Ep. 178 | Case Study: Mark & Jessica
Download MP3Hey, everybody. Welcome back to the Teaching Tax Flow podcast, episode 178 today. We're gonna do something different as we always try to stir things up a little bit. We are gonna look at a specific case study from that Defeating Tax book that if you haven't gotten it yet, check it out. Multiple platforms.
John Tripolsky:So you can't say that you don't have access to it. It's all there. And if you're an avid Starbucks drinker and you get a lot of stuff and a drink and you really stack on the options, I'm sure this is actually cheaper than the drink that you get that your significant other probably gets mad at you for, you know what? Get this and you'll have more insight, not a stomachache. So with this one, we're gonna look at a case study.
John Tripolsky:Chris Picciurro, welcome back, Sarah. Now we're gonna look at this one. We're gonna look at Mark and Jessica. Right? Yes.
John Tripolsky:The book, we refer to them as the growing family, which I love this one because I feel out of any of the ones from that book, it's probably most relatable to me. Right? Age group, growing family, you know, you we bring up the infant and and this word makes me cringe when I think of paying for childcare because holy crap, is it expensive? Which obviously there's some financial decisions. So I look forward to this one, man.
John Tripolsky:So what? Maybe I'll let you drive the ship here a little bit. Tell us a little bit about Mark and Jessica and where they came to be.
Chris Picciurro, CPA:Well, I would say I'm going back to your Starbucks real quick. I just a week ago, my my daughter did something really positive, and I said, you know what? I'll there's a Starbucks, like, two miles away, two and a half miles away. Like, I'll run you up there and get you a drink. She's like, okay.
Chris Picciurro, CPA:Cool. So we drive up there. I didn't even want a coffee. Got her a drink. Next thing you know, she gets this fancy wancy it sounds like a football play.
Chris Picciurro, CPA:You know, she's got all this mocha latte spritz thingy with this, that, and all this other jazz. And then and then proceeds to order a cake pop. And guess what? It was $12. I said, look.
Chris Picciurro, CPA:I'm not taking you here anymore. That's that's you know, I don't even have enough points to to pay for all this. So, yes, I get it. So speaking of, absolutely, John, I have the defeating taxes book in my hand. If you're driving or walking your dog, just when you get back, go to defeatingtaxes.com.
Chris Picciurro, CPA:And you're right. For about the price of this book, those as you could, you know, you can get a Starbucks for your teenage daughter that has sometimes struggles with concept of money. However, I'm excited to do that because we do a lot of content, as you know, on our YouTube channel also, conceptually, but I'm excited to bring this to life. There are multiple case studies in this book that we work through that are easy to understand and relatable at every season of life. And Mark and Jessica are just one of them.
Chris Picciurro, CPA:So the we want I we we wanna do a podcast of just kinda how someone would think through this as a tax planner, as a CPA like myself, their their situation. Because these are the type of taxpayers that commonly begin to work with a tax professional on tax preparation but are never exposed to tax planning and strategy at all. And it also goes to prove that and and this is the the you and I truly believe in is that tax planning and strategy is for everyone. In lower to moderate income households, actually, I think benefit as a percentage of their disposable income more than the higher income households, on tax planning and strategies. You don't have to be rich.
Chris Picciurro, CPA:You don't have to make a lot of money for tax planning and strategy to be effective.
John Tripolsky:And I know we'll get into, you know, a lot with this one, you know, in a short period of time, but, you know, to to solidify what you were saying. Right? And that this is me in my own scenario. I really never knew about even HSAs, so we've done a whole episode on that. I wish I would have known that before our child was born.
John Tripolsky:Like, I feel like that's such a simple thing, but may never come up if somebody's treating their taxes as really, like, transactional. Right? Once a year, you're just doing it. But if you really don't look at opportunities with stuff, you miss things like that. And some of them, you know, just thinking of the HSA one, for example, it took me all maybe two minutes to set this thing up, and it's significant.
John Tripolsky:I love it.
Chris Picciurro, CPA:So Absolutely. Go and pre tax with with as much as you can. So and that's that's the thing as we talk about a lot in the our book. Again, shameless. Of course, if you're listening to this podcast or watching, you probably are familiar with it.
Chris Picciurro, CPA:You know, I I use the example in the book that if I was driving, let's say, where you live from Michigan to Florida and and and I made a wrong turn, even a wrong turn and a mile down the road, I realized I made a wrong turn. I can that little bit of a turn, right, I could easily correct it. But if I make a wrong turn and then 300 miles down the road realize, oh, darn. I'm in Kentucky on I 65. I should be at I 75 down through past Ohio right now.
