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We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.

Steven Jarvis:     Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professional’s Edition. I am your host, Steven Jarvis, CPA. In this show, I teach financial advisors how to deliver massive value through tax planning. With me on the show, I have a great guest, Travis Gatzemeier who’s a CFP and has his own firm, Kinetix Financial Planning. One of the things that makes Travis a little unique is that his practice is virtual. He works with clients all over the country, and he spends a lot of his time working with small business owners and equity compensated employees. So definitely great areas for tax planning. So with that, Travis, welcome to the show.

Travis Gatzemeier:       Steven, thanks for having me on. I’m excited to talk about all things tax planning, and maybe a little bit of equity comp and small business, self-employed planning as well.

Steven Jarvis:     Yeah, I really appreciate you spending some time in coming on. We got connected because I’ve been loving some of the content that you put out particularly on LinkedIn, just really trying to clarify just really almost the right way to think about certain tax related issues. I think the most recent one I saw was just a great summary of, well, really what’s the difference between a tax deduction and a tax credit. There’s so much value even just in the education piece for our clients and the people we serve. As we dive in, I’d love for you to talk about kind of where your commitment to tax planning came from, and just from a high level what that looks like in your practice.

Travis Gatzemeier:       Yeah. So tax planning, I will say that about five years ago, I got really curious about tax planning when I was at my previous firm. It came up when I was just thinking about the tax impact, a couple things we were suggesting, and I was really wanting to learn how do we take this information and project it into the future and show someone a scenario or multiple scenarios on how what we are advising is going to impact taxes, and ultimately, in combination with the discussion with the client, come down to the best decision on what’s going to help them reach their goals and build the ultimate plan that they kind of envision, right?

So really tax playing for me came out of curiosity, like how do I start building projections? Honestly, I had no idea how to do it. I just knew you just give the information maybe to a CPA, right, and they blast off this information and you get a projected tax return. I was like, “That’d be super cool if we could do that.” So long story short, that finally with some technology and just me being curious and learning about stuff, fast forward to now and tax projections and tax planning is a staple of my business. I’m able to put projections together for clients at least once or twice a year based on our recommendations and supply them with that.

So ultimately, it just came out of curiosity, me wanting to know more about taxes, and I felt like it was a big, big value add with clients by showing them the impacts taxes and teaching them about how the decisions that we make as financial planners can impact their overall tax picture, because as you know, almost everything we touch as financial planners has a tax impact.

Steven Jarvis:     Yeah, it certainly does. I think it’s really common that advisors will recognize that the impact is there. What’s less common is taking that step that you talked about and really diving in and embracing it because it taxes are this big kind of complicated, messy, almost scary to thing. So it can be really easy for advisors to shy away from it. I mean, you hit on it. It impacts nearly everything we do, and so for advisors who really want to embrace this idea of being truly comprehensive, taxes have to be a piece of that, because as we go through it and make recommendations, the chances of you having something in your financial plan that doesn’t have a tax impact, it’s probably slim to none.

Travis Gatzemeier:       Yeah. I mean, even our financial planning software has a tax tab in it. So if that doesn’t tell you something then, I don’t know.

Steven Jarvis:     Yeah. So there’s definitely people out there like me who spend all of their time on taxes, but even I recognize and frequently will remind people that taxes are an important consideration, but not the sole consideration. I like to think of it as taxes are an important passenger on the bus, but they shouldn’t be driving the bus. So it’s certainly something that needs to be incorporated, but not override the rest of what we’re doing.

Travis Gatzemeier:       100%. I stressed a lot to my clients, which as you mentioned, I work with equity comp professionals and small, kind of micro business, self-employed professionals, and one thing I always stress is there’s things we can do to reduce your tax bill, but we also want to build in flexibility to your plan. So especially for business owners that have a lot of their ownership and investment inside the business, you want to have some kind of flexibility outside of that, which sometimes be means foregoing a little bit of a tax savings today to build in that ultimate flexibility. So it’s just a balance on making the right recommendations that is… It could be a tax benefit today with future flexibility. So just balancing that, those recommendations together to create that ultimate flexibility and tax savings at the same time.

