Read The Transcript:

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. Now, for the next couple of weeks, you’re in for a special treat. It’s just going to be me and I’m going to be sharing some tales from tax season. Just a few weeks removed from the tax filing deadline, I want to make sure that I’m sharing some of my takeaway, some of the most common things that came up with clients. And since my audience is primarily advisors and not tax preparers, although I know there are a few of those listening, so thanks for listening in, my focus is going to be on the things that your clients are bringing up so that you know how you can speak to clients, how you can deliver values you’re having conversations around taxes.

At this point, I exclusively work with taxpayers who also have a financial advisor who is a member of the RTS premier community. So I’m definitely talking about clients who have another professional in their life already who quite often have a professional in their life who is doing at least something, if not a lot, around tax planning. And these are the things that are still coming up. A lot of times these come up because so many tax preparers focus just on getting the boxes checked on compliance. So for many taxpayers, they’ve never had someone who’s taken the time to explain some of these things to them. So while again I know that my audience is not necessarily interested in becoming a tax preparers, there are going to be some great things in here that you’re going to be able to learn along the way that’ll just really set you apart as you share these things with clients, as you educate clients on these things. It’s going to set you apart as someone who really cares about tax planning, who has a focus on this, who has an expertise in this.

So let’s just dive into it, common themes that were coming up as I worked with taxpayers this year. So probably the most frequent question I got asked in some form is, what can I itemize? What can I deduct for tax purposes? And while this came up in a lot of different ways, there was still just the general misunderstanding of what actually is tax deductible for individuals. Now, when it comes to individuals, we got to keep in mind that about 90% of taxpayers take the standard deduction. So even though we’re a couple of years in to the Tax Cuts and Jobs Act being applicable, which significantly increased the standard deduction, there’s still just a lot of people who haven’t really embraced or consistently remember that the standard deduction is so high.

Going in for 2022, for people filing as a single individual, the standard deduction is $12,950. And for married filing jointly, it’s$ 25,900. So what this means for a married couple filing jointly is that they have to have nearly $26,000 in potentially deductible expenses to have any tax benefit from those. And where the misconceptions keep piling on is that while there’s a couple of different buckets of potential deductions, they’re not all created equal. So if you look at the schedule A, which is where we report itemized deductions, right at the top is where you’re going to find medical expenses. But medical expenses have a floor, a 7.5% of AGI. We can only deduct things that are above that threshold. So right at the gate, there’s going to be a large portion of medical expenses that aren’t deductible.

Now, when clients ask about this as to, okay, well, should I even take the time to keep track of them? I say, absolutely, let’s make sure that we’re keeping a record throughout the year so that if we end up in a situation where they’re deductible, we have the information. Now, I don’t want them to go out and purchase some other software or spend their nights and weekends meticulously taking notes or writing on receipts. But we at least want to have an idea so that if we have years where that is applicable, that we can take advantage of it. Our second bucket on schedule A is taxes. And the biggest piece of this for a lot of taxpayers is going to be state taxes. This is the same bucket that property taxes will fall in, but state taxes in states where there is an income tax tends to be a higher amount for many taxpayers.

Now, unlike medical expenses where there’s a certain minimum before we can deduct anything, taxes have the opposite, we have a ceiling, there’s a cutoff at $10,000, that we cannot deduct more than $10,000 of taxes. So with medical expenses, we have a floor we have to get over to be able to deduct, with taxes, we have this ceiling that we can’t deduct more than that. Then we move on to interest, which primarily this is going to be mortgage interest on your primary home. There are some limitations as the mortgage amounts start getting higher. But that doesn’t always come up. Not something I spend a lot of time on unless it’s applicable to a given taxpayer. So we have interest you pay again, primarily your home mortgage interest. And then we get to probably the most common bucket that people will ask about, which is gifts to charity or charitable contributions.

And there’s a couple of nuances in that bucket depending on what type of contribution we’re making. But when we look across all four of these buckets, we have to be over that standard deduction for there to be any benefit. So as this would come up with taxpayers, one of the themes that I would see around this was for the taxpayers who understood that there was a higher standard deduction now, one of the questions I would get similar to that idea around the medical expenses is, well, we don’t have that much, so do we need to track it at all? Again, similar to the medical expenses, I’m going to say, absolutely, let’s at least get an idea of where we’re at because we don’t have much is a pretty generic statement to make. And there was one taxpayer in particular, call them Bob and Sue, because that’s what we call all of our taxpayers, who came to me with almost this exact statement of, “We don’t really have that much, is it even worth keeping track of?” So again, my response is absolutely, let’s at least take a look at it.

