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Save Money With Smart Year-End Tax Planning

Summary

It’s smart to review your tax strategy and planning to keep more money in your pocket. Use the checklist below as a starting point to see what might apply in your situation.

  • Maximize contributions to your employer retirement accounts (401k, 403b, etc) ✅
  • Maximize contributions to your Individual Retirement Accounts (IRA) ✅
  • Top off your Health Savings Account (HSA) ✅
  • Take your Required Minimum Distributions (RMD) ✅
  • Consider making a Qualified Charitable Contribution (QCD) ✅
  • Use a Donor Advised Fund to implement a bunching strategy. ✅
  • Consider a Roth Conversion (or multi-year Roth Conversion strategy) ✅
  • Tax Loss Harvesting: sell investments at a loss to offset gains. ✅
  • Tax Gain Harvesting: sell gains if you are in a low tax bracket. ✅
  • Make sure to use your Flexible Spending Account (FSA) money. ✅
  • Can you defer income to 2022 to save on taxes?  [might not be a good idea based on potential increasing tax brackets]✅
  • You can give away 100% of your income as a Cash donation in 2021! ✅


Photo by The New York Public Library on Unsplash

Transcript

[00:00:00] Mike: Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton certified financial planner and chartered financial counselor. Today's episode is all about how to save you money by using planning strategies for the end of the year. Find out which of these tax saving tips might apply to your situation.

As I discuss strategies with Matt on his radio broadcast, enjoy the show.  

[00:00:27] Matt: I'm Matt Robinson and I'm joined As always

by our resident guru expert, in chief Mike Morton  

[00:00:33] Mike: expert and chief. I love it.  

[00:00:34] Matt: That's just that there are P on experts who work under you in a vast empire of expertise.

And you.

[00:00:41] Mike: of experts,

[00:00:42] Matt: are the czar. So Mike Morton of Morton financial advice, the host of what's the name of your podcast, man,

[00:00:50] Mike: financial planning for entrepreneurs and tech professionals. See, I remembered it. I remembered it this time.

[00:00:55] Matt: I'm super proud of you. I expect nothing less than an expertise is, are you were, you and I were talking a little bit before the show and you were saying, is it too early to drop a show about year-end tax planning? And here's my argument for why it's not, this is going to hit all of our listeners right now.

And the first reaction they're gonna. What a bummer. I'm not ready to face year-end I haven't even hit Halloween. I haven't even hit Thanksgiving. Don't talk to me about end of year. It's going to stress me out. But the fact of the matter is these things creep up on us. And before. You don't have the lead time that you need to do all of the clever little strategies that you're about to run down.

Am I right? So this is in my mind, the perfect time to do year-end tax planning, and to hear from you about all the smart things you can do to save more money, make more money, defeat your enemies, w whatever else you're planning to present, you.  

[00:01:50] Mike: yeah, this is a good topic. And just the one topic I had for today. We could talk about, the potential changes that are happening in Congress, but until it's real, that would be a lot of planning for discussion sake. So instead. I figured we'd bring some real world topics that actually apply to everybody for today in 2021 that we know are in the works and can save you money.

So this is a good time for just bringing it up. And as Matt said not necessarily having to step on this right away, still have plenty of time to implement these things, but it is a good time to start thinking about them. Just so you have a script for. Hey in November, December when I actually have to, do some of these things that need to happen before year end, you already have an idea of what those might be.

[00:02:34] Matt: with a lot of these things, especially because of people who have been listening to you, which, they probably should, you are after are all Azhar they have been doing smart, fire it and forget it, type things like. Automatic account deductions or contributions.

And so maybe if you want to hit some of these year-end strategies that you're about to lay out the time to act is right now. So that those changes roll in for a couple of months. , why don't we start at the beginning novel concept?  

[00:03:04] Mike: That's always a good place to start, Matt.

[00:03:05] Matt: Yeah. I don't know. What if you're in a Christopher Nolan movie?

Yeah. Shouldn't you start midway and then it turns out that time is moving differently for Tom Hardy or something. All right.

