#207 3 Advanced Tax Strategies That You Might Be Missing as an Investor

Hey, everyone. Hope you're having another great week. When I'm recording this, this is April. This is the time of taxes. At least the early season for taxes. And if you're thinking about it, it's been on my mind lately, then you've been thinking about the best ways, the best strategies to try to minimize the amount of taxes that you pay. Because we all know as doctors, we pay way too much in the way of taxes. So we're always looking for strategies when it comes to investments to minimize our tax burden. So in today's episode, we're going to introduce you to three very important tax strategies that you may know about. It's something important for you because you don't leave it completely up to the professionals, meaning that you want to know what to do, to ask them the right questions to make sure you maximize your opportunities and know how to keep as much in your pocket at the end of the day as possible. So stay tuned. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. If you enjoy hearing about this stuff, make sure to hit subscribe. Now let's get on with the show. Okay, so thanks for joining us today. I know it's that dreaded time of year where we get that reminder of how much money that we're actually giving back, how much money that we made but have to actually pay in the way of taxes. When you make more money, typically you pay more in taxes. However, if you're a smart physician who knows how to take advantage a lot of the tax benefits that are available to us when we act as investors or entrepreneurs, then you can make the most of this situation to keep more in your pocket at the end of the day, because that's what matters most. I mean, you can make a ton of money, but if you can't keep a lot of it, then what's the point? If you think about it, that means you're really essentially working that time for free. And I know that's not a great feeling. We're trying to minimize that as much as possible. Now, to be honest, I don't like dealing with taxes. In fact, dealing with taxes in a lot of ways is one of the most stressful times of the year for me. I have to admit, I'm not necessarily the most detail oriented when it comes to keeping track of all the little details and expenses and whatnot. So I definitely rely on my CPA to get this done well. But you still, as a responsible person, you have to submit all your paperwork you have to make some of those big decisions and sometimes you have to be an advocate for yourself in front of your cpa. So the more you know, the better off you're going to be. Even though you do want to have the best team behind you as possible. I don't care which CPA you go to, but there are times when they don't know everything that's going on. Like I will tell you, for example, there have been some times where I made investments throughout the year, but I forgot to tell my CPA and so they didn't even know it happened. I would just produce this K1 later on in the year and they'd be like, what's this? You never told us you made this investment. This makes an impact on your taxes and your estimated taxes. And I didn't realize that I needed to be up to date on this and know and take part and be responsible on my own. So you may know the things I'm going to talk about, but I'm going to mention three things in terms of tax strategies that you should know about for your own self to protect yourself and to also let your CPA know that these are some of the strategies that you're thinking about and and see if it might be relevant for you. We obviously are extremely busy. The last thing we want to think about are taxes and tax strategies. We've got things we want to do in our lives, enjoy to enjoy time with our families. So when it comes to taxes, we want to just offload that. So actually, in the next few minutes, I hope to share three of my favorite advanced strategies that I know about that you can use now and in the future to save some more. Number one is this concept of tax loss harvesting. Now, what is tax loss harvesting? It's a strategy. It's used by investors to offset some of the capital gains and reduce your taxable income by selling those investments that actually have experienced a loss. Those losses might be on paper, but you realize them or make them real by actually selling them to mark that loss. So how does it work? Number one, you have to identify some of your underperforming assets. So you're going to look at your investment portfolio and maybe look at some of your securities or assets that you might have that are underperforming. Here's an example of that. Maybe there's a stock that you bought and you bought it at the high and the prices have gone down significantly or you hit a peak in the market when it comes to crypto or something like that, and your Asset values have dropped significantly. So maybe on paper you've taken a loss, but when it comes to your taxes, it doesn't count as a loss until you actually sell them. So what you would do is you would sell those underperforming assets. You would strategically come up with the time to sell those to make those losses real. So what you actually create is something called capital losses that's opposed to capital gains. So if you know that you're going to have some gains that year, your losses can be used to offset some of those gains. Now why would you want to do this? Number one, because you can offset those gains. So if there's an investment that you know you've done well and you're going to have to pay