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Steven Jarvis, CPA (00:55.074)
Hello everyone and welcome to the next episode of the retirement tech services podcast financial professionals edition I’m your host Steven Jarvis CPA and I’m very excited for this week’s conversation because it’s gonna be Focused completely on how do we help clients have better outcomes, which is what we care about how people take action So my guest this week to have this conversation with me is Matthew Doren Matthew. Welcome to the show

Here Matthews, we’re getting ready for this episode. I’m super excited about your kind of intentionality and focus around inputs are great and all, but really what we’re trying to solve for is the outcome for the clients before we dive into kind of some specific examples, some things we can talk about around this topic, like give us just some of your background so people know where you’re coming from. I know personally, I love to learn from people who do this stuff in practice. So share what it is you’re all about.

Matthew Doran (01:42.958)
Yeah, so I’ve been in financial services for nearly 30 years, the first 20 in a large, well-known broker-dealer. Then I left to start an RIA because I really wanted to be planning-centric in recognition of the fact that clients face so much more complexity today than in previous generations, and decision-making has a really big role to play outside the portfolio, right? The portfolio is always going to be important, but there’s a lot of decisions that are being made that have create financial impact, particularly things that people don’t get a chance to rehearse. So experience and expertise matter. For the last several years, I’ve been the leader of advanced planning in a hybrid broker dealer, large firm called Ann Partners based in St. Louis, Missouri. And we are really embracing holistic planning. I know that word is overused, but tax planning is part of what we offer and we seek to partner with folks like you.

Steven Jarvis, CPA (02:41.71)
Appreciate you mentioned that as far as like the term holistic planning and it’s interesting because it’s definitely gotten overused as a marketing term. That doesn’t mean it’s inherently wrong. It’s just, it’s more important than what you actually do as opposed to the words you ascribe to it. So I think really what you’re getting at there is like, hey, we want to make sure we’re actually doing the thing. Exactly. Not just saying the thing, which I’m all for. Like anybody who wants to do holistic planning, great.

Just actually do it, don’t just tell me about it on a webpage. So this conversation really came from an article that you wrote, you do a great job putting content out there, but it’s article specifically about the QBI deduction. And we’re gonna get into that a little bit, but the bigger reason that we’re gonna have this conversation, and you mentioned something that made me think of it as we were getting ready is to kind of highlight that for advisors who talk about taxes all the time, which anybody who listens to this podcast, I’m gonna go ahead and give you the benefit of the doubt that you’re probably in a small group of advisors who understand taxes pretty well. And so when you talk to people like me, when you listen to this podcast, when you talk to other people like yourselves, it’s easy to get convinced that, these things that we’re talking about, they’re common knowledge. And Matthew, one of the examples you gave as we were getting started was,

how many people you meet that are surprised by the widow’s penalty. And for us that do this all the time, it’s like, well, of course everybody knows about that, but they don’t. And you mentioned just a second ago that for a lot of this complexity, most clients have never experienced it before, or they’re only gonna experience some of these planning opportunities once. Like they don’t have time to learn from repetition. That’s why they need you. So we’ll kind of talk through the QBI deduction here for a minute to illustrate this of where that expertise can help come in and drive better client outcomes, then I’m sure we can give some other examples as well. So if we think specifically about the QBI deduction, like maybe just start high level for, well, there’s at least a few people who I’m sure would admit like, hey, I’m not really familiar with that. So start high level. How do you explain this concept to business owners?

Matthew Doran (04:34.606)
Yeah, and it’s actually a wonderful way to illustrate how partnership between CPAs and financial advisors needs to come together. So, yeah, let’s start there. And I wrote that article because, of course, the timeliness of people having just filed or in the process of filing and trying to raise their awareness to this very valuable deduction that is often hiding in plain sight. I talk to clients all the time who have a sizable QBI deduction and didn’t even know it was there.

So what happened essentially for many, many years, the LLC became predominantly the pathway for forming new businesses because it offers legal protections, it’s simplified filing, it’s a pass-through entity where somebody who’s starting a business can take advantage of the income flowing through on their personal returns and take advantage of the graduated tax brackets and avoid the double tax regime of CCORP. But we go back, 10 or more years, you roughly 10 years, the corporate tax rate was 35 % and the double tax regime felt pretty penal. If you’re paying 35 % first at the corporate level and then distributing a dividend that has to be taxed again to the shareholder, a la the owner, there could be some real tax arbitrage in allowing that to pass through and land on your graduated personal tax returns. But the game was changed when Tax Cuts and Jobs Act was signed into law and reduced the corporate tax rate from 35 % to 21. Suddenly now the disparity between those tax treatments isn’t so great. The C-Corp brings with it some other advantages, particularly if you might qualify for Section 1202 and sell with an exempt capital gains. And people were starting to say, hey, well, what does this mean for me? I have a pass-through entity. Do I need to become a C-Corp now? And I think QBI was introduced as a tax deduction for those pass-through entities to sort of level the playing field of that reduction in the corporate tax rate. And it took the form of a 20 % deduction on qualified business income for people who can manage their income to stay eligible. And that’s the trick is taxable income plays a really meaningful role in qualifying, preserving, or restoring this benefit. And I think the financial advisor plays a really meaningful role in the recognition of taxable income, which influences this deduction.

