Ep # 71: How Do I Lower My Tax Bill?

Benjamin Haas |
  • Proactive tax planning strategies - 5:06
  • Reactive tax planning strategies - 8:20
  • Health Savings Accounts - 10:06
  • Factors that drive your taxable income higher and being proactive with asset allocation - 11:39
  • Lowering your tax bill retroactively - 15:16




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Full Transcript:

Benjamin Haas  00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts....now!


Adam Werner  00:26

Spring has sprung.


Benjamin Haas  00:29

Yeah. I'm so excited. I could wet my plants. 


Adam Werner  00:34

I knew that's where you're going. 


Benjamin Haas  00:37

We've had so many great bad guy jokes flying around the house. I've got more of them. Let's not make the podcast about those today. The topic, far more exciting than bad Dad jokes: taxes! We will often get that question as people are getting their taxes done like, wow, you know, what can I do to lower my taxes? Nobody likes paying taxes and I think we both saw the same article so I'm going to test your memory. 


Adam Werner  01:13

Oh, yeah. 


Benjamin Haas  01:15

The percentage of tax filers this year, Americans that paid $0 in federal income tax, do you know the percentage?  


Adam Werner  01:22

It was something in the 50s? Was it 53?  


Benjamin Haas  01:25

It was 57, which, granted, there was a lot of stimulus money. There was a lot of tax credits this year. More people filing Social Security so maybe that's the thing, but go the other direction. 39% of tax revenues to the government are paid by the top 1%.[1]


Adam Werner  01:47

Wow. Yeah. 


Benjamin Haas  01:49

I'll ask you one more, paid by the top 10% of filers.


Adam Werner  01:56

Paid by the top 10%? It has to be the 90/10 rule. 90%?


Benjamin Haas  02:05

It's not that high. It's like 71 or 72%. The point is 72% of the government's tax revenues come from 10% of the filers. So when we say in a podcast today, let's maybe get into it, I want to lower my tax bill. We know that this podcast is really probably more dedicated towards the people that feel like they maybe have some discretionary income. Are actively looking for ways to defer so that's the types of strategies we should try focusing on. 


Adam Werner  02:37

Yeah, so what you just said, right, looking for ways to defer the taxes and if there is that discretionary income, that excess income that they can have ways to save in other investment vehicles. We've talked about this a lot in different iterations but should I be saving in different types of accounts? We use the terminology, the pecking order of savings and that certainly applies from a tax perspective too. Should I be saving in this account instead of that account? Should I be saving in my non-retirement account, should be saving in my 401k, whatever that may be. Yeah, different goals may lead to different outcomes. So specifically, looking through the lens up from a tax ability standpoint? Yeah, we could talk about what those vehicles are.


Benjamin Haas  03:24

Yeah. Bingo. So then that's kind of it. If you got a bonus, maybe you made more than you thought, you had a liquidity event. This podcast is dedicated to you, right? Because lower my tax bill is probably not just, well, I don't want the IRS to get it. 


Adam Werner  03:41

That's part of it. 


Benjamin Haas  03:43

Well, I'm sure but you have to have the means then or the excess reserve to feel like you can do that. Otherwise, I mean, maybe we can hit on it. Maybe it can be the last thing there certainly are wasted, like redirect some of that income. But then you really aren't giving it away. We're going to be talking about ending it or gifting it and that's not like keeping it for yourself. 


Adam Werner  04:04



Benjamin Haas  04:05

That might be the longest intro we've ever had. 


Adam Werner  04:10

Well, we gave, there's some nuggets in there so yeah, I'll add to it. Longest intro in podcast history. It's often a misconception that there is some sort of like secret weapon or there's some secret sauce or there's a silver bullet that I can keep this money, but I can shield it from taxes and that's really just not the case.


Benjamin Haas  04:39

Well, that is doable. It's just illegal.


Adam Werner  04:41

That's a great clarification. I'm glad you made that. Yeah, it's the shades of gray in between where it's weeks here and there that their decision points and I think we'll kind of get into that. Where it's higher expenses, if you're a business owner. Now I'm giving stuff away. 


