Smart_Year-End_Tax_Moves_To_Make
00:00:00.000 | Hello, everybody.
00:00:00.720 | It's Sam from Financial Samurai.
00:00:02.120 | And it is almost the new year, which
00:00:03.940 | means we should conduct some money-saving tax
00:00:07.500 | moves to save some money and grow our wealth.
00:00:10.740 | Taxes are our largest ongoing liability, right?
00:00:14.640 | Death and taxes, you can't avoid them.
00:00:16.800 | But we can get smart about our taxes,
00:00:19.080 | and we can make moves to lower our tax liability.
00:00:23.120 | The great thing about having multiple income streams,
00:00:25.240 | as I'm sure all of you guys have, is that-- you know what?
00:00:29.820 | We don't rely on one single income to survive.
00:00:32.800 | But the bad news about having multiple income streams
00:00:35.600 | is that we have to do more tax work come year end
00:00:39.680 | and into the new year.
00:00:41.120 | So let's talk about some various tax moves we can make.
00:00:44.560 | Number one, and most obvious, is charitable donations.
00:00:48.360 | Everybody should be feeling more charitable
00:00:50.720 | during the holiday season and hopefully
00:00:52.440 | all throughout the year.
00:00:54.080 | Being able to give your time and money away to worthy causes
00:00:57.040 | is one of the best benefits of being financially independent.
00:01:01.000 | You no longer feel conflicted about whether you
00:01:03.660 | should save and invest your next dollar versus helping someone
00:01:06.720 | in need.
00:01:07.780 | You just kind of do it.
00:01:08.940 | And being able to spend that time with someone
00:01:11.780 | is really, really special.
00:01:13.340 | So in terms of charitable givings,
00:01:15.860 | keep in mind you'll need to itemize deductions
00:01:17.820 | and file Form 1040.
00:01:20.020 | The charity organization must be qualified with the IRS
00:01:22.700 | and be actively tax exempt.
00:01:25.300 | Used items such as housewares and clothing
00:01:27.500 | must be in good condition or better
00:01:28.980 | for them to be deductible.
00:01:30.500 | So when you're going to Goodwill or the Salvation Army,
00:01:32.800 | don't just give them a bag of stuff
00:01:35.460 | you wouldn't wear because they're
00:01:37.180 | dirty or ripped or broken.
00:01:39.180 | You've got to donate usable items that you
00:01:42.460 | would wear or use with pride.
00:01:45.100 | Donated vehicles can be deducted at fair market value
00:01:47.980 | if you meet certain requirements.
00:01:49.700 | For example, the charity must sell your car
00:01:51.460 | well below market price to a person in need.
00:01:54.860 | If the total of your non-cash contributions
00:01:57.060 | is greater than $500, you'll need to file Form 8283,
00:02:02.180 | which means you have to highlight
00:02:04.300 | the details of that giving.
00:02:06.500 | You'll need a written record of all cash donations
00:02:08.580 | with the date, amount, and charity name.
00:02:10.900 | If you donate $250 or more in cash or property,
00:02:14.260 | you'll need a statement from the charitable organization
00:02:16.760 | detailing your gift and so forth.
00:02:19.780 | So there are many, many rules.
00:02:21.120 | But overall, I don't think the IRS is
00:02:23.500 | going to nitpick on what you give
00:02:24.980 | and what you write as the value.
00:02:26.740 | Just be as close to the true value as possible.
00:02:31.500 | In terms of giving percentages by rate of income,
00:02:33.620 | I thought this was really interesting.
00:02:35.280 | The average giving percentage as a percentage
00:02:37.900 | of total adjustable gross income looks to be around 3%.
00:02:42.440 | Now, the lowest giving percentage rate
00:02:45.700 | is from the income group who make between 200,000 to 250,000
00:02:50.020 | at 2.4%, while folks making 45,000 to 50,000 give 4%.
00:02:56.020 | And then if you move up the income curve to 10 million
00:02:59.160 | or more, these folks give away the most percentage at 5.9%
00:03:03.860 | and also the most in absolute dollar terms.