So what's the first thing you should do here in terms of prepping for end of year.  

[00:03:20] Mike: it may not be the first thing you should do, but it is the top of our list that we're going to be discussing today. So doing employer retirement plans and your point, Matt, actually, this is something to be aware of now at the start of October, because these deductions have to come out of your.

If you were adding to your employer, retirement plan, you can't just walk into your HR department with a check for $6,000 and say, please deposit this. It has to come out of your paycheck. So if you are not hitting those maximums for 2021, it's always a great place to start now. I should say, in terms of funding account strategies, this might not be in priority order for you in particular.

Okay. So don't just go out there and be like, oh, Mike said, do this one first. It's this is not necessarily in priority order for account funding. We did have an episode and a blog post about account order, which ones you should fund first. And your IRA is actually tends to fall above maxing out your 401k, but anyway, employer retirement plans.

If you're going to max it out and make sure it is being maxed out for this calendar year 2021, that'd be 19,500. If you're under 50 and be $26,000, if you're over 50 needs to come from your paycheck. So if you're not hitting the maximum by the next few pay periods, go to HR today and bump up that contribution.

[00:04:39] Matt: Got it. And so mean, first of all you raised an interesting point about this may not be the order of importance, but maybe people should just listen and treat this as more of a checklist. Are you going to provide a checklist that people can just reference perhaps on your website or via an email?

Is there a website that people could go to if they're glazing on things you're saying right now to get a checklist for what they should be doing In  

[00:05:04] Mike: In the show notes on all of our podcasts and episodes there is a link, so you can go to Morton financial advice under my blog articles and find a link to this one, to this podcast. And we'll have in their show notes, this checklist, I think that's a good way to describe it as a checklist of things that may or may not apply to you.

So that's why it's good to review it and see which things make sense for you.

[00:05:25] Matt: Excellent. All right. Your maximum. Those retirement account contributions. What's next.  

[00:05:32] Mike: Yeah, those are the employer retirement accounts that we mentioned. That'd be your 401k 4 0 3 B are the very typical ones. The next thing I would like. Individual retirement accounts. And the whole reason we're doing both these on the checklist is because it's deferring taxes. So that's why you get to save on taxes for 2021.

Anything you put into a tradition. And that's what the capital T traditional 401k or traditional IRA comes off your taxes, that amount of income that you're contributing comes off your taxes. So you save whatever your marginal tax rates for this year. So you can max out those IRAs. You could do that towards the end of this year 6,000 for individuals.

If you're under 57,000, if you're over 50 per person, you can also do this in the first quarter of next year. But I like just getting it done sooner rather than later. And so that's why it's on the list.

[00:06:24] Matt: Got it. All right. So That's retirement now. I see an advanced copy of your notes here of some of the things on your checklist that are going to turn into an awesome thing that people can find on your website. I'd say I'm writing checks that your body has to cash. I love that. I'm like  

[00:06:40] Mike: You can find all the details, every little nuance you could ever care about. It's going to be, it's going  

[00:06:44] Matt: you want Mike Morton social security number, go to his website.

I reminded of the common doc in top gun. It's like son, your ego's writing checks that your body can't cash. I'm writing checks that you've got to cash. Fantastic. All right. We did an episode. A ways back about the many smart ways you can use health savings accounts.

First of all, I want to plug that episode. It was great. Second of all, you wanted to say something about HSA is when it comes to end of year tax planning.  

[00:07:11] Mike: same thing. So we're HSA is one of my favorite accounts ever. It's got triple tax benefits. We've had. Podcasts on it. In fact, I'm going to do a mini series on all the nuances about HSS. Cause I think they're great. Again, you get to save on this year's taxes. So if you contribute to your HSA, then you take it off your taxes.

So for individuals that can be $3,600 is the cap for 2021. And for couples it's $7,200. And again, you couldn't do this in Q1, so you can top it off. So a lot of people out there, Matt will have the employee. We'll be contributing to the HSA. So you're in this high deductible health plan through your employer and they'll kick in some money to your HSA, but they might not max it out.

