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Save Money With Smart Year-End Tax Planning
Episode 3826th October 2021 • Financial Planning for Entrepreneurs and Tech Professionals • Mike Morton, ChFC®
00:00:00 00:22:07

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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! ✅

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

Transcripts

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


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by our resident guru expert, in chief Mike Morton 


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[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. 


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[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, 


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[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. 


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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. 


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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? 


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[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. 


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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. 


ed out for this calendar year:

[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 


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


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[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. 


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[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 


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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. 


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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. 


ook in January or February of:

[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 


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


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


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[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. 


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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. 


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


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


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


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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. 


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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. 


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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. 


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[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 


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[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, 


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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. 


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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. 


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[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. 


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I don't think anyone needs a Matt Robinson 


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[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 


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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. 


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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. 


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


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[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. 


change from last year and in:

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


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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. 


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


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[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