Tax Planning: Unlocking Hidden Wealth

Mike Pine: [00:00:00] Welcome back to the Hidden Money Podcast. Kevin and I, as always, are excited to talk to you about tax- tax planning, tax mitigation, tax reduction. You should never pay more tax than you're legally obligated to pay. You just shouldn't. It's not being a good steward of your money.

So, the question of today, Kevin- if I make $700,000, and I work with a tax planner with plenty of time before the end of the year, is it possible for me not to pay a penny in tax, legally?

Kevin Schneider: Yeah. I just had a consultation with a client just yesterday. He's going to have a $250,000 W2.

He has some investments that are kicking off and selling that he's going to net about $500,000 on those this year. So, he's going to be creeping near a million dollars of income when it's all said and done for the year, and here we are in June.

And so, it was like, 'What can I do?' --and I laid out a lot of options for him, and now he has five months to implement this and weigh his options, interview these people who I'm recommending that he invest with, that are tax-advantageous investments, such as oil and gas. He's already heavy in the real estate sector already. That's where all of his money comes from.

So, he's like, 'I got enough real estate. I don't want more. I want to diversify.' --So, we talked about retirement accounts, mutual funds. 'Hey, if I invest in the S&P, does that do anything for me?' --I'm like, 'No, it's not a tax advantageous investment. It might be a wise move to diversify your cash flow into different markets like that, but if you're looking to invest and save taxes, oil and gas is a really nice move for you.'

--And we talked about the ins and outs. He's joined some of our webinars and he had some questions, but he's taken some of these syndicators that we interview on the podcast. He had a two hour lunch with G2 Petroleum, and he just hit him with some questions. I mean, he's a wise investor, and he's being smart with his money. He's not just trusting my word for it. He's doing the work also and looking at the PPMs, looking at these agreements, looking at what he can invest with.

And on top of that, he's making a decision to move forward with them because he has a level of comfort. If you come to us in December, and say, 'Hey, I have a huge tax problem.' --you're not going to have time to do any of that due diligence. It's almost going to be throwing a dart at the dartboard, or some sort of scrambling near year end saying, 'Okay, I got two weeks to implement some tax planning.' --You can already feel the stress with that. It's just not wise.

Mike Pine: The Excess Business Loss rules also apply to oil and gas. So, the most that guy can offset, or reduce his taxable income by this year, if he's investing this year- $580,000. What if he would have called you last December and said, 'Hey, next year, I'm going to make a million and a half dollars, and I don't want to pay any tax.

And I want to grow my investment portfolio.' --Then you would have told him, 'Well, invest now, so we can get an Excess Business Loss carry-forward going into 2024, and you can invest some in 2024, and eliminate the entire amount.' --Like, $0 in taxes this year.

Kevin Schneider: Yep, you just laid out a two year plan, but yeah, if you have the capital, that is what a proactive tax planner does. We look at the whole picture, what's not only this year, but next year. Because if you're going to make   this year and a million dollars next year, [00:06:00] let's heavily invest this year, get some carry forwards, and we'll offset more tax even, next year. That's exactly right. Yeah.

Mike Pine: Let me share with you an example of a new prospective client I met with... second time I met with him, last week. He's been in the insurance world, something called stop loss insurance, and he decided to quit his job because he knew he could fix this problem.

But here's how he funded it. He took out half a million dollars from this 401(k), a year ago, last 2023, and he started using it to fund the new investment. Well, guess what? He's not 59 and a half, and he has half a million dollars of taxable income from last year. I just wish he would have come to us beforehand. If he'd come to us beforehand, we could have avoided the 10%- $50,000- penalty that now he's stuck with.

We could have avoided any tax situation from this, and it would have preserved his capital to really help him grow this new startup, but it was too late. He called me the first time 61 days after he took that withdrawal. We couldn't put it back. We couldn't reduce the tax. That was too late to do a ROBS.

He could have saved, literally, over $100,000 in taxes and $50,000 in penalties, if he would have just reached out to us before he did that. I hate that. It's just aggravating. I spent an hour on the phone trying to look for other ways of getting him out of it.