00:03:06.420 | It's interesting that the lowest giving income bracket
00:03:09.240 | is the 200,000, basically to the $1 million range.
00:03:13.180 | I postulate the reason is because between 250,000
00:03:16.820 | to a million, you are paying a crap load of taxes
00:03:20.980 | based on your W-2 wage.
00:03:23.540 | The tax system is progressive.
00:03:25.260 | Top tax rate is 37%, which is lower than the past at 39.6%.
00:03:30.780 | But still, 37%, then you get state income tax,
00:03:33.060 | you get FICA tax, and so forth.
00:03:35.220 | You're probably not as willing to give
00:03:37.820 | because you feel like you're getting
00:03:39.280 | screwed over by the tax system versus someone
00:03:42.320 | who pays little to no income tax or versus someone
00:03:45.180 | who's making millions of dollars a year
00:03:47.220 | and paying a lower tax rate because most of the income
00:03:49.580 | is from long-term capital gains.
00:03:51.900 | All right, besides charitable giving,
00:03:54.220 | we can all capitalize losses on bad investments.
00:03:57.660 | So if you own securities or property
00:03:59.200 | that have been declining and you're below your cost base,
00:04:01.820 | consider liquidating before year end
00:04:03.620 | if you don't anticipate a recovery.
00:04:05.940 | So under the tax code, an individual
00:04:07.580 | may deduct up to 25,000 of real estate losses per year,
00:04:11.260 | as long as your adjusted gross income is under 100,000
00:04:14.380 | or less, and if you, quote, "actively participate
00:04:16.940 | in managing the property."
00:04:18.500 | Deduction phase out is when your income approaches 150,000.
00:04:23.340 | So over 150,000 in income, you're
00:04:25.120 | not eligible for these deductions.
00:04:27.600 | In terms of stock investment losses,
00:04:29.900 | you're still only allowed to deduct 3,000 a year
00:04:32.540 | in capital loss deductions.
00:04:34.740 | That said, you can just keep on deducting that 3,000 a year
00:04:38.540 | every year until it is exhausted.
00:04:41.020 | So another good tax move is to defer income and itemize
00:04:44.620 | deductions.
00:04:45.820 | So it all depends on how much you plan
00:04:48.180 | to make the following year.
00:04:49.820 | You won't know for sure, but it's good to guesstimate.
00:04:52.500 | So here are some individual tax moves.
00:04:54.460 | One, you can make additional contributions to your 401(k)
00:04:57.020 | before year end if you haven't maxed them out.
00:04:59.540 | Two, if you're not subject to AMT,
00:05:01.660 | you can also consider paying property tax installments
00:05:04.700 | and state taxes in the current year that
00:05:06.620 | aren't due until next year.
00:05:08.580 | Accelerating these payments may help you benefit every other
00:05:11.940 | year and lower your tax burden for the current taxable year,
00:05:14.820 | but you've got to do the calculations based
00:05:16.700 | on the new SALT tax deduction limit of 10,000
00:05:19.900 | and the standard deduction limit of 12,000 a person.
00:05:23.020 | They're always changing, folks, so you've
00:05:24.680 | got to stay on top of this.
00:05:26.460 | Three, you can also try asking your employer
00:05:29.140 | if they can pay you your year end bonus in the following year
00:05:31.940 | if you want to defer income.
00:05:34.100 | Back when I was working in finance,
00:05:35.660 | we had the option to defer our entire year end bonus
00:05:38.380 | until some later date by one to three years.
00:05:41.860 | And I never took that option because, well, I don't know.
00:05:45.060 | Sometimes I am afraid that the company will just
00:05:47.620 | go bankrupt or not pay me, and that's something
00:05:49.700 | you have to consider as well.
00:05:51.320 | And then finally, you can consider
00:05:52.660 | reinvesting some of your investment proceeds
00:05:55.020 | into opportunity zone funds, which
00:05:57.540 | may end up being tax free if you hold
00:05:59.620 | for the required period of time.