Chris Picciurro, CPA:Now you've got a big problem. Now you've got a so these little shifts now, especially for Mark and Jessica who are both in their early thirties, in our case study, are are are important. And and as you watch us and or you listen to this, you might be thinking, I'm not Mark and Jessica. The point is, let's think about how we look at things as tax planners and have those conversations together. If you're single, have them have them with with yourself.
Chris Picciurro, CPA:I don't know. Have them with trusted advisers. We talked about building out your board of directors, and talk to your tax professional about your situation and and and or licensed financial adviser of of what you should be doing. So so yeah, let's talk. Mark and Jessica.
Chris Picciurro, CPA:So I'm going to set up the profile for just a couple of minutes and this, we're going to talk through this just like you and I. Let's say we're both tax professionals sitting around a conference room or a Zoom room now, I guess, in about their situation. So yeah. So Mark and Jessica, they're in their early thirties, and they're filing jointly, and they're in a moderate income tax state. So what that what does that mean?
Chris Picciurro, CPA:Right? Well, we you know, John, we like to pick on our Californias, New Jerseys, New Yorks. We even call those states out in our book, which which is kind of fun, is those higher income states. So the way I look at it is a state where you're you know, if your tax rate's six to 7% or higher, especially over 7%, that's a higher income tax state. Moderate's kinda like Michigan.
Chris Picciurro, CPA:You know? It's about four four and a half, four around that. So it's a it's not like it's a state tax of one, two, or 3%. Four to 6% of your income is is is an expense. You know?
Chris Picciurro, CPA:That's a that's a line item. So let's yeah. So they're in a moderate income tax state, let's so let's call it 6% state income tax, but in their combined marginal tax rate's 28%. So let's remember, your marginal tax rate or MTR is your number one KPI, more acronyms, key performance indicator on tax planning. Your tax bracket lies to you.
Chris Picciurro, CPA:There's a perfect example of tax brackets lying to you because on paper, they might be in the 22%, quote, unquote, tax bracket on the federal return and 6% on state, so 28%. However, based on their income, they might be getting phased out of child the child tax credit. You never know. Mark or Jessica could earn overtime. They could earn tips that they're getting phased out of those deductions.
Chris Picciurro, CPA:We all we have talked about the new schedule one a deductions on a lot of our content with the one big beautiful bill act. They could be getting phased out of student loan interest deduction. So there's a lot of things they might getting beginning phased out of, and that's where marginal tax rate is more important than than your tax bracket. So marginal tax rate, we're gonna call it 28%, which is which is a significant number. What else happened with these these two lovebirds?
Chris Picciurro, CPA:Right? So the early thirties, they just purchased a a larger home, and they began itemizing their deductions. So remember, the Tax Cuts and Jobs Act, we have that higher standard deduction, almost $30,000 ish for a married joint, but now they purchased their home. Oh, by the way, they have an infant too. So one of the reasons they purchased a larger home is to have that that that space.
Chris Picciurro, CPA:Maybe they're going to start a family, you know, or they start a family. Maybe they're going expand their family. Maybe not. But they have their they have an infant now. And they wanted them more more space.
Chris Picciurro, CPA:So now they have mortgage interest. They have property taxes to deduct, and they have state income tax deduct. So they're now going to, be in this larger home, and they're gonna itemize their deductions. Their income's probably around 2 to 300,000 ish give or take. Just as kind of as a range.
Chris Picciurro, CPA:But again, we wanna we can focus on marginal tax rate on tax planning. So they have that one infant and guess what, John? As you well know, they now get to pay for part time daycare. And that part time daycare, because they have some flexibility, is $10,000 a year.
John Tripolsky:Get it cheap. Get a discount daycare.
Chris Picciurro, CPA:Part part time daycare, John. Part time. Yeah. We looked and this is where remember, financial planning and tax planning could could kinda intersect. Right?
Chris Picciurro, CPA:Their household cash flow is good. So they have about $4,000 a month in surplus, meaning 4,000 more is coming into as income per after tax per month more than their expense. So that's what's called surplus cash. Okay? And that that's that's a good situation to be in.
Chris Picciurro, CPA:They also have been good savers. So they have about $50,000 in liquidity, which is which is great, and they have a and they expect a tax refund of $5,000 So what are what is this telling us, John? It's telling us, okay, we're gonna yeah. We have $4,000 a month extra right now. At least 10,000 is gonna have to go towards day care.
Chris Picciurro, CPA:They've been they've purchased their home, and they have $50,000 of savings even after purchasing the home, which is pretty good for early someone in their early
John Tripolsky:And I'm looking I I have the ebook actually open here too, so I'm looking at this case studies here, reading through it. I know we're gonna get through some some steps, maybe a little bit of how you would approach this as a tax professional. But I I do wanna for anybody that's listening to this, kinda stepping out of it a little bit more myself. Right? I can see this if somebody's hung out, listen to us chat here for about ten minutes.
