Read The Transcript Below:

Steven (00:50):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and with me on the show this week, I have a new experience. I have a guest who considers himself a tax savings architect, which I love that title, that description. So Mark Myers, welcome to the show. Tell us what it means to you to be a tax savings architect.

Mark (01:13):

Steven, thank you for having me on this show. I’m excited about chatting it up with you today. And Tax Savings Architect is just a cool title I gave myself, right? I don’t think you’re going to hear that many other people out there saying they’re tax savings architects, but it really is a cool title that I gave myself to say, Hey, I do analysis work alongside the business owner or the high-income earner and the CPA and their financial professional because most of my clients are referrals from financial professionals, whether it be CPAs, enrolled agents or registered investment advisors, because I don’t do their work.

(01:46):

I don’t do any tax prep, I don’t do any tax filing, I don’t do any bookkeeping. I don’t tell them how to manage or invest their money. I just say, listen, I am an architect. I spend all my time looking through the 75,000 pages of plus plus pages of tax code and finding those coupons that are in there, and there’s a lot of them. And then finding the groups that actually execute those coupons very efficiently because anybody can do them, but it might take them away from their core focus. So if you have a group that actually helps turnkey these things for people and they could put this coupon in place and that coupon in place and this coupon in place with relatively small amount of effort, then it becomes more attractive. So I’m really the guy that says, what is your fact pattern? Let me understand what your income looks like, what your tax liability looks like, and let me see what you’re doing currently to offset that. And usually I can come in and say, well, here’s one or two or three or four, or sometimes five or six additional ways that you can reduce tax and this is the economic impact it will have. Yeah, that’s a really helpful description. 

Steven (02:58):

So your focus really is on that design piece, which especially when we get into more technical areas, is really critical that someone who understands, I like how you call them coupons, but of this 75,000 plus pages of tax code, there’s all these different potential things. And I pretty proudly focus on really what I’d consider a lot of the basics, the things that people can consistently do year after year to help minimize their tax bill over their lifetime. But I’ve never claimed to cover every tax opportunity, and I really embrace the fact that there are limitations on what I do from an execution standpoint. And so while the advisors listening to this show really lean into a lot of the things that I talk about and are helping a lot of their clients with those things, I do get the questions sometimes. So, okay, great, I’ve taken care of those things, but now what else is there? I still think I pay too much in taxes.

(03:42):

What else is there? So talk a little bit more about your process, and you even mentioned it in there that you look at, okay, what are you already doing? Because as I looked through, as we talked about the list of things you do, really from my perspective, none of these are the first thing you should be doing on taxes. There’s probably some other things, other ducks we need to get in a row. But when we’ve taken care of these here, now we’ve got this great list to move on to. So talk about how you identify someone who might be a good fit for what you’re doing and then how you take that to, okay, here are some of the things we need to be considering.

Mark (04:12):

Steve, it’s a fantastic question and yeah, you’re exactly right. The planning that I do is integrated into the current planning. Obviously when it comes to getting all the basics done, hopefully they’re tax professionals like yourself always looking for opportunities. And then when you get to that point, what else is out there? Because think about it, this is why in medical practice we don’t just have general practitioners. If we did, then there wouldn’t be a lot of things that aren’t being accounted for with the neurologist and the endocrinologist and the oncologist and all the different specialties. Same thing with tax planning. A great forward-thinking tax professional like a CPA or an enrolled agent. They’re going to say, this is what I have bandwidth to understand. There’s more out there. Let me explore. And of course, if it makes sense and it’s completely legal and we feel like it’s a confident position, then we’ll move forward with it.