He's stuck with it now. Man, he could have saved $150,000, which is big, real money when you're trying to start up. You're trying to create a startup from scratch, and all of a sudden you give 30% of your capital away to the IRS. Please talk to your tax advisors before you make these big decisions. Please!

Kevin Schneider: Yeah, anytime that you feel like there's a big life event, or some sort of large financial transaction, or you're changing something in your world that's out of the norm. That should almost trigger something in your mind to reach out to your CPA-

I am moving to a different state, and I'm getting a raise. I let go from my job and I'm starting a business. I am having marital issues, and we might be getting a divorce, or I just got engaged and I'm going to be married. Any life event. All those situations have tax implications at some point that you may not know about.

 Now, Mike and I and our team are not counselors, but we know our field, and we can help you [00:09:00] during these transitions from a tax standpoint, so that you're not blindsided. And in some situations, we can't really help anything- we just give you knowledge so that you'd know what is coming.

Just don't stick your head in the sand and be like, 'Ah, it'll all work out. I'll talk to my CPA a little later.' --I know it's not exciting to reach out to a CPA and let us know of these things, but you're going to be thanking yourself if we can come up with any strategies or knowledge to help you get through those.

So, financial advisors are a big one, attorneys, CPAs.

Mike Pine: Financial planners, CPAs, and your attorneys, if you're doing something that involves legal liability. I just want to go back to my example real quick. That guy also, he was 55 years old. He quit his job in November of last year, or the year before, took the money out the following January. It turns out there's this hidden rule- it's not really hidden, but you have to read a lot of fine print.

I think they call it the rule of 55. If you quit your job and you're 55 years old, you can take out your 401(k) without paying any of that penalty, but you have to do it in the same calendar year. And again, he did all this before talking to us. If he would have just waited a month and a half to quit his job, or taking the withdrawal out earlier, it would still have income tax, but that $50,000 penalty wouldn't have been there.

Kevin, you and I are working on marketing for a new fund- Revo. One of the big things we're trying to get across is- The enemy is not the IRS. The enemy is not taxes. The enemy is ignorance of the tax rules. If this guy would have known what we knew- if he would have known that, he'd be $150,000 richer right now, but he didn't.

I mean, don't be offended if we're saying ignorance of taxes, the problem or the tax rules, but that we can't know everything. I know nothing about medicine. I use my doctors for that. I know nothing about so many areas that I use experts for that. When you know you need an expert, you go get one, and what we're trying to get across to you guys, to everyone listening here, please get an expert in tax so you're not overpaying your taxes.

It's a huge, huge paradigm shift we're trying to get you guys to understand and embrace. Please get an expert.

Kevin Schneider: Yeah, and just like you said, the IRS isn't the enemy. They don't just magically show up on your doorstep and be like, 'How much money you make? Okay, we're going to impact these rules, these rules, and these rules, and hit you with an iron fist.'

--The rules are out there. It's almost like you're a football coach, and you have the playbook of the other team already.

The majority of the tax code is all about [00:12:00] tax mitigation, what you can do to plan to reduce your taxes.

Mike Pine: I heard this from Tom Wheelwright, the first time I heard it 20 years ago. Something like- he said 99% of tax law has nothing to do with the levying of taxes. It all has to do with the incentives, and he's right. I tried to do a quick search back then when I was younger and had time, and did an Excel spreadsheet.

I think it's closer to 99.6% of all the IRC, all the treasury regulations- those are the incentives. Those are the yumminess in the tax code. It's less than 0.4%- 0.4 of 1%- that actually deals with the levy and the assessment of tax, and penalties, and interest on taxes. It's a beautiful, beautiful book, if it was all in one book.

The internal revenue code, treasury regulations- it is your yellow brick, your yellow brick road to wealth generation. Absolutely.

Kevin Schneider: Yeah, and it's constantly changing. They're changing the playbook every few years. It's an election year this year. I love election years. It's exciting as a CPA because a lot of things change. And with change becomes more opportunity to invest and to maneuver this tax code, because a lot of the times when they come out with this tax code, there's always loopholes- they tend to have some, so they're not looking at every single angle possible, and there's ways around things.

