Ep. 84 | Top Tax Strategies for Low-to-Mid Income Households (less than 100k annual income)
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John Tripolsky:Welcome back to the podcast, everybody. Episode 84 today, we are gonna dive into a very interesting and specific topic on today's show. We're gonna look at those top tax strategies for low to mid income households. That's households averaging roughly 100 k and below an annual taxable income.
John Tripolsky:But before we do that, as always, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Alright, everybody. Let's jump into today's episode. As mentioned there in the intro, in the title, and in the description in the show notes there, which you probably didn't read. So we're gonna tell you about it anyways, a little bit more of detail. But before we do that too, we have to welcome the bald guy back with all the knowledge.
John Tripolsky:Chris Bacuro, what's happening, man? How are we doing today?
Chris Picciurro:I am doing great, John. I'm gonna put you on the spot, and you love when I do that because you do that to me with your tax questions.
John Tripolsky:Oh, boy. Here we go.
Chris Picciurro:The number 84 has a very, very special place in my heart. Can you guess why? 84.
John Tripolsky:Well, actually. Well, probably because
Chris Picciurro:it's such an obscure number. It's the last year the Tigers won the World Series, 1984. I was just a young 9 year old boy running around next to my next door neighbor's house, you know, counting down the outs as the Detroit Tigers took out the San Diego Padres in game 5 of the 1984 World Series, who'd have known 40 years later I would still be waiting for the Tigers to get that elusive world series trophy back.
John Tripolsky:Hey. That's how Detroit Lions fans feel, though, too, about even just making the playoffs. And see, things happen. So it you know? True.
John Tripolsky:True.
Chris Picciurro:Well
John Tripolsky:You can't you can't, you can't throw on the ball just yet.
Chris Picciurro:I know.
John Tripolsky:It's just It's all good.
Chris Picciurro:Been a long time for for those those Tigers. We had some chances into the world series, but but that has nothing to do. Although, if, you know, if you with the price of sporting events now, you have to be a high marginal tax rate household to to even afford to go to these dang games. Oh, just a problem. Like the old man on the porch.
John Tripolsky:Hey. Hey. To get my mom out. You know what? At least so you know what?
John Tripolsky:I'm not even gonna make an old joke because you're not that much older than me. Let's be honest. I was gonna I was gonna say, hey. Back in the day, you know, when last time they won the world series, that was probably when you could, you know, catch a home run, take the ball, and then they'd give you a free ticket to the game. But we're not talking about the fifties here.
John Tripolsky:So we're Yeah.
Chris Picciurro:That might be before my time.
John Tripolsky:That is that's right. I guarantee that's pretty much before your time. But speaking of before people's time. Right? So let's talk about this one.
John Tripolsky:And and this topic here, again, just to kinda reiterate, you know, again, what it said in the show title, the description, and the intro, We're looking at those households, which makes up a huge percentage of the United States population that averages less than a 100 k, $100,000 a year in annual taxable income. So we're gonna look at those top tax strategies. But before we do that too, Chris, I wanna I wanna mention that. Forget what episode that we talked about this specifically, and I know we've done it multiple times. Right?
John Tripolsky:We talk a lot about tax planning and strategy and how some people think that, oh, that doesn't apply to me. You know, I'm not making 500,000 or a $1,000,000 a year. That's like going to a country club. You know, it's it's out of reach, some people think, for themselves. Well, the good news is the country club left their door open and unlocked in the middle of the night.
John Tripolsky:You can walk right in. So let's talk about why it's so important for even these households to tax plan for lack of better terms.
Chris Picciurro:It's very important for everyone to tax plan, and I always argue that the the lower to middle income taxable income households, tax planning and strategy is more important than to someone in a higher marginal tax rate. Why? Well, the dollars are less, but the percentage of their income is more. And, unfortunately, most tax planning and strategy focuses on your high net worth, higher income households. So we wanted to do this podcast.
Chris Picciurro:We had a reel on Facebook that that got a lot of attention when we talked about this, and and so I've broken down my 3 favorite tax planning strategies, for these type of households. But before that, we let's define what we consider lower to middle income households. In the teaching tax flow system, we believe that, your marginal tax rate is your most important KPI. And and it's important for many reasons because there's a lot not only is your tax the amount of tax you pay, but the amount of credits you received, including child tax credits, earned income tax credits, daycare credits, all really depend on on this figure, and a lot of them on your adjusted gross income or modified adjusted gross income. So what we would define as lower to middle income households, is there anyone in the 12% or lower tax bracket.
