#88: Year End Tax Planning

Micah: Well, welcome to the Plan Your Federal Retirement podcast. I’m your host, Mike Shilanski, and with me, I got a special guest but an awesome advisor, my father, Floyd Shilanski. Hey, pops, how’s it going?

Floyd: Doing great. It’s how Winter is coming to Alaska.

Micah: It is quickly coming to Alaska. I was hiking in snow a few weeks ago, and then it all kind of went away and, but it’s starting to come back, isn’t it?

Floyd: Yeah, we’ve been driving in from the house this morning. It’s snow flurries.

Micah: Oh, all the joys. We went from fall to winter in quickness. Well, speaking of things that are going to happen in a quickness, a year’s end is approaching us we at the end of October here. And before we turn around, this year is going to be wrapped up, and it could be time to looking at your income taxes. So one of the things we’re doing right now with a lot of our clients is we’re talking about tax planning. And pops, I thought it’d be a great idea for us to kind of get to jump on here actually your idea to talk about the tax planning, which I thought was great. What are things that we need to look at year-end to make sure people are on track for taxes, and what things can we help do to help control that tax bracket now and in the future?

Floyd: Micah, great question. And I think it’s time to do that. So many times, people wait until December 25 or right after Christmas to do their tax planning. And there’s not a whole lot we can do. So, whereas I’m at with my federal clients right now, we’re projecting income. And we’re starting just to run a tax calculation. And it’s amazing how many people I find that have not maxed out their T S P.

Micah: Yeah, during that year-end review is really good right now. Right. A lot of things can go wrong throughout the year that we can miss. I’d say one thing: whether it’s if you’re actively employed or you’re retired, I’ve seen your withholdings get changed where I have had a retiree, that withholdings all a sudden got stopped at OPM or reduced. I’ve had federal employees that are active; their withholdings got changed as well. They go on about every single day life their paycheck changes, but no one’s really paying attention to that net deposit coming in every two weeks. They think it’s fine. And then at the end of the year, they get their tax bill. They’re like, holy crap, how do I owe so much in taxes? Nothing has changed… lives. And we go back and look at it, and it’s because they didn’t pay enough in. Right. So now is a good time to be reviewing all those things.

Floyd: Micah, you’re 100% Correct. And how about someone that turned 70 and started Social Security? They don’t get taxes withheld. You have to submit another form for that, surprise, April 15.

Micah: Yeah, all of your withholdings, right, it’s all going to be different. So let’s talk about this just a little bit. And some things that we can do is number one, I would definitely say look at running a tax projection and for us that’s get all of your sources of income together and look at a year-to-date statement and how much have you been paid gross, which is going to be taxable. And then how much have you paid in to the IRS and each one of those sources.

Floyd: 100%. And you got to remember that we’re the IRS pays us on a 12 month period of time, and then you’ve got a supplement by the cordeliers which really aren’t cordeliers , right because you’ve got that June crazy one that August crazy one that you gotta build up if not you had subject disabilities.

Micah: Yeah, making those estimated tax payments. So there’s a couple things you can do. Now, if you’re coming at your end, and you are looking at this and you still owe money. A couple things to think about is number one is have you Max funded your TSP account. There is still time to increase your withholdings and put more into your TSP, whether that’s the normal contribution or catch up if you’re age 50 or older this year, you can put more money in there. You cannot do it via a check. It has to be payroll deduction. So as a reason we got to be ahead of this and can’t wait till after Christmas to figure it out.

Floys: Micah I’m doing that with three of my beds right now. They’re shorter than about 10 grand. So we took how many pay periods are left through the year and divide it out and increase it just a little bit? Because OPM may not respond quickly to start the deductions.

Micah: Yeah, that’s such a great point to be thinking about. Another thing is going to be your HSA. contributions, your health savings accounts now open season is upon us well quickly upon us. I should say it’s coming up very soon. And so maybe you’ve done it maybe you haven’t if you’re in an HSA for this year, so you’re in a high deductible account that’s HSA eligible for health savings account. You can put more money away pre-tax and take it out tax-free. So, I’d be looking at those contributions. Have we put enough money in there? Now, if we’re not eligible for one, then I’d be looking at 2024 during this open season. Can I make a change in my plan? So, in 2024, I’m eligible for that HSA.

Floyd: You know, Micah, that’s all part of that planning side of it. Right? I do have a lot of things going on in your life that you need a normal deductible, or I’ve been pretty healthy, and maybe not picking on kids, but maybe the kids are not out of the house. So now I can have a high deductible plan and then start maximizing, putting extra money ended out up to the max every year and accumulating it year after year, after year up until you turn 65.

Micah: Yeah, but more money inside of it, which is always a fantastic idea that money can grow for you tax-free in an HSA, you can actually invest it through TD, which is now Schwab you can invest that money and have it continue to grow for you, which is just fantastic. So these are really important things that we should be looking at and saying how do you plan for.