They issue something. They're like, 'Uh oh! People are manipulating, and doing this over here. Update!' --and so, they got to keep updating the code. So, be on the front end of that, and election years are always fun because a good way to get votes- get favorable tax law, because everyone's scared of taxes.

Mike Pine: If they raise taxes, guess what? There are going to be tons of opportunities to lower your taxes in those new laws. If they lower taxes, yeah, there're going to be tons of opportunities, and also some mines you have to avoid.

There's always opportunity with new tax law. Every single time. I mean, there was.. been some pretty relatively large tax hikes over this current administration. Every single one of them offered us a goldmine of opportunities to share with our clients, and people are saving money. So, I can guarantee you.. I can't guarantee much in politics, but this I guarantee you... come November of this year, or next January, whatever the new administration is, or the existing administration, I guarantee you there's going to be new tax opportunities coming in 2025.

Guaranteed.

Kevin Schneider: Trump changed the game in 2017. The Tax Cuts and Jobs Act was one of the biggest changes I've seen to the tax code being in practice now- only 40 years old, been in practice a little under 20 years- but that was huge.

I mean, bonus depreciation.. all these things hit.. and the QBI deduction- goodness! 20% deduction off your net income for not doing anything, but maybe planning how much you pay your people, or if you're your [00:15:00] own business owner, how much you pay yourself- so much tax planning there, but with tax opportunity, the IRS always has to level it out, right? And that's where 461(l) came in- the Excess Business Loss limitations that we just talked about.

We used to be, before 2017, if someone made a million dollar W2, we could wipe that away with a million dollars of business losses. No problem. When 2017 hit, that changed the game. If you had a million dollar W2 and a million dollar business loss, you can only deduct that $500,000.. $520,000... it inflated every year... but you had that $500,000 rough number, and then, you still had to pay tax on $500,000 on your W2.

They wouldn't let you deduct at all. So, there are gives and takes in this, but as long as we understand the tax code and can maneuver that, we can either prepare you for the gives and the takes, but we can also plan for those takes and be wise with them, or try to get around them. That's why you want a CPA is, 'Hey, what's this tax law change? How can I get around it? Or how can I take advantage of this?'

Mike Pine: --Yeah. An interesting statistical fact. So, the 2017 Tax Cut and Jobs Act was a huge tax cut. A lot of people worry that it was going to add to the deficit. A lot of people were. Every single time in recent history, since the 60s, every single time a 'big tax cut' came out.. Now, granted, almost every time a tax cut comes out, there's other tax increases..

But the fact is, every single time taxes have been lowered- income tax that is in this country- the following year's revenues collected- the actual dollars that the treasury department collect from income tax- it goes up. If you go look.. I used to know these numbers by heart.. but go look at 2019, the first full year that Trump's Tax Cut and Jobs Act was fully enforced.

Compare the revenue collected by the treasury department in 2019 by the revenue in 2018... you can adjust it for inflation... it went through the roof! It does that. So, I hope our government will cut taxes and spending, and increase their revenue, and do something about our deficit because it does really worry me, and it should worry all of us. But we'll see- I mean, if they raise taxes, it's our job to go get people to be able to pay less taxes legally, so they have more money to put in the economy.

Kevin Schneider: It's very interesting. Yeah. I like your insights.

Mike Pine: So many business owners I've met in the course of what we do, Kevin, come to me and say, 'You know, I'm not really interested in tax planning because all that means is you're telling me I'm going to have to buy more equipment, or bonus your employees. That's the only way to reduce your taxes.' --Oh, I love it when they come to me and they're looking for a CPA and they say that, because it's not true!

There's so many ways to reduce taxes without wasting money. It might be something you're already doing you're just not aware of, provides you a [00:18:00] tax credit or another tax benefit. Can you think of some of those, Kevin- business owners, they don't want to spend more money necessarily. What are some examples you've seen where you've severely reduced your tax liability?