So as we dove into the details, they had about $10,000 in charitable contributions which they knew. And in their minds, that’s okay, that’s not even getting me halfway there. They had a few thousand in interest on their mortgage call it $6,000 for a nice round number. So they knew that was there, but again in their minds, they’re still really short. But what happened, because we ended up itemizing just by a small amount, but we ended up itemizing because of their state taxes. And in their minds, that wasn’t coming into consideration because state taxes are just withheld from their paycheck in this situation and so it wasn’t top of mind for them. So they were thinking about things that they had to go out of their way to pay.

And so the interest was top of mind for them, the charitable contributions were top of mind for them, but the state taxes because they were paying state tax in Oregon, that just wasn’t really on their radar as potential deduction at the federal level because they weren’t actually writing the checks for those. So that’s why I always like to make sure we ask. I don’t just leave it up to the client to make that decision on their own, we want to at least get an idea of what might be out there. So it’s definitely what I saw come up quite often. I would say more often than not as we had those conversations, it was more of just an education and helping them understand why some of the things they were doing weren’t deductible, but want to make sure we’re providing that clarity and that peace of mind for them so that there’s that a little bit higher level of understanding.

The next theme that came up quite often is around this idea of what is the actual tax benefit, is how is how I’m going to word that. And in particular, it came up around contributions to tax advantaged accounts, is how I want to talk about this. There’s one example in particular that I’ve shared recently of a couple I was working with that were considering no longer contributing to their 401k because they didn’t understand what the tax impact in the current year was. So that was just one of many examples though where for the client, there wasn’t a direct connection between I made this contribution and so here’s the impact on my taxes. These are great areas to be looking for as you review tax returns and highlighting for clients as you have tax planning conversations.

So depending on the type of account, making sure they know what does that mean now and what does that mean later. So for making 401k contributions, similar to the state taxes we talked about a second ago with deductions, since 401k contributions are just typically withheld from a paycheck, this can be something that the client isn’t really actively aware of and actively aware that there is a tax benefit. So if we are making contributions to a traditional 401k, our taxable income is lower in the current year, so we’re paying less in taxes. Now, of course we’re deferring that. And at some point the IRS is going to ask for their portion. But the trade off would be that if we stopped making that 401k contribution, our taxes would instantly go up. I want to make sure that we are drawing that connection, making sure clients understand here’s what the impact on the current year is.

Similarly for traditional IRAs. If we are making contributions to our IRA, it’s lowering our taxable income, it’s lowering the amount of tax that we pay. And so it could be that we end up in a situation where it’s the right decision to stop making those IRA contributions. But we don’t want that to turn into a surprise for the client where they don’t understand why their tax bill has now gone up. So for traditional IRAs, for deductible IRA contributions, we’ll talk about non-deductible in just a second, that is having an impact this year is lowering our taxes this year. Switching gears from retirement accounts for a second, we also have our health savings accounts or HSAs. Which again, we want to make sure we have that clear distinction for the client that this does have an impact on our taxes.

Now, this one can be even harder for clients to see the impact of because not only are quite often the HSA contributions withheld directly from a paycheck, but if they are withheld directly from the paycheck, they aren’t reported online, one of the 10 40. So there isn’t even a direct deduction we can see on the tax return because it’s already been considered in the payroll process. But if they were to stop making that HSA contribution, their wages reported online one, would go up and so therefore the amount of tax they pay would go up. So started with some of those contributions that will have a direct impact this year in the sense that our taxable income will go down and so therefore our taxes will go down. But we also want to make sure it’s clear for things like Roth contributions or non-deductible IRA contributions, which is the first step in making a backdoor Roth contribution.

To make sure it’s clear that yes, we’re contributing to a retirement account but there isn’t going to be a tax impact this year. Whether I contribute $5,000 to a Roth IRA or $10,000 to Roth IRA or $0 to a Roth IRA, my tax situation does not change this year. So the tax impact this year might not be the reason that we decide which of those types of accounts we’re going to contribute to or how much we’re going to contribute, but we still want to make sure we’re drawing that connection to here’s how it impacts the current year tax return. It helps set really clear expectations, it helps prevent surprises, it’s a good education piece for our clients, and it’s almost guaranteed something their tax preparer is not going over with them.

Another question that came up a few different times, so that’s why I wanted to mention it here honestly it was a little bit surprising to me this year. But we make a real push for our clients who all make their tax payments online. Whether we’re talking about the payment with their tax filing or estimated payments during the year, anytime we can, we really want to encourage clients to be making these payments online for a variety of reasons, checks can get lost in the mail, they can get misplaced, they’re more subject to identity theft, the processing time is slower when we’re doing manual checks. So there’s just a lot of benefits to paying online.