Steven Jarvis:     I really like how you describe that. It brings up an important point that goes along, really that we should bring up anytime we’re talking about using software, and that is the fact that software, these projections, it can be a great tool, but they’re just one tool. They’re not the be all end all of what should happen, because you kind of describe those in two separate pieces. But first you talked about, hey, you do these projections, these scenario analysis, and then as you’re talking about your small business owners, you’re saying that maybe the recommendation you make isn’t necessarily here’s how we absolutely save the most in taxes, it’s how we balance all of these different things.

So any anytime we’re using software, we got to make sure that we’re using that just as one potential tool, and sometimes I run into advisors who want the software to give them a magic answer they can use every time, but sorry to be the bearer of that news, you still need to use your professional judgment. It sounds like that’s the approach you take.

Travis Gatzemeier:       Yeah. That comes with education. So like I mentioned, being curious about things. It’s not like you can just buy the software and then start entering this data into it and it spits out this magical tax savings for clients. It took me a while and I’m still learning. Everyone’s always learning, especially when you add taxes to it, because things are always changing. You’re never going to know everything about it, because it’s constantly changing. Something’s going to change. You have to be on top of it. So yeah, you really have to understand what the numbers are. When you input data into the software, you have to understand what those numbers are going to be because you can enter really bad information in the software and get really bad information.

So my curiosity came from how do I learn this stuff to put it into the software correctly and spit out the numbers that’s going to be somewhat accurate based on projections that we have for clients, which is going to give us the best opportunity to present recommendations to them, right? So you have to have good data, you have to know what the data means, and that just comes with educating yourself and working with clients and real life situation stuff and then entering that correctly into the software.

Steven Jarvis:     Yeah. It’s certainly an education process and a continual improvement process. You mentioned that really this curiosity started for you about five years ago. Is there anything in particular that stands out about how you thought about taxes five years ago versus things you’ve learned along the way that might even be like I can’t believe that’s how I used to think about it?

Travis Gatzemeier:       I wish I had written some stuff down, so I need to think about it. It’s amazing how much you can learn when you, especially in this industry, as you just progress through your journey, through learning finance and learning tax, you don’t realize how much you didn’t know five years ago. I just remember things, I probably didn’t really understand itemized deductions and standard deductions back then. A little bit, but that just comes with… I wasn’t really involved in the whole tax piece. It was more of like I came from more of an investment background.

So adding the tax component, there was a large learning curve there for me. But once you start looking at taxes in a different way on how it actually impacts the financial plan, and even investments have… There’s a ton of tax implications within investments. So once you start adding all this stuff in, you really start to understand how they all piece together and all of that combined with just I have to know this stuff to be able to give my clients the best recommendations for their money.

Steven Jarvis:     Yeah. I like that you’re bringing that back to this is all about how it impacts the clients, because even using an example in there like itemized versus standard deduction, the number of financial professionals I run into, let alone taxpayers, who will have this mindset of, “Ah, it’s so terrible that I can’t itemize my deductions. I wish I could itemize.” When in reality for most people, it’s a great thing they can take the standard deduction because maybe they only have $10,000 in itemized deductions. But great news, if you’re married, you can claim over 25,000 now. So even just some of those nuances just help with our mindset around it.

Travis Gatzemeier:       Yeah. It’s education too for clients as well. You may have a client that says, “I want to buy a house so I can itemize to get mortgage interest,” or something like that. You look back on, it’s like, “Well, it’s not really going to be a benefit because you’re going to take the standard deduction based on what your itemized deductions would be.” They’re like, “Oh,” and it kind of just… It’s not like that drives the ultimate decision on anything, but it puts them in a different mindset on the way they’re thinking about making this purchase, right?

Because a lot of people from tax standpoint, they make these decisions because of taxes or something. I always say never make a decision, and I think you said this a minute ago, never make a decision solely because of taxes alone. Don’t let that be the ultimate driver. Do it because, one, it fits within your financial plan, it’s the right time to do it, you have the resources to do it. If we can do it and there’s a tax benefit to it along the way, well, that’s just icing on the cake.