Kevin Schneider: That is a very fun problem to have because I get the same questions sent to me. If a client says, 'They just want me to buy, go into debt, buy a bunch of equipment- I may or may not need it, but Hey, I'm saving on taxes. Right?' --And you know what that is? That's lazy. That is lazy CPA work. It does work.

Don't get me wrong. Equipment purchasing may be part of your tax plan, but only if you need it, and if you don't need the equipment, do not go buy it, and it's not worth it for every dollar you spend implementing that tax plan and that buying that piece of equipment, you're getting a 25 cent return. For every dollar you spend, that's your return on that- 25%. So, not worth it, not worth it.

Ways you can do it without it is- first, just looking at the structure of the business. What am I doing? What industry am I in? There's different tax plans and rules for different businesses. A tax plan for a CPA firm or a law firm, or a doctor or someone in family practice, it looks completely different from someone in construction.

So, there was a husband and wife, the husband's the physician earning the revenue, getting the practice income. she's the CFO of the companies. She runs the operations, the HR. She makes the machine run, and he's the pilot, right? So... as the revenue came in, we partitioned more ownership to the spouse, not the doctor.

So, on the K-1, all the income from the practice would go into... let's call it medical LLC. We would give the mechanic... self of a spouse, like 90% ownership of that partnership, and then give the doctor 10%, and we would allocate the income as such. And then, we took the position that only 10% of the income in the medical LLC is subject to the SSTB limitations, and 90% of our allocation went to the spouse. She's not earning that income based on any sort of knowledge from her. It's her work, it's her efforts.

And we wrote up the agreement as such that her compensation is going to be this before these specific things, and it wasn't subject to the QBI limitation, so we're talking big money here. And so, the IRS- she actually got pulled for audit on this, and an agent come in. I broke it out in a spreadsheet. I go, 'Here're all of our entities. Here's all the QBI we took. And here's the position I'm taking is that the spouse is not subject to these limitations because she's not in these areas. She's doing different work inside these LLCs generating revenue.' [00:21:00] --and passed audit.

And so, we won that audit as a no-change. And honestly, I'll tell you, I was a little nervous going into that audit because it is an aggressive position, but it was something that we thought outside the box in, like, 2018, and we've been doing it since. And I was honest with our client. I was like, 'Look, I got a shot to win this, and it's aggressive, but I'm confident I can defend it, and Hey!

Mike Pine: The fact is, this is a great marriage and a great business partnership between the spouses. The physician would have capped out his earnings if he were the only one running the show.

He was just working. He was not very entrepreneurial, but he was a great physician. He was great at everything he did, but he did not have a business mind. The spouse, she had an amazing business mind. She created so many different entities and ancillary services that were making them income. And it wasn't because she was a physician, because she wasn't, she just had a great business mind, and it was her efforts that truly were bringing in 90% of that income.

So again, if that wouldn't have been the fact set, I don't think Kevin would have sailed away in that IRS audit as easily as he did, but the fact was he dug into it. We worked on this. We found out the facts and we said, 'Hey, wait a second, you're making more money here.' --and her husband even agreed, by the way.. 'You're making the majority of the money. You are running this business. You're building this business. We're going to attribute that income to you.' --And because you're not a physician, you're not an SSTB, so boom! 20% deduction.

How much do you think they saved in taxes, just that one year that was audited?

Kevin Schneider: I'm going through my memory bank here, when I had the honest conversation with her saying, 'Hey, I'm going to try my best to defend this. I think the code allows this, but If I fail...' --I think it was somewhere around $80,000.. $120,000 in tax.

Mike Pine: In one year.

Kevin Schneider: So, that's part of our job too. We would have had to explain the risks, explain the positions we're taking. I think we only charged her like $10,000 for that audit defense, which is pretty cheap across the board.

She had eight entities under audit, and I didn't want to open the audit outside of the QBI- that's all they were auditing. They weren't auditing income and line items and pulling bank statements. It was literally just a QBI audit.

Mike Pine: You had to walk very definitely in that audit because...And that's something you need. If you are audited, I highly recommend you work with a professional.