(05:10):

So that’s really how I step in. I’m really, when someone is doing everything they can and they’re still thinking like, wait, some people seem to pay less than I do. Why is that? What more is there? That’s when they come to me and say, this is what I’m doing. This is my CPA, what other opportunities are there? And I review it and I’m happy. I would love to work with their CPA because every CPA I meet potentially is someone that’s going to refer me to some more clients because I’m doing that extra mile that they’re like, we don’t have the time and bandwidth to do, right? So it’s like it’s really a value add. So that’s really how I position myself, what additional layers are available, and here’s how I look who I’m looking for possible client number one, highly appreciated asset. Doesn’t matter whether it’s real estate stocks, private equity, a piece of art, doesn’t matter.

(06:03):

They’re going to sell it and have a significant gain, capital gain, whether it be short-term or long-term. If I can speak to them before they sell it and before they sign their name before they ink their name on a binding letter of intent or a purchase agreement. If I can have that conversation with them prior to, I might be able to give them, well, I know I can give them a couple of very powerful ways, actually three very powerful ways to either defer that text in perpetuity or maybe even eliminate a good portion of that tax by structuring their sale in a different way, not taking assignment of income as themselves, but essentially shifting the assignment of income to another entity which has a much more efficient tax liability. So that that’s kind of prospect number one or possible client number one. But client number two has to do with ordinary income.

(06:58):

How much are they paying based on ordinary income, whether it’s passive from real estate or whether it’s active from their job, whether it’s short-term gains for their trading. If they’re paying a lot of ordinary income, even if they’re W2, I can generally show them additional coupons that would reduce their taxes quite significantly. So really I’m looking for the person paying a big tax bill on their ordinary income, whether it’s active or W2 business or they’re about to sell appreciated asset and they’re saying, Hey, I know that I can 1031 this if it’s real estate, but maybe I don’t want to, or it’s not real estate, it’s my business, it’s crypto, it’s private equity I own. What can I do to offset this potentially 20 to 37% long-term capital gains bill, California being 37 and Florida being 20.

Steven (07:48):

Mark, before we dive into some more of the specifics, I want to highlight two things in particular and one of them you already called out, which is that when you’re talking about highly appreciated assets, you want to talk to these people before they ink the deal. Way too often these questions come up after a transaction has already happened, and in most cases it’s too late. We have to proactively plan for some of these things, and the earlier we start having the conversation, the better. So that’s the key point. The first key point I want to highlight is there. And then the second key point I want to highlight just about this conversation we’re having is that, again, back to your comment about being an architect, this is really about the design and really the exploration phase and the next 20ish minutes that we have, we are not going to cover every technical detail you need to understand about these approaches. We’re going to give you questions, you can ask opportunities you can identify that you’re then going to explore further. So this is all about identifying potential opportunities and really I think that’s the role you take on some of these that some of them you help your clients execute, some of them you help facilitate the relationship to make sure that it can be executed. That’s really how we want to think about these opportunities are who might these be applicable to so that we can explore them further.

Mark (08:55):

Absolutely. No, very exciting. You want me to jump into maybe an example of a person selling an appreciated asset and how it turned out with regard to pre-planning versus I already sold it and I have this big tax bill, what do I do?

Steven (09:11):

Yeah, I love examples. And as you dive into the example, will you, and this probably is going to be specific to you, everybody uses it a little bit differently, but you talked about highly appreciated assets and high-income earners. How are you defining that? Are there dollar amounts you look for that it’s over this amount and this might be more applicable?

Mark (09:28):

Yes. When it comes to high-income earners and we’re looking to reduce the tax they’re paying on ordinary income, generally speaking, when they hit $400,000 or more of adjusted gross income, I can start really helping them underneath that, there’s less opportunity. Now if they’re a business owner, there’s more opportunity under 400,000 because they can control the way that they pay themselves. But if it’s more of a W2 earner, now we’re looking at 400,000 or more of adjusted gross income for me to really be able to do some real damage in a good way. Now as far as this person selling the appreciated asset, usually we’re looking at, I want to see them paying at least $150,000 of tax if they do nothing. If they do nothing and they just pay the tax bill and they’re going to stroke a check for one 50 or more, the numbers start penciling out to do some pre-sale planning because there are some expenses to the presale planning and you want to make sure that the expenses offset the actual tax that bill.