Floyd: You know, it’s not only that, Micah but it’s talking about are you selling a piece of property and you have some capital gains you have to deal with? Can we delay something in the next year because you’re going to retire and the income going down? It’s so important to look at all aspects of your income and your expenses as well as what you own if you want to buy yourself like they ended up coming here.

Micah: Whoo. All right. So getting a little bit of planning distinction between my dad and I. So there’s one aspect should you defer selling something? I’m gonna take the other angle on it and say should you accelerate on selling something because we know what the capital gains laws are and in a couple of years. Our current tax laws expire at the end of 2025, which is quickly approaching our current tax laws expire, they get repealed and go to a higher amount. Now, what’s going to happen with taxes? Who’s going to know the code? I don’t know. I’m just looking at their current tax law as we know it today but pops to your point. These are things you should look at it at least make an educated and informed decision.

Floyd: Without a doubt. I was talking to a client yesterday, and he said you know I got this lot. I think I’m gonna sell it and I go through his income and he’s taxable income is gonna be under $22,000 this year, and I go well, I would do sure because, under 22,000, your long-term capital gains rate is zero. And he goes, I didn’t know that. So…

Micah: Yeah, so taking advantage of things like that is just a fantastic idea. Yeah. So all of those sources, etc. Then looking a little bit into next year as well with that one, too, right? What can we set up in 2024? Whether that’s maybe in your FSA, a flexible spending account? Do you want to increase your contribution to that we want to set that account up, etc. Can’t do anything with this year with an FSA, but for 2024, you absolutely could.

Floyd: You know, Mike and so many times we see people that have the FSA, as well as use it or lose it so I don’t want to put any money and I go well how did you plan? Why don’t you put money in there? Do you need to replace your glasses? The answer that’s not come on by the health coverage that we can three funded and it’s all tax deductible.

Micah: Yes, that’s a huge part of that right is being in that tax deductible side of it. So FSC’s are great if you’re going to use the money with a little bit of that kind of carry forward outside of the health benefits pops. Another one to consider that we’re thinking about year end with a lot of our clients is Roth conversions, doing that tax analysis and saying, hey, when these tax laws expires, your taxes go up in 2026. What does that mean? What tax bracket will you be in when you retire? What tax will you be in? That makes sense to micro Roth conversion? So maybe not hundreds of 1000s of dollars, maybe it’s hundreds of dollars, maybe it’s 10s of 1000s of dollars, but it converting some of that Roth IRA and some taxes today on that money, but have that money grow for up to three.

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Floyd: You know, Micah, what’s that big lie that I’m guilty of telling people for so many years? When you retire, your tax bracket will be lower. But unfortunately, inflation and our cost of living just continue to shake things up. So I haven’t seen one of my retirees yet. Slip into our lower bracket. They’re maintaining the same bracket. So I’m telling people if you do a Roth conversion, consider it like you’re planning as see an apple tree, right? You want to pay taxes on the seed, or you want to pay taxes, and every time you pick an apple off the apple tree, I’m gonna pay taxes on the seed because now the apples are tax-free.

Micah: It’s a great point and the seeds are smaller, you’re paying taxes on a smaller amount right and what you’re betting on here is well, regardless of what tax laws do or not, I like diversification, same reason you don’t have everything in the C fund. Same reasons you don’t have everything in the I fund, right is we want to diversify our investments. Are you diversifying your tax plan and that’s what these strategies allow you to do.

Floyd: You know, Micah. So many times we talked to people that did a great job, the first thing we did was find the TSP and maybe their IRAs, but when we start talking about taxes, their eyes kind of glazed over and go, I never thought about that.

Micah: Yeah, that’s really important to think about, right? How do we minimize those things to make sure you’re not being doubly taxed on things to make sure the taxes aren’t dramatically increasing you in the future on all of those things? And that all comes back to a pops. What you were saying is doing a tax calculation or tax projection for the end of the year, how is that being set up that make sure that you know what your taxes are going to be?

Floyd: You know, Micah for years, the Schedule A of W2 workers, where’s the best place to put money away? And we watch people pay? You know, I remember the old adage one of our CPAs told me, boy, buy a bigger house and pay higher interest because a solid deductible right? Well, now we have limitations married filing jointly in 2023. You have to have excess interest and charitable contributions or property taxes as to see $27,700. Wow. So many times when I have clients that walk in with stacks of paper and we do the calculations, and it’s under 27, seven things have changed dramatically from that aspect. And so many times, people were still remembering three four tax acts later when it used to be not what it is today. So I strongly encourage everyone listen to the podcast, get your last year’s tax return out, look at your LSs do your tax calculations. Make sure then look at schedule A, how much would you pay on interest how much you pay in property taxes, and I can’t forget the Tax Act. But now we’re limited to $10,000 maximum on sales tax and property taxes now, right Micah?