taxes on that, let's say you sold a property or again, you sold some crypto or sold some stocks that have done well and you know you're going to pay taxes on it, well, you can offset that by, you know, realizing some of the losses on some of these other investments and they offset it by dollar by dollar. What that means is that if you have a gain of $100, then you create a loss of $100, those offset completely, really minimizing your taxable income. Now, when you sold these underperforming investments and you've realized these capital losses, you can decide whether you can invest in something else or you can hold the cash for future investment opportunities. So you have options there. So when you use a strategy, you want to consider a few things. Number one, the timing and market conditions. Like, you want to know what the market conditions are, know that there are short term fluctuations, figure out whether this is a good time to actually go and sell. And here's the thing, there's something called a wash sale rule, meaning that after you sell it, you can't necessarily just buy it back right away. That definitely happens in the stock market where you couldn't sell Apple, for example, and then buy it right away and then try to claim that loss, you've got to wait at least 30 days before selling and then purchasing it again for it to be realized as a true loss. Now there's some strategies behind this with certain index funds. For example, if you buy a certain index fund has lost money, you can buy a different index fund that's slightly different, that maybe track something very similar, but is considered different enough that you don't have to worry about this wash sale rule. Now for those who are wondering, in the crypto world, when it comes to Bitcoin, Ethereum, let's say you lost some money there, you took some swings at that, you bought an NFT or something. I'm not sure what it is, but you did some of that. Well, there is no wash sale rule in that scenario. So you could just create the loss right then and there by selling and then you could actually just buy it right back. And so you would be able to memorialize the loss, but still be able to keep the asset. And now recognize you're using those losses to offset gains. So you want to be strategic when you go ahead and do that to make sure that there's some gains to actually offset. Of course you want to look at your long term investment goals, just make sure this all fits within that. And of course, each transaction, whenever you buy or sell something that can come with some transaction costs. So that could make a difference when it comes to figuring out whether it's the right time or whether it makes sense to go ahead and sell that asset at a loss. You also want a strategy for what you're going to do when it comes to reinvesting that cash. We all know that inflation is high. Cash that's just sitting there unfortunately is wasting away. So what do you want to do with that cash once you sell that asset for a loss? Now, I should have probably said this in the beginning, review all these with your cpa. But it's good for you to know to bring it up because you have to be your own best advocate when it comes to taxes. Number two is charitable giving with a donor advised fund. Now, to many of us, the concept of giving back and doing charitable giving is important to us. And so people want to figure out the best way to do that in a way that's tax efficient and makes sense for you. So why not get both benefits so you get the feeling of giving back and you're able to contribute to those causes that you're passionate about or that are important to you, but then also get a tax benefit. On the other side, there's something called a donor advised fund. And what you do there is you contribute funds or you can contribute assets, so you can donate stocks or things like that to a specialized charitable account and that's managed by some sponsoring organization. Usually it's like a financial institution like Vanguard or Fidelity or something like that. And the benefit of that is that you get an immediate tax deduction in the year you make that donation. So for example, let's say you donate $100,000 worth of stock or you put cash in there or whatever that is. You take the full benefit in the year you make the donation and you can deduct the market value of whatever you are donating. Let's say you're donating $100,000 worth of Apple stock. Then you get the fair market value at the time you donate it. So what's the strategy with this? Now for a lot of people, they had a nice run up in their asset value in their stock portfolio over the last several years, or maybe even the last decade, their portfolio has increased a ton. And if they were to sell any of that in terms of stocks or whatever that is, they know that they're going to have to pay some significant capital gains. And for a lot of us, that's in the 30, 40, 50% range. Well, what you could do to avoid paying that capital gains tax is donating the appreciated value of whatever asset that you want. And then you can still deduct the full market value of the asset as is. For so, for example, if you bought $50,000 worth of Apple stock and it's appreciated up to $100,000, normally you'd have to pay taxes on the appreciated gains, that $50,000. But if you donate that amount, you're able to donate that appreciated amount, that $50,000, you're able to write that amount completely off without having to pay any taxes on it. And so the nice thing is you can decide how much you want to donate in