But as I was talking to one client about this, their response was, “Well, I don’t want the IRS to have my account information, I want to keep that private.” And even as, in this case it was Bob because of course, again, all of our clients are Bob and Sue, Bob is saying this. And I can see as he’s saying it out loud that he’s realizing that, oh wait, that probably isn’t the right logic. And we talked about it for a minute and he said, “Oh, I guess really they have all of my information anyways, don’t they? And even if I send them a check, they’ve still got my account number.” And we talked through it for a second, but Bob had had this option for years and he’d been working with a tax preparer for years. And he’d still been making these payments by check because no one had ever taken a step back and talked this through with him.

So that might seem like a really simple thing, but giving clients a place to have these conversations, to ask questions, to share their concerns, then we get to a place where they understand the why and are much more likely to follow through on it. Because if I hadn’t given Bob a chance to respond or ask his questions and I just said, hey, we require that all of our clients make their payments online, he either wouldn’t have done it or he would have done it and been resentful. By giving a place for this to be understood and have a conversation around it really increased not just the likelihood that Bob’s going to follow through on it, but by the end of the conversation, he was appreciative, he was thanking me for explaining it to him and making that step easier in his life.

Of course, we also send our clients a how to guide on making online payments to make this as easy for them as possible. So for our RTS members, there is a version of that in the member section on the website that you can just go print that out and use it. If you’re not a member, yet there aren’t any trade seekers behind how we made that. I asked someone on my team to go out and go step by step through the process and take screenshots. And Beth on our team did a fantastic job putting that together. She took it all the way, I recommend you do this if you’re going to make your own, she created an account and took it all the way through the payment confirmation so that there weren’t any mysteries along the way. Again, that might seem like a simple thing, but clients have appreciated that so much. We send that out all the time, we send it to advisors, and we get tons of positive feedback on just making that step just that much simpler for everyone involved.

The next thing that came up a few times was related to selling a primary home. A couple of times it was a vacation home, but not a rental property, I guess is the distinction we want to make here. So the questions that were coming up were around the exclusion for gains on your primary home sale. Now, if you’re not familiar with this, for single individuals, there is an exclusion of up to $250,000 of gain and for married filing jointly, it’s $500,000. Of course it’s the IRS, there’s, of course, a couple of rules that we have to make sure that we’re falling in line with. The biggest one is that it’s been our primary residence for two of the last five years.

But as long as we’re following those or as long as we fit into those criteria, a taxpayer can exclude for married filing jointly up to $500,000 of that gain from their taxes. Which is a great benefit and something we want to make sure we’re aware of. But we also want to make sure we’re reminding clients that it’s not just, hey, what did I pay when I purchased the home and then what did I sell it for. Major renovations and remodels can also increase the basis in our home. So we want to keep an eye out for those because even though there’s an exclusion, let’s make sure that we’re getting that gain as small as possible before we even have to worry about the exclusion.

Now, a clarification I had to make with several taxpayers around this topic was that for a primary home, really for any property sale, outside of some very specific circumstances around what’s called a 1031 exchange, which we’re not going to dive deep into that, but just know that’s something you have to prepare for upfront. You can’t decide after the fact that I want to treat a property as a 1031 exchange. So all that to say the question that kept coming up was, well, what’s the tax impact if I sell my home and then immediately invest in another home? And for tax purposes, at least under current tax law, the IRS doesn’t care what you did with the proceeds, they’re going to look at what was your cost basis in the home and what were the sales proceeds and then how much of that can fall under that exclusion. So whether you pocket the money or invest it in the stock market or purchase another home, that’s not going to change the outcome for tax purposes.

The last one I want to highlight on this episode is coming from married couples, and it’s the question of, well, would there be any benefit to us filing separately? Came up quite a few times this year. And always happy to field this question from clients because I understand where it comes from. Everybody wants to save as much as they can on taxes. And a lot of taxpayers are aware that they can make this choice. So for them, it’s really coming from just a place of, hey, I want to pay less in taxes. So I always want to make sure I have the conversation and educate them on why. Because again, if we just shoot it down and say, nope, we made the right choice for you, the question’s going to keep coming back up or they’re going to hear about a situation from a friend who saved tens of thousands of dollars by filing separately. The accuracy of that might be coming into question, but let’s just assume that they believe their friend because tho those one off stories are always going to exist.

