In this episode, Micah is joined by a special guest who will shed light on some myths and misconceptions that you may be dealing with while doing your taxes this year. Steven Jarvis is a CPA and the cohost of the Retirement Tax Podcast, and he’s just who we need on the show this time of year to share his insight and help you more easily navigate tax season.
Listen in as Steven shares why he’s so enthusiastic about this tax-time information, as well as specific areas where you need to stay on top of your taxes. You’ll learn how to be more proactive so that taxes are easier for you in the future, commonly missed items, and how you can ensure that you’re not paying more taxes than necessary.
What We Cover:
- How easy it is to overpay the IRS—and how to prevent that.
- Common myths about tax planning (especially in retirement).
- The things that stop taxpayers from being proactive with tax planning.
- What you need to stay on top of with your taxes.
- The right questions to ask your CPA.
- Things that easily get missed on your tax returns.
- Possible issues that pop up with tax software.
- Changes that have taken place that you may want to pay attention to.
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.
Micah Shilanski: Welcome to the Plan Your Federal Retirement Podcast. I’m your co-host, Micah Shilanski. And with me as usual is not Tammy, actually. We actually have a special guest today, which is amazing. We have Steven Jarvis, CPA from The Retirement Tax Podcast. So Steven, thanks for taking the time and joining me today.
Steven Jarvis: Yeah, Micah, I’m really excited to be here. Thanks for having me on.
Micah Shilanski: Well, this is one of my favorite topics and I know our listeners already know that. Tammy always is generally my guest… excuse me, my co-host on this. And she does such a great job talking about benefits and how they employ, et cetera. And then I always step back and want to provide a financial planning angle to things, but being that it’s tax time coming up, we thought it’d be great to have a CPA on and really talk about some myths, maybe some misconceptions that our listeners are probably going through doing their taxes right now. What do you think?
Steven Jarvis: Yeah. I was so excited when you invited me to come on. I get questioned a lot of, “Hey, is your enthusiasm about taxes actually genuine or is this all a show?” And it honestly is because everyone has to pay them, no one likes them, and there’s actually a lot we can do around them to stop overpaying the IRS. So I get excited because I know the impact we can have by sharing this information.
Micah Shilanski: That’s so true. So often taxpayers, in my opinion… of course, you’re the CPA, so feel free to push back… overpay the IRS, but they do it the wrong way. What they do when they’re overpaying the IRS, they’re looking at their current tax return and they’re saying, “How do I get the most out of this today?” But they have no regard to the future. So they’re saying, “Let’s do the best savings we can today. And then hopefully in the future, our taxes will be less.” And I think Steven, a lot of that comes from… I’ll blame our industry, the financial planning industry. So often retirees have been told, “When you retire, your taxes will be less.” And the reality is 9 times out of 10 with at least federal employees, that’s not the case. We have Social Security, we have pension, and then 90-plus percent of your retirement assets are all safe pre-tax. So that means all of your income you have coming in for the most part is taxable income that’s there. So we really got to be proactive in tax planning to making sure you’re not overpaying the IRS.
Steven Jarvis: Yeah, you’re exactly right, Micah. And I think what compounds that a little bit is that we all pay taxes, but a lot of taxpayers just kind of see income tax as something that happens to them. They don’t really see themselves as an active participant in the process. And so you’ll almost see this as how do we gauge if we’re winning against the IRS? And for a lot of people it’s, “Did I get a refund this year? And was it bigger than last year’s refund?” But really if we take that long-term perspective you’re talking about, there are things that we can do to make sure that over time, we actually let the IRS keep less of our hard-earned money. Because I’m not nearly as concerned about whether I got a refund. I want to know how much of my money the IRS kept.
Micah Shilanski: Great point. So Steven, before we jump into this, I think we need to find some terms to make sure our listeners are on the same page. And this first term is a little confusing. And I think this is what stops taxpayers. There’s two things that really stop taxpayers from being proactive in tax planning. One is complexity because taxes are complex. How do all these moving pieces come together, et cetera. But then the complexity really leads into the second issue. And that’s actually what IRS stands for. And we jokingly say, what IRS stands for is, “I’m really scared.” Because when you at that love letter from the IRS and everyone’s so worried about making a mistake. “What is the IRS going to do? What are they going to come back with, et cetera, that all of a sudden I’m going to be in a lot of trouble because I made a mistake on my tax return?”
Well, great news. Everything that we’re going to be chatting about today is 200% above board. We’re going to be talking about solid tax planning strategies that you can implement, and there’s no gray line. Now you still need to know the tax effects of how this affects your personal tax return. But Steven, let’s kind of jump into that if it’s okay and really talk about whether someone has a CPA helping them prepare their return or whether they’re preparing their return on their own, what are some things we need to stay on top of?
