Tax Strategies You Can Start Using Today

Mike: Welcome to the Hidden Money Podcast. We've, kind of, laid the foundation of the importance, the power, the value of doing proactive tax planning, choosing not to be a victim to the tax code, rather leveraging it for your own benefit.

Kevin: Being in our profession, doing what we're doing, we know the importance of tax planning. We see it every single day. We can tell a difference in a client's outcome when we file their tax return, if they did planning or they didn't. Our job and goal here on this podcast is to educate you, and, hopefully, give you the eyes to see what we see and know.

And so, the importance of this podcast is to help you understand that tax planning doesn't just happen. You don't just 'fall' into tax planning. It takes some intentionality. It's going to take some specialists. It's going to take someone who, in your corner, understands what to do, what levers to pull, what to do at what time.

And so, that's why we've laid out potential tax planning strategies for you guys, and it's going to cover an array of things. Some may apply to you. Some may not, but at the very least listen, because your circumstances could change tomorrow, it might apply tomorrow, or it might apply to someone you know.

Mike: You really should consider, and not just consider, but take the leap and start doing your own proactive tax planning.

I just want to briefly talk, Kevin, about 30 minutes ago, you met with a new client, and they're not leveraging the tax code at all in this situation. They're just thinking of two small changes. Those two would have saved them hundreds of thousands of dollars in taxes each year. I can't wait to see when you deliver that tax plan to this client.

Kevin: Yeah, it'll be fun. I think the husband was a sole proprietor, the wife was too. So, husband was making anywhere between $500,000 and $800,000 a year as an attorney, Sole Proprietor Schedule C on his tax return, and his wife was making about $350,000 through a newly formed partnership.

And so, getting them to understand that self-employment tax is going to be their enemy, and you don't have to pay into Medicare and Social Security as much as the government wants you to. It's inefficient. And so, not only that, but like you mentioned, they had a short-term rental property, and they had no idea that you can tax plan with real estate.

They have children, children that we could potentially pay because they're going to be working in this advertising business. I don't care if the kid's sweeping floors, shredding papers, managing social media. If there's a general, reasonable argument that they are providing some sort of value to that business, we're going to shift some of that income over.

We see this every day, and that is why we're going to dive into these topics. S corp election is very good, so let's just start with the self-employed individuals because self-employed people have a different battle than just your W2 employee. Not only battle, but there's going to be benefit too.

It's going to be more work, but there's more benefit, typically, if you're self-employed because you could just be more creative. With a W2 earner, you're not stuck, but there's only a limited number of things that we could do to reduce your taxable income by a significant amount.

So, let's just go through opportunities for business owners.

Mike: Yeah. So, you just mentioned S corp, and that can be a beautiful, beautiful option. And we don't know yet what the potential client you just met with, but most likely that's going to be, at least, one of the, probably dozen, prescriptions that we write for them. They're paying two kinds of tax, income tax, and self-employment payroll tax. 

And you don't have to pay self-employment payroll tax on $800,000 of income, or combined, over a million dollars with this husband and wife. You can reduce that greatly with an S election. You can also use the S election to start paying yourself a W2 salary so you can be more bankable.

There's a lot of good reasons for S corps, and they could save, again, this one potential client, $100,000 a year, easy. But S elections aren't always a good idea. There are a lot of times, especially with real estate, where an S corp will prevent you from mining the tax benefits that are available.

So, don't just go out and make an S corp because you heard this part of the podcast. Understand when it's beneficial for you, and other times, it could be a detriment to you. So, just be careful with that. 

Tell me about the 199A deduction, the pass through deduction, Kevin.

Kevin: Yeah. The 199A deduction came in the Tax Cuts Job Act from Trump back in 2017. What this deduction is, you don't need any additional cashflow, make any additional investments, change your business, restructure anything. It is literally a 20% deduction on your net income of your business. 

Now, there's stipulations tied to that deduction to qualify for all 20%. You have to meet certain metrics but to maximize that 20% deduction is going to take some intentionality. You just need to make sure you're maximizing it.

Other than that, most people who are self-employed, if you have children of age, are pushing money to them and getting a tax deduction for their tax bracket.

And the children, so long as they're under the filing threshold, don't have to report it as income. And so, that could be a very powerful thing because you can shift money from the business, get a tax deduction at your bracket. They don't pick it up as income, but now they have a checking account that's building some cash reserve. 

What are you doing with that cash? You can do a Roth. You can contribute to your college fund from that checking account. So, you're almost, in theory, getting a tax deduction for contributing to a college account. It's just going to take some additional steps, and make sure you qualify.

Mike: Another big one, it's just maximizing the deductions in your business. I can't tell you how many times, Kevin, I've seen a new client come across, or review some person's tax return, and see that they're not deducting internet or cell phone.

There's so many ways to maximize deductions. You should take and deduct every legal tax deduction available to you. If it's ordinary, necessary for your business, it's a legal deduction, most likely. Can't be too ridiculous, but most likely. So many people miss those.