Now, in all of the returns that we did this year for married couples, which was a lot, there was only one where it made sense for us to file separately. And we talked to the client about that and we went ahead and did it. But while there was only one where it made sense, for every single married taxpayer we worked with, we did an evaluation of whether it would make sense and we let them know we had done that evaluation. So this is a combination of making sure that we are looking at every opportunity for the client, as well as what we like to call the dishwasher rule of making sure we take credit for the things we’re doing for them to give them the peace of mind that they’re being taken care of.

And so actually for a tax preparer, it’s not, I’ll let you know a little secret, it’s really not that big of a deal to do that comparison. So if your clients don’t work with RTS, if they work with a tax preparer, this is a really simple request to make if the client takes the time to ask. And there’s a good chance their tax preparer is already doing this. Because when I say it’s really easy to do the comparison, in most tax preparation softwares, there’s just a boxy check that says, hey, do this comparison for me. And the software in the background will do the comparison and tell you which one is going to come out better.

Now, the vast majority of the time married filing jointly is going to be preferable. The one we did this year that was married filing separately that that made more sense, it was a very specific situation, really driven by the COVID stimulus money that came out. And just the way it worked out with the income levels of Bob and Sue and their kids and just the stimulus checks they’d be eligible for. They came out about $2,000 ahead by filing separately that one year. In most situations, that’s not going to be the case, you’re not going to come out ahead for taxes by filing separately. The one area where I do see this more commonly is where there are student loans involved. There can be advantages to filing separately in terms of student loan repayments for married couples with student loans.

But outside of that, typically the only time it’s going to make sense to pursue married filing separately is actually for non-tax reasons. Usually it’s in situations where there are concerns about the marriage, there’s trust issues, maybe there’s previous tax issues for one of the spouses but not the other. It’s usually not just a proactive, positive planning issue, it’s usually dealing with other non-tax issues. So not something we see really commonly. But again, the question will come up and it’s good to be able to address the question and why it makes more sense to file married filing jointly.

All right. So again, the next couple of weeks, I’m going to keep sharing experiences from this most recent tax season so that you can keep learning from the experiences I’m having with taxpayers who are working with financial advisors. One of the most common questions I get from advisors, just real quick, is related to how tax planning gets incorporated into the prospecting process. And as we go through the summer, I’ll have guests on to do whole episodes talking about how tax planning specifically fits into the prospecting process. But just because it’s timely, I want to give a shout out to an upcoming event that’s being put on by The Perfect RIA on May 18th. Just two days from when this episode is released, they are having a free online power session. If you go to theperfectria.com, you can get signed up for that. It’s all about the five mistakes that advisors make in prospecting.

They’ll highlight a couple of things related to taxes, but it’s really about the prospecting process more broadly. And for my handful of listeners who aren’t financial advisors, if you have prospecting at all in your business model, this is going to be a great session. It is being put on by Matt and Micah. And so they’re speaking from their experience as financial advisors. But there’s so much great value, I’ve already seen the slide deck, I’ve heard some of the things that they’re going to talk about. So much value for financial advisors or any other professionals who get involved in the prospecting process. So theperfectria.com, it’s going to be a great session.

So to wrap up here, we want to talk about action items. Of course, action item number one is going to be to get tax returns for all of your clients and prospects. There’s different things I’m talking about. They’re going to come up as you’re reviewing tax returns, they’re easier to explain to clients as you have their tax return to give them their specific context for how these things work. Because that’s really where we can start having an impact when we make it specific and particular to that client. Action item number two is to make sure that you are building your list of frequently asked questions or common items that your client base is going to have impacting them. So I’m sharing some of the ones that came up for me. If you work with business owners, they don’t really talk about that at all today.

Depending on your niche, there’s going to be other things that come up most commonly for you. Make sure you are building that into FAQ or some kind of process, some kind of checklist so that not only is your review more effective, but then you can actually start delegating some of this to team members. So it’s a great action step to take. The last action item I’m going to recommend is that anytime you’re talking to a prospect or a client who you had this conversation with before, really recommend you ask the question, has anyone ever reviewed your tax return with you? You might be surprised at how often the answer is no, even for clients who have a tax preparer. This isn’t something that’s very commonly done and can be a huge way to deliver value to your clients, to identify potential planning opportunities, and to just really set yourself apart, especially with prospects, that you do things differently and that you really are committed to tax planning.

All right. Last action item, we continue to get great reviews on this podcast, we’d love to see it grow. If you’ve listened to this whole episode, clearly there’s something you’re getting out of this. So please take the time to leave us a five star review and leave comments on the podcast so that we can keep spreading this message around tax planning. So thanks for listening. Until next time, good luck out there. And 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.