Want to save on taxes? Matt and I discuss 8 different strategies that can help you keep more money in your pocket. We cover the first 3 tips in this first podcast, followed by 5 more in the next podcast.
- Use Index funds over actively managed funds. This is generally great advice, but also better at saving on taxes due to less turnover of holdings.
- Use ETFs instead of mutual funds. ETFs are a unique “wrapper” that avoids you from paying taxes on interest and dividends.
- Hold the right asset in the right account. Tax-deferred and Tax-free accounts (401k, IRA, etc) are great for bond funds because you avoid paying taxes on the interest and dividends each year.
- Tax-loss Harvesting. Make lemonade out of lemons by intentionally taking a loss and deducting it from your taxes or offset other gains and pay no tax.
- Tax-Lot Management. It’s important to sell the correct shares so that you take advantage of short-term or long-term gains/losses in your account.
- Savvy Rebalance. Use additional funds or tax-deferred/free accounts to do your rebalancing and avoid paying capital gains.
- Long-term Investing Horizons. Long-term capital gains are taxed at a lower rate than short-term. Invest for the long run!
- Charitable Giving. Donating appreciated assets helps you avoid paying taxes on capital gains.
[00:00:00] Mike: Welcome to financial planning for entrepreneurs and tech professionals. I'm your host. Mike Morton certified financial planner chartered financial counselor. And today is a continuation of our last episode on eight strategies to maximize tax savings or to pay less in taxes, Matt and I cover quite a few more tips in this episode.
Enjoy the show.
[00:00:25] Matt: Welcome to real financial planning broadcast on WK Excel. 103.9 FM in Concord, 14:50 AM in Concord and 101.9 in Manchester. The gate city. I am Matt Robeson. I am joined as always by Mike Morton. The host. planning for entrepreneurs and the purveyor of Morton financial advice, a fascinating website.
If you want to read about the kinds of topics that we also cover on this show and okay. Here's what's going on for radio listeners. You may have been listening to us last week when we did part one of a two-part episode about tips, tricks, ideas, saving on your taxes. And now for podcast listeners, you've just hit next episode, because we're going to continue that conversation.
It's right up in your podcast feed and Mike Morton. Welcome back to continue our country.
[00:01:25] Mike: Yeah. Thanks, man. I feel like I was just here
[00:01:27] Matt: Yeah, overwhelming sense of deja VU for all of us. But yeah, so in the first segment, in the first episode we covered the first three of these, let's just do super short recap because we have . Podcasts listeners who literally just sprawled over to the next episode.
So what were the.
[00:01:48] Mike: The first three favor indexing overactive management that will save you in taxes with turnover, less turnover that the is doing. Second is using ETFs instead of mutual funds that we dove into the difference. But the takeaway there is just use ETA. Instead of mutual funds across all your accounts.
They're great product get the exact same thing, but better tax efficiency within the.
ETF. And the final point was the location of where you hold, which types of assets, bonds, stocks, those sorts of things in your tax. Tax deferred or tax free accounts. It matters you can save, there was a recent Vanguard study that said you could save almost up to 1% per year on a taxes, the tax strategy, or have the boost of your returns by almost 1% per year on where you hold, which types of assets.
So go back and check out that episode.
In those three.
[00:02:48] Matt: that actually goes to the point that we finished the last episode. And I think a good launching point for this, which is each one of these things is maybe not on its own, a gigantic deal in your financial picture, but you can combine all of them together and make a pretty big impact.
I'm impressed that just that location. amount to a 1%,. It doesn't sound like a lot, when you look at your whole tax picture, that could be quite a lot.
[00:03:17] Mike: Yeah. In each of these strategies, do I agree with you, Matt? Some of them may or may not pertain, some of them may be may or not be a couple of hundred dollars, a couple thousand dollars, but some of them could be when you hear they could be ones that saves you five or $10,000. That is very common in the clients that I work with.
What are, we'll find one of these strategies. That's oh my gosh, we're going to save $10,000. Just by doing that this year. Just to listen in
and see if any of these might apply, cause it could be bigger than you think
[00:03:44] Matt: Ask your financial advisor. Locational strategies are right for you. Side effects may include tech savings. All right.
Do not do locational
[00:03:53] Mike: savings, more income,
[00:03:55] Matt: We are, we're in danger of going off the rails and I'm driving us there. Let's get back on track. What is number four?