Steven (10:36):

That’s really helpful context. Yeah, go ahead and give us an example of how this plays out in reality.

Mark (10:40):

Yeah, so for example, let’s just say you have an appreciated asset, and let’s use the deferral example. Most people are familiar with real estate selling real estate and having an appreciated piece of real estate, looking at a really large tax bill because of the gains over time, and they decided 1031, they’re like, you know what? I love real estate. I want to capitalize on my sale, but I don’t want to pay the capital gain tax right now, so I’m going to use a 1031 exchange. So that’s what a lot of people do. Obviously when you sell high, a lot of times it’s more challenging to buy low because the market is generally high and the challenges with 1031s, they’ve got 45 days to identify the property and 180 days to close on it. So a lot of 1031s actually don’t make it to the finish line.

(11:25):

So what I’m doing is saying, Hey, there’s an alternative particular to real estate on selling that appreciated real estate asset. And that has to do with assigning prior to inking the contract and saying, Hey, I’m selling it and here’s the purchase agreement and I’m putting my name on it. Don’t do that because what you want to do is make sure that the name on that purchase agreement or that binding letter of intent is a specific trust that we can structure for the client that fully control, and now the sale occurs and the trust receives the income, not the person, therefore, the tax liability is the trust’s tax liability, not the person. And the way that we structured this trust is the trust essentially acquired the asset at the same price as the sales price. So there was a net zero, so there was no taxable liability to the trust, but then the trust produces a note for your client, and now the trust is responsible to pay out that note at whatever percentage is agreed upon.

(12:24):

But your client, the person who acquires this trust is in control of the note reasonably. They have a lot of control and a hundred, they have very high level of control over this note. So what essentially happens is the only tax liability is the amount that’s being taxed based on the interest coming out of that trust via the note. So you could see if there’s a 3.5% note payment, well now you’re only paying taxes on three and a half percent of the net asset value in that trust per year, but you might’ve put $7 million in that trust and didn’t have to pay a 23.8% tax bill. So see what we’re saying is you basically have 23.8% more to start with, and now you’re investing and reinvesting, investing and reinvesting in that trust and deferring and deferring and deferring all the gains of the investments in that trust.

(13:14):

And you’re only paying taxes on the income you take out, which can be as slow as 3.5%, and you don’t technically have to take out the three-point half percent. That’s a whole other layer of granularity. But that’s where you can basically say, on this million dollar sale, I would’ve paid 23.8%, so I would’ve only had 70,000 plus dollars, but now I can structure this trust and I can pay 1% of the sales fee on this trust as opposed to 23.8% tax, and I can have 99% of the sales value or my income that are in this trust now working for me. So that time value of money, that extra 230 some thousand dollars are now in that trust working and compounding, and there’s no taxes being paid on it, and less money’s being taken out of that trust, and they can hand that off to their kids and their kids can hand that off to their kids and their kids can hand off that to their kids. So technically speaking, you don’t have to deal with a step up in basis issues for the kids. You can essentially keep, if there’s continual money growing and it’s not exhausted, it can go to the next generation. And that’s the deferral mechanism. There’s even a better one, which is a tax elimination mechanism, but I won’t go into that right now. Let’s just keep it simple with the deferral mechanism.

Commercial (14:31):

