Ep. 60 | Top 5 Year End (2023) Tax Strategies
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Speaker 2:Welcome back to the podcast, everybody. Today on episode 60, we're gonna jump head first into the top five year end tax strategies from none other than Chris Paciro here, founder and educator of Teaching Tax Flow. But before we do that, as always, let's take a brief moment and thank our sponsor.
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Speaker 2:Hey, everybody, and welcome back to the teaching tax flow podcast. Today, we're gonna take a quick look. We won't get into too many details, but our top five year end tax strategies for 2023. But before you do that, one thing that I'm gonna challenge you to well, actually, if you didn't do it this year, you better do it next year. If you happen to be listening to this on Spotify, they actually just announced, it's in your Spotify app, kind of your year wrap up, and it shows your favorite artists, how much music you listen to, etcetera.
Speaker 2:But this year, it actually added into that, if you, Spotifyers, have a notice, what your favorite podcast is. So we expect to see the teaching tax full podcast on there. Heck, if it's on there, send us a picture of it. Maybe we'll mail you a cool little prize. But no no cheating, but that's a challenge.
Speaker 2:So trimming the fat a little bit. Let's get down to the chase. Chris Pacquero, welcome back, man. You're ready to ready to talk, your top five?
Speaker 4:I am really excited about this podcast, Jen. Welcome back to yourself. Happy holidays where we've got about one month left in the year here in 2023. One of the laws of teaching tax flow is that your tax return is a verb, not a noun. So tax planning should be occurring all year round.
Speaker 4:But what we want is tax planning
Speaker 2:is never really done. You never check the box and say, yes. I'm a % planned forever. Right? Exactly.
Speaker 2:That being said that being said, one of
Speaker 4:the things that's important to us is timing. And I wanna walk through the my top five year end tax planning strategies. Now before before we roll the teaching textile community into a tizzy, because they may have heard me say something about another strategy that that I like more. This is not my top five tax strategies. This is my top five tax strategies that you have to implement in December with a hard deadline of January or December 31.
Speaker 4:So that is something that we thought was urgent. That's something that the the tech excuse me, the tax flow community teaching tax flow community wanted. So let's talk about the top five year end tax strategies, And then when I tell you about the strategy, I'm gonna tell you in general who it would be best applied to.
Speaker 2:Awesome. Awesome. And, Chris, I I'm I'm trying to toggle my memory here a little bit. I feel like it was just yesterday. It probably was almost a year ago exactly on multiple shows.
Speaker 2:You know, I always use the reference of so this is what you either have to do or you can do it after, you know, the the ball drops at 11:59PM if you're out hanging with friends, and I think you, you know, you you gave me some some, some teas we should say. Be like, man, every every analogy you make, you're out drinking with with friends. So we we won't give that example. We'll just say after the new year or before it, I will shut my mouth. So let's let's hear these things.
Speaker 2:So this is the clock is ticking already on this. So that's why we chose to do this early December. These are the year ends. Let's get rolling, my man. Hit us with your top five.
Speaker 4:Correct. In no particular order, by the way.
Speaker 2:Oh, okay. One of my top caveat in
Speaker 4:there. We're dripping with drama here. One of my top five would be for someone that is in a green diagnosis. Green diagnosis in our teaching tax flow system means you are in a low marginal tax rate. And for someone that is in a low marginal tax rate this year, they should consider doing a Roth conversion.
Speaker 4:What that means is they're taking money from a pretax account, let's say, traditional IRA. They're converting that to a Roth. There's no limit on that conversion. The conversion amount is taxable at whatever your marginal tax rate is, which in this case, it would be low, but there's no early distribution penalty if you're under 59 years old. So we use the Roth conversion strategy on many clients that that are at a lower marginal tax rate in in the green diagnosis.
Speaker 4:And guess what? You could be very wealthy and have a lot of cash flow. Remember, John, tax flow doesn't equal cash flow. So for our real estate investor clients that maybe bought some new properties then did a did a, cost segregation study, so they have these big, big deductions coming from their real estate that might even exceed their their income. This is a good way to take advantage of that.
Speaker 4:So Roth conversion is one of my top five strategies. You have to do it before the end of the year and whatever the converted amount, you you utilize will be on what's called the form ten ninety nine r, but you've got to get that done before December 31. Awesome. And that's different than a Roth contribution. So it's called Roth conversion.
Speaker 4:That's number one.
Speaker 2:No. I'm looking at number two. So that that was a good one. We hit a green diagnosis for that one. So I'll let you kinda keep rolling with that one, but I think that one will apply to a good amount of people.
Speaker 2:So I'm I'm glad you started with that one.
Speaker 4:Oh, hey. My pleasure. My pleasure.
Speaker 2:And I know you probably you're in your brain, you're probably thinking like, oh, man. I gotta nail this thing down to five of them. You're probably changing it in your mind right now on which ones are your favorite. But, you know, it's all good.