Chris Picciurro:So for single filers in 2024, that number is approximately $63,000 of of of income, adjusted gross income or less. And I'm taking into account the brackets. I'm also taking into account a standard deduction. For head of household taxpayers, that's about $84,000, $85,000 or less. And for married filing joint taxpayers, it's a whopping $125,000 of of adjusted gross income or less.
Chris Picciurro:So that's that's the range that we're looking at. And for those type of taxpayers in the teaching tax law system, we categorize them as a goal diagnosis, meaning that they can accept accelerated income. Their, rather green diagnosis. In gold diagnosis, they should focus on tax free income and growth. I wanna point out one more thing, John.
Chris Picciurro:The amount of I mean, we these are facts. We have people in our private CPA practice that are absolute millionaires and still considered in a lower or middle income household because income and assets are 2 different concepts. So this doesn't mean if you're in this situation that you are not wealthy. Some of our wealthiest, wealthiest clients are in this in this, in these in these categories. So let's so now that we define that, let's start diving in because we talked diagnose, prescribe, IQ test, implement when we talk about tax strategy.
Chris Picciurro:So we've diagnosed you. If you're if if either you are in this category or you have a family, a friend, I want you to share this with them. What are the three things? And I try to create, I tried to pick out real basic strategies that anyone could do. You don't need to build a team of people to make them, happen or implement.
Chris Picciurro:What are the top three strategies for these type of taxpayers? In no particular order, except actually now that I think about it, they're in order. I'm gonna do next one of my most favorite last.
John Tripolsky:There you go. There you go. And and, Chris, let's go back just briefly to I know we touched on. So we we always mention too, you know, household incomes, tax marginal tax rate. So we're looking at, you know, we say a 100,000 and below for a household income.
John Tripolsky:So how does I mean, we talk about it a lot, but let's reiterate it. You know? What exactly is a household income to individuals? Right? Families, individuals, how does it look?
Chris Picciurro:Yeah. Your adjusted gross income is really your taxable income. Alright? So some things that are tax free, like buy some, some type of municipal bond interest or, or what have you. And some of the, some of your income is taxed as net income.
Chris Picciurro:So rental income and and self employment income. This is just an accumulation of all of your taxable income items, starting at the top with w two wages all the way down to taxable Social Security, retirement plan distributions, bank interest, dividends, capital gains, capital losses. Could be gambling income. It could be any type of income in the in when you add it up of what what plays a role in making up your adjusted gross income. Now we do know that different types of income are taxed at different rates.
Chris Picciurro:But to define the low to middle income households, we had to kinda draw we had to draw a line in the sand and say that range, we're talking about 65 to a $125,000 depending on your filing status or less. Perfect. Perfect answer.
John Tripolsky:And then also, you know, when we dive into these strategies, right, are we going to or does it really make a difference? Right? Are we looking at say it's a family of 2, you know, or a household of 2. Say they're both w two full time employees. Say one of them's an employee, one of them's self employed, how big of how big of a difference can we expect that to make as we get into these?
Chris Picciurro:Well, I mean, it's self employ if you're self employed, you're playing paying the self employment tax, which is gonna be an extra 15.3%. So, yes, someone that makes a $100,000 of of, self employment income versus someone that's a w two at a $100,000, their federal tax they pay is gonna be the same. Yet, the self employment tax for the w for the for the, self employed person is gonna be 15.3%, where the employee is gonna pay only half of that through their payroll. Now the self employed person, though, can offset their income with home office deduction and any type of ordinary necessary business expenses.
John Tripolsky:Perfect. Perfect. Perfect. Alright. So I won't do a drum roll in this podcast, but let's dive into it.
Chris Picciurro:Alright. Number 1 is a health savings account contribution for a few quite a few reasons. Now you might be saying, wait a second. You just said that these folks aren't necessarily worried about tax deductions. And I would agree.
Chris Picciurro:Right? You're, you're more, we're more worried about tax free income and growth. Yet, because the, typically, people in this in the with this income level do not itemize their deductions. And even if you itemize your deductions, the medical expenses are very limited, and they have to exceed 7 a half percent of your income. So just numbers wise, most of the people that that this situation applies to, which is, by the way, the vast majority of people in this country, do not get a deduction for out of pocket medical expenses.
Chris Picciurro:So you might as well make that health savings account contribution if you're going to have those medical expenses for at least your deductible, and take that off the tax return because you will, you know, maybe preserve, again, some child tax credits, some earned income credit tax credits. And since you're not getting any deduction for it anyway, you might as well utilize that health savings account contribution if you are eligible. Shameless plug. We have other content on health savings account contributions, And you can there's there's a advanced tax strategy, where you could do a one time conversion from an IRA to a HSA. But, again, this echoes beyond this conversation.
