Chris Cice: [00:01:00] Good afternoon, everyone. And welcome to the third edition of the GWH Steps to Success podcast. I am Cice, I’m your host. I’m here with Mike Cice, my co-host, as well as Riley Masterson. And we have a guest appearance today from our managing partner and CPA, Steve [00:02:00] Hill. We’re going to focus today on taxes.

Now that we are in a post-election world, and we have, a candidate that we know has implemented tax reform in the past. And we’re looking forward to seeing what this new administration brings to the world of taxes. And we have some questions for our expert, Steve Hill, today. And we’re going to dive right in.

Steve. Welcome, everyone. Welcome, Steve. So, we’d like to With the year drawing to a close and tax season right around the corner, what tax-saving strategies should taxpayers be doing right now to reduce their tax bill and prepare for this year?

Steve Hill: That’s a good question. I think, getting organized, first of all, recognizing the end of the year is coming, and start to think about things that have happened in the year. So, for instance, itemized deductions. If we had some medical expenses over the year, with kids or with ourselves, getting that list together.

How much were those medical expenses? Cause they can come into play with your itemized [00:03:00] deductions. One of the things that happened a few years ago was, they made the standard deduction a lot higher. It’s about 29,000,000 for married couples and a little over 14, 14,000 for individual filers.

So, in most cases, folks will utilize that standard deduction. But, if we have an off year where we had significant medical expenses, and they along with your salt taxes, your property taxes, your state and local taxes, and other itemized deductions surpass that standard deduction, they can be a benefit to you.

So, A couple of things that go into play with that, in addition, is your mortgage interest. So, you’ll get a 1099 statement for your mortgage interest at the end of the year. So You’ll see that number on there. And then, the other thing is charity. Take an inventory of what charity contributions you made during the year, and see if they will help you surpass that standard deduction.

And one little tip about charity is, we talk to folks sometimes about [00:04:00] chunking. Meaning, if you know you’re going to give charity contributions every year that total a few thousand dollars, say you might consider making a bigger chunk contribution of 3 years all at once. Doing that would give you a larger charity contribution of say, 9 or $10,000, and then that can get you past that standard deduction and be a tax benefit to you on your tax return.

Riley Masterson: That’s pretty cool. I actually have a question about that too, Steve. So, you said, the standard deduction or it was itemizing, you said, so it’s one or the other. So, if you donate the charity and it’s not over that standard deduction, it will not benefit your taxes is what you’re saying?

Steve Hill: Right. So Again, in general, the standard deduction is a good thing because it took a lot of record keeping away, it took a lot of the 2% small deductions away, and everybody, married couple gets the $29,000. 000. And so, sometimes people think that, Hey, I gave 3, $3,000 and I’m going to get a tax break on that. Not if it [00:05:00] doesn’t pass that $29,000 in conjunction with all the other things we just mentioned.

Riley Masterson: Oh, wow. That’s cool. So, instead of giving to your church every year for Christmas, you could just do one big lump sum, and then still give to your church every year, and get a tax benefit from it?

Steve Hill: right? So, there’s a great example. So, Hey, you go to the person in charge of shirts, say, Hey, listen, normally, I give you $3000. I want you to know, this year I’m going to give you 12. But know that for the next 3 years, we’re going to sit idle.

And then that $12,000 could put you over the $29,000, and 000. And then you’re getting a tax break on it. And in the end, you’re giving the same amount to your church. You’re still contributing, you’re still tithing, you’re still taking care of the people you wanna take care of.

Riley Masterson: Wow. that’s really cool.

Mike Cice: What can people do with their retirement contributions?

Steve Hill: Well, that’s an, again, I think a lot about taking in inventory. Have you maxed them out? What is the pace if you’re a W-2 employee? Take a look at that. You know, You’re thinking about cash flow and all those things that you need to think about, but are you maxing that out fully at your 401(k)? Or if you’re at a [00:06:00] certain tax bracket, are you making a separate IRA contribution that’s deductible? Again, maxing those out, straightforward tax deductions on your tax return.

Mike Cice: I don’t want to get into the weeds, but people from time to time will ask us to clarify how the Backdoor Roth works. Can I Just explain that in layman’s terms, because everyone asks about it, but very few people qualify?

Steve Hill: So that’s, not going to be a tax savings. So, let’s get that part right there. It’s after-tax dollars. But think about the Roth, accounts as a terrific way to save money in retirement that is never, ever going to be taxed again. So, you can take up to I think, $7,500 is the number. And you put that into a non-traditional IRA. And then the very next day, you convert that to a Roth IRA.