[00:04:03] Mike: Alright, tax loss, harvesting. And we've probably talked about this in the past, but the idea here is when you have losses, this probably isn't gonna apply too much to this year, Matt, we all know the market's been doing
a fantastic again, almost 25% this year. W
[00:04:17] Matt: That's nutty. Yeah.
[00:04:19] Mike: I know it's crazy. It's crazy, man. It's good. It's good times.
[00:04:23] Matt: good, episode, by the way, for people to check out the question of is the market overheated and what do you do about it? If it is, that was another eye-opener for me. So go back into the podcast feed. We do some of these in the capital closeup podcast feed. I do. Listeners to that feed to get some of these, but most of these episodes can be found in financial planning for entrepreneurs with Mike Morton.
So go back and check out. That is the market overheated. I have a feeling this is going to be relevant in 2022. If not before then when you're the IB, like things are pretty hot right now, but go on. All right. Tax loss, harvesting, not relevant right now may be relevant
[00:05:05] Mike: Yeah. And in fact, this is one of the things to keep an eye out throughout the year. So we often talk about the end of the year, but March, 2020, when we had that 30% dip within a few weeks, All right. That's when you want to take advantage of this.
So just knowing it, making some lemonade out of lemons, when you're parts of your portfolio down individual stocks or mutual funds or ETFs or whatever it is, has lost value, you put in $10,000. Now it's worth $8,000. Okay. So it's gone down. If you sell that, you take a $2,000 loss and you can deduct some of that from your tax.
Or offset other gains. Okay. So that's why it's a really, can be a really good strategy. And in fact, three it's really good strategy because if you have short-term capital losses, you just invested something three months ago, it's gone down in value. Okay. So you lost $2,000. You can sell that, be careful the wash sale rules, but sell that and take a, $2,000 loss and you can deduct that off your.
Okay. Up to $3,000 per year, straight off your income. Now you can also offset other gains, but it's something to really be aware of
because, um, you could save a lot in taxes depending on your
[00:06:20] Matt: So you might, for example, be a, you know, you might earn a relatively strong salary, but you're, you might have investments that don't do very well. A perfect match . There. Right? You could apply those losses on your investment side to offset some of your tax liability on your salary side.
[00:06:41] Mike: yeah, correct. Up to $3,000. So that's why it's perfect to just for that amount, because if you're in a 24% tax bracket there you just saved, 800.
[00:06:49] Matt: Is there any carry forward on this or it all has to be the same year.
[00:06:53] Mike: It's. Yeah, you can definitely get a good question. You can carry it forward So any losses you do not use on your taxes. So if you didn't offset gains, you can carry those
[00:07:02] Matt: Well, that's a particularly useful thing. If you incurred losses, let's say in March of 2020, but now had a stunningly strong year. Might that be kind of relevant for some of our listeners right now in 2021, as they look back and they say, There's a whole bunch of losses that I didn't harvest last year.
I wonder if I could go searching and apply them to my gains this year.
[00:07:32] Mike: Yeah. So you just have to look up your taxes. So you would have had to in that March, 2020, you had to sell something. To get the loss, to incur that loss, know, it's not an actual and laws unless you sell, but if you did, and you had 50,000 of losses that you did not use in 2020, you could have done the same thing, the end of 2020.
Oh my gosh. It went back up, offset some gains with the losses. But if you carry that forward, absolutely. Take a look
return and see what you carried forward and you can offset gains. In other
[00:07:57] Matt: Well, it does sound like this is another one of where you really can't. Shape what you're and what your tax picture is going to look like in terms of, I mean, you were talking about location and the impact that can have, but also timing and that always evergreen advice pay taxes when you're in a low bracket.
And so it sounds like there's a lot of kind of mixing and matching and pairing. You just need to be, what was the term you used before tax aware? You need to. Uh, Keep an eye out and maybe this is what a good tax preparer will help you do, or a good financial advisor will help you do, there's opportunity.
It sounds like on both sides. If if you're in a high bracket. Great. If you're in a low bracket, well, there's opportunity in that too. If you've had gains, if you've had losses , there's ways to put those things together and improve your financial sector.