Kevin walked in there deftly and he stayed focused on this. He was careful about what he did show the IRS, because if you accidentally submit something, a different schedule from a different area of the return, or a different entity, you've submitted that to them during the review, and usually, IRS agents are required to review everything you send them.

 But yeah, man, that was an awesome audit.

Kevin Schneider: And that's the importance of having different bank accounts. If you commingle and you're sole proprietor, and you have your personal bank account, and you're running your business and your personal finances out of one bank account, and you get pulled for audit, they're going to be like, 'Hey, please send me all your bank statements.'

 --'Here's all [00:24:00] my... here's my personal bank state... here's every...' --because it's all commingled, right? So, that is just a small example of why partitioning your income and partitioning your cash is very important.

Mike Pine: So, that's why you use separate bank accounts, and use the right accounts for the right business. Commingling has caused so many problems, not just in IRS auditing... but we'll leave it at that. It does cause problems with audits. So, be careful with that. Use your separate accounts for that.

I remember we did have that discussion with that spouse. You led it, Kevin, before we took this position, and you explained- Here's the risk. Here's why we think it is. Here's what the rule says.

This is the way we see the facts. Do you agree? And this is how much the risk could potentially be, and how much the audit could potentially cost. Are you okay with it?- and she was absolutely okay with it. I think she had talked to her husband and they were both okay with it. But there are plenty of times we have those discussions with clients, are like, 'You know, hey, I just won't sleep well at night.

I'm okay not saving that $100,000 dollars.' --It does hurt us a little bit when that happens, but we accept it. You're the ones that are accepting the risk. You need to know what the risk is. It is our job to explain it to you, to make sure you understand it. If you don't want to accept it, you don't have to.

 Always understand the risk and talk with your tax planner when you're taking aggressive positions, and understand them, and make sure you can sleep well with it.

 Be willing to accept that. Don't be scared of the IRS. Here's something. So, Kevin and I, we hired this great new team member a couple of weeks ago. This guy served at the IRS for four years, and he's going to be on the podcast sometime in the next couple of months.

He's an attorney, a tax attorney. He served the IRS... was talking to him this morning, and he said, 'One of the things they train you in an orientation at the IRS is- big reason the IRS is there, and why they have so many resources out there, and they send agents to your house and to your CPA's office, is they want to intimidate you.' --So, if you're scared of the IRS, you're falling into their trap. That's a deception.

Don't be scared of the IRS. Be informed, well informed about the rules. Be well informed about the process of challenging the IRS if they challenge you, and prevailing against the IRS. Just make sure all your ducks are in a row. Don't cower to what they want you to do.

There's a huge tax gap- over a trillion dollars- where people are cheating on the taxes, and the IRS would need tens of millions of employees to be able to fare most of that out.

They can't, so they use intimidation as one of their major forces to get people to pay their taxes. The problem is, is that intimidation causes too many people to overpay their taxes- to pay more than they're obligated to pay. I've had clients that say, when we tell them, 'Hey, you only owe $4,000 in taxes this year.' --He's like, 'Man, that's so low compared to the last few years.

I'm not comfortable. Let's go and pay him $10,000.' --I'm like, 'What!? Seriously?' --Some people want to do that because they are so intimidated by the IRS. Don't be intimidated. Just be well informed, well represented, [00:27:00] well educated.

Kevin Schneider: Well said, well said. I got another example. It's kind of a bittersweet story. We were talking about the QBI deduction and there's so many examples of this because it was such a tremendous tax planning opportunity.

I actually had a client. They came to me and I had some consultations. She was making upwards of $700,000 a year with her material, her business coaching, and all this kind of stuff. Looking at her prior returns, the prior CPA had that all subject to SSTB rules, saying it's a specified service trade- you're consulting.

Consulting is the performance of services in the field of consulting, which just means the provision of professional advice and counsel to clients to help them achieve goals and solve problems.

That's the IRS's definition of consulting- which she's doing- but it does say, there's a sentence here- and this is why the little things in the code make it all the difference- it does not include the performance or services other than advice and counsel, such as sales or economically similar services or the provision of training and educational courses.