Micah: Yeah, you got that salt limitation which is there right state and local taxes, which is you’re limited to that $10,000. So you know, if you now if you chose to live in a state with a state income tax, you got to worry about that. Dad and I jokingly say our experts in a few states state income taxes. That would be Alaska, Florida, Texas, Washington. If you don’t get the joke, those are states without a state income tax. But those are something you got to figure in property taxes. as well. Right. So with the increase in the standard deduction, and this next year, the standard deduction when I look at my cheat sheet is going to be $27,000 and change. So you got two things. You got a limitation on the salt deductions. In addition, you got that increase in that standard deduction, which is amazing. It really allows a lot of people to get more of a deduction than they did before. But then that probably means on charitable contributions. How does that stack in do you should use a donor-advised fund should you use QCD as qualified charitable distributions, right? How should you kind of mix that up because you have such a great standard deduction?

Floyd: You know, Micah, we could do a whole podcast on alphabet soup, right? QCD is RMDs and so on, but so many retirees don’t even understand or don’t even know that QCDs that are out there. And they’re great, especially if you can exceed the charitable contribution rate on the Schedule A, but again, you know, tax planning is so important. And the thing that I look at being a little older than my son is in this tax planning since 1981. I’ve seen tremendous tax x change, but every time it’s changed, they’ve given us more leeway, higher charitable contributions higher this, that and the other. So right now at $27,000 on a Schedule A I think less than 20% of Americans actually filing now, that long what we brought, we refer to the long form, taking advantage of that Schedule A. So all of a sudden they cut all these things down and make it easier to file taxes. What happens when they start raising the tax rate and the sunset provision that you talked about a little bit earlier? That takes place in 25? I believe that we revert backwards to the old tax brackets.

Micah: I think that’s such a great question pops is and this is why you need to know what your tax plan is today. This is why you need to kind of think about this not just today. Well why we like to run a 10 year tax projection with our clients is it’s not the taxes today I’m worried about it’s the taxes in 10 years. Taxes is the largest expense you will have in retirement probably even greater than health care, especially federal employees, right? You have fantastic health insurance. So it’s the largest expense, how are you planning on saving for it or getting it reduced?

Floyd. So important. So many times when people talk to us, Micah, my comments or they’re interested in the TSP don’t have the right allocation, so on and so forth. But when you get again to the tax side of the equation, sometimes I like to look backwards at my clients’ taxes, especially those that do it themselves, just to make sure that taking advantage of every deduction and I would probably say three out of 10 returns I look at we make modifications to prior years because someone says oh TurboTax didn’t ask me that question. And that’s the reason why I between October and November, so important to do those tax reviews. So important to say do you maximize that TSP or 401k plan? Have you put as much money into it? And I got to push back yesterday. What I’m getting, I’m 100% into it. I go, great. Tell me about that. Well, I get 4% match on putting 4% in so I’m 100% in. It’s like you’re short and then we go through the tax calculations they go I can save that much in taxes? I go Yeah. We just have to do it today and then go to OPM again or their employer and it’s payroll deduction, payroll deduction, payroll deduction, because we can’t write checks to catch up.

Micah: So super important to know these things. Right. So this podcast is all about action items. So, let’s talk about a little things that you can do before the end of the year to make sure you are on track. Pops I’m going to say number one: steal your thunder here but run a tax projection use the IRS; his website is pretty good. Create your own system if you like but know what these numbers are. So you’re not surprised in April.

Floyd: You know, Micah, if you’re working with an advisor, sit and talk with the advisor, you may have capital gains or mutual funds being paid, that you’re not even anticipated in there. And I see that, you know, we’re having clients that have individual accounts that they’re running at, but it’s now Schwab, you know, and they got all these great mutual funds. So, look at historical capital gains; how much dividends are they paying? Because if you get a $10,000 to someone who has rebalanced a portfolio and it’s become an event that can screw up your tagline. I like in my clients plus or minus 1000 bucks. That’s kind of a mental track as I go through that, making sure we have enough paid in you get a small refund or a little bit not huge refunds, although I have some clients that like to save the IRS.

Micah: I love it. Last action I’m gonna say is look at your Roth conversions that you should do on. A big fan of these. Literally, every single year doesn’t mean it makes sense but look at the numbers. Does it make sense to do? How are you going to pay for those taxes if you do a Roth conversion, but start increasing that tax-free portion of money for your retirement?

Floyd:And I like the laughter and like if cash flow we talked about, you know, putting more money into to make sure we can afford it. Don’t want to put your credit card debt because you live on credit card for three months. Just to get to tax savings. So it’s a balancing act for sure.

Micah: I love it. It’s 100% a balancing act things that we got to be focused on right? That make sure you’re taking action with this podcast. Make sure you’re doing those things and prove you, and until next time, happy planning