00:06:01.420 | I think that period of time is 10 years,
00:06:03.700 | so that's a long time to tie up your capital.
00:06:06.100 | But after 10 years, and if you make some money
00:06:08.100 | and you don't have to pay taxes, that can be a huge win.
00:06:11.420 | On the business side of things, if you
00:06:13.080 | have a business which is cash based, not accrual based,
00:06:16.820 | you can defer taxable income to the following year
00:06:19.380 | by sending December invoices at the very end of the month.
00:06:23.400 | The reason this can work is the business won't receive payment
00:06:26.060 | for those invoices until January or later,
00:06:29.440 | and the business's taxable income
00:06:31.060 | isn't captured until the date the cash comes in, right?
00:06:34.140 | Just got to follow the money, the cash.
00:06:36.920 | So for me, what I'm doing is I have some checks
00:06:39.860 | that I received in December for stuff that I did in November,
00:06:45.220 | and I'm not going to deposit them in December
00:06:47.780 | if I already have a great year.
00:06:49.340 | I'm going to just wait until January 2nd
00:06:51.700 | or whenever the bank's open to deposit those checks.
00:06:54.700 | Companies and sole proprietors can also
00:06:56.900 | reduce taxable income in the current year
00:06:58.820 | by charging business related expenses in the fourth quarter
00:07:02.860 | that they normally take in the first quarter
00:07:04.740 | of the following year.
00:07:06.220 | So if you expect your business to grow rapidly
00:07:08.100 | in the following year, then wait until the following year
00:07:10.780 | to load up on capital expenditure.
00:07:13.400 | In terms of business expenses, if your business
00:07:15.700 | needs a vehicle and is also having a great year,
00:07:18.800 | consider buying a 6,000 plus SUV or truck by December 31st,
00:07:24.180 | because you can deduct basically all of the expense.
00:07:27.860 | So let's say you buy a $70,000 Range Rover Sport
00:07:30.700 | and use it 100% for business.
00:07:33.460 | Tax law allows you to deduct 70,000 or a lesser amount
00:07:36.820 | if you would like.
00:07:37.580 | In this case, you'd use section 179 for expensing.
00:07:40.940 | So you can amortize that expense over a longer period of time.
00:07:44.500 | If the gross vehicle weight is 6,000 pounds or less,
00:07:48.340 | your first year write off is limited to 10,000.
00:07:51.340 | But if you have a luxury auto, there's
00:07:53.700 | this bonus depreciation where you can basically
00:07:57.020 | deduct 18,000.
00:07:58.700 | But again, check with your tax accountant.
00:08:01.260 | Finally, a great private business strategy
00:08:03.500 | is to hire a close friend or relative
00:08:05.740 | who is in a lower tax bracket than your business tax bracket.
00:08:09.460 | For example, you could hire your high school son for $3,000
00:08:13.580 | to redesign your website, or maybe $3,000
00:08:16.380 | to clean your toilets and mop the floors.
00:08:18.860 | If all he's earning is $3,000 for the year,
00:08:21.620 | it's going to be tax free.
00:08:23.340 | Meanwhile, you reduce your taxable income by 3,000
00:08:26.500 | and hopefully get a slick new website or some clean floors
00:08:30.220 | out of his labor.
00:08:31.780 | So this is something that many family businesses do.
00:08:34.140 | They hire friends and relatives to do work for them,
00:08:37.380 | spread that wealth, and reduce their taxable income.
00:08:41.100 | All right, next, you should also review your flex spending
00:08:43.620 | account, the FSA.
00:08:45.500 | Make sure you don't lose any money in your FSA
00:08:47.660 | if you haven't yet spent as much as you anticipated this year.
00:08:50.820 | Check with your employer if your plan is
00:08:52.500 | eligible for a rollover of unused funds
00:08:54.500 | until March 15 of the following year.
00:08:56.900 | If not, you've got to figure something out
00:08:59.140 | on how to use that money.