It does not include that. So I took the position that it's not subject to the SSTB. At the end of it, we got through all of that. I developed also, tax plan- got her in some oil, got her into some charitable things. We did all this tax planning, got our fee at the end of the year, and did not enjoy the fact that they had to pay us for the services we rendered, which were four to five times the CPA she was using.

She's used to paying $3,000 to $5,000 for a tax return preparer. When we're looking at the tax code, when we're looking at these things- I think her ended with consulting, planning and preparation- she was about $15,000.. $20,000 for that year. Which, if you're making that much money, I saved her, or our team saved her, hundreds of thousands of dollars.

And even having that conversation, she still says, it's just too expensive, too expensive. They wanted a $500 tax fee, but they wanted a Rolls Royce of the tax plans. It was so weird.

Mike Pine: She didn't want to pay the $20,000 to save her the $200,000. She'd rather pay the CPA $3,000 to $6,000 and give the government back $100,000 to $200,000. I don't understand that either. It also hurts to see them leave because she's getting underserved. She's overpaying taxes and it's a tragedy of the tax code.

A tragedy. But yeah, it happens.

Kevin Schneider: Yeah. And there was some other expectation gaps in that, to be honest, I think with the onboarding. So, we have different levels- people in our firm- and she's like, 'I thought Kevin was doing this.'

--And I was like, 'You don't want my bill rate in the data entry.' --We have trained team members at a $100 an hour to do all this, and so, I think there was some expectation gaps.

We try to [00:30:00] best bridge that expectation gap, --because if we prepare your tax return, more than likely, Mike and I aren't going to look at the tax return. We're going to set the plan and we hand that off to our team, and our team Is trained- they believe the same values we do.

They're all in step with us, but they're going to have access to all of our consults. They're going to have access to our videos, our notes, everything. They know what the game plan is, and then they also bring us in if they need us.

Mike Pine: Yeah, I think we can do better at bridging that expectation gap. and I forget sometimes that when you come up from a small CPA, who's really just one person, or maybe two people that you've been working with, they don't realize that we have an entire staff that's following the systems and processes we created.

I have a $1,000 an hour bill rate, Kevin, and I'm slow on preparing a tax return because I haven't prepared one for four or five years in our tax software. Would have had to pay like $20,000 if I prepared it versus $4,000.. $5,000 when our staff did it. We've got to get better at setting that expectation and bridging that gap.

Kevin Schneider: Yeah. Yeah. As we rebrand to Revo, we're going to have the same team. Mike and I are still doing in the same roles, but as we grow, Mike and I's roles are changing in our business.

And this material here that we give on Hidden Money, this is free consultations. People pay us for us to just say what we say on Hidden Money because they're like, 'Hey, I have high taxes. What can I do?' --Well, you can almost DIY your learning from a very high level. Now, it's not going to be pinpointed to your specific example, but if you go through our Hidden Money podcast, you're going to see a lot of the tax planning theology and ideas that we come up with.

Now, we haven't laid them all out there. Some of them... a lot of them, actually, are not in there, but you can get a really good head-start by just listening to this free content that we give out. But we also want to provide that pinpointed advice, that personalized tax plan too.

Mike Pine: That personalized advice is very important. I mean, by all means, send your CPA our podcast. Let them learn. Listen to it, learn it- and be a refresher for them. But what works for one person who looks almost exactly like the carbon copy of another taxpayer, doesn't work for them because of one or two small facts that changes the tax world.

Most tax situations are very detailed, very specific. If you have a tax preparer, try to convert them to being a tax advisor, to be a taxpayer advocate. That's what you need.

Anyone can prepare a tax return. You can prepare a tax return on TurboTax. That's tax preparation. Most CPAs are still in the paradigm of being tax preparers.

At Revo Taxpayer Advocacy, that's what we're changing, and we've changed it already here at the firm. Now we're just changing the name of the firm to recognize it, to revolutionize your services and tax by having a tax paying advocate.

Taxpayer advocacy. Not tax preparation. Convert your CPA to that. Send them our podcasts.