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8 Tips to Pay Less Tax Continued
Episode 4430th November 2021 • Financial Planning for Entrepreneurs and Tech Professionals • Mike Morton, CFP®, ChFC®
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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.

  1. 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.
  2. Use ETFs instead of mutual funds.  ETFs are a unique “wrapper” that avoids you from paying taxes on interest and dividends.
  3. 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.
  4. 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.
  5. 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.
  6. Savvy Rebalance. Use additional funds or tax-deferred/free accounts to do your rebalancing and avoid paying capital       gains.
  7. Long-term Investing Horizons. Long-term capital gains are taxed at a lower rate than short-term.  Invest for the long run!
  8. Charitable Giving. Donating appreciated assets helps you avoid paying taxes on capital gains.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcripts

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Enjoy the show. 


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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. 


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[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. 


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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. 


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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. 


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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 


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Do not do locational 


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[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? 


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a fantastic again, almost 25% this year. W 


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[00:04:19] Mike: I know it's crazy. It's crazy, man. It's good. It's good times. 


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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 


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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 


tax bracket. 


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[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. 


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[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 


forward. 


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I wonder if I could go searching and apply them to my gains this year. 


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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 


words, 


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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. 


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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. 


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It kind of reminds me of one of my favorite movies, the distinguished gentlemen, have you ever seen the distinguished gentlemen, the Eddie Murphy? 


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[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. 


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[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. 


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definitely look into do a 


Google search on tax gain harvesting 


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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. 


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It means when when you're going, the tax loss harvesting. Great. I got some losses. I'm gonna go ahead and say. 


Oh yeah. I bought it back in:

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 


loss. 


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[00:13:19] Mike: Yeah, didn't I just say we could hit this one really quickly. talking. I was like, 


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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. 


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make sure you sell the 


one that you want. 


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[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 


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[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. 


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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. 


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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. 


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[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 


your tax 


deferred accounts. Tax-free. 


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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. 


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Taxes on that. So instead, eh, why don't we just hold onto that house And pass it down 


and that's 


all tax-free step using the step up 


basis, 


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[00:19:18] Mike: That's correct. 


Yep. Yeah. act like the 


billionaires and just borrow money. They'll 


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good book name one. 


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[00:19:39] Matt: that I've stumped. Mike Morton. All right. Lik I, now I'm 


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from 


Connecticut, I believe and seemed 


like a really nice 


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[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. 


a share. Now it's:

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 


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[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 


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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. 


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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. 


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