So oftentimes we'll look in January or February of 2022 and see how much was contributed for the year of 20, 21. How much the employer put in, and then you can just top it off, add that extra thousand dollars and save right off the top of your head.

[00:08:08] Matt: Got it. And again, the triple tax benefits is what always gets me about these HSA is it's I remember doing that episode with you and I kept having. Do you remember the old Saturday night live thing that Amy Poehler and Seth Meyers used to do? It was just a segment called really? And I just remember it used to be like no, there's even more benefits here going really, that can't possibly be right.

But it is so check that out and make sure to take advantage of all those  

[00:08:36] Mike: Yeah. And I think that account isn't named correctly is my new thing. It should not be the health savings account. You can use it as another retirement account. And so that's really a great way of thinking about it.

[00:08:46] Matt: I think we can brand it better than that.  

[00:08:48] Mike: 5%

Future money grow future money. So it would be a bazillionaire  

[00:08:52] Matt: yeah. Get rich, the, I don't know. I was going to, I was going to go further afield, forget. All right. What's next on your list. Before I got myself into trouble, we do have to abide by FCC regulations here. So what's the next step.  

[00:09:04] Mike: Okay next required minimum distributions, RMDs. This is super important. You should know about these. If you're in this category of people that need to be retake taking out distributions. So if you are over 72, you're in that category of having to take out you've deferred your taxes, the things we were just talking about, you were doing that for decades, and now you have to pay the taxes.

Requires you to take money out of those accounts. So this would be your traditional employer accounts. 401k is a four, three BS, and it'll also be your individual retirement accounts, SEP IRAs, simple IRAs, traditional IRAs, anything where you defer taxes, not the HSA though, but anything else? You've deferred taxes.

You will have to take required minimum distributes.

[00:09:51] Matt: Now I know you're you were fixing to talk about charitable contributions here in just a moment and not to get ahead of you, but can you, so let's say you have an RMD here. Is there a way that you can turn that around into a tax benefit? If let's say, there's a reason that it's a required minimum distribution.

You got to take it. Maybe you don't need it right now. Could you turn that around into a tax benefit by thinking about a charitable avenue or some other mechanism of using it to defray your taxes? So it doesn't cost you as much.  

[00:10:30] Mike: Yeah, absolutely. So that's the QCD mat that you're talking about.  

[00:10:34] Matt: Is that where you buy things online?  

[00:10:36] Mike: qualified charitable distribution,  

[00:10:39] Matt: Oh, I was thinking of QVC. All right, go on.  

[00:10:43] Mike: This is an audio  

[00:10:43] Matt: I don't really want to buy a Chin's armchair right now, or like a Topaz pendant.  

[00:10:49] Mike: No, but you're exactly right. If you find yourself in a situation you don't need. It's all the money coming out of your RMDs. The QCD qualified charitable distribution is fantastic way of doing this because you're able to donate the money and save on taxes. So it's really great strategy.

So I just put it out there, like you'd have to do your own research on it just to make sure it makes sense for you. But if you have RMDs and you're charitably minded, definitely look into this option because you can save a lot on taxes.

[00:11:21] Matt: What position are your clients finding themselves in right about now as you, cause you obviously talked to lots and lots of people who are looking at their financial situation. What I tend to find with my own family situation is that as I go through the year, I'm a little risk averse.

I don't know even if my wife and I are both getting W2 income, we're employed. We're not an imminent risk of losing our jobs unless I, run a foul of the FCC, for example. Even then I just find that I'm a little bit more risk averse earlier in the year. And it's right around now as I enter the fourth quarter of the year that I start to check in a little bit and see, all right, have I given as much to charity as I intend to as my yearly target is.

And have I done these other things in terms of savings? Are you finding that among your clients that they're they've been a little risk averse given the pandemic uncertainty and they're needing to check in and catch up.  

[00:12:16] Mike: Yeah, definitely. I think it's just very natural to do it during the fourth quarter, for all, for a variety of reasons, feeling more comfortable about what happened, knowing we just do everything in calendar years. What's the market done this year. Oh, it's done. It's done well. So I'm feeling pretty good.