Hey, advisors, when I first started in the business, my dad told me that people come in for investment advice, but they hire you for your tax planning advice. And to this day, it couldn’t be more true. Clients now more than ever, are looking for tax planning advice. And with the exodus of CPA firms out there, financial advisors have the responsibility to become more and more competent in their tax planning strategies to help clients. That’s one of the reasons that I joined the Retirement Tax Services and became one of their essential members. I love my membership with Retirement Tax Services so much because as an advisor, I’m not sitting at home reading the tax code at night over an old-fashioned, rather, I’m relying on my affiliation with Retirement Tax Services to keep me at the cutting edge of what I need to do to provide mass tax planning advice for clients. Part of my membership includes making sure that I have a supportive and dedicated community of other professionals doing the exact same thing I’m doing and working with clients on how to deliver tax planning advice. I get checklists, monthly newsletters, quarterly tax return reviews I can invite into masterclasses, and I have a library of videos of other financial advisors and CPAs and how they’re using tax planning strategies in their real-life practices. This is a critical membership to have, and it shouldn’t just be mine alone. Jump over to retirementtaxservices.com and join their essential membership. It is critical to your tax planning success, and if joining Retirement Tax Services ends up being a decision that you regret as an essential member, then let me know the next time you see me at a tax conference. Maybe I’ll buy you the old-fashioned.

Steven (16:06):

So Mark, one of the questions I always like to ask when people are presenting especially new tax planning strategies is when is this not a good fit? Because there’s very few things when it comes to a planning standpoint or a tax standpoint that are just universal. This is a good idea for everyone all the time. So we already talked about maybe an income threshold because there’s some administrative costs in this. What else should people be considering that might say, wait, this probably isn’t the right fit for me?

Mark (16:31):

Yeah, that’s a great question. So for this deferral mechanism, that’s an alternative to the 1031 exchange where it gives them more flexibility, the dollar they have, they don’t have 45 days to make a decision. They can take a year to make a decision on a new piece of real estate or not. It doesn’t even have to be a piece of real estate inside this trust. It can be anything, any type of asset, but it wouldn’t make sense for someone who loves real estate, they’re only going to invest in real estate period. They don’t want to invest in anything else, and they want to be in control of a 100% of the decisions in that trust. It wouldn’t be appropriate for them. And I’ll tell you why. Because the way the trust is structured, about 20% of the dollars in that trust need to be directed by a financial professional.

(17:14):

And it could be chosen by the client, right? It could be their financial professional that they’ve used 30 years, but 20% of that money and that trust needs to be shepherded by a licensed financial professional. In more retail investments, stocks and bonds and treasuries, et cetera, the remaining 80% can completely be controlled and invested in whatever the owner wants to invest in. So the seller of that asset. So I guess what I’m saying is if they don’t want anyone else to manage their money anywhere outside of real estate, then it’s probably not a good idea. But if they’re okay with saying, Hey, I’ll let my financial guy that’s been managing my money for 20, 10, 15, years to take 20% of this, which I would’ve paid that money to the government, I would’ve never seen it anyways and let him or her keep doing it, and I’ll take the remainder and go into real estate or cryptocurrency or private equity or start my own business literally, then it’s a good thing. But if they’re saying, no, I want to take a hundred percent of my return and I want to go into real estate and I don’t want anybody to make any decisions on any portion, probably not a good idea for this because we do have that 20% real rule that has to be professionally managed in more traditional assets.

Steven (18:27):

So there’s some additional administrative costs. There’s a limitation on the amount of control that we have, although it’s all still our money. And then again, a tax guy, not legal guy. But anytime we get into legal documents and legal entities, there can be state considerations. Is this something that’s going to be universal or is this something that we’ve got to look at on a state-by-state basis as well?

Mark (18:47):

It’s pretty universal. I mean, this planning has been around for close to three decades. There’s quite a few tax groups or attorney groups that offer it. So it’s always a metric of who are you deciding to help you. And that’s where I come in. I do the vetting of these groups, and of course, not every doctor is built the same. Not every attorney is built the same. Not every strength and conditioning coach is going to be as good as the other strength and conditioning coach. So really my job is to go out and vet these different groups that offer these solutions and say, Hey, I think this group or these two groups or three groups are the ones that do it best. No different than an insurance professional saying, Hey, I think that you should buy Allianz or Northwestern Mutual for your policy as opposed to Guardian, and these are the reasons. So that’s what I’m doing. And at the end of the day, they’re relying on that group to navigate the tax code appropriately based off of the 30 years of precedent. And the group that I work with has been doing this the longest, I think, and out of most groups in the nation, and they also, they’ve actually withstood over, I think 14 audits now, like full-on audits, and they’ve withstood every single one of them. No taxes do no change in plan, so they are doing it right.