Steven Jarvis:     Definitely. Travis, I always love to hear specific examples of how this works with clients. I mean, it’s one thing to talk about it from kind of a theoretical level of what would be great if it worked out, but would love to hear experiences you’ve had where you’ve seen the values specific to a client.

Travis Gatzemeier:       Yeah. Then we can talk about one or each or example of like a self-employed or equity compensation kind of example. But a big one is obviously when you get clients information and you get the tax return, as you always say, the tax return, that’s almost a necessity to get the tax return whenever you’re viewing someone’s finances, right? So you get all their information and then you start piecing this stuff together, right? So something that I’ve seen with a couple of new clients lately is when they come to me, you can review through the tax return and you can immediately see things, and I’m referring to more of a self-employed person or a small business owner in this particular situation.

But you can see if they have any self-employment plans, solo 401ks, that kind of thing set up. You can see what their business entity is kind of set up as. You can see if they’re taking QBI, qualified business income deduction, stuff like that. So one thing that I found last year with a number of clients, one in particular is the tax professional was not going to allow the in to elect qualified business income deduction because they were a high earner, but they weren’t under a specified service trader business, right?

So big opportunity right there. I was able to do some research. I contacted a number of CPAs with the situation, just get other people’s opinion on this thing. We find out that we could in fact get some qualified business income deduction based on this person’s financial data and numbers. So that’s one opportunity we could bring QBI back in which resulted in about a $30,000 tax savings for this person.

Steven Jarvis:     Wow.

Travis Gatzemeier:       Not only that, when he first came to me before I even was able to speak on QBI, because I didn’t have the actual documents, he wanted to set up a plan for his small business. So we ended up setting up a solo 401k. We got that funded. That’s quite common at the end of the year for self-employed people to start figuring out how do we get things like this lined up. So solo 401ks is a big one. A lot of my clients use the solo 401k. We got that set up.

Then the income year also for this professional ended up being much, much higher than what was anticipated. So he wanted to go ahead and start accelerating some expenses. So we did that at the end of the year. So expenses that were going to be needed in January and February, we went ahead and purchased those in December, right? So accelerated some of those things to get the deduction in in that current year. So with these couple things combined, we ended up with a total tax savings of about $55,000 total.

So that’s just being able to review that stuff and showing the client first, if we do these things, because here’s a couple things you want to do, which was setting up a retirement plan, accelerating some expenses based on our recommendation, and then other things outside of that was like, “Oh wait, did you know your tax preparer is not going to let you get QBI?” She didn’t want to have him get QBI based on his particular income, right? It was just missed opportunity right there.

So bringing that the attention as well, all these things combined is going to allow us to get a $50,000 reduction on taxes or savings on taxes, which is quite substantial. So those things are big benefits, looking at taxes, being proactive with taxes, especially for small business owners. There’s a ton more things that we can do. But those are just a couple things based on from the end of last year that was top of mind for me.

Steven Jarvis:     One of the things I want to highlight that you talked about in there was that so this is a client that has a tax preparer, maybe I’m a little bit biased because I’m also tax preparer, but I try to give people the benefit of the doubt that everyone’s out there trying to do the best job they can. But this illustrates that tax professionals typically just have a different focus than financial advisors, which creates this huge opportunity for tax planning.

I’ll give that tax preparer the benefit of the doubt that they were doing everything they could to do right by their client, but typically, what they’re being asked to do is, “Hey, please take care of this year’s tax return for me.” So it’s a very historically focused, a very compliance focused, and getting things reported to the IRS correctly is important, but having a tax preparer is not the same thing as having a tax planner. That’s not always a distinction that is going to be obvious to clients.

This is why it’s so important, you mentioned getting tax returns, so important to actually look at the details and not just take for granted that your client’s already working with a tax professional that’s going to take the time to not just say, “Here’s what the numbers were and let’s put them into the software and get the form filed.” But to take that step back and say, “What else should we be thinking about? What are decisions we could make to reduce the amount that we owe the IRS this year?”