Steven Jarvis, CPA (07:02.158)
Yeah, it absolutely does. And you mentioned in there, but QBI, Qualified Business Income, which then goes with the Qualified Business Income deduction, that Q that qualified is super important and I think gets glossed over quite often. I’ve had clients similar to what you were saying, they don’t even realize they’re getting that deduction because for a solo producer or someone like with a side gig that’s got some 1099 income that’s coming through on a schedule C, they don’t even really think of themselves as a business owner.

Like for a lot of these people, it really is just kind of a checkbox on their tax return. They get the deduction, they move on. They don’t really have to think about it. Their CPA is probably not thinking about it either. It’s one that’s super vital to be aware of because it won’t happen, even though for simple situations like in the software, it’s just checking a box. I’ve seen situations where that box didn’t get checked and people weren’t getting the QBI deduction they should have. So we need to be aware of it for starters. And then to your point, it actually gets fairly complex with how to maximize it outside of these really simple situations. So again, if I’m doing some consulting work on the side and have some 1099 income on a schedule C, it might be pretty automatic of 20 % of my net income. Not exactly net income, but pretty close. That’s why it’s QBI, they don’t just call it net income. But where this definitely gets a lot more complicated is depending on the industry that we’re in, depending on our level of income, there’s other factors that go into it. So how do you help people navigate that? It’s one thing for us to say, hey, there’s a bunch of complexities. What are some of those complexities and how do we navigate them?

Matthew Doran (08:29.676)
Yeah, so it really begins with recognizing that there’s two different populations that we’re talking about here. And the first one is called specified service, trade, or business, which is largely businesses that depend on the skill or reputation of an individual. Like, accountants, lawyers, people who largely are in a consultative role have still the eligibility for QBI, but they have a more onerous phase out when it

Steven Jarvis, CPA (08:45.678)
financial advisors, for example.

Matthew Doran (08:58.946)
comes to the income thresholds, right? So the 20 % deduction is available to people in those specified service trades or businesses. However, once they exceed the income threshold, it’s over. It’s a cliff. And so the role that a financial advisor can have in partnering with the tax preparer or CPA is to help with what are the levers that could keep us under that threshold, which could mean

It’s all or none. I might not get any of the deduction and managing my taxable income to just below that threshold means I’m going to get a big deduction. And that’s a really meaningful role for the advisor to play because they have a seat at the table for how income is being recognized, whether to accelerate it or defer it. And on the topic of accelerating it, I think the predominant strategy in tax planning and at least in wealth management is to defer it. And I’m a big fan of deferring swap till you drop on things that are going to step up, but some things never do. I often see people who are putting money into, you know, employer contributions into retirement plans that are actually cannibalizing their deduction because they’re below the threshold and an employer contribution into a retirement plan reduces QBI, which reduces the deduction.

And sometimes the path, I’m sure we could talk for days on this, but sometimes the path to paying less tax is actually to accelerate income, not defer it, if it’s going to be recognized efficiently.

Steven Jarvis, CPA (10:26.542)
I’m sure you’d agree on this, but share your thoughts here. The best tax planning I see for the vast majority of taxpayers, like we’re gonna ignore for a second people who qualify for Section 12 or two or some of these areas that are just, I mean, when you qualify their home runs, they’re amazing. But for the vast majority of the population, we’re not looking for these one-time wins, we’re looking at managing tax brackets over time. And nobody can perfectly predict this, but we’re saying, okay, over the next five years, over 20 years or 40 years, what are those big events? I can’t map out every year, but right now, when do I plan to retire? When do I want to be gifting money or what do I want my legacy to be? Like what are these funds gonna go towards? What would be the tax rate now versus what would it be in the future? And then we start getting to move some of these things forward or backwards. And to your point, the industry for decades really defaulted to, well, I’m gonna defer everything I possibly can. And that’s not the only lever to pull.

And so the more we can understand what our options are, the more informed decisions that we can make. And there probably still will be years where it makes a lot of sense. Yes, please defer as much as you can, but let’s make an intentional decision, not a default decision.