Benjamin Haas  05:04

It's fine. 


Adam Werner  05:06

Yeah, well, let's just start from the top. So going back to the savings side of things, there's ways to be proactive. Yeah, with your tax planning, right, and we kind of talked about a little bit. If you work for a large enough employer, you have a 401k plan, clearly putting money pre-tax into some sort of retirement plan, 401k, 403b, whatever that may look like, that's all pre-tax money. You essentially get the deduction on your tax return for anything that you would put in there and that immediately lowers your tax bill because your taxable income is now lower.


Benjamin Haas  05:43

So then, I'm glad you started there because the key to me is being proactive and when we think as planners and I go back to like, who are we really talking to in this podcast? Maybe you get bonuses, maybe it's variable comp, maybe you know, you have a liquidity event, it takes some planning ahead to go, how can I maximize this tax savings? Because unlike some other ways we'll talk about, getting money into that 401k or through payroll deductions, 403b, that's not happening lump sum at the end of the year or it's certainly not happening next March when you're trying to retroactively save for the prior year. Like you have to be proactive. 


Adam Werner  06:22

Yeah. I'm glad you said that since because, yes, that is, especially when it comes to those employer plans. You're limited in your flexibility to get money in within certain timeframes. So yeah, even just thinking from that standpoint of, you have the calendar year to contribute to those accounts. Unlike, say, an IRA, you can contribute to your IRA up until the tax deadline and be able to make that retroactive contribution. So in this instance, if you go to file your taxes in a couple of weeks, you can still make a contribution for your 2021 tax return, even though it's going to be April of 2022 here. But not all accounts give you that level of flexibility.


Benjamin Haas  07:06

Yeah, so this is the important distinction. There are ways to do this proactively. There are a couple ways to do it reactively but focusing on being proactive, the only thing I might mention is if you are a higher income earner. You have to check to see if you have a deferred comp available to you because there's a really nice, clean way for you to think about that. Just those words, I am choosing to defer taking these paychecks until a different point in time and just by doing that it's not showing up as income in the given year so if you have that available to you, let's talk about it.


Adam Werner  07:45

Yeah, well, and I'll add one little note there too. So unlike a 401k or a 403b, where you can potentially adjust your contributions throughout the year. Deferred comp is, correct me if I'm wrong, but that is something you basically have to set at the end of the prior year, what you want to contribute to that, what's going to come out of your paychecks and then I think that's kind of set-in stone for that next calendar year. There's not a lot of flexibility in that system. 


Benjamin Haas  08:20

Yeah, admittedly, the only ones that I know based on the clients that we have, work that way so if there are other ways, I haven't been introduced. But yeah, those things through the employer like that, really are the things you have to be proactive for. So key takeaway here is, if you're kind of in that phase of life, where you know, there could be bonuses or I'm higher on the pay scale, like there is absolutely good that comes out of trying to be thoughtful about what my tax is going to look like. So I can make the decisions in the beginning of the year but you did touch on there are a couple reactive ways to do that. IRAs, one of them if you qualify. 


Adam Werner  09:04

Oh, you want me to take that and run with it? Great. So yes, it's the IRA. You have to be eligible to deduct, there's rules. If you're covered by an employer plan, you have a 401k or a 403b, if you earn over a certain amount, you can't deduct those contributions so it can get messy pretty quickly. But all that being said, I think one of the often missed sides of things is the spousal IRA contribution. So even if there's only one income earner, the spouse doesn't earn income or just how that all works out. Perfect example. You still have a one spouse working but the other is retired. Theoretically, you could still contribute to an IRA on behalf of that spouse even if they don't have the earned income, which is often the trigger for being able to contribute to a retirement account. Right. But that's a way to again still get a tax deduction that is often missed.


Benjamin Haas  10:06

I love to throw the health savings account in here too. I mean, 


Adam Werner  10:09

That's a great one.


Benjamin Haas  10:09

It wouldn't be a typical podcast of ours if we didn't talk about our love for the HSA. 