Chris Picciurro:My point is health savings account contributions, a great way to at least get a tax deduction. Even if it's $1,000 a year and that's your deductible, take advantage of it. Put the money in a HSA account. It grows tax free if you use it for medical expenses. The other thing is typically people with lower to middle income households, it's very hard for them to have a a savings account designated just for unexpected health expenses, dental expenses.
Chris Picciurro:So to have that bucket separated out in a tax efficient way is is very is very good. So so, John, let me for instance, if someone if there's a married couple, let's say they have a teenager, and let's say their tax bill income is $80,000 a year or gross income. So their net and their taxable income is maybe 55. If their child needs braces and it's $3,000 having that health savings account set up with the money in it is gonna be a huge stress relief for them versus if you have a household that they make $800,000 a year and their child needs braces, they probably don't take a second thought of saying, okay, just get the braces. So that's why I'm saying tax planning is so important for the for these type of households.
John Tripolsky:It's almost like you get it you you know, in layman's terms, you get much more bang for your buck or efforts, we should say. Right? And, honestly, Chris, going back, and and I'm trying to just recall what episode that was where we really dove into it. It was pretty early on, where we've really, really kinda drew the line in the sand on or I should say we erased the line in the sand actually on who tax planning and and, you know, strategy is most beneficial for, who can take advantage of it. And I'm not gonna lie.
John Tripolsky:I was even shocked at the end of that. I'm like, okay. Well, this is definitely a lesser known fact in the wonderful world that we live in. Right? A lot of people
Chris Picciurro:year and a half ago. Yeah. That 1st year end of 2022, we went through each of the 4 diagnosis, these red, green, purple, gold, and we talked through our favorite strategies for each diagnosis. So HSA is really a red strategy in the teaching tax flow system, but also also gold because there's tax free growth and distribution. So you might be thinking of that.
Chris Picciurro:See, we did a 4 part series where we went into each color coded diagnosis, which segues away nice segues nicely into my number 2. This would be retirement plan distributions. Now I'm going to put a caveat in here. This assumes you're not paying a 10% early distribution penalty from your retirement plan. We highly recommend avoiding that.
Chris Picciurro:But if you are in a situation where you can take money out of your retirement account and you are still in a low marginal tax rate, that's when you would accelerate income, meaning you are a green diagnosis. Green means go. Let me give you an example, John. Let's say you've got someone I mean, we both grew up in the Detroit area. Right?
Chris Picciurro:Commonplace. Let's say you've got somebody, and and we're not gonna name names, but I I these are these are client former clients. Right? They started working at they're deceased now, first of all. So it's not like they you know, we kicked them to the curb.
Chris Picciurro:Baby boomers drafted drafted to Vietnam, went to Vietnam, came home at age 21, started working at the big three, put in 30 years retired full pension at 51. Okay? Now does that happen anymore? Not really. They can't really take money out of their retirement accounts.
Chris Picciurro:Well, they are till 59 and a half, let's say. Or they they they there's creative ways they could out of their 401 k. But the point is, they're aged 51. They have a a lot of money in their 401 k plan. They've been saving diligently.
Chris Picciurro:They don't have a they paid off their modest home. They aren't gonna see Social Security income for 15 years plus. So, ultimately, let's say they're getting a pension from General Motors or Chrysler or Ford of $40,000 a year. And, you know, they don't have any expenses. And when I started this 20 years ago or so, there are people like that out there.
Chris Picciurro:Right? Their home was probably living a $60,000 home, paid off $40,000 a year. But my point is, right now, they would pay all of $2,000 of federal tax per year Mhmm. Because of the because of the standard deduction. In that case, even if they didn't need the money, they should start taking money out of their 4 zero one k plan early, not early, but now.
Chris Picciurro:They would assuming they don't have a 10% penalty, and just put it in savings or do something with it. Because at some point, if that money continues to grow for the next 19 years and they have to they have to take it out using a required minimum distribution, it's gonna be probably taxed at a higher rate, and their Social Security could be taxed. So the point is there are a lot of people or there are people, you know, that could take money out of a retirement plan that are real estate professional status, and because they have a huge, you know, cost segregation study or may again, remember I said that you don't you can have a lower low taxable income and be extremely wealthy. So in that case, a retirement plan distribution might make sense. So taking money out of your retirement plan, assuming that you're not paying the 10% penalty, in the same year that you have a low amount of taxable income is my number 2 strategy for, lower to middle income households.