Travis Gatzemeier:       Yeah. 100%. Going back to my example when I say things like accelerate expenses or bringing expenses into the current year that are going to take place next year, a lot of small business owners or self-employed will automatically think of buying something they don’t necessarily need, but it has to be a necessary expense, right? It has to be something that’s going to be in your budget or needed expense that you’re going to pay for in January, February, or even March, that you can put in December.

Just you can’t go buy stuff that’s not needed because now you’re just spending more money ultimately than you have to and ultimately reducing your cashflows anyway. So that’s one thing I always stress, especially with small business owners. We don’t want to buy random things just to get the deduction. Sure, it’s reduce your taxes, but it’s going to reduce your cashflows too.

Steven Jarvis:     Yeah. I actually recently wrote an article about basically that tax write-offs don’t exist. I mean, write-off gets used as a replacement for the word deduction, but that’s not the word used by the IRS and it comes with I think so much misunderstanding from clients that, kind of like you’re describing, that this small business owners get this idea that, “Oh, well, if I can write it off, that makes it free.” It’s like, well, no, no, no, no. You still had to buy whatever the thing was. If it’s not necessary to your business, you’re still out the money that you paid for it.

Yes, your taxable income’s going to go down a little bit. You’re going to save a little bit on taxes, but we can’t, back to the earlier point of, we can’t let taxes be the sole driver of the decision. In other words, the other analogy I like for that is we can’t let the tax tail wag the decision or the investment dog, the decision making dog, whatever, however you want to phrase it. That has to be one of the considerations, not the primary consideration.

Travis Gatzemeier:       Yeah, 100%. Then you mentioned benefit of the doubt for the tax preparer, and I just want to stress that always do that. Whenever you find a situation when you’re reviewing a tax return and you spot something, if you’re a small business owner and there’s no QBI, qualified business income deduction on the tax return, just ask them like, “Why wouldn’t this be applied in this situation?” Get their input first. Maybe it was just missed. Maybe they have a reason for it. In this situation, they had a reason for it, but there was something are missing within the actual rules of QBI why it wasn’t brought back into the tax return.

So it’s a collaboration between you reviewing the return and then collaborating with the person that prepared the return. Don’t just assume that they’re not a good tax preparer because it was missed. People miss a lot of stuff and it sometimes takes more sets of eyes than just one to review something. So whenever you spot something on a tax return or within your software that you’re using that wasn’t marked, always just ask questions and clarify and get their point of view on what it was and make sure you document their side of things too, and then go do your own research.

Steven Jarvis:     Yeah. When this episode airs in March, we also want to make sure that we’re sensitive of timing of when we’re reaching out to those tax preparers and how we’re having those conversations. Anytime you can, these are great conversations to have near the end of the calendar year when there’s still time to do something about it and when those tax preparers aren’t in the middle of their busiest time, because if you call a CPA or an enrolled agent in the middle of March and say, “Hey, I think you messed this up. I want talk about it,” good luck getting a good response to that.

Travis Gatzemeier:       Yeah. Oh, keep in mind. Mine was in December.

Steven Jarvis:     Perfect, perfect. I love to hear it.

Travis Gatzemeier:       So I think I’m good on that one for now.

Steven Jarvis:     Well, yeah, that’s a great example of things that we can look for on the business side. You also mentioned that you spend time working with people on the equity comp side. Anything that comes to mind for you as far as client experiences where you’ve seen the value of having this mindset for tax planning?

Travis Gatzemeier:       Yeah. So lots of similarities between equity comp and self-employed, but I’ll keep the equity comp short and just kind of something you could spot with someone that may have equity compensation. Obviously, there’s lots of opportunities with AMT and incentive stock options. Commonly with equity compensation, you’ll see RSUs, or restricted stock units. So one thing that’s beneficial whenever you’re at least making projections and planning around the tax impacts of things like RSUs and equity compensation.

For an example, one of my clients last year was going through an IPO. They had RSUs that had double triggers. So those that aren’t familiar, a double trigger on RSU are basically there’s two things that have to happen for those to vest. Typically, it’s a time vesting and that’s common. Most people are going to understand the time vesting component of RSUs, but they also had an event trigger. So the time vesting had already gone through. The IPO was the event trigger, so, and then they had a period of time after the actual IPO that the second vesting component was going to take place.