So do I feel like a giveaway a little bit more? Yeah. Maybe, based on that and based on the time of year between Thanksgiving and the holidays and everything else, I think it's a very natural time. So we have. So you add all that together and it's a natural time to have those thoughts and those conversations and figure out, again, if it makes sense for you, I have clients across the board, right?

Some, very interested in doing lots of charitable giving. I can tell you stories of saving tens of thousands of dollars by various tax strategies and then people that, aren't as interested in it. It's all good, but it's something to just check in at the end of the year.

If it makes sense for you.  

[00:13:02] Matt: Oh, go ahead. Go. Go.  

[00:13:04] Mike: yeah. I was just going to say more on that topic in terms of charitable giving here at the end of the year, besides the QCD. Cause  

[00:13:09] Matt: Yeah.  

[00:13:09] Mike: not have the access if you're in the R RMDs. And the QCD is is you have above the line deductions now for individuals. So you no longer have to item.

You still have to itemize if you're doing a lot of charitable giving and other itemized deductions, which we can talk about, but the We want to encourage the government, wanted to encourage more charitable giving during the pandemic. So they made a change that individuals can donate $300 and get that straight off the top.

So again, tax saving right above the line, which is saving. Whatever your marginal tax rate, 22%, 24% of that. And for families, you can give up to 600. So you don't have to itemize to get that 300 or 600 for a family in terms of a charitable deduction. So I definitely would look at that amount, towards the end of the year,

[00:13:56] Matt: I was just going to ask, you mentioned a second ago. of your clients are doing what I tend to do. And, it's ah, it's end of the year,

is creeping up leaves are turning maybe time to think about how I've done, who repent and, is that kind of thought process, especially when it comes to things like charitable giving.

But I imagine also some of these. Tax strategies on your list. How are those things affected when we've been in a relatively strong stock market year? Like we've been in this year? What, how does that change? People's thinking.  

[00:14:30] Mike: Yeah, I think all of it, when you're in a strong stock market, at least the clients that I have, we tend to feel a little wealthier, right? You tend to feel pretty good. Now the news might not be great. Although this year, it's been up and down way better than last year, I would say on average.

And so when you feel a little bit better and a little bit more well, Then, yeah, these conversations flow a little more easily. There's definitely years where there's a downmarket and people just don't feel as rich. And so not willing to, give away as much. So I think, again, that's all very personal of course, first and foremost, but also very natural and it's good to feel your overall wealth, not just, Hey, this is my income and here's, what's my accounts, but take us take stock of everything.

When you're looking at your net worth and your.

[00:15:15] Matt: What about some of the strategies that you've advised before when it comes to, pay more taxes when you're in a low tax bracket, pay less when you're in a high bracket. Anything when it comes to end of year planning that We should consider in that vein.

[00:15:30] Mike: We definitely got a few things there. One last thing before I leave, you keep trying to leave from the charity. Now, one last thing before I leave there is what's called a donor advised fund. And a lot of my clients are familiar with this, but a lot aren't Matt. So the donor advised fund is a way of that you, as an individual, you don't have to start your own private foundation.

It's very easy with a click of a button to donate. To essentially your own little private foundation. So it's not actually gone to charity yet. It's an account that you own and manage called a donor advised fund they're at fidelity and Vanguard and Schwab all had this open, that, that type of account, okay.

With a click of a button and then you can transfer appreciated assets like your stock straight from your Schwab portfolio. Y'all donate a couple of shares of Tesla. They've gone. They've done pretty well over to the donor advised fund. So that might be a few thousand. And you get to deduct it off your taxes this year as if you gave it to charity.

So those couple of thousand dollars, even though it's still under an account under your control in your name it's as if you gave it to charity in terms of taxes. Okay. And then sometime in the future next year, or the following year, 10 years from now, you could actually give it to a charity. It eventually does have to end up at a public.

It could be churches could be national organizations, local organizations. You can look up, make sure whatever you're interested in donating to make sure it's on the approved list, but thousands and thousands of nonprofits, eventually you will have to donate that money to a nonprofit, but in the meantime, it can be under your control.