Matthew Doran (11:37.03)
Yeah, and let’s make it a tool for retaining eligibility for other things or managing deductions that we might already have that otherwise we could be phased out of. And interestingly, as you know, a new tax bill signed into law middle of last year with some provisions retroactive, some immediately effective, and some not yet effective. And you know, so when you bring in a higher salt cap, but you don’t get rid of the salt cap… But now you have a higher cap, where you introduced a senior enhanced deduction, and you have your Medicare premiums being priced from two years earlier on a tax return, that it’s going to price your Medicare premiums in the future. Thresholds become every bit as important as brackets. And I think that financial advisors can play a meaningful role in the planning of how and when to recognize income simply by paying attention to order, timing, and amount.

Steven Jarvis, CPA (12:38.54)
Let’s get super tactical here because we’re recording this in early May. It’ll most likely release sometime in May. So we’re fairly close to the end of the primary tax filing season. So let’s start with for an advisor who’s never really delved into tax planning before. I’ve written articles and done whole episodes on the line between tax planning and tax advice. Please go back to them. Tax planning covers way more than you think it does. It’s actually a lot harder to give tax advice that you shouldn’t than you’re probably imagining. But… For someone who’s just started into this, like what are those first couple of steps to feel confident that they’re adding value to clients and not just confusing the issue when they haven’t done this before?

Matthew Doran (13:14.71)
Yeah, fantastic question and it’s easy. I think most people understand we live in a progressive tax system, but they don’t necessarily understand how that translates to them. So when I’m speaking to advisors or clients, I start off with orienting people to how the brackets work. First of all, there’s two sets of brackets, right? The first one is for ordinary income. It isn’t always obvious for people that the moves between the brackets are not uniform. We start out at 10 % and then we go up to 12 percentage point change, but the next jump is to 22 percent. And then we go up two percents to 24, and then we go up eight to 32. And those big gaps between the 12 and the 22, the 24 and the 32 are screaming to be managed. And what’s on those brackets is taxable income, which means anything that wasn’t taxable is not in the picture. And above and below the line deductions are already out. So it’s quite possible under the current tax regime for a retired couple to have $150,000 of total income and still be in the 12 % marginal. It happens all the time. And so when I’m reviewing these kinds of things, I consistently see people who could fill up a low tax bracket and didn’t, and they don’t know what’s waiting for them down the road, a la the widow’s penalty and inheriting pre-tax accounts. This is a place where advisors can lean in, understand the tax brackets, the fact that there are two of them, what lands where, where deductions hit against and educate their clients to at least filling up low tax brackets.

Steven Jarvis, CPA (14:46.674)
My favorite way to deliver value on tax planning is definitely tangible tax savings. Like if we can point to, yes, we saved you money, that is certainly my favorite, but that is not the only way to add value on taxes. To your point, even just providing that education to clients, helping minimize pain and reduce surprises, those are all value adds on this topic. You mentioned in there like things that you’re seeing as you review these situations. And am I assuming correctly that when you talk about reviewing, I mean, you’re talking about reviewing actual tax returns. Like if you want to do If you want to do good work on tax, I think it should be mandatory. In my opinion, should be mandatory that financial advisors get tax returns whether they’re doing proactive tax planning or not, because hopefully this isn’t a newsflash for anyone listening to this podcast, but every money movement has a tax impact. So whether you think you’re doing tax planning or not, you are. It’s just a matter of whether you’re doing it on purpose. So I’m a huge advocate for you should be requesting tax returns from your clients every single year. At a minimum, just to double check that the work you did with them got reported correctly. Even if all you do is manage a single taxable investment account, great, that shows up on their tax return, double check that. But to your point, there’s things that we can start doing from there. If we understand these building blocks, the education we can provide and then the decisions we can start recommending.

Matthew Doran (16:01.078)
Yeah, without a doubt. And common mistakes that advisors should be on the lookout for is they know the client did a QCD because they recommended it. sometimes it shows up as the IRA distribution was all taxable. It got missed some. Hopefully this year is the first of changing that. But that often happens because firms that aren’t self clearing, know, use custodians that kick out a 1099 that says taxable amount not determined and it might easily get missed. And the other thing that often gets missed is somebody contributed after tax dollars to an IRA because they know they can get taxed for growth. They may have done it even after their tax filing. So they neglected to file an 8606 and track the basis. But the advisor is the one recommending a lot of these things and they need to be making sure they got accounted for properly and being a good partner. But to your point about collecting tax returns, and I know a lot of advisors are in places where they simply can’t do it, but I believe that financial advisors or clients live one financial life.