Adam Werner  10:15

That's right. 


Benjamin Haas  10:16

It's just another way to lower income in a way that we really think in the future. If you have the ability, right, there's rules on that too. But if you have the ability to get money in at some point, you're going to need to cover a healthcare deductible or there'll be a health event that's going to happen, so doing it that way and getting the deduction now is kind of cool.


Adam Werner  10:36

And for any business owners out there, if you're self-employed or you're a small enough business, you always have the ability to add to your SEP IRA. And I should say, the SEP IRA has different limits in terms of what you can contribute or it's based off of your, essentially, your net earnings or your net income from that business. But all of these things that we just talked about - IRA, spousal IRA, SEP IRAs, the HSAs, those are all things that you're able to do, as you said, reactively, essentially up until the tax deadline for last year's taxes. So I guess that's a that's a key point, we want to hit on that. You don't necessarily have to do that in the calendar year, you have that flexibility to see how your taxes shake out and then you can still make those adjustments to lower that tax bill.


Benjamin Haas  11:30

I don't know. Can you think of any other savings vehicles that we didn't hit? You know, whether it's proactive or reactive? 


Adam Werner  11:38

I don't think so. 


Benjamin Haas  11:39

Yeah, nothing's coming to mind. I guess the next thing we could probably talk about is like how income is generated on your return because we were kind of talking about earned income here, employer plans, things of that nature, certainly investments, depending on if you have them outside of those retirement accounts. That can drive your taxable income higher and there's maybe ways we can talk about reducing that taxation too. 


Adam Werner  12:06

I know we've talked about this, again, just different aspects of different podcasts. But if it's funny, it's the people that are affected by this in particular, usually have been either really good savers. We've maybe already filled their retirement accounts in any given year but there is still that excess discretionary income that we don't just want to accumulating at the bank and you start a non-retirement investment account and that's a great thing. At a certain point, some of the recent situations that we've seen is those accounts have grown and grown over time and depending on what you're invested in, it may be kicking off taxable income that you can't control to a certain extent. The other side of that is, it's like the snowball kind of rolling down the mountain. If you're invested in mutual funds as the example, they're kind of the biggest culprit when it comes to taxable income, capital gains distributions, at any point during the year that are somewhat out of the control of the investor. The larger those accounts get, the larger the taxable income gets and again, assuming you bought the same fund, you still own the same funds that you bought 5, 10, 15, 20 years ago, you now have imbedded capital gains that would be painful to try to unwind as well. So, you kind of back yourself into a corner from a tax standpoint. Now, all of that being said, our role would try to be for anybody starting an account or having an account like that, being mindful of the tax impacts from the investment standpoint. There are more tax efficient investment vehicles, it's individual stocks, which again, we should clarify, we're not necessarily huge fans of that because that increases potentially some risk from single stocks. You don't want necessarily that huge portion of your allocation. That's just fundamentally what we believe. ETFs are a great way to still get broad exposure but by their nature, their structure themselves, they can act a lot like a mutual fund but they aren't hindered by the taxable income, those capital gains distributions. Again, it all has to do with the ETF, the exchange traded fund structure that allows them to be extremely tax efficient from a taxable income standpoint.


Benjamin Haas  14:31

Yeah, you hit on everything that was going through my head there and like, I guess, wrapping that in the theme of the podcast here, that's being proactive with your asset allocation. That's being proactive throughout the year to kind of think about what are the capital gains that are coming? I'm thinking of client situations where we'll try to get those estimates from all the different fund companies to say this fund is anticipating paying a huge capital gain at the end of the year. We want to do something about that before that happens. There are advisor tasks that we have to try to help in this case, it wouldn't be lower the tax bill retroactively, it would be to try to skirt some of that potential income taxation before it happens. 


Adam Werner  15:14

Right. Yes. 