00:09:00.700 | Surely there is something bothering you
00:09:02.860 | that you probably should check out.
00:09:04.500 | And on the other hand, if you've already
00:09:06.180 | run out of the funds in your FSA,
00:09:08.020 | but have things like medical work or fillings
00:09:10.020 | to do at the dentist, try to just postpone them
00:09:13.020 | until the next year if they aren't urgent.
00:09:15.740 | If you're planning on leaving corporate America next year,
00:09:18.380 | get your physical done this year.
00:09:20.500 | It's usually free under preventative care.
00:09:23.100 | And also consider going to specialists
00:09:24.900 | to treat all specific injuries.
00:09:27.220 | Maybe you need an MRI for a bum knee.
00:09:29.700 | That's expensive.
00:09:31.060 | And you're also going to have to pay a co-pay for that.
00:09:33.460 | Or maybe you should finally see a pulmonologist
00:09:35.420 | for your asthma or COPD.
00:09:37.700 | Whatever the case may be, use your FSA,
00:09:40.900 | use your health care benefits, and don't let them go to waste.
00:09:45.820 | Next, consider revising your withholding.
00:09:48.680 | Even though you probably submitted your W-4 form
00:09:51.100 | to your employer ages ago, you can still
00:09:53.820 | file a revised form to make adjustments
00:09:55.560 | to the remaining pay periods left in the year
00:09:58.100 | and for next year.
00:09:59.860 | So if you anticipate you haven't withheld enough taxes so far
00:10:02.900 | this year, you can increase your withholding
00:10:04.980 | to help reduce penalties and fees when you file your taxes
00:10:07.980 | and also for next year.
00:10:10.100 | Also check if you've already paid 100% of your current tax
00:10:13.180 | liability this year.
00:10:14.740 | If so, and your AGI is less than $150,000,
00:10:17.660 | you should be able to avoid being charged a penalty.
00:10:20.620 | But if not, you need to have paid 110%
00:10:22.980 | of your current tax liability in the year
00:10:25.760 | to avoid getting dinged if your AGI is above $150,000.
00:10:29.320 | So this is the safe harbor rule, because the government always
00:10:32.760 | wants your money no matter what.
00:10:35.040 | For 2020, the federal income tax rates don't change,
00:10:39.040 | but let's just review them real quick.
00:10:41.400 | If you make between $0 to $9,875,
00:10:46.120 | your taxable income on the federal level is 10%.
00:10:49.620 | Now I said that kid, your son, who made $3,000 from your
00:10:53.480 | business doesn't pay any taxes.
00:10:55.160 | And the reason why is because the standard deduction
00:10:57.320 | is $12,000.
00:10:59.040 | So if you make between $9,876 to $40,125,
00:11:04.680 | the taxable income is 12%.
00:11:07.980 | And then if you make from $40,126 to $85,525,
00:11:14.360 | you pay a federal marginal income tax rate of 22%.
00:11:17.800 | And then from $85,526 to $163,300,
00:11:23.840 | you pay a tax rate of 24%.
00:11:26.600 | From $163,301 to $207,350, you pay a 32% tax rate.
00:11:35.480 | From $207,351 to $518,400, you pay a 35% tax rate.
00:11:44.460 | And then for any income above $518,400,
00:11:48.600 | you pay a 37% federal marginal income tax rate.
00:11:53.080 | So I wanted to point out a couple of things.
00:11:55.440 | One, notice how the tax rates are 10%, 12%, 22%, 24%.
00:12:00.700 | And then it jumps to 32%.
00:12:03.640 | So 24% to 32% is an 8% spread, 8% difference.
00:12:08.760 | Therefore, I think the optimal gross adjusted income
00:12:11.920 | for an individual is about $163,300.
00:12:16.280 | My question to all of you is, do you really
00:12:18.580 | want to pay a 32% marginal federal income tax
00:12:22.080 | rate on every dollar you make above $163,300?
00:12:26.760 | I don't think so.