[00:08:52] Mike: Yeah, it's funny the way you say that. And it's exactly right. Matt is, again, thinking of my clients. There's always something where we're saving a few thousand bucks, some losses, some gains offsetting, something, looking for these different opportunities charitable donations.
We'll probably get to there's just a number of things that you can tweak and do to save a few thousand bucks here and there. It's unbelievable. It's also, it can be complicated. So we'll try to give you the high level stuff and see what
to you. And, you You can do
more research or reach out to professional.
[00:09:20] Matt: I know it sounds rosy to say like, oh, there's opportunity ever. I mean, look, if you're taking a bath in the market or, you know, I'm not trying to pretend that everything is OSHA, but there are, there are opportunities again. one's going to say no to saving a few thousand bucks.
It kind of reminds me of one of my favorite movies, the distinguished gentlemen, have you ever seen the distinguished gentlemen, the Eddie Murphy?
[00:09:42] Mike: no, I
[00:09:43] Matt: look, we're digressing here. I will keep this very short. I will
just say, if you want to actually know, like for people who thought that the west wing, the TV show, the west wing was some kind of a documentary.
Let me assure you. It is not, that is not.
[00:09:57] Mike: I thought it was
[00:09:57] Matt: That is not how things work. No one talks like that. That's how people
talking to Aaron Sorkin world. That's not how people really talks to each other like that. That's not how things work in Washington, but, but as insane as this sounds, the distinguished gentlemen is the best look at how.
Actually work and operate in Congress that has ever been put on film. I promise you, I worked in Congress for a decade and there's this great scene where the Congressman goes to a lobbyist and he says, what's your position on such and such? And he's like, I don't know what should my passivity, cause it doesn't matter.
There's opportunity both ways. If you're for farm subsidies, I have money for you from the farmers lobby. If you're against them, I have money for you from the Baker's Alliance. The point is. You're saying there's opportunities, both ways. You just need to be very aware and look for them.
[00:10:43] Mike: Yeah, That's right. And we probably won't talk about it today, we just said tax loss, harvesting, there's also a tax gain harvesting, and I've got some articles and podcasts on that. So if you find yourself in a low tax bracket, you took a year off of work or something like that, where you're really not making much income,
definitely look into do a
Google search on tax gain harvesting
[00:11:03] Matt: really interesting because you know what, there are a lot of people who might be right now, too. You might've been unemployed perhaps, um, not by your choice or this might have been a had to take care of your kids and you weren't able to go to work and they were home.
So, But you might've still been invested in the market. You might had a lot of tax gains. And if you realize those gains. Ask your financial planner. See if tax gain harvesting might be right for you. Okay. Let's move on.
[00:11:28] Mike: right, moving on. Hurt this one pretty quick. Hopefully this is taking advantage of tax lot management. When selling, What does that mean?
It means when when you're going, the tax loss harvesting. Great. I got some losses. I'm gonna go ahead and say.
You may have bought that stock or that ETF over a couple of times. So like I'm going to buy the S and P 500. Oh yeah. I bought it back in 2018. I bought it in 2020, and I just bought it three months ago. The exact same ticker symbol, S P Y for the S and P 500. So you've now bought, you've bought a hundred shares, three different times.
Okay maybe you just bought it last month and now not predicting this map. Let's say the market goes down, but before the end of the year, so you want to take advantage, say, oh, I heard about this tax loss harvest name. Let me sell some of that while you've bought three different lot. You own 300 shares because you bought them in three, $100, 100 share lots, the most recent ones, the one you want.
Because you just bought it. It's a short-term loss. So you want to sell that most recent one to get your short term loss. Okay. So it matters which lot, which shares specifically, you're going to sell right now. You might want to take the long-term capital gain. And the flip side is oh, I'll take the longterm capital gain when I sell, because that's tax at a lower rate than the short-term capital gain.
Or you might want to take the short-term capital loss. Instead of the long-term capital loss. Okay. But which ones specifically, you share that you've got to go in and decide that. So when you go to, fidelity or Schwab or TD and you click sell, you have to pick which ones to sell. And it's really important.
You pick the right ones. So you get the right either gain or
[00:13:08] Matt: Do you ever get the feeling when you talk about the stuff that this is all a massive scheme between the tax preparation and CPA and lawmakers, and it's like, let's make this more and
[00:13:19] Mike: Yeah, didn't I just say we could hit this one really quickly. talking. I was like,
[00:13:22] Matt: Well, yeah. Um, there, there. was, uh, There was a lot in there,, but I know, I think I get it.