John Tripolsky:And before we get into the third one, if if our listeners feel maybe a little overwhelmed or a little confused right now, totally fine. I'll give you a fun fact that'll make you feel a lot better. Right? So, you know, we we mentioned a couple of times now, you know, you gave the example of back in the day, you know, quote, unquote, back in the day. Think of think about it this way.
John Tripolsky:Right? You might be overwhelmed at this very moment, but at least you're also not our parents slash grandparents who were paying 14 to 17% interest rates on homes. So so that is a plus. Kinda unrelated to this, but, you know, we take a little comedic
Chris Picciurro:frame to It does relate, though, because those folks would you know, because the interest rates were so high, they would wanna pay their mortgage off as quickly as possible. And lending was was different then. So, so, yeah, that's that's so in those cases, we we work we work on those type of plans and take those retirement distributions. There are certain situations where you can take money out of an a retirement account early and you you get an exception from that 10% penalty. So definitely work with a tax professional.
Chris Picciurro:Don't just wing it on your own, but but these are some of that's that's my second strategy for these type of households. Now number 3, using Roth accounts. And there are 2 ways to you can use a Roth account to your advantage. One of them is, I'm gonna call it cousin of the second strategy, a Roth conversion. So it is a retirement distribution account, but it's instead of it coming into your pocket that money, you are converting it to a Roth.
Chris Picciurro:So there won't be a 10% penalty, but now you have that money growing tax free. And this is a strategy we use all the time. Excuse me. Because, you know, real case in point, we are working with a client. Client average is average income was about $550,000 over the last 4 years.
Chris Picciurro:Socked away a lot of money, made great investments. Client's gonna retire in about 8 years, and they wanna spend time with their kids. So they're gonna take a sabbatical from work, and they live within their means. They could take a year off, year and a half off from work with very, very little taxable income, yet they were making over half a $1,000,000 just last year. In that case, Roth conversions is a great option for them.
Chris Picciurro:Because they have a dependent, we can move every year a 100 and a $125,000 of money out of their retirement IRA or 401 k into a Roth and paid maybe $10,000 worth of tax. And now that money's gonna grow for them, you know, tax free the rest of their life. So so the Roth is my 3rd strategy. The Roth conversion, cousin of retirement plan distribution, is one component in Roth contributions. Oh, I'm gonna get you know, John, it might make when I hear 10.99 employee, you know how I get set off like a firecracker.
John Tripolsky:Gosh. Yeah. That's like somebody showing up late to
Chris Picciurro:a meeting with me. Right. Something that might set me off worse is when I see younger usually younger, but it doesn't have to be younger, taxpayers with a low marginal tax rate. So they're they're in this group that we're talking about, 10%, 12% marginal tax rate. And they because they got to work the 1st day, signed up for the 4 zero one k plan, they're putting money in their 4 zero one k plan.
Chris Picciurro:I'm not saying that's a bad thing, but why don't you put it into a Roth? If you're 30, 25, 30 years old, teachers, I see this a lot because they go sign up. They're excited to start work. First thing they do is put it in I know they don't have 401 k plans for teachers, but put it in their 403b or 457 plan for and get a tax deduction. They're not paying any tax.
Chris Picciurro:Right? They're they're may let's say they're making $50,000 a year. They're paying for their medical insurance pretax. Ultimately, they're paying they're getting peanuts of it. You know, let's say they put a, you know, $3,000 in, and they get a $400 tax benefit right now.
Chris Picciurro:Big whip. Put it in your Roth portion. Right? Because that $3,000, I know I've done this calculation before on the fly, not the smartest thing to do. But let's say that money is gonna double, you know, 5 times before they retire.
Chris Picciurro:3000 is 6, 12, 24, 4896. Would you rather have $96,000 in your retirement tax for retire tax free or an extra few $100 in your pocket now. And you have to pay tax on all that money when you retire. So Roth contributions are part of my number 3 strategy for middle to lower income. The the 4 the IRA contribution or traditional 401 k really doesn't do you that much good.
Chris Picciurro:And for for those people, a lot of them get a retirement saver's credit on their federal tax return. Roth contributions are eligible for that retirement savers credit.
John Tripolsky:Mhmm. Mhmm. Well, pretty good, man. I I know there was those 3, and I'm I'm sure if we really poked and prodded you, we can get a couple more couple more out of you, but, meh, we'll let you off the hook. And, again, I I really like this topic because I I know a lot of the a lot of the topics we do here on the podcast, obviously, it's content that's coming from our community, coming from our audience.