00:12:27.640 | I just think that's too much because, well, I
00:12:30.120 | live in California.
00:12:30.960 | So I've got to pay another 6% to 12% state income tax
00:12:34.660 | plus FICA tax.
00:12:36.200 | And then if you look at the tax rates for married couples,
00:12:39.840 | it's pretty similar except the income levels are double.
00:12:43.000 | So in other words, the marriage penalty tax
00:12:45.200 | has basically been abolished.
00:12:47.640 | So that threshold for the optimal adjusted gross income
00:12:50.440 | for married couples is probably around $326,600
00:12:55.520 | because after $326,600, you're paying a 32% marginal federal
00:13:01.580 | income tax rate, which, I don't know,
00:13:03.960 | it just doesn't feel right to me.
00:13:05.280 | So it's up to you to figure it out.
00:13:06.960 | And these tax rates are also a good indicator
00:13:10.480 | for when you should contribute to a Roth IRA.
00:13:14.040 | So if your tax rate is 24% or below,
00:13:18.240 | it's probably OK to contribute to a Roth IRA.
00:13:20.960 | If your tax rate is 32% or above,
00:13:25.200 | I would definitely not contribute to a Roth IRA
00:13:28.160 | because chances are greater that when you're retired,
00:13:31.500 | you're going to be making less money than while you're
00:13:33.640 | working.
00:13:34.640 | And if you're at the 32% or higher marginal income tax
00:13:37.940 | rate, you're already making a really healthy income.
00:13:40.640 | So it just makes no sense to pay that higher tax
00:13:43.280 | rate when most likely you're going to pay a lower
00:13:46.400 | tax rate in retirement.
00:13:48.120 | So that's about it, folks.
00:13:49.520 | You've got to know your tax rules.
00:13:51.640 | Supposedly, the tax code is tens of thousands of pages long.
00:13:55.640 | And frankly, we all make mistakes.
00:13:57.480 | I've done my taxes for over 10 years.
00:13:59.280 | And I'm sure I've made at least one error every single year.
00:14:02.800 | And the IRS knows that the tax code is complicated
00:14:06.200 | and knows that we all make mistakes.
00:14:08.440 | So they're not like the movies where they're
00:14:10.400 | waiting outside your door to audit the crap out of you.
00:14:13.680 | You just got to know the tax rules, follow the tax rules,
00:14:16.160 | do your best.
00:14:17.520 | And if you make a mistake, well, they're
00:14:19.560 | going to ask for you to pony up.
00:14:21.880 | Or maybe they might give you a refund.
00:14:23.480 | So this year, I actually received, I think,
00:14:26.200 | around a $2,500 refund from the state of California
00:14:29.560 | because I amended my 2017 tax return.
00:14:32.640 | But at the same time, I had to pay like $2,000 more
00:14:35.120 | to the federal government.
00:14:37.200 | Whatever the case may be, the IRS figures it out for you.
00:14:40.560 | You just have to do your best to do your taxes properly.
00:14:44.200 | If you haven't done your own taxes,
00:14:45.960 | I highly recommend trying.
00:14:47.440 | You're going to learn so, so much
00:14:49.560 | about how the system works.
00:14:50.880 | And you're probably going to take steps
00:14:52.500 | to optimize the way you earn and also optimize your expenses
00:14:57.120 | to reduce your taxable income as well.
00:14:59.400 | Thanks, everyone, for listening.
00:15:00.760 | I want to remind everyone that I am not a tax professional.
00:15:04.440 | I've just been doing my own taxes for decades now.
00:15:07.800 | And I'm always learning something new.
00:15:09.800 | And I think it's incumbent on all of us to know the tax code.
00:15:14.040 | If you want professional tax advice, talk to a professional.
00:15:16.920 | Double check with someone who does this
00:15:19.240 | for a living all day long.
00:15:20.960 | I just look at this for hours every single year
00:15:23.320 | when I do my own taxes.
00:15:25.280 | Talk to you guys later.