I think I get it. I think again, you you might have choices in what you sell and again, it sounds like it depends, right? It's like you could take a gain, you could take a loss. It just depends on what your basis is.
[00:13:40] Mike: And whatever strategy you're trying to take advantage of, just make sure you pick the right thing to sell. If you've bought a fund or a stock or that ticker symbol, more than once,
make sure you sell the
one that you want.
[00:13:53] Matt: Got it. All right. I mean that when you put it that way, it's pretty straight forward. All right. Uh, We've got about 10 minutes left in this episode and I know you've got a few more items in the bag. I'm not sure we have to hit absolutely all of them, but you hit when you hit the. Of the remaining and let's see how much we do on it.
[00:14:10] Mike: time. Yeah, we can do it We can always speed up a little bit, Matt, we could probably go a little
[00:14:15] Matt: What does it work at? People just play this on their, on their podcast at like one and a half speed. Does that help us?
[00:14:22] Mike: We'll have to go in and slow it down. Alright. Tech savvy rebalancing. So we'd like to rebalance our portfolios. Stocks have gone up 20% last year. They're on a tear again this year at 25%. So maybe you're a little bit heavy on stocks versus your bonds and cash allocation. So to get back to the right balance.
You could sell longterm capital gains, make sure you pick the right ones and sells some of those S and P 500 index fund and buy some bonds or just have some cash, but then you'll take a long, you'll take that capital gains hit. Maybe you could do other ways of rebalancing to be tax efficient, use new money.
Okay. So in your 401k, you're adding a thousand dollars a month. If you've set it to auto by that target date. That's heavy and style. And maybe, you're a little bit overweight in stocks. We'll change that and say no, just buy the bond fund. So use new money to rebalance. Don't sell anything now in your 401k, won't matter because it's all tax deferred so you can buy and sell stuff to rebalance.
Okay. So you want to do any rebalancing there, but in your taxable account, don't just rebalance and sell stuff willing to. You're going to have to pay a lot of taxes. So be careful with how you rebalance use tax free tax deferred accounts to rebalance use new money to rebalance use interest in dividends to rebalance.
So take a look at the entire portfolio and make sure you're
not incurring a
lot of taxes to do your rebar.
[00:15:47] Matt: I see, that makes sense. And this is the kind of thing that. There are a lot of tools. Let's say you're in a low cost index fund. I mean, Most of the places that you might be investing now give you that, that pie chart compare where you're at in your allocations to sort of the ideal mixture that you should have the.
Profile that you're looking for. And, you know, especially if you're in a target date fund, what the risk profile is that's appropriate to where you are versus that target date. So this should be relatively easy to do, although you've introduced in some previous shows some wrinkles to that. Maybe you want to be a little heavier or a little lighter depending on your investment strategy.
[00:16:30] Mike: Yeah, There's unfortunately, what I run across is it does get more complicated, because. , if most of your money's in that 401k, in that target date fund, great. Probably not too bad, but most of my clients have IRAs, they got their 401k, they got their IRA, they got the brokerage account and then they're married and their spouse has the same, all three different accounts.
And so there's no one picture, the 401k is at fidelity, the broker just over at Schwab. It is good and there's software out there that'll help you pull it into one pie chart, but you do want to look at that. It's really important.
[00:17:01] Matt: Yeah, and it, it does get extremely complicated, extremely fast. Speaking of which we're rounding the home stretch here. All right. What do you got next?
[00:17:10] Mike: All right. Using long-term investing horizons. This goes without saying we've been talking about in the past. Invest money. Let it sit there for the longterm. That way you don't take taxable hits. You don't want to be changing in and out Of strategies in and out of funds and individual stocks.
Every time you do that, you're taking a hit and especially the. short-term capital gains versus long-term capital gains. So your short term is going to be taxed at your initial. Rate tax rate. Okay. So 24% bracket, maybe a 32% bracket, whatever gains you have are going to be taxed at that rate long-term capital gains or tax currently at 15, maybe 20%.
So obviously less than your income tax rates. So if you do sell things that have gained, make sure you pick that longterm capital gain or just let them ride and rebalance and
deferred accounts. Tax-free.