And we cannot ignore that the IRA is 50 years old, the 401 chain is 40 plus years old, wealth is being created in vast and varied ways and sometimes suddenly. And now we have timing issues that create complexity for clients and they’re hiring us, you, me, and their other advisors to help them navigate that complexity and engineer outcomes they wouldn’t get on their own. And a lot of that I really believe it’s an annual thing. It’s not one and done. It’s not, we always contribute in this fashion. It’s an evergreen endeavor because rules, laws, markets, spending patterns change.

Steven Jarvis, CPA (17:39.246)
I’m push back a little bit on one thing you said there and hopefully we can have some fun with this because it has changed over time. But I think I heard you say that there’s advisors in some places where they can’t request tax returns. I’m gonna argue with that one. Like I know where it’s coming from and I’ve met those advisors too who think they can’t. But at this point, and this has changed over the last few years, I’ve worked with advisors at Edward Jones, at Merrill Lynch, at you name it, I’ve worked with advisors there who have found ways to compliantly request tax returns or review them with clients. Now, they definitely have to be more intentional. They have to be more careful. There’s some things they have to do in their communications, but I have seen advisors at every shape and size of firm at this point request tax returns to some level. And so I would encourage anyone listening that if you’re in that boat where you say, I agree with Matthew on this one, please send me a message. I will help you work through that with your compliance department. Because we’ve seen success on this one. It’s just a personal place of advocacy for me now.

Matthew Doran (18:36.622)
I think it’s wonderful and it’s reflective of the fact that, you know, when I started in the business, I was more in the business of presenting things that would be suitable to people that would help them achieve their long-term goals. now, especially because the rules on inheriting pre-tax accounts have changed, people have been investors for a long time, whether they want to or not, through their retirement plans at work. They have more equity compensation tools.

They own rental properties. The complexity is there. And the financial advisor is no longer selling the inputs, but managing the pieces in conjunction with other professionals. And they need to. And what I like about what you’re saying, and we certainly agree, is that the tax return is going to tell the financial advisor things that the client either wouldn’t think to tell them or wouldn’t be able to articulate well. So, for example, they had a net operating loss in their business.

Or they’re carrying forward a loss from an account held somewhere else. Or they’re the beneficiary of a trust held somewhere else. Or they inherited an IRA and it’s with the original account owner’s advisor. they’ve got rental properties that are fully depreciated. They’re giving cash to charity. There’s so many things where an advisor could lean in and add to the efficiency. But if they don’t see what’s happening, they’re flying blind.

And the tax return does a much better job of illuminating those items than the client themselves.

Steven Jarvis, CPA (20:05.9)
Yeah, absolutely. And I want to come back to you. You brought up QCDs and mentioned that, maybe it’s the first year they’ll get done a little bit better because they added a new distribution code to the 1099R, which I appreciate your optimism. I’m a little more cynical probably because I’m in the trenches preparing tax returns still. But I think this is a good illustration of one of the things that you’ve reinforced a couple of times, is these things are getting more complex, not less complex. Even the 1099R now having a distribution code for QCDs is a great example of how this stuff won’t happen correctly on its own. Most custodians this last year, when that update came out, they pretty much just said, hey, it’s going to take us at least another year before we even use that code. You mentioned the new tax laws that got passed this last year. Tips and overtime. Those are both things that are only sort of reported in W2s this year.

I mean, we could make whole lists. I mean, you mentioned the 8606 before. That’s an area that’s rife with potential issues of how things get reported. again, whether you think you’re doing proactive tax planning or not, you’re having an impact on the tax return. And the default tax reporting is not enough if you’re not being proactively involved.

Matthew Doran (21:13.928)
Absolutely right. And even, as I said before, order amount and timing, income smoothing alone can go a really long way toward mitigating the stealth taxes, like early adjustments to Medicare or triggering net investment income tax. I think people like yourself and myself and probably most of the people who might listen believe that when a law changes, strategy should be re-examined. But behavior often rules the roots, not strategy. And so, for example, when the Secure Act changed the way a non-spouse inherits a pre-tax account, the order of withdrawal or the distribution strategy probably should have been revisited by many people, but it hasn’t been. And I don’t believe personally that increasing the RMD age is at all a good thing, unless the person is doing conversions with that extra time or withdrawals.

But if I don’t have to do something and doing something is going to cost me tax dollars, the way that’s going to play out is potentially the person who ultimately inherits that account or even the surviving spouse of a couple is going to pay more tax on the same nest egg than they otherwise might have if they were more intentional about how it was distributed.

Steven Jarvis, CPA (22:15.31)
gonna do it.