Steven (20:01):

Yeah, that’s a good track record to be able to have. We’ve talked about this potential idea for a trust in lieu of a 1031 exchange. I know that you’ve got other things that you’re looking at with clients as you look to say, okay, how do we minimize your tax liability? I mean, what are some of the other coupons that you go through the tax code and pull out for clients?

Mark (20:20):

Thank you for that question. There are so many. It’s like, which one do we go for? But I think that the hot coupon this time is right now, the hot coupon is renewable energy. And when I say renewable energy, I’m speaking specifically of the energy that’s created by the Sun- solar. So why is solar a hot coupon? And I’m not talking about putting solar on the roof of your house. I’m talking about purchasing solar just like Wells Fargo does, just like Bank of America does, just like Jeff Bezos does at Amazon. They purchase billions of dollars worth of solar every year. Why? Because the federal government wants them to, the federal government says if you purchase solar, Mr. Amazon owner or Wells Fargo Bank or Chase Bank, or even Mr. And Mrs. Smith that lives in residential Idaho, we’re going to give you a tax credit. So when you buy solar, you’re getting a tax credit.

(21:11):

Every dollar of tax credit offsets a dollar of federal tax liability. Also, when you purchase solar, it is a depreciating asset, and you can depreciate that asset over a very short period of time. Also, when you purchase solar in on the right roof, maybe on the roof of a church or on the roof of a grocery store on the roof of a public school where you own a portion of that project, it’ll also reduce cashflow because somebody’s paying for the energy and whoever owns the panels gets the payout of the energy. So solar is a great coupon because people can buy it and get depreciation, tax credit, and cash flow, kind of like real estate, but with real estate last time I heard the federal government was not giving out tax credits to purchase of single-family residences. But here’s the thing, I always say, don’t think that you’re going to buy solar in lieu of real estate.

(21:56):

Real estate is always a better move because it appreciates and generally has a better cash-on-cash return. What we do with solar is we only buy enough solar to offset your federal tax liability. So what I always say is, let’s profit from your tax liability. If your tax liability is $250,000, just an example, they’re going to pay a federal tax bill of 250. It doesn’t have to be that much. It can be a little bit less, but let’s just use that as an example. I can say we can turn that $250,000 tax liability into $350,000 of tax benefit between the depreciation, the tax credit, and the little bit of cash flow. So do you want to send the 250 off to the feds and the state and let them spend it the way they want to, or do you want to take them up on their offer to take that same 250 that you would’ve spent to the feds, put it in your solar business, purchase solar in the right way, and get a $350,000 net gain from it?

(22:52):

That’s a hundred thousand dollars of free money. Well, guess what they can do with that extra a hundred thousand dollars of free money, buy more real estate. So again, we’re taking their tax liability and profiting from it because we’re structuring their acquisition of solar in a very powerful way. So that’s a very high-level view, but just wanted to kind of get the overview of saying, don’t spend, don’t take your federal tax liability and just send it to the feds. Look into the offer that they give you to say, we’ll give you benefit if you buy solar, and let’s take that same dollar of federal tax liability and buy solar and let’s create more than a dollar’s worth of benefit from it. Infinite return on investment, right?

Steven (23:31):

Yeah, no, I really appreciate that overview. It’s always so helpful to know what’s possible because again, I’m a huge advocate for starting with the basics, but then you’re always going to end up with these clients who say, great, we took care of all those basic things. What else? I still feel like I’m overpaying the IRS, and that’s when it’s time to say, okay, let’s explore these things together. None of ’em are going to be one-size-fits-all. None of ’em are going to be universal answers. But there are things, there are opportunities available to us. There are coupons as you put it available to us in the tax code if we understand what’s available and if we have somebody to help us along the way to make sure we understand the details, the nuance that we’re doing these things correctly, because it is critical, it’s essential that we do them correctly, that we have the documentation, that we have the legal steps that we’re reporting it correctly. Because the last thing we want to do is set ourselves up for what we think is going to be a huge tax savings only to miss out on the tax savings and have all the legal costs to go along with it.