So, it’s called a Backdoor Roth because there’s 2 steps to getting into the Roth account. Again, not a tax savings, but a [00:07:00] great retirement strategy for the long term because, That’s 7, $7,500 and the growth will never be taxed again.

Riley Masterson: Steve, just to backpedal a second. Mike, when you just brought up the retirement accounts and contributing to 401(k)s and such throughout the year to help with your taxes. So that’s different from itemizing, correct? That’s before you go to itemize, that would get taken off of the top?

Exactly.

Steve Hill: There’s not a criteria for your IRA contribution. It is a tax deduction. So, if you make 80, $80,000 and you contribute 15, $15,000 to your 401(k), your taxable income is now $65,000. At $15,000, is a straight deduction, you get it right away.

Riley Masterson: Okay. Yeah. There’s no, It doesn’t matter, the standard deduction.

Mike Cice: I know that, and Maybe you can explain this, how it works. But with a lot of our clients in the last quarter, we try to take a look at what their Capital Gains and dividends are coming forth. But we try to offset those Capital Gains with maybe [00:08:00] some, some losses in the portfolio to try to make it revenue neutral.

Steve Hill: Right. And I think, working with you guys, that’s a big help because you’re looking out for clients to do that. The average individual, again, it’s about taking inventory. You’re not going to get that Capital Gains report or you’re looking at your quarterly report, you’re not going to get it until after the year’s over.

But 10, 11 months in, looking at your portfolio, seeing if there’s some rebalancing that needs to happen because you had some growth, and things are a little different than how you had them balanced before.

And that gives you the opportunity to buy and sell. And then you’re picking stocks at that point to reallocate that have both losses and gains. So, if you’re heavy in gains right now, you might rebalance with stocks that have losses to offset those gains.

Riley Masterson: Is there a time of year it’s best to do tax harvesting?

Steve Hill: I think, I mean, I’ll ask you guys that same question. But in my mind, at the end of the year, you have more [00:09:00] of the big picture, you know where the year’s going to be. I think it’s a 10, 11 month thing to looking at, at that point.

Mike Cice: Yeah. We like to do it October, November for the clients. That seems to work best. And it gives us an extra month to make those adjustments. Yeah.

Chris Cice: it’s obviously it’s easier. if the market is having a down year. it’s easier to find some stocks where we may be able to harvest some losses as opposed to a year like this year where the market’s up double digits.

We may have to do a little bit deeper dive into our client’s holdings to find some losses to offset some gains. But, overall, it’s not a bad thing when the market’s up so.

Steve Hill: I think, there’s one more topic that I wanted to just mention to you was HSAs. Cause I see HSAs a lot on The high deductible plan, you have the opportunity to contribute to an HSA. High deductible medical plan. High deductible medical plan, yep. So When we W-2s, we see on there the employer contribution for the HSA.

And sometimes, [00:10:00] we look at those and they’re not at the maximum value of what the HSA limit is. So, there’s another opportunity for tax savings. Your employer put something in, 3 or $4,000. You can put in, if you’re a family, another three or 4,

or to max that out. And again, there’s a straight tax deduction. There’s nothing to do with itemized deductions or anything else. It’s a tax deduction for you.

Mike Cice: And those HSA dollars have a lot of flexibility, especially in retirement. If they’re not used, you don’t lose them like FSA accounts. Right. So, you know, They roll over and they become like a supplement to your retirement, and it can be used for a lot of different things. And you know, you know, for health costs and retirement.

Riley Masterson: A lot of people don’t don’t know that about HSAs, they really are kind of like a unicorn. You get the triple tax advantage. You get the tax benefit when you put money in, gross tax-free, take it out tax-free, and when you turn 65, it essentially turns into a retirement account as Mike just mentioned. You could use it for anything you’d like.

Yep. So,

Mike Cice: Enough about individuals. [00:11:00] Let’s, talk about businesses, or the self-employed individuals, and things that they could do to prepare for tax season in the last quarter of the year.

Steve Hill: One of the things that we talked to new business owners and even some seasoned one is, getting organized. And especially, in this 10th or 11th month, again, there’s it’s the time to make sure that you’ve documented everything correctly. And even all during the year, is everything from your small business separate from your personal? Do you have a separate bank account? Do you have a separate credit card? Are you making all the payments and all the deposits into that separate business account?

And then understanding all the things, anything that you’re doing in regard to that business should be documented. I’m not trying to say that, anything that you write down is necessarily going to be part of a business deduction, but that’s the conversation you want to have with your accountant is, Hey, I did this. I’m working from home. Am I allowed to use a home office? Yes, you [00:12:00] are.