Speaker 4:Right. Exactly. Well, I'm thinking about which ones are so time sensitive that they have to be implemented, you know, by the end of the year. So number two would be bone the bonus depreciation deduction. Now you might say, well, that deduction occurs on your tax return, which is true, which doesn't happen till next year.
Speaker 4:But an asset has to be placed into service before December thirty first of twenty twenty three to be eligible for bonus depreciation. Now we're not gonna talk about what assets in detail are eligible for bonus depreciation, but in general, automobile is over 6,000 pounds, equipment, furniture, you know, could be a tractor for a farmer. It could be a variety of things. But you have to have that asset placed into service, not ordered, but placed into service by December 31 to be eligible for bonus depreciation. Bonus depreciation for 2023 is 80%.
Speaker 4:It was a %, and it's only gonna be 60% next year under tax cuts and jobs act. So my second, my number two would be taking advantage of the bonus depreciation deduction, which would entail placing a needed asset in the service. Now I always talk to our private CPA firm clients and our teaching tax law community about don't let the tax tail wag the dog. Meaning, don't go buy a hundred thousand dollar, 9 thousand pound vehicle just to get a deduction. Get a new vehicle if your business needs it.
Speaker 4:It's gonna help you with efficiency. Or go buy a piece of equipment or it could be computer equipment. It could be if anyone actually still uses printers. It could be a I mean, especially for people that don't have a medical practice, could be a a very expensive medical device. New dental chairs.
Speaker 4:Make now you you can't just order them. They've gotta be placed in the service before the end of the year to be eligible for that bonus depreciation. So some type of equipment purchased and placed in a service as long as you're gonna need it if especially if a private CPA from clients says, hey. I'd really need some this this new piece of medical equipment. It's $60,000.
Speaker 4:I'm gonna need it by February 1. I'd say just then get it now. You know? Get it get it now, place it in a service, and remember, cash flow doesn't equal tax flow. So it doesn't matter if you finance the entire purchase or if you pay cash.
Speaker 4:That has nothing to do with your depreciation deduction. So number two, place place a, depreciate bonus depreciation, eligible fixed asset in a service that is needed.
Speaker 2:So if you're looking for a new private jet, this is the time to do it as long as they can deliver in thirty days.
Speaker 4:Well, it it's funny as in Thomas John. We have, we have someone that's been on this podcast, and maybe we'll bring them back on that works in fractional, aircraft and jet purchases and and leases, and they there's some tax benefits for people in that as funny as that sounds. But
Speaker 2:Absolutely. Topic too. I I love talking with them about that. We had a great conference. I think I was drooling the whole time.
Speaker 2:I was just blown away with how it works, but and the fact of owning a private jet. You know? I don't I don't have a big enough parking lot for it. No problem there.
Speaker 4:Right. No. I hear you. Well, so number three is going to be income shifting to family members. So for for eligible people that have a business that have family members that work in the business, it might make sense assuming that family member is doing legitimate work for the business.
Speaker 4:So if you are in a just like the bonus depreciation, you've gotta be in a red diagnosis. So red diagnosis and teaching tax flow means high marginal tax rate. And if you have someone in your household or in your family that's working with for the business doing legitimate work, you can pay them a reasonable wage for their work. And if that person think about if it's a dependent. If that person's tax rate's 10% and your tax rate's 35%, there could be significant tax savings.
Speaker 4:It could be a spouse. Typically, you're not seeing a ton of tax savings when you pay a spouse unless it's paired with employee benefits. So when I say income shifting, that does include employee benefits, as well, which could be employer sponsored retirement plans. But the bottom line is that income shifting, if it makes sense for the business owner, that income shifting has to be done by the end of the year. You can't pay someone your cash basis tax, but I can't pay my child in January and pretend it happened in December.
Speaker 4:If I had a wait if I had a time machine, no offense, I wouldn't waste it on that. So number three, income shifting to family members is a really powerful tax strategy that is rather time sensitive.
Speaker 2:And that's a good one. A good one a lot of people don't know legally and ethically exist.
Speaker 4:Exactly. No. So the first one, Roth conversion is really good for anyone. The last two really pertain to business owners. I wanna wrap up with my final two.
Speaker 4:I wanna wrap up with two strategies that I think pertain to almost everybody. Now I'm gonna bounce back to the green diagnosis. So let's say you are in that low marginal tax rate. One of the opportunities you have would be capital gain harvesting. What that means is that, let's say you have assets in your brokerage account, let's say stocks, mutual funds, etcetera, etcetera, and, you wanna free up some cash or you're in a situation where that stock has gone up and you know you're gonna sell it at some point in the near future, but you're in a low marginal tax rate this year, you might wanna harvest those capital gains, meaning sell the security, sell the stock, mutual fund, or whatever, and recognize those gains in 2023 because you're gonna pay very little to no tax.