Benjamin Haas  15:16

Which we talked about doing that with certain IRA dollars too. Now maybe this is a part of a different podcast where we can get into like the nitty gritty details of charitable giving. But yeah, it's not uncommon at the beginning of the year here for us to put out notices to clients that if you are in the required distribution age, and actually, maybe a little bit before the old rule 70 and a half. Don't want to get too deep into the weeds. Instead of having to take these distributions and pay income taxes on that, you can gift directly from your IRA to a charity and in that strategy, you really are avoiding the income taxes on that gift. So in a way you're saving yourself those income taxes and we're a big fan of that. 


Adam Werner  16:06

Oh, absolutely. Yes. If in that scenario, where you have to take that RMD, just use a round number. So you have to take $10,000 out of your IRA, that's going to show up on your tax return as taxable income and the point is to hit that RMD age, you're required to take that out. Hence the name because the IRS is saying you've avoided paying income taxes on the savings up to this point, now's the time to pay to fiddler. So the great way to avoid that if you don't need that $10,000 or need all of that to meet your needs, and you're also charitably inclined, a great way to take a portion of that or all of it, send it directly to a charity and by the way, now in that circumstance, so let me give the example. $10,000 RMD, you take $5,000 of that, you send it directly to a charity, what shows up on your income tax return is now just that difference, that $5,000 that you received is what shows up on your tax return as taxable income.


Benjamin Haas  17:07

Yes, so if you're in the let's call it 20% tax bracket, you just saved yourself $1,000 of income taxes. 20% of five. So yeah, now again, if we're talking to higher income earners who have to take a $50,000 RMD, $100,000, RMD. Yeah, but they're used to gifting $30-$40,000 a year, you saved yourself significant tax dollars by doing this. 


Adam Werner  17:30



Benjamin Haas  17:31

Once again, here's the theme, you really have to be proactive with that because there are very strict rules on making sure your gifting to charity from your IRA happens before you receive any other dollars. So you have to be proactive.


Adam Werner  17:47

Yeah, there's a theme that just popped into my head. It's location, location, location. I know that's always been the same for real estate but when it comes to investing, where you're invested, where you get from the location of that matters, too.


Benjamin Haas  18:03

I like it. Um, I don't know, I have two other random thoughts that maybe we can wrap this up. I got the question like a week ago, I know there's tax credits out there. Like if you really are all about lowering your tax bill and you want to get into like solar panels, like, you can get reimbursed for some of that through tax credits. Business owners have a lot of different options on maybe reducing their income either through expenses or employer plans, employer benefits, things of that nature.


Adam Werner  18:33

Yeah, like I kind of touched on that earlier but that is a great one, especially as you get towards the end of the year as a business owner and you have a better idea of what's the total income going to look like? And maybe you can pull some future expenses into the current tax year. That's a great way. Again, it seems very simple and straightforward but it's just part of being proactive, being thoughtful about ways to lower that tax bill moving forward.


Benjamin Haas  19:09

Because as you said, at some point, you have to pay the fiddler. 


Adam Werner  19:14

Yeah, you never heard that term, pay the fiddler? I can't be out fiddling for free. 


Benjamin Haas  19:22

Pay the piper, nobody wants to pay the piper? Maybe nobody wants to pay Fiddler's or Piper's, I don't know. 


Adam Werner  19:28

Musicians in general are underpaid professionals, I think is what we're learning historically. 


Benjamin Haas  19:33

Well said so, great way to wrap it up lowering taxes. I know that's kind of like a theme for everybody. Hopefully, you got what we have to say here. There's many different ways to do it but it probably requires you being a little more proactive which is not very helpful for you filing your taxes next week. But then maybe it gives you good reason to start talking about it now for next year. 


Adam Werner  19:57

Perfect. I agree. If it's too late to save for this year's taxes, hopefully that's the motivation to be a little bit more proactive and if you have questions, certainly lean on us. We can strategize with you. 


Benjamin Haas  20:15

Sounds great. Thank you, sir. Have a good night. 


Adam Werner  20:18

You too. 


Benjamin Haas  20:27

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!


Investment advice offered through Great Valley Advisor Group, a registered investment advisor.


[1] https://www.cnbc.com/2022/03/25/57percent-of-us-households-paid-no-federal-income-tax-in-2021-study.html


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