that year. Use it as a strategy. This is really beneficial for people who have exceeded the normal standard deduction thresholds. And if you itemize or whatever that is and you've exceeded that, this is another great way to increase your deductions. Then what you can decide is once it's in this donor advised fund, you can decide how to grant that. Now you can grant it all in one year. You could grant it over, spread over a couple years. You can take the deduction in the year you donate it, but then you can decide how you to allocate that moving forward. For example, if you know you have a significant amount of appreciated assets, you want to donate that over time, you could take the deduction in year one. You can use that as a strategy to lower your taxable income, especially if you're somewhere near the thresholds. You're in a high income tax bracket and you know that and you'd love to take a deduction. It's really nice because it offers a lot of flexibility in the timing of your contributions and how you donate money. So when you think about this as a strategy, you want to consider whether Your donor advised fund contributions are tax deductible. How much it makes sense to donate that year, evaluate the timing of this, how much you want to basically allocate towards donations and giving what you would normally pay in capital gains, let's say, if you sold that asset. I think it's a great discussion to have with your CPA about this. I've used the donor advice fund to help with my commitment to funding certain passion projects, certain funding, certain things that are important to me that I align with. I've also been able to utilize as a strategy to drop my taxable income to get those deductions. Okay, and the third one, real quick, is something called qualified opportunity zones. You all have heard about this in the past. I've talked about it. It was something that came at the end of the last decade in the 2000 teens, where you're able to do a lot in terms of deferring your taxes for certain assets. Originally, they had offered the opportunity to defer some of your capital gains taxes by selling certain assets and moving them into qualified opportunity zones. Now some of those benefits have sunsetted, meaning that they've gone away. But they're still a benefit. For those of you who still want to look into opportunity zones or certain real estate investments that you can get into that still use that benefit, you're able to delay capital gains tax at least until 2026. And if you end up holding that investment for 10 years, you're still going to have a really, really favorable tax treatment. Now currently there's a bipartisan bill which talks about extending the opportunity zone situation for another couple years. And if that passes, just know that this opportunity continues to go on. Now this is great for someone who wants to park some of their capital gains and transfer that into some real estate investments. And they know they want to be in that for the long term. They also want to feel good about investing in certain key economic areas. Now, if you look at the some of the maps for these qualified opportunity zones, they're in like major areas that you wouldn't imagine would be an opportunity zone, but they're areas that the government or the local city really want to prop up, want the area to grow in terms of economic value and be developed. Investing in those areas can make you feel good in some way because you're helping to revitalize just distressed areas, help to create jobs, some business growth, improve some of the community infrastructure. So that can be a great thing and it can really align with some of your social impact goals. If you feel good about that and that's important to you. So again, these investments are really designed for people that are willing to hold their investments for at least 10 years. So think about that. This can be integrated into like estate planning strategies. So there can be a ton of tax efficient wealth transfer, some legacy building, you can designate beneficiaries. All of this stuff can be really important when you're trying to pass along assets to the next generation. Now obviously you have to do your due diligence to make sure you're investing with the right deal. They say the tax tail wag the dog, meaning that it's important to think about investments in terms of taxes, but that should never be your primary concern. You want to make sure that you have a great investment first that is going to make money for you and then think about how you can supplement that or maximize that with good efficient tax planning. So anyways, I know you think about taxes right now, so these are three strategies that I thought about that I happen to utilize and then I've talked to my CPA a ton about. So my recommendation for all of you out there is to talk to your tax professional about creative ways to use your investments to minimize your tax burden. Because at the end of the day, again, it's about what you keep, not what you make. We're going to be talking more about taxes over the next several weeks, hopefully things that are bringing a ton of value to you and that you can utilize in terms of strategies to help get you closer to your ideal life. Anyways, have a great week and let's talk again soon. Thanks everyone. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us at. And if you haven't already, make sure to hit subscribe. Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. Learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.