Mark (24:28):

A hundred percent. And, that’s really important, Steven, because with anything, there’s risk and reward, right? People buy real estate in hopes of getting gains. People buy its stocks in hopes of getting gains. Well, it could go the other direction. My communication with people when they’re doing these advanced tax strategies is we’re not really taking a risk on your return. We know your return is definitive based off of your income, right? Because I’m looking at whatever they’re doing, whatever their tax bracket is, is the savings. Because if I can reduce their income in a certain tax bracket, then I know that, hey, a 37% tax credit, every dollar of benefit I can give you saves you 37 cents. So if I can give you that a 37 cents benefit for 15 cents, well, if you want to trade 15 cents for 37 cents, most people will do that all day long.

(25:13):

So that’s really, there’s no economic guessing as to what the return will be. Then it’s like you said, are you executing this coupon or this tax code as it was designed? Are you following the letter of the law and are you doing what the code is designed for you to do? And if that’s the case, yes, then great. That’s why there’s a whole bunch of tax pages or code, there’s a whole bunch of pages of tax code. Most of it tells you what you can do to reduce tax. And that’s like after the first 10,000 pages. Then there’s a whole kinds of things that’s saying, Hey, if you’re doing this kind of business, if you’re this kind of corporation, if you’re doing this, you get this tax credit. So essentially that’s what we’re doing is saying, let’s find the areas that if you execute it accurately and don’t get egregious, then you’re going to get a wholesale tax rate, not a retail tax rate.

(26:06):

And judge Learned Hand, who is a very well-known appellate court judge, which you probably quoted before, but some of it, I love his statement. He says, in America, there are two tax systems, one for the informed, one for the uninformed. Both are legal. So I always say, well, which tax system do you want to follow? The uninformed and informed they’re both legal. I can inform you on some areas that maybe you don’t know right now, but if you know, maybe you’ll want to take advantage of them. And there’s no legal, there’s nothing legally wrong with paying less tax as long as you’re following the tax code.

Steven (26:38):

The other quote from Judge Learned Hand that I always like to share is that there are no patriotic awards for overpaying the IRS. And so that’s where we always talk about tipping your server and not the IRS. But Mark, I really appreciate you coming on and sharing so much great information for people listening who are thinking, Hey, I want to learn more about some of these things because like we talked about, we didn’t cover every detail. We just gave you the overview. How can people learn more about what you’re doing or get in contact with you to explore this further?

Mark (27:07):

And I just changed my brand, Steven, so hopefully I don’t confuse people. But taxwisepartners.com is the new website, the new company name, and it’s just as it’s spelled Taxwise, WISE partners. We partner with a lot of financial professionals, but it’s not like we can’t work with the client directly and their current financial professional. But if they go to taxwisepartners.com, you can learn a little bit more about us. They can actually request some case studies. They can actually book a complimentary 20-minute consultation, and literally in 20 minutes, Steven, I can tell them if there’s an opportunity or not. So it’s a really quick conversation to determine how much opportunity is there, and that just a little bit of time no cost.

Steven (27:53):

Taxwisepartners.com. Mark, thank you so much for sharing that. Really a huge fan of exploring everything that’s potentially available for our client. That’s why I’m always talking about getting tax returns for our clients. We want to know the details of what their current situation is, so we know what other opportunities might be out there. So again, Mark, thanks so much for coming on the show.

Mark (28:11):

Thank you for having me. It’s been a blast.

Steven (28:12):

For everyone listening, thanks for being here. And until next time, good luck out there. And remember to tip your server, not the IRS!