Your Tax Savings and Prosperity Strategy – Episode 494

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re wrapping up. Depending on when you listen to this episode, it could be towards the end of the year, or you’re starting out sometime at the beginning of the year or next. And this is going to help you to align yourself with what may be coming down the pipeline, taxes. Kim, you look at taxes different. I know a lot of financial people, they actually they get frustrated like, oh, I’m racing to pay zero taxes. What’s your take on it? I think racing to pay zero taxes is a race to the bottom that nobody wins. And I just have to laugh. I used to get mad, but I gave that up. So I just have to laugh whenever I see that out there, because actually, my

[00:49] husband, Todd Langford of Truth Concepts has a great reaction to it. And that’s that, oh, my gosh, if you’re paying zero taxes, that isn’t because of anything we did to you. That’s pretty good. That’s really, really well said. If you’re paying zero taxes, you have no life. You have no income. You are living a meager existence. And I am sorry that that is the case. It is. And don’t get me wrong. Like, we don’t want to be overpaying. And we also we don’t want to make that our full purpose, because again, the name of this podcast is The Prosperity Podcast. Like money moves around. So let’s keep it moving. So let’s talk about tax things. If someone’s listening to this in the end of 2022, maybe some tax things that could happen.

[01:44] I’ve got a list from a Twitter thread and some of those items you may agree with, some you may not. Not agreeing is an awesome thing, too. Yes. So let’s hit it. So the first one is buying I bonds. You can buy up to 10,000 in I bonds. Is that a good tax thing or not? Well, it’s a decent return right now. Ten thousand is not a lot of money, but that’s OK. It’s a good start. I’m certainly for them. And they do the job for the amount of money that is available there. And at the same time, I think it’s always really important that people understand that as interest rates move around, bond values also move around. So whatever interest rate is currently be quoted, that is not anything that we can rely on the value being there.

[02:34] Those are two different things and not an easily understood arena. So I’m not opposed to it for 10 grand. OK. Second one is tax loss harvesting. What do you think? Well, it sounds great. And yet at the same time, it indicates that you had some losses. So I think people pursue things sometimes just for the tax benefits. And that causes the tax tail to wag the financial dog, which is a very dangerous space like, oh, my real estate’s losing. So I get to do all these things. Well, the first sentence was the problem. And same in your stock accounts, which is typically where the tax loss harvesting discussion occurs. If you are holding stocks that have lost and you want to do some loss harvesting, by all means, do it.

[03:20] But the first sentence is the problem again. You’re holding assets that have lost and, you know, that’s going to happen in the stock market. But again, please don’t let the tax tail wag the financial dog. Yes, I will admit on this podcast that you’re talking to the guy that let the tax tail wag the dog last year. And there was a second order effect of it. So for everyone listening, when you chase things like that, you also complicate your life and your accountant and your bookkeeping team will say, thank you for causing more work. And it actually costs you more money. That’s the second order effect. So, OK, third, contribute to your 401K. So if you have a match from your employer, MATCH, then I am a fan of contributing in your 401K.

[04:14] However, if you do not have liquid money, emergency money, opportunity money, if you have credit card debt, if you have even student loan debt, if you have a job that you might lose because your industry is fickle or your employer is fickle, then contributing to your 401K is not a good idea. All of those other things must be shored up first. Your emergency money, your opportunity money, any debt payoff environments and also clarity that your family can move forward if the job is not there. And so locking money up until you’re 59 and a half in a 401K is not always the best thing to do. Will it give you a tax deduction this year? Yes. But what happens if in the future you are actually doing well

[05:01] and taxes at a higher tax rate? That is also letting the tax tail wag the financial dog and not a good strategy. OK, so number four is converting your traditional retirement account to a Roth account. Yeah, I think that can be a effective strategy. People need to be very clear that it is required to do that, to pay outside dollars. So you want to be very cautious that transaction can cause opportunity costs. So you have a hundred thousand dollar IRA. You want to convert it to a Roth. Let’s just say that’s 30 grand in tax. You pay the 30 grand in tax. Now you have one hundred thousand dollars in your Roth. You have to choose a good investment in the Roth. Number one. Number two, that 30 grand in taxes today

[05:53] on from your finances for the rest of your life. That’s opportunity cost. And you have to measure the cost at the rate of which your best investments are. So if you can earn 10 percent on your money, that’s 30 grand times 10 percent for the rest of your life. Once you run that calculation, you may not decide that the conversion is valuable. On the other hand, if tax rates are going to go up, up, up, up, up, which they certainly seem like they will, it could be a very good move because it may actually overcome the opportunity costs. So I’m good with the strategy. I just think all the things have to be looked at. And you have to make sure you have taxes, tax ability to pay with outside dollars, money outside of the IRA to pay the taxes.