John Tripolsky:They're probably thinking, well, you know, I have a simple, and I'm doing air quotes. I have a simple tax return. I'm I'm an employee, and you have this stuff. I think the last couple minutes completely solidified what you always say. There's no such thing as a simple tax return.
John Tripolsky:Right? Because even if somebody thinks that, oh, I bought a house, sure. I can I know that I can deduct mortgage interest in in most cases? And, yeah, you know, we're me and my spouse are both employees, so there's no really complexity, again, quotes, with somebody being self employed or any of this, you know, give any of that stuff. Yeah.
John Tripolsky:Okay. It's a line on the tax return or that we have a a dependence. We have an infinite all this stuff. So even by looking at a form, and this is just me talking to Chris. Tell me if I'm wrong.
John Tripolsky:Right? I I think the perception is still very strong out there that, oh, well, mine's very simple because I can answer all of the questions that's on a tax return. Even if I look at it myself, why do I need somebody to help me with planning? Right? But what we just talked about, all this other stuff.
John Tripolsky:Like, I would be curious how many people even know what a phase out is and what it actually is when it comes to taxes. You mentioned that. Right? Some people probably
Chris Picciurro, CPA:Right.
John Tripolsky:Know, blew over their head.
Chris Picciurro, CPA:So what yeah. What are the things these Mark and Jessica should consider? And and these are these cases are things that I've actually seen in my practice. Obviously, we change the names to protect the innocent. Right?
Chris Picciurro, CPA:But I've seen it where one spouse might be older than the other spouse so that and and that so let's talk about retirement contributions. Yes. They're a just touching to the red diagnosis, 28% total marginal tax rate. But Mark and Jessica should be thinking about, do I put some of my money into a Roth account and then some of my money into the pretax retirement account. And you wanna make sure that if they both have a match with their employer, grab that match.
Chris Picciurro, CPA:John, I I many times, we've I've had situations where you've got a married couple, and they're like, well, you know, let's say Mark is well, Mark's five years older than Jessica. So Jessica's not putting money into her retirement plan through her employer, but Mark's putting it into his because in theory, we can get to Mark's money five years earlier when we're in retirement. And I understand that. But if but if Jessica's leaving company match on the table, oh, right? That that's that's that adds up.
Chris Picciurro, CPA:Remember that one little that one little, wrong turn gets to be a big wrong turn down the road. So what I would be talking to Mark and Jessica about is and remember, build your board of directors. Look at your financial adviser involved. Let's make sure you're both taking advantage of your company match, and let's make sure that we're balancing pre and post tax tax retirement contributions. That's easy.
Chris Picciurro, CPA:Right? That's that's gonna be something we wanna talk about. Let's make sure that we do the best job we can in being tax efficient with the $10,000 of daycare expenses. So I would I would fully if if either of them have an an employer that offers a dependent care FSA, so flex spending account, let's max that out. So that way, those expenses are pre tax.
Chris Picciurro, CPA:They're better than a tax credit because they're coming off your W-two. And when we're looking at a tax churn, you can't just look at a tax churn and get the whole picture. You kind of alluded to that. I wanna see their w twos because that's telling me where they're directing some of their pretax dollars and if they're being efficient. So definitely and then if their if their daycare expenses exceed the flex spending account limits, then, we just pay that out of pocket and we try to take a credit for that.
Chris Picciurro, CPA:So, that's something to consider. Here's another thing to consider. Not all tax planning has to deal with mid tax reduction right now. When my wife and I when Holly and I, feel like I know everyone that watches and listens to the podcast now, so we'll just use first names. Right?
Chris Picciurro, CPA:When Holly and I, had our younger family, you know, we were we were growing our assets, but our bigger risk was what happens if we both get hit by a beer truck? Who's gonna raise our kids? Yeah. We had so for Mark and Jessica, make let's make sure you have life and disability insurance in place. Because if you're relying on both of your incomes and something happens to one of you, you still have an infant child to take care of.
Chris Picciurro, CPA:And you're either gonna have more expenses for day care, or you're going to have to supplement, you know, have that those assets, because you're not gonna have that income the rest of rest of your life that you expected. So looking at life and disability insurance is important for them and also thinking about some estate planning. You might be saying, well, they're not rich. They don't need estate planning. Oh, estate planning goes beyond being rich.
Chris Picciurro, CPA:It goes beyond guardianship. Right? I mean, think about, you know, not to get personal, John, but if you and your wife got hit by a beer truck, who's gonna who's gonna take care of of the baby? She's not necessarily a baby anymore.
John Tripolsky:I have a short list of people. Let's put it there. I mean, love that with you.