Speaker 4:This is especially important if you have what are called capital loss care carry forwards. So if you let's say you had a $10,000 capital loss last year, John, and you and no capital gains, you could only care you can only deduct $3,000 a year of losses. The remaining 7,000 has to carry forward. So you would be eligible for cap good candidate for capital gain harvesting. Obviously, don't let the tax don't wag the dog.
Speaker 4:Make sure you you work with your licensed financial advisor to determine how to what stocks to harvest capital gain. But I see for a lot of clients, you know, imagine that a stock went up and this year your income's $12,000 for whatever reason. Next year, you're it's at 200,000, and you happen to sell it in January 2, and you're paying tax based on
Speaker 2:a $200,000 income at $12,000. So if you're paying on Amazon, you bought at a hundred and $90.
Speaker 4:You might wanna consider a little change. Exactly. So that's capital loss percent sorry. Capital gain harvesting green diagnosis. My final strategy, fifth and final, is a cousin of capital gain harvesting, capital loss harvesting.
Speaker 4:It's the exact opposite. It's for a red diagnosis, someone that is in a high marginal tax bracket. Let's and let's say you have again, work with a licensed financial advisor, but let's say you have stocks, bonds, mutual funds that have gone down in value and you don't think they're gonna come up. Well, you might as well sell them. You still have the same amount of money.
Speaker 4:It's just cash, not stock, but now you have a capital loss deduction. Now these capital loss deductions can you can deduct up to $3,000 a year if you're married, filing jointly, 1,500 otherwise, if married separately or single. No. I'm sorry. Married separately is 1,500.
Speaker 4:Everyone else is 3,000, but you could deduct $3,000 a year, but the remaining capital losses carry forward so they're not lost. And it this is especially valuable if you have other capital gains. Sometimes you have capital gains and you don't even realize it. Let's say you, John, you bought that stock and you have a financial advisor that's managing your portfolio and they're buying and selling things and and you have $5,060,000 dollars of capital gains, but you don't have any cash in your pocket. It's just getting traded in your account.
Speaker 4:And that's where at the end of the year, we work with a lot of people on, okay, what are your capital gains? Let's harvest some losses to to mitigate that that income. So the thing I like about the capital gain and capital loss harvesting, those last two, is that this those that doesn't require you to take any cash out of your pocket. All you're doing is selling securities, and that's that's why those are especially powerful. So I'll run it back down.
Speaker 4:Number one, in no particular order, Roth conversions, green diagnosis, low marginal tax rate. Number two, bonus depreciation eligible machinery and equipment placed in
Speaker 2:the service are typically business or rental property owner. Number three, income shifting to family members, another red diagnosis for businesses or rental property owners. And then number four or five, the cousins, the brothers from another mother, capital harvesting for the green diagnosis, quarant, capital loss harvesting for the red diagnosis, quarant. Excellent. That's a that's a good little mic drop for you as we wrap this up too.
Speaker 2:So, Chris, thanks for running through those with us. We are gonna get out of your headphones, your speakers, whatever you're listening to this on right now. Again, the clock is ticking the calendar year and is not gonna wait on you. So get moving on it. Chris, thank you for sharing those.
Speaker 2:Everybody listens to this podcast, I will drop a couple notes in or I should say a couple links in the show notes in reference to some of the resources we have within teaching tax flow. We know we have a couple courses that are on a few of these strategies as well. They're free. Log on. Goes in a lot more detail on them specifically.
Speaker 2:And definitely, definitely don't miss next week episode. I think you're really gonna appreciate this one. It's it appeals to the masses. It's a different topic. It's definitely towards a lot more people, I think, than than we usually jump into, but enjoy it.
Speaker 2:As I always close out now at same time, same place here next week on the Teaching Tax Flow podcast. Thank you everyone for hanging out with us here on this episode when me and Chris dove into those top five year end tax strategies, and like most good things, they must come to an end. Right? Just like the calendar year. So what that means is, as we alluded to many times in this show, don't waste any more time.
Speaker 2:Get prepared. Get planned. Let's do this together. Any questions, reach out to us regarding tax planning. We actually offer through Teaching Tax Law, a very very fantastic, to say it even lightly, there is a tax planning personalized tax planning product we offer to all of our members and anyone who may be interested.
Speaker 2:If you're looking for more information on that, be sure to visit our website as well as shoot us any questions, shoot us any messages. We are happy to tell you about that product. We do we're creeping up on the end of the year. I was looking for a different way to say that one, but we're under thirty days. Let's put it that way.
Speaker 2:If that doesn't get the get the mind flowing. So with that being said, turn this off, get in the right mindset. Let's do this together as I mentioned, and be sure to keep following us here on the Teaching Tax Flow podcast.
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