We’ll take a percentage of your home expenses. We’ll take that spot in the home office. Hey, I have a cell phone. I’m using it for personal and for work. Can I deduct part of that? Yes, you can. The internet. I’m driving to clients. All right, Well, there’s a mileage factor that we can use even if it’s your personal car because you’re using it some time for business.

Now, the IRS does want you to keep logs, and keep detailed records of that as you do that. But again, anything that you’re doing with your business should be documented and the expense should be noted.

Riley Masterson: And Steve, you just mentioned the home office and made me think of our viewers that work from home, especially after, COVID. So, this is not W-2 employees, correct?

Steve Hill: No. That’s one of the things, again, we back to that standard deduction, why they made it so high? Is to get rid of things like the home office for the W-2 employee. So, it’s kind of, baked into that high standard deduction. So, this is for business owners, and 1099 people, for them to use the home [00:13:00] office as an expense.

Mike Cice: And like individuals, self-employed and businesses have their own retirement plans, but different and higher maximum.

Steve Hill: Yeah, there’s options there, right? And they’re much higher. And again, it’s a straight offset to your income. And again, At the end of the year, that’s when you know where your profit is. And that’s where we got to try to figure out what your tax liability is going to be. And if it’s higher than where you want it to be and cash flow is there, that’s an opportunity to make a bigger contribution to your SEP, to your solo 401(k). And again, huge tax savings opportunities with your retirement plans.

Chris Cice: Like what you hear so far, make sure you never miss an episode by clicking the subscribe button. Now, this podcast is made possible by listeners like you. Thank you for your support. Now back to the show.

Mike Cice: Now, during the presentation, Riley has been getting phone calls in and questions from our listeners. So, he’s got a few that he’s jotted down. [00:14:00] So, uh, Riley, why don’t you uh, yeah, of course, some of our viewer questions.

Riley Masterson: So The first question I got here is from Cindy from Boise, Idaho. She put in the question here. Why do I owe money every year if they withdraw taxes from my paycheck?

Steve Hill: It’s a common thing that we see, and that has to do with withholding on their W-2 not being high enough. Where do we see it? We see it when people change jobs during the year where they make a portion of their income at one job and a portion at the other. That’s when it happens.

And we see it when people are filling out their W-4, and they get married later on, or they have children later on when their life circumstances change while they’ve still been on a job. Or we see it when a second spouse takes a job. All those things rebalance your tax return, which means, you should consider rebalancing your withholding. Okay? So, the fix to that [00:15:00] is That is to increase your withholding on W-2.

Riley Masterson: Okay, that makes sense. So, I know even my friends, they will compare their, tax refunds. And I know, a lot of people will do that, Like, Hey, why is your refund so much higher than mine? Why did I not get as big of a refund? So, from what you’re saying is, they’re just not paying as much taxes throughout the year.

They’re getting more in their paycheck throughout the year. So, we’re all paying taxes at the end of the day. It’s just whether or not you overpaid or underpaid throughout the year based on your withholding.

Steve Hill: It’s just the timing of the payment. The amount of taxes you owe at the end of the year does not change the number is the number. It’s just whether you paid it all during the year and you’re paying some of it in April or you paid too much during the year and you’re getting that Delta back in April.

But to your point, yeah, the amount of tax is the amount of tax. We like to make it a non-event. You want to make April a non-event, meaning, you’re within a safe margin, either way, small refund, small [00:16:00] amount owed, insignificant, and things are good.

Mike Cice: Any other questions?

Chris Cice: Another point to that too is, we’ve had a lot of clients over the years. Now that more companies are offering Roth options in their 401(k) plans, if you switch from a traditional 401(k) contribution to a Roth contribution, your taxable income is going be higher,

Steve Hill: Absolutely. And that’s a really good point. So, I feel like, the Roth 401(k) is new. Maybe the past few years that became more of an option. And more employees are adopting it, and some folks are going to that or they’re going to half Roth half traditional, and then exactly that makes your, taxable income is going to go up.

Again, the Roth the great idea is separate from all this. But the amount of taxes you’re going to pay is going to increase, and you might have to adjust You’re withholding based on that.

Riley Masterson: Got a 3 questions here for you. Mark asked, can I still deduct my HELOC interest? HELOC is Home Equity Line of [00:17:00] Credit.

Steve Hill: So, that’s the, it depends answer, right? So The amount of your mortgages now can be up $750,000. And by that, I mean, if you have a mortgage or a combination of mortgages up to $750,000, you can deduct that mortgage interest and that could potentially be help you with your itemized deductions.