Chris Picciurro, CPA:Though, because if you don't, think about it, then the court could decide that. And and and your wife's parents and your parents might be saying, no. We wanna take care of her, and now you've got a big problem. Right? Absolutely.
John Tripolsky:And this for anybody that's listening to this too, you know, we're talking about this stuff, and I'm sure some people might think, well, what in the world does this have to do with taxes? Right? And, again, back to the whole side of what is tax planning. Right? This all plays such a huge part of it.
John Tripolsky:Chris, you alluded to it just briefly there too when you said, oh, you know, let's max out an FSA because it's pretax.
Chris Picciurro, CPA:Well Right.
John Tripolsky:It's it's basically free money at that time. I mean, for lack of better terms, putting in dummy terms, when you take advantage of things, sure, there's caps on a lot of stuff. Like an HSA, you can only fund up to a certain amount, all the stuff. But if you plan ahead, right, I don't I'm going off memory. What is it?
John Tripolsky:Like, $8,200 or whatever per family to fund an HSA per year. But you mentioned if you go off say you take a a wrong turn one time, say that's year one, but say you never get back back on track after ten years. Well, you just basically lost out of $80,000 of benefit, and say you only make $80,000 a year. Well, you just pissed away a year a year of your income basically just in savings, right?
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Chris Picciurro, CPA:So you're right. Great. So what yo. Good point. Health savings account should be so between the between the childcare expenses and the medical expenses, which are now are gonna be higher because you have an infant, you you have to you're gonna have those expenses no matter what.
Chris Picciurro, CPA:So let's make them tax efficient. And and using a health savings account would would help accomplish that as well as maybe the flex spending account for the child care. And we talked about estate planning. I'm gonna talk about you know, they have that $50,000 at work. Maybe you put that in a brokerage account and start growing that.
Chris Picciurro, CPA:You have a $5,000 tax refund. Maybe you reduce your withholdings by $4,400 a month because these folks, I could tell I call them folks, we know how old I am. I'm definitely not in the mid early thirties.
John Tripolsky:At least they didn't say we're gonna tape record these folks.
Chris Picciurro, CPA:So The the yeah. Mark and Jessica, obviously, are financially disciplined, and they're not relying on the $5,000 refund to to, you know, to live on. So like you say, maybe we direct some of that towards some life insurance. Maybe we direct some of that towards additional contributions to retirement or depending on what they their plans are for their child. Maybe we would direct some of that towards a five twenty nine plan.
Chris Picciurro, CPA:So those are and and 05/20 nine plans were all ended. There are other considerations, but those are just the things you think about when, like you said, John, is a quote easy tax return because now they're finally itemizing. There's so many things to think about, and I lied. My final thing I wanna say is we talk about building your board of directors. Right?
Chris Picciurro, CPA:And if you need someone on your board, please reach out on the teachingtaxflow.com backslash hub. You've got your you've got an estate planning attorney involved. You got a financial adviser involved, and you have a tax professional involved. Just and maybe a banker involved to do the HSA. All these people are there to help you, and there are millions of Mark and Jessica's out there that can use the help.
John Tripolsky:Absolutely. And this this was a great example, I think, when we started. We we chose this case study, I think, because it is more relatable to a lot of people. But even the other ones, you know, in the book, I think we'll get to a bit further down the road. We'll do an episode maybe on another one or a couple of them or as new ones come up because they're they're all so different.
John Tripolsky:I mean, you like you mentioned, no easy tax return. So I I feel smart now because you're telling me that I'm right with something. I'm like, you know, put a put a dollar in the bank. But then with that, right, you could have somebody that's the same age, lives in the same town, works at the same company with the same income. The situation is completely different from one turn that's different between all of them.
John Tripolsky:So we'll we'll get into some of those. Again, Chris, you mentioned the hub, great resource. I'm gonna put the the link actually in the show notes here as well as a couple other things too. And, yeah, man, I look I look forward to getting into this again. I feel like I'm reading the book, different chapter every time we're we're kinda cranking through this, which is great.
John Tripolsky:So heck, it took you twenty plus years to write this thing. Right?
Chris Picciurro, CPA:I know. Well, guess what? It's here now, and and we got to we got to read it out loud too, which was interesting. Well, thanks again, Don't be a stranger. Be an active part of the Teaching Tax Flow community.
John Tripolsky:Absolutely. All right, everybody. Have a great week. We'll see you back here again next week on the Teaching Tax Flow podcast. Have a good one.
Disclaimer:The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.
Disclaimer:Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment advisor. Chris Picciurro is a registered representative of Cabin Securities and an investment advisor representative with Cabin Advisors LLC, teaching Tax Flow as an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.