John Tripolsky:So sometimes it tends to get a little skewed towards higher income earners, real estate investors, etcetera. So I love these ones that really have have a little bit of a wider wingspan, if we will. A little wider reach, a lot more of those average household incomes. And and plus, Chris, you know, going back, you know, thinking about a year and a half ago. Right?
John Tripolsky:Well, even now we're we're episode 1, 82 in. You know, our goal even when well before we launched this podcast, right, was to make as much of an impact as we possibly could through teaching tax flow with taxpayers. So educating them of opportunities that are out there, and really putting the the power in their hands and in a nonaggressive way, but taking it out of the IRS's hands enough. Right? Because and I'm gonna quote you on this one.
John Tripolsky:Right? If you don't if you don't tax plan and and take, take advantage of a lot of the strategies, you know, the IRS will pick your tax. So if you don't pick your tax, they will, and they're never gonna pick it in your in your favor. Right?
Chris Picciurro:John, I'm very proud of you. This is this is a proud was a proud moment. Yep. You pick your tax, or they do. You don't.
Chris Picciurro:And if you don't pick your tax, they're going to be. Or sometimes we say yours or theirs. What does theirs spell? The IRS.
John Tripolsky:Oh, that's just that's just nasty, isn't it? It sounds dirty. But no. But, I mean, take that to heart. Anybody who's listening to this, again, I know some of this might seem a little bit overwhelming.
John Tripolsky:If you've never if you've never, really dove into this at all, we are here for you. Please drop us a line. Connect with us. We are an excellent resource. If you haven't take advantage of it yet, even just sign up for a basic, teaching tax full membership.
John Tripolsky:It's free. Completely free. So you got a bunch of courses on there. You can take you can dive into this content. Obviously, this podcast, we do completely ungated.
John Tripolsky:We release it into the wild for free for everybody, because that's what we're here for. So we extrapolate the information from Chris's head every once in a while and just throw it out there into the into the ecosphere. So, Chris, we appreciate it, man. Thank you for running running through those with us.
Chris Picciurro:My pleasure. It feels good to do these type of things for different types of taxpayers. And, like, I reiterate, love what you said. Jump in to our either LinkedIn group or private Facebook group, and let us connect you with the people that can help you execute these strategies.
John Tripolsky:Awesome. Awesome. And before I close it out as I always do, I wanna make a very good point, very strong point here. Chris does not know this one's coming, but I can always tell when he's super, super in tune with what we're saying because he doesn't mention pickleball. So on that note, see you back here.
John Tripolsky:Same time. Well, different time. Same place, different topic. Back on the teaching tax loan podcast. Thanks for hanging out with us everybody.
John Tripolsky:John here from the teaching tax flow team. We let Chris off the hook here. He is out probably playing pickleball on the courts. I'm slowly getting in tune with the terminology. Heck, I feel like I know more about taxes than I do pickleball hanging out with this guy, but he's trying to change that.
John Tripolsky:I promise you that. But in all seriousness, again, this topic is something that maybe it's a little intimidating. I know we mentioned that a couple times in the show if you haven't been exposed to it yet. But, again, that's what we are here for. That literally is our mission with teaching tax flow.
John Tripolsky:So couple resources for you. I will throw at you here in the outro, but also drop them in the show notes. You have our defeating taxes. That is a private Facebook group started by teaching tax flow. Chris, myself, the team, there's a lot of tax pros on there.
John Tripolsky:There's a lot of taxpayers on there naturally. So post your questions on there. You can do it anonymously too if you had a question you did not want the world to see your business, but I promise you there is a lot of brainpower in that group. And the easy thing for us is we don't even have to monitor it. We don't have to slap anybody on the hands for saying anything inappropriate.
John Tripolsky:Everybody there is there to help. Also, as mentioned, sign up for that free teaching tax flow basic membership. The link is in the show notes. Again, completely free. No strings attached.
John Tripolsky:Guarantee you'll pretty much learn something from that. Very easy to navigate. If you have any questions or looking for something specific you cannot find on there, it's probably in there. We have a ton of courses. Shoot us an email.
John Tripolsky:Drop us a line on any of our socials. We're happy to guide you in the right direction. And if it's something that we don't have on there, even better, maybe it'll be a podcast episode. Maybe it'll be a course. That's, again, what we are here for to help everybody out as taxpayers and taking the power away from the IRS in a nonaggressive legally and ethic legally and ethically manner.
John Tripolsky:Doesn't sound right, but you get what I'm saying. Alright, everybody. We will see you back here next week. As mentioned, new topics. Looking at the roster, we have some fantastic ones for those real estate investors and just the general taxpayer.
John Tripolsky:We got a great, great lineup of guests. Talk to you soon.
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