[00:18:03] Matt: Of course the. Way to avoid capital gains. Taxation is just, just die and pass on your assets as part of your estate. And you have those estate levels, which are pretty darn high. so, I mean, I'm kind of being tongue in cheek, but if if you're getting. Is to accumulate intergenerational wealth.
If you're a P a part where you're being to think about what your estate might be. I mean, That, and avoiding those capital gains, you know, there, that is actually part of the strategy.
[00:18:39] Mike: Oh, absolutely. Absolutely. So now I'll give you a quick story. A client that has his mother has a house, bought it for 25,000. It's now worth 800,000, right? Bought it, 45 years ago. So that's all appreciation. That's a long-term capital gain. It's an asset. If she sells it, you gonna pay long-term capital gain.
Taxes on that. So instead, eh, why don't we just hold onto that house And pass it down
all tax-free step using the step up
[00:19:07] Matt: and of course, if you, if you find that you need cash, there's reverse mortgages and there's all kinds of tools you can use with your assets. So, you know, why liquidate and take the tax?
[00:19:18] Mike: That's correct.
Yep. Yeah. act like the
billionaires and just borrow money. They'll
[00:19:22] Matt: act like the billion, you know, there's there's a lot embedded in that we might, we might have to have a whole conversation about like, what have you just walked around and acted like a billion, not a jerk. I want to be clear. Don't walk around and act like A jerk, but you Yeah. A
good book name one.
[00:19:38] Mike: quick.
[00:19:39] Matt: that I've stumped. Mike Morton. All right. Lik I, now I'm
[00:19:42] Mike: No, there was in fact, no, I can name one. The co-founder of us. It was just written up in the wall street journal. Yeah. Co-founder of subway was worth over a billion he's
Connecticut, I believe and seemed
like a really nice
[00:19:54] Matt: wow. Billionaire and from Connecticut and nice. That is a small Venn diagram overlap. I got to tell you. All right, let's hit it. Let's hit the last one.
[00:20:04] Mike: Alright, charitable giving. There's a number of strategies here in terms of taxes. Now, of course you're getting, you're giving money away supporting causes that you really believe in. So you're giving money away, but let's do it in a tax efficient way. If you're going to give the money away anyway, let's save as much as we can on tax.
So the first thing is to look at appreciated assets. So giveaway appreciated stock. So GI bought Amazon 10 years ago, for $10 a share. Now it's 2000. If you sell that shit single share and give away $2,000, then you're paying taxes on that gain almost $2,000. So you pay taxes and then you give away 2000.
Whereas you could just give the stock. Donated to a charity And they still get the $2,000, but you do not have to pay any capital gains. So you actually
save, you know, 15, 20% right
[00:20:54] Matt: Oh, that is smart. And that's that's good stuff. And that's one of those things where it may not apply to you, but if it does, if this situation applies to you, this could be a relatively bigger chunk for.
[00:21:05] Mike: Yeah. That's a no brainer in a sense, like if you're going to give something away, give away appreciated stock. The charity gets the full benefit of the worth of that stock. And you
don't take the capital gains hit on that. So that's always a
good one to
[00:21:18] Matt: That is a really good one. And of course, like I said, I, know, again, this may not, Ms. May not apply to you, but just kind of wrapping this up. It's the same thought that we've returned to throughout the last two episodes is that there is a real grab bag here. Some of these things are going to be spot on for you.
Some of them aren't and many of them can be combined And put together. And so you really do need to kind of scan down the menu. And there are things that we haven't even hit here. Um, but there there's a lot of options.
[00:21:48] Mike: Yeah. Yeah, absolutely. And I will throw out a teaser. We need to do an episode on the bunching strategy around charitable giving, because I mentioned this briefly in another one of our podcasts that most Americans are not getting any tax deduction for their charitable goals. Okay. 90% would not be getting any kind of tax deduction for their charitable giving.
So I can come, I can tell you a strategy that you can take advantage of that. So we can hit on that in a future podcast, but in general, around charitable giving, you want to take the advantage as much as you can for your
own tax situation.
[00:22:20] Matt: we're brainstorming future episodes. People may not know this, but Mike Morton is also a font of wisdom about just general life what the kids call life hacks. I don't know why you want to hack your own life. That sounds awful and violent, but Mike Morton does the nice version of that.