Kevin: Yeah. And these business deductions, like the home internet and cell phone, you might be saying, "Yeah, $100 a month,” and, "Okay, $50 a month here." All these small things add up. It's kind of like death by a thousand cuts, but you're torturing yourself by not taking these very small things that add and add.

And now, you take a step back and look at all the things you've maximized in your business. Now, it's material to you. I mean, if you just take one small aspect, and find one more deduction that's getting you one step closer, and then one step, and another step. And so, we're going to help show you the devil's in the details in this.    

And then, a very niche part, and we've already hit on this topic in past episodes, but R & D tax credits. R & D tax credits are very unique in the fact that it's not just there's a lot of incentive in the tech space just because a lot of R & D happens in the tech space, but anybody can qualify so long as you meet certain guidelines, and those are credits, not deductions.

We've already done some podcasts on that, so if that already kind of triggers something in you, you want to learn more about R & D tax credits, go to our website and check it out.

Mike: Yeah, if you might remember Randy Crabtree we had on as a guest, and he mentioned and walked us through how he was able to get the R & D tax credit for his bar, and it was real, and he got some serious money out of it. 

Another big one, and this one means a lot to me, I get passionate about this one- it's selling your business. Most people who sell a business have worked their entire life, or significant portion of their career, building this business, and having built a business myself, I know what kind of sweat and tears and hardships and sacrifices go into building a business.

But then I see people, they come to us after they've sold their business, and they're in their late fifties or sixties, trying to retire, and they paid half of their gain, in some cases, more than half of the income they got for selling their business, went straight to the IRS. God, does that drive me crazy, Kevin! It doesn't need to happen that way. 

You've got to be proactive with the ins and outs of maximizing your tax strategy with the sale of a business, but you’ve got to do it before you sell the business. You probably ought to do it before you even get a letter of intent signed.

Kevin: Then retirement planning. We've also hit on retirement planning with Kyle Gabhart. He is just a tremendous wealth of knowledge, but we didn't even scratch the surface with Kyle on what's available as retirement planning. If you're self-employed, you could get very creative.

If you have employees, you can structure it a number of ways. If you have children, I mean, this rabbit hole goes very deep, but just to keep your eye out for it, because some people out there are not very interested in retirement planning at all.

They want to keep their cash and invest into something else, like real estate, for example. That's perfectly fine, but I think there's a good mix of getting a healthy retirement account and doing alternative investments, if cashflow allows. That way you're still knocking off taxable income with retirement planning, but you're just, kind of, stuck investing in mutual funds, or stocks, bonds, things like that.

Still, that's a good diversification tool. You don't want to, probably, be all in real estate, and you don't want to be all in the market. So, how do you balance that on the retirement planning?

Mike: Absolutely. Diversification is key in so many areas, but optimizing your timing, surfing your tax brackets, you can time your deductions as a cash basis taxpayer. That's important. If you're surfing the tax brackets from year to year, trying to keep your income at a specified level to prevent yourself from getting knocked into a higher tax bracket.

You get deductions for expenses that you incur, that are ordinarily, necessary for your business. You get some deductions for paying your mortgage interest, and your property taxes. Well, you ought to surf your tax brackets. The way it works in the US, the more money you make, the higher tax bracket it is, but you can do some serious, serious benefit to the growth of your financial portfolio by surfing those brackets, timing when you're recognizing income.

You have a choice in a lot of cases by timing when you pay for deductions, or pay for expenses that you get to deduct.

It doesn't always make sense to pay them early. It doesn't always make sense to pay them late. There's actually more of a science than an art that goes into when should you incur these expenses? When should you accept that revenue and that income?

Kevin: There's two trains of thought, typically, when timing, and two accounting methods, I'll say, cash or accrual. Now, there are other methods of accounting. If you're in construction, for instance, or different industries have different revenue recognition roles, because some industries, if you're heavily recognizing revenue, or collecting cash before job is done, or if you're recognizing a lot of expenses that aren't paid, this could be very beneficial in the timing aspect.

That will really help a lot of you people who are self-employed just start thinking about what is out there.

You need to reach out to us so that we can actually help you implement these ideas and put them into work. This is high-level what's out there, and then, getting the right people on your corner to implement.

Mike: Trying to help all of our listeners choose to not be a victim to the tax code. Choose to understand it enough to where you can talk to your CPA, your tax strategist, or talk to us to change your facts, so you can change your tax.

So, on the individual side, people who are W2 employees, people who don't have the tax opportunities and the planning strategies available to them by owning their own business, the majority of our country, one of our favorites, is the oil and gas benefits, or the loophole. It's one of the only ways where you can get material, significant tax deductions against your active income, your W2 income, your business income, your pension income.

It's huge, and you can get a great return on your investment with it.

Kevin: We've covered this quite a bit in the past. I think we've had several podcasts on it. We've done some webinars on it. We're really hitting oil and gas hard this year, and that's mainly because real estate has always been so good, and real estate is still good, but if we objectively look at the investment itself, bonus depreciation is going down and interest rates are higher than normal.