If you take a HELOC loan out, it depends on what you use the money for. If you use the money for that house that the HELOC loan is on, and you update your kitchen, redo your bathroom, then you can use that interest on that HELOC loan as part of an itemized deduction. If, and this may still be a good idea, you do a HELOC loan to pay off some credit card debt, to pay for your kid’s tuition, or to buy a new car, that’s fine. But that mortgage interest cannot be deducted on your tax return.

So, the bottom line is, take the HELOC loan, use it on the house, use it as a deduction. Take the HELOC loan, use it for [00:18:00] something else, not on your tax

Riley Masterson: return.

right. This is a good one. This one’s from Tony. He said I’m thinking about selling my home. What do I need to know about Capital Gains and what can I do to avoid them? So, I’m guessing this is his primary residence.

Steve Hill: Well, That’s the key right there. If his primary residence, then he lived in it for 2 years or more. If you’re single, you get a $250,000 exclusion on your Capital Gains. So, if your Capital Gains from when you bought your house when you sold your house, the first $250,000 of that is not taxable.

If you’re married, the first $500,000 of that is not taxable. Anything above that would be. If it was a vacation home. So, you had a home down the shore, then there is no exclusion for the Capital Gains. Whatever the Delta is, there’s going to be Capital Gains taxed to on that.

Riley Masterson: Interesting. And you mentioned, we just talked about the HELOC doing maintenance on the house So you redo your kitchen and such. Let’s say somebody bought a house for $ 50,000,000 in the 70s, and it’s worth a million dollars [00:19:00] now. And they’ve redone their kitchen a couple of times, they’ve got a new roof and things like that. Will that also help with those Capital Gains?

Steve Hill: That’s a great question. So, that goes into your basis. And that’s exactly true. I bought the house for 50, and over the last 20 years, I spent 200 on it. Well then, my basis is $250,000. The combination of those two is what goes into your basis. And that’s where we count the Delta from for Capital Gains.

Riley Masterson: Oh, that’s interesting. So, I’m assuming not too many people have to worry too much about Capital Gains on their primary residence?

Not

Steve Hill: on their primary residence. So, property values are increasing, but if you’re married at 500, $500,000 exclusion plus the fact that you’ve made improvements over the years, usually is going to take care of all that.

Riley Masterson: All right. We got one more here for you. Bill from New Town, actually, where we’re located here. He asked, what happens if I gift too much money to my grandkids? So I’m assuming he’s talking about the $ 18,000-a-year gift tax exclusion. Actually, this is a great question because we get this a lot here at [00:20:00] our firm.

Steve Hill: Yeah, we do. We get questions about that and they always say, well, is my grandson gonna have to pay taxes on that? And then the other one is, do I have to pay taxes on that? And the answer is, nobody pays taxes on that. It’s a reporting requirement. So, under $18,000, nobody has to report anything. Over $18,000 to any one individual, then there’s a gift tax return and it’s a reporting requirement that you have to file with the IRS.

Riley Masterson: Oh, that’s interesting. So, Bill, he can go give his grandkids 100, 000, $100,000, $500,000, there’s going to be no taxes for either his grandkids or, or him.

Steve Hill: But a gift tax return reporting requirements. And it’s a separate tax return, and it just identifies the amount of the gift and the recipient of the gift. And then you file that with the IRS and it goes on record, and that goes toward their whole lifelong estate gifting.

Riley Masterson: Oh, that’s really interesting. I don’t think a lot of people know about that. Right. Awesome. Well, that’s all I have for you. Thank Steve.

Mike Cice: Steve, on behalf of uh, our Steps to [00:21:00] Success podcast, I’d like to thank you for being here.

Thanks for

Steve Hill: having me.

Mike Cice: Chris, do you want to wrap it up?

Chris Cice: Thank you all again for a great third episode of our GWH Steps to Success podcast. And thank you to Steve, for being here today. I think it’s a good time of year. As you’ve mentioned, to take a look at your tax situation going into the end of the year, so you don’t have any surprises come April when you file your taxes.

So, I think, a lot of the points that were made today are helpful and good timing as well. So, thank you all again for being here and we look forward to seeing you in our next episode.

Thanks for joining us this week on the GWH Steps to Success podcast. Make sure to visit gwhadvisors. com where you can subscribe to the show. Or tune in on iTunes or Spotify. So you’ll never miss an episode while you’re at it. If you found value in the show, we’d appreciate you hit the thumbs-up button, or if you’d simply tell a friend about the show, that would help us out.

Too. If you like this episode, you may want to check out [00:22:00] more content available on our website. Be sure to tune in next week for another episode filled with actionable insights and financial wisdom until then, this is Chris Cice signing off.