[06:36] Yeah. You know, I want to pause on that one for just a moment, because you gave a multi layered answer to the question. And the reason why is because, you know, that’s very similar to asking a talk radio host if you should do a 30 year mortgage or a 15 year mortgage. And most of the time they’re going to say, well, pay off your debt, do a 15 year mortgage because you’re going to pay it off. Whereas you’re looking at it with decades of experience, multi layered. And you’re not just looking at the tax savings or the time, you’re also looking at the opportunity costs and what else could have happened. Yes, it is opportunity cost is the most missed element in personal finance. Many, many, many personal finance people,

[07:24] brokers, salespeople, advisors, planners, whatever you want to call them, do not even understand opportunity cost as a concept or know how to calculate it. Yeah. So number five for regarding taxes by the end of the year is making a charitable deduction to reduce your taxable income. What do you think? I donate a lot to charity, a whole different ones. We tend to stay very narrow and put large dollar figures into that space. And it’s a fabulous thing to do again. However, don’t let the tax tail wag the financial dog. OK, number six, reduce your taxable income by prepaying business expenses. This is an interesting one. It comes up a lot. If those business expenses are truly expenses that you were going to pay in January.

[08:18] Yes, of course, you can do that. Is it really that valuable? It’s so hard to know because next year you’re going to do it again and then the next year and the next year. And it’s not something I would get overly focused on. And what tends to happen instead is people buy things that they weren’t really going to buy anyway. They say they were going to buy them anyway, but it is very, very tempting to purchase something under the guise of, well, I’ll get a tax deduction for this. Well, that means that you just traded a dollar that you have today for a 30 cent deduction. Last time I checked, that’s not a good strategy. Yes, so very true. Number seven is gift tax exclusion. And so, yeah, it’s you know, it’s up to $16,000 to anyone.

[09:05] So so talk about that. Well, $16,000 can be given by me to my daughter, to you, to my daughter’s husband. Like each person is $16,000 doesn’t matter. But it’s not a tax deduction for today. Now, while the calendar year does cause a reset of that number. So like, let’s say I had $50,000, I wanted to give it to my daughter. Well, that would be great. $16,000 this year, $16,000 in 2023, $16,000 in the next year. And the numbers, you know, the government might raise that to $16,500 or something, but it’s not income to her, which means is not taxable to me, which means not tax deduction to me is what I meant. So it’s a valuable strategy if you are going to be doing gifting anyway. But again, don’t let the tax tail wag the financial dog.

[09:55] And in this case, there isn’t even a tax tail. It is an after-tax transaction, a hundred percent. So what I’m gathering from this and I think from what our listeners will hear is don’t let the tax tail wag the dog. And so often we see that happen in Q4 every single year, over and over and over. And you’re looking at it from a legacy perspective. So before we end this little piece of the different steps of what may be able to happen with saving taxes, what does it look like with life insurance and how can we navigate that piece between now and the end of the year? Well, as already stated so many times, life insurance is not a tax deduction for this year. And so what life insurance does in the tax environment

[10:49] is help you next year and next year and next year and for the rest of your life, because every single year, the growth of the cash value is not taxed. So the money that you put in is after-tax dollars. There are some occasional corporate strategies that you can use, but they really are not appropriate for the regular business owner environment that are typically our listeners. It’s so much better just with life insurance to pay the tax free up the money, use the freedom word earlier and let that dollar now sit inside the cash value of life insurance and grow without taxes. And that is a substantial difference over time. So not beneficial in the short run, very, very beneficial in the long run.

[11:37] Wait, is that how prosperous people think? They’re they’re willing they’re willing to take away the temporary gain. Last time I checked, yes. OK, thanks for sharing that. And I guess the news is out, everyone. We’re not going to go and buy fleets of electric vehicles. We’re not going to set up our own solar farms. Maybe what we’ll do is we’ll look at this as a legacy piece and we’ll not let the financial tax dictate how we live our lives. So that’s perfect. Well said. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit Prosperity Thinkers. .com.