So, it was back in the past, short-term real estate, real estate, was always a tried and true way to tax plan, because you could put less money down on a rental property, and get the benefit of 100% bonus depreciation. Well, now, while that strategy is still viable, it's losing some power.

Oil and gas has always been here. It's always tried and true on the reduction of your tax bill, and the tax strategy is not going to fluctuate with depreciation just like real estate is because there's more to oil and gas than just depreciation, and it's gaining ground on our list of tax plans.

Mike: Yeah. And then, of course, the short-term rental loophole. This is very near and dear to our hearts. We've had two podcasts now with Sean Moore from Vodyssey on short-term rentals.

Unless you're a real estate professional, you can't, generally, use real estate investments to offset your active income. But if it's a vacation rental, or a short-term rental, has an average lease length of seven days or less, whoa! Now, you get all the benefits of a real estate professional in that property, but you've got to cross your T's and dot your I's.

Short-term rental loophole, we love that here!

Kevin: And in the same stroke of the pen, you got long-term real estate, different tax rule set, not as many people will qualify, but there's more things you could do with long-term real estate, if you qualify for the deductibility of those losses.

We've done syndications, multi-family, it's, kind of, in the same vein as those.

Capital loss harvesting is going to be, maybe, a new concept for some listeners out there. Capital loss harvesting is very powerful when used properly, and the concept is, I'm going to intentionally sell some stocks that are not producing, or I don't think are going to recover in the marketplace.

I'm going to get that loss put on my tax return. So, I'm going to actually recognize the loss of those stocks, and trigger my capital loss, but you don't want to just do that willy-nilly because there's going to be caps on the deduction. So, you want to time this properly.

You can sell your loser stocks that you picked, so long as they're not in a retirement account. You can sell those losers off and get some immediate tax benefit off of it, if you don't think they're going to recover in a year where you might have cap gains.

Mike: Yeah. And a newer kind of strategy for us, it's been around for a while, but only the last couple of years have we really seen it, where there are actual investment funds, engineering and designed to harvest capital losses for you. 

It was a shock to me when I heard a client saying, "Hey, my investment advisor's pitching this mutual fund, or something like a mutual fund, this was three years ago, or so, and they're promising me to get 15% of my investment back in capital losses each year. And I said, "Whoa, whoa, whoa, whoa! You're, you're going to invest in a fund that's promising to lose your money??" That's what it sounded like to me, at first. Freaked me out! 

But no, they make money in the long term, or at least, they traditionally have, but they harvest enough capital losses to pass it through to you at the end of each year, to really offset some serious capital gains.

Kevin: Very cool. Next is the crypto wash sale. When you hold crypto, there is a loophole regarding wash sales. We'll walk you through the legislation of that. What happens? How do you do it, and what are the benefits? And what is a wash sale? 

Then after that, we got solar energy credits and electric vehicle credits. Elon's really pushing his vehicles, Ford's doing it. Every car company is pushing some sort of EV, and with that comes those credits. Also solar credits, Mike, you have personal experience with dealing with solar credits.

Mike: I love solar credits! Saved me $30,000 in taxes two years ago. It's not just solar. It's alternative energy credits, battery storage. Kevin, I'm actually looking at adding new battery systems to my house this year for the credit because they'll be covered on the credit. They are beautiful.

Credits can apply to anyone. You got to be careful. They've got to be applicable to you and your active income. There are ways to invest and get credits that actually don't help you as much as you would think, but they're great. They're available. 

If you do them right, they pay for themselves by lowering the utility bills, and you actually spend less money out of pocket. There's a solar credit that you can get as an individual for your residential real property. There's also solar and alternative energy credits you can get as a business owner. And they go as high as 30% of what you spend.

Kevin: Charitable funds. If charitable giving is important to you, you can creatively structure these charitable funds in such a way to get more tax advantage from them. Now, Mike and I never say, "Hey, let's just throw money at charity to save on taxes." The heart has to be there. You have to have it already, a willingness to give. And if that willingness is there, then we can be smarter about how we give. 

But there's also charitable funds that we are aware of that you can get a multiple on your charitable deduction. So, if you put in, let's say $10,000 into a charitable fund, you could get a $50,000 write off.

Mike: Yeah. And then, finally, there's also tax credits that you can buy out there. You can literally buy your taxes down. We're looking at one right now where you pay 60 cents on the dollar. If you were going to owe $100,000 in taxes, you get out of that by spending $60,000 buying this tax credit.

It's legit. It's legal. It was intended to be sellable, just like you can sell your EV credit to the dealership. Works the same way. There's a lot of stuff out there like that, that most people have never heard of.

Kevin: So, hope you're excited as we are. And as I mentioned earlier, not everything here is going to apply to you, but education and knowledge is power. Your facts could change next year, and then, just call back and you can get some power back to you.

Mike: Yeah. Real tax and real dollars saved, and we're going to make it real for you.

I don't expect you guys to love tax as much as Kevin and I do, but man, the money you can save, and the wealth you can generate by, at least, availing yourself, and understanding how to strategically plan your taxes, that I can't imagine you're not going to love it.