Okay. So that's how the donor advised fund works.

[00:17:06] Matt: Oh, that is interesting. I've actually, I've never heard of that before, because I give all my charitable contributions to the Derek Zoolander center for kids who don't read good and want to learn to do other things good. But that is a donor. I didn't realize I could become my own little founded.  

 I don't think anyone needs a Matt Robinson  

[00:17:21] Mike: That Robeson foundation.  

[00:17:23] Matt: All so before we run out of time, I do want to hit some of these questions about, what to do in general, the theory we, you were just talking about pay more taxes when your tax bracket  

[00:17:35] Mike: right. Yeah, let's do it. So at the end of the year if you can take losses, that's a good time to maybe take losses. If you have high income and you've taken some gains now that is probably not gonna apply this year. And not a lot of things have really lost value here in 2021. You probably are not going to be looking at what we call tax loss.

Harvesting. The flip side is also true. Okay. You can take a, no one really talks about this mat, but if you have a low income year, you can sell almost $80,000 worth of gain and pay zero capital gains. All right. So say you took the year off mat and you didn't make any money. You could go ahead and in your brokerage account, sell things that have appreciate.

Okay. Reset the basis seldom. Oh, I had $40,000 worth of gain in this index fund. You sell it and you don't pay any capital gains. Okay. So tax gain harvesting. So again, when you're in a low income tax bracket, that's what you'd want to do. Just take advantage of that.

[00:18:33] Matt: Got it. So , and again, the moral of the story here is, and this is, I think it just comes full circle to why it's counterintuitive, but October is the time to start thinking about these things is it's worth starting to consider what kind of year have you had and what kinds of steps do you want to put in place now? Because they need a little lead time or because you need a little time to talk to your financial advisor, talk to whoever helps you with your taxes or do a little bit of research. If you do it yourself, to understand some of these strategies, because some of them involve some pretty big movements of money.

Talking about like selling $80,000 with something that's a lot of money. I own almost anyone's reckoning, but you're saying that the benefits are really there and it's really, people should pay attention to this.  

[00:19:22] Mike: tens of thousands of dollars in benefits. I just told you, you could take 80,000 and not pay any capital gains, which is 15 to 20. Oh that 80,000. Okay. Other things we'll be looking at are Roth conversions, which may be going away. So this is definitely a year to really consider Roth conversions. And that's another way of controlling your income, Matt high-income year low-income year.

How much to do in terms of converting from your traditional to your Roth, because that will be additional income here in 2020.

[00:19:49] Matt: And for people who are in the category of, I want to do this myself, there are resources for this on your website. We also did. Episode on Roth conversions, you can get the download on it and about 20 minutes and just check it out in your podcast feed. All right. As we turn the corner here to the end of the show, anything else we haven't covered in terms of end of year tax strategies?  

[00:20:13] Mike: Just a couple other quick ones. If you have an FSA, flexible spending account, make sure you're using those dollars here. You can't carry over very many of them into next year. So make sure you're keeping track of your FSA spending this year is an interesting one. Matt. I know you'll love this. You can give away a hundred percent of your income in charitable contributions and deduct all a hundred percent.

So that's a new change from last year and in 2018.

[00:20:35] Matt: Who are the people in position to want to do that,  

[00:20:39] Mike: I'll tell you who it is though. If you find yourself, here's what it is. And it's of course, because a hundred percent of your income. Okay. If you find yourself in a situation where you had an inheritance,  

Right? If you find yourself in a situation where you just had a big stock IPO, Big stock options year people, there's thousands of thousand people that made millions of dollars this year as a special year, in their work or their income.

Those are the ones that yeah, you can take a look at it, if that's interesting to you.

[00:21:06] Matt: Hey, say that website again. Before we sign up.  

[00:21:09] Mike: Yeah. Morton financial advice.com. You can find all articles, podcast, show notes, et cetera, over there.

[00:21:15] Matt: Great resource and a great list of very helpful items. Thanks so much.  

[00:21:19] Mike: Yeah. Thanks man. Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in