Steven Jarvis, CPA (22:31.534)
Oh, I completely agree with that. When secure came out and changed the inherited IRAs, one of the early kind of reactions to that from advisors that I had to just kind of finally be like, hey guys, stop, you’re thinking about this the wrong way. If everybody gets in kind of in the way back machine with me real quick, like when those rules first started coming out, there was a lot of confusion about were RMDs required on an inherited IRA, were they not? And so the IRS kept punting on enforcing those rules. They basically, for a couple of years, they said, hey… We haven’t clarified this yet. So we’re not going to enforce any of the penalties and the original reaction from a lot of advisors was this is great news. We don’t have to do anything now. I was like wait, wait, wait time out the the required minimum Distribution was only ever meant to be the minimum There’s a lot of clients that would benefit from you looking very intentionally at that 10-year period and some of them you’re gonna say actually We should probably take most of this out in the first three years. Some of them you might smooth it across 10, some of them you might take it in the last year. But if by default, and we ran a couple of scenarios just to try to illustrate this to advisors, and you took a million dollar in inherited IRA, and you took it all in year 10 instead of just simply smoothing it out over 10 years, the tax difference was six figures. Now, there are a ton of assumptions in there clearly, but just to illustrate the potential magnitude of intentional versus default… Like this isn’t small dollars if we just kind of let things happen to us.

Matthew Doran (23:58.774)
Yeah, and before we even get to the inheritor, Steven , the surviving spouse, we have this generation of people who maybe still had a pension. House was paid off before they retired. Kids were out of the house before they retired. Social Security claiming age was a little younger. They worked a little later. And so by the time they retired, they didn’t really need to tap into their tax-deferred retirement accounts, so they haven’t. It’s grown. RMD age has been increased. And the balances are really, large. But people aren’t thinking about what happens when the first member of the couple passes away. In the following year, the surviving spouse is a single tax filer moving through those brackets much more quickly on half the standard deduction and a lower IRMA threshold and so on. And so even before we get to the inheritor, we need to be thinking about the tax efficiency of getting money out of those accounts so that we can optimize the tax instead of just defer it.

Steven Jarvis, CPA (24:58.766)
Yeah, for people listening, mean, keep in mind that the importance of this conversation is what you then go and do with your clients about it, right? Because we can all talk about, Matthew and I can, geez, we can probably talk for days about some of these topics, and I’m sure there’s people listening who think, yeah, yeah, guys, I’m familiar with that, but it’s not whether or not you’re familiar with it. When was the last time you were talking to your clients about this? How are you articulating this to prospects? Like, how are you putting this into practice? It’s not, you listen to a podcast and be like, oh, yeah, yeah, that all sounds familiar. How often are you practicing how you deliver this to your clients, your team members, whoever it might be to help execute things? That’s what really matters.

Matthew Doran (25:37.718)
That’s right. And we’re really educators. That’s what I love so much about the roles that we play is we navigate complexity and we absorb a little bit of the complexity along the way by bringing experience to the table that makes it less opaque and manageable, right? And so it really is about articulating and doing, empowering people to take action.

Steven Jarvis, CPA (26:01.708)
Matthew, before we wrap up here, you mentioned before we jumped on that you’re actually getting ready to release another article all about kind of what to do now the filing season is over. So when can people find that? Where can they find it?

Matthew Doran (26:14.506)
Yeah, I believe the article, which is all about post filing, what do I do now? It’s exactly the beginning of a journey, not the end of one. And it’s to be published within the next few days in Advisor Perspectives Magazine.

Steven Jarvis, CPA (26:32.344)
Perfect, yeah, Advisor Perspectives does great work and if it’s gonna be published in the next couple of days by the time we release it should already be out there. So definitely go find it. There’s so much great content out there, Matthew, I appreciate your contribution to that. The other thing that I’ve found is that if you really want to level up what you are doing in practice, you’ve gotta find other people who are also doing these kinds of things and share experiences. And so with no small amount of bias. That is why we put together this annual event that we do, the summit, which is the end of September, it’s in Phoenix this year. So if you’re committed to learning and leveling up from other advisors doing great things, go to retirementtaxservices.com slash summit, get signed up, come join 350 other advisors as we talk about how we can create better outcomes for our clients. So Matthew, thank you so much for your time, for coming on, for sharing your expertise. Really appreciate you being here.

Matthew Doran (27:21.9)
Yeah, my pleasure Steven . Thanks for the invitation. Great talking with you.

Steven Jarvis, CPA (27:25.454)
Absolutely, and to everyone listening, thanks for being in here and until next time, good luck out there and remember to tip your server, not the IRS.