all states directly or through affiliate companies. Mike is an investment advisor representative with JB Wealth Advisors. Any financial planning information shared on the show should not be construed as financial advice for you personally. For your one-page financial plan, please reach out to Ideas by Mike through the website. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Ideas by Mike. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investment advice. Any financial planning information shared on the show should not be construed as financial advice for you personally. For your one-page financial plan, please reach out to Ideas by Mike through the website.