Steven Jarvis: Yeah, there’s really a lot of things we need to be aware of, but we’ll just highlight a few here to make sure we stay under your time cap here. So let’s start with if you’re working with a tax preparer. There’s going to be some overlap here. But if you’re working with a tax preparer, the first thing I try to remind taxpayers is that even though taxes in the title, tax preparer, their focus really is what happened last year and how big of a refund can I get you right now. And so Micah, as you and I are talking about, hey, being proactive, looking to the future, having a tax preparer doesn’t mean you have someone in your life who is doing that. This is something that’s out of that just normal kind of process in that particular industry.
And so we’ve got to make sure that we are proactively thinking not just about, “Did I get a refund this year?” but am I asking question of my tax preparer to say, “Hey, can we think about next year? Can we think about the next 5, 10 years and what are choices that we can be making to have an impact over time?”
Micah Shilanski: And Steven, this is something I found talking about tax preparers and CPAs over the years. This is in no way a malice thing that comes up. This is more of, “I’m really busy. I have 1,000, 1,500, 2,000 returns I got to get done in a six-week period in time,” and their life becomes extremely stressful. And so all they’re focused on is the least amount of work they have to do. Not putting them down, but their main focus is getting that tax return done. And they really can’t think about the future inside of that time window. Is that a fair statement?
Steven Jarvis: Yeah. It’s totally a fair statement. And I appreciate you highlighting that it’s not out of malice in any way. And actually it’s mostly out of the tax preparer wanting to do exactly what their client is asking them. And so this is a really good reminder for people who do work with tax preparers, make sure that you aren’t just going in and saying, “Hey, get me the biggest refund possible this year,” because then that’s all they’re going to do. And we can have a bigger impact than that.
Micah Shilanski: Perfect. So Steven, let’s talk about some things that get missed pretty easily on a tax return. Regardless of this is a TurboTax, at H&R Block, a CPA… Not picking on anyone, but just seeing regardless if it’s self-prepared or a CPA, what are some things that get missed? And I’ll tell you one thing on my end that I see a lot. There’s two big things that come to mind. One of them is QCDs, qualified charitable distributions. And as you know, this is a very clever way, very great way the IRS has allowed us to take money out of our IRA account, give it directly to a charity and never have to pay taxes on that money.
Now there’s some rules around that, how much you can give. You got to be over 70 and a half, et cetera. So don’t run out and do it right now. But this is one of those things that if you took advantage of this QCD, qualified charitable distribution, and you get your 1099 at the end of the year from your IRA, it’s marked as a taxable distribution when it should be tax-free. So Steven, how would a CPA know that when they get a 1099, it says, “Hey, Bob took out $15,000.” Bob ended up giving all that money directly to charity the way he was supposed to. But the CPA, if he’s looking at the 1099, does he know that?
Steven Jarvis: He doesn’t. For whatever reason, the IRS is just relishing in how scared we are of them and hasn’t made a way for custodians, for account holders to easily report that. I’m glad you brought up 1099s because there are some other things that we need to think about as well. And the only way on the QCD issue that Bob’s CPA is going to know that there was a QCD is if Bob thinks to tell the CPA, or if Bob works with an advisor, making sure that advisor’s communicating with the CPA. But that’s a unique situation in that it gets reported wrong all the time because there’s not a great way to report it. We also need to be really looking closely at those 1099s, that tax information form, because sometimes just mistakes happen. Just because it’s on a fancy-looking form that’s all official and whatnot doesn’t make it infallible.
Was working this last year with an advisor who had a client do a rollover, which if you roll money out of your 401k into a self-directed IRA, that is not supposed to be a taxable event. But the 1099 that got issued, that tax form at the end of the year, marks it all as taxable. This tax preparer picks it up, says, “Hey, this official-looking form says taxable. Let’s go ahead and put all of this as taxable.” And now the client is paying all this extra tax because a mistake got made and no one caught it.
Micah Shilanski: You know, and Steven, that’s why our listeners, one of the things that we are very strict in in our terminology is that our listeners only use the word transfer when they’re talking to custodians about moving money over because while rollovers could go one way or another, transfers, as our listeners know, is taking money from the TSB, transferring it directly over to an IRA account so we can avoid that taxation. And the reason this were transfers so important in the federal community is if you call the TSP and ask them for a rollover, they’re going to help you with a rollover, which means you’re probably going to have a big tax bill at the end of the year. If you say, “Hey, I need to do a transfer,” there’s only one way to do that. And that will make sure that you avoid the taxes at the end of the year. So I love that, looking at 1099s that are wrong.
Steven Jarvis: Yeah. And so again, whether you work with a tax preparer or are preparing your own taxes, one of the things I really try to encourage people is that when it’s tax time, make sure that at a minimum, at a starting point, you’re looking at, “What happened last year and does what I’m paying this year, does that make sense to me based on what happened?” And so that’s ultimately how things like these incorrect 1099s can get caught is that we take a look and say, “Great. So in this case, that rollover got reported as taxable. The taxpayer paid, I don’t know, 80,000 extra in taxes.” And so they would’ve taken a step back before the