Not many people know this, especially the employees that work at these companies that especially pre-IPO companies know that once that second trigger are hits and they’re vested, you may have two or three years of RSU income that hit on the same day of vesting, right? Now, let’s just say you had $100,000, $200,000 salary, and now you may have 400,000, 500,000, $600,000 of RSUs all vesting on the same time. Good thing to see on your pay stub, right? Everyone’s going to like that, like my RSU’s vested.

But the one thing you have to be proactive about with planning is is the withholding going to be enough when those hit. Typically no. If it’s under a million dollars in income, they’re only going to be withholding 22%, right? However, this person who’s usually could be in the 22, 24, somewhere in there bracket, probably is going to be shooting through the upper bracket, right? So they’re probably going to have to withhold extra taxes on their end of things and set this aside their own little tax account and potentially pay estimated taxes, right?

So for someone like this, what we did was we were ahead of things, we kind of projected. Obviously you don’t know what the stock price is going to be, but you can project a high and a low what you think it may be by the time that second trigger hits. So what we did, we did a number of things. We increased 401k contributions to the max to defer as much as we could, because we knew that this year was going to be a much, much higher income year with all those RSUs hitting. It was two or three years worth of RSUs all on the same day vesting.

Then we took advantage of an HSA. So we added an HSA whenever their open enrollment occurred. Then we also funded the spouse’s retirement plan as well at their job that they weren’t taking advantage of yet. So maxed both 401ks out and took advantage of an HSA to basically take… All we’re doing here is simply taking some of this RSU income that’s going to be taxed in the next year, or this year rather, and sliding that into a tax deferred account. It’s just money that they’re not going to use. It’s just well above what their living expenses and their goals are. So we’re just sliding that in. We’re kind of pre-funding the retirement plans using some of that RSU income, just doing it through their payroll instead of when the RSUs hit.

So that based on I made a couple of projections in my software. Here’s one, we could do the strategy I just talked about, or we could do these other couple of things without fully funding the 401ks. They decided, “Hey, this is going to be a much, much higher income year than usual.” So yeah, that sounds great. Let’s put as much money into 401ks that not only puts auto contributions in there and forces us to pack as much as we can there, it also can potentially reduce our taxes.

So when those RSUs hit this year, we’re going to basically take the vesting amount. We’ll shave off some of the stock immediately and that’s going to supplement any living expenses that we didn’t have, because we were putting more money into 401ks. Then we’re also going to hold onto some stock and then take some stock and put it into taxable accounts too, to create that flexibility. So we’re not only optimizing taxes through the 401ks, but we’re also using RSU income that’s going to supplement some of the lost income, not lost income, but their paycheck was reduced because of the 401k. So using some of that RSU income to supplement that and then using some of it to create that flexibility we talked about earlier.

So we’re immediately balancing tax savings and flexibility, and then with any of the rest of it, it’s going to go towards goals. If they want to hold some stock, there’s still going to be plenty of stock there to have a nice position in the company. But with equity compensation, I always stress that they’re supplying you for your current paycheck. You don’t want to put too too much in a basket that’s also supplying you for your future, which would be like a big basket of stock in the company, right?

So I’m a little different in that realm. I’m fine with clients holding much more than kind of your rule of thumb concentration amount, as long as we have other resources and we have our other financial obligations funded. But we still want to be aware of how much we’re relying on the company for our current living and our future living. So that’s kind of an example of something I went through last year and being proactive with the planning, make sure we understand what’s coming up with their equity compensation and everything. We could get into like AMT and ISOs and everything, but that would probably just… Yeah, I could go on forever on those strategies so I want to keep it simple with RSUs.

Steven Jarvis:     That’s definitely a rabbit hole you can get deep down. But I love that example you gave. I mean, looking to the future is always important to tax planning and equity compensation can definitely raise the stakes and really just reinforce the difference in the choices we can make if we think about these things proactively and looking to the future, as opposed to awaiting until the end of the year and then being reactive to everything. At that point, we’ve already missed a lot of our opportunities. So yeah. Love the intentionality behind that, how you’re proactively working with those clients.

So Travis, we always like to make sure that the information we’re sharing turns into action for our listeners because while it’s great information, action is what counts. So either as you’re thinking about the examples that we’ve talked about today, or you just think about your progression in this commitment to tax planning, what’s an action you could recommend to our listeners who are committed to doing more with tax planning?

Travis Gatzemeier:       Yeah. I would say if you’re kind of at the beginning stages of it, just be really curious and start learning about how… Like I said earlier, you can have all the software in the world, but you have to figure out what inputs, accurate inputs and how everything works to get it correctly into that piece of software, right, so it spits out the data you want to see. That’s kind of the main thing. That’s where I kind of started. Obviously, still down the path of learning. There’s always something to learn, but that’s one thing if you’re at the beginning of it.

If you’re kind of already down the whole tax planning rabbit hole, and you’re just looking for more to do, one of the things that I’ve found with clients is when you start tax planning, it gives you this another piece of deliverable to supply to clients. So I would say create something to show value to clients. I’ll give you an example. This year I created in Excel, let’s just call like it… Not Excel. I use Google Sheets. I basically created a Google Sheet that has every single tax form that a client may get and categorized it.

In that, I call that kind of my database, and then I created a Google Doc that’s linked to that sheet. I have a templated almost a tax informational letter for each client. What I do is I go in the sheet and I’d check mark what documents apply to that client. So if they have W-2 wages, obviously W-2 is going to be in there and it says, “Here’s why you got it. It here’s what it means and here’s why you got it.” It’s just kind of like, “Here’s the things you should expect for tax time.”

Then I have all the documents listed on there, where they may have dividends, they may have done a rollover, whatever. it’s all in there for them. Then for each client, they get that because the sheets are linked and I check mark on the sheet what applies to them. It goes into the Google Document and I send that to the client. So tax planning has given me this extra way to touch base with my clients that I typically wouldn’t have done, right?

So, and that goes for anything, not just creating this database that I can send to clients based on what’s happened during year, what they should expect to receive from tax forms, but maybe they have to pay estimated taxes. You can have these check-ins with them like, “Hey, remember to pay estimated taxes,” and you can even use your software to calculate that for them, to help them determine what that’s going to be. Or even things like RSUs vesting, those are good things, like planning the taxes around those.

It just helps you kind of build out these different checkpoints in time. When you’re doing this tax planning with client, you want to stay on top of it. So it gives you extra ways that you can reach out and be of value to your clients. So show something of value has been something that’s really kind improved my practice. Maybe that’s just for me wanting to show them something that I’ve done for them, but so far everyone’s enjoyed the proactiveness with showing them some piece that we’ve done from a tax planning or tax expectation perspective.

Steven Jarvis:     Yeah. I love that. That’s something that we work with advisors on all the time. Love to hear that other people are implementing something similar and that you’ve customized it for your clients. So yeah, I mean, really the two things I took out of that is being curious, and that applies whether you’re new to tax planning or your years or decades in. Love that recommendation of be curious and then make sure that you have a way to physically deliver that value, whether it’s a tax expectation like you’re talking about, or we like to do what we call a 1099 letter, but some way to show your clients to set them up for success.

I would use that to kind of to pivot into something else you brought up during our conversation of making sure you’re collaborating with their tax preparers and that document that you talked about is whether you provide that directly to the client’s tax preparer, or just recommend that your client bring it to their tax preparer. That’s a great way for you to ultimately benefit your client, but through making their tax preparer’s life easier.

Then the last thing I’m going to highlight from our conversation, because I always love it when other people say it and not just me is that you need to be getting tax returns from all of your clients every single year. It’s such a critical step to making sure that you really are taking taxes into consideration and doing everything you can to serve your client. So, Travis, thanks so much for being here. I really appreciate your time coming on the show today.

Travis Gatzemeier:       Thank you. I enjoyed it.

Steven Jarvis:     For everyone listening, be sure and follow us on LinkedIn and at retirementtaxservices.com for more great content around taxes. Until next time. Good luck out there. Remember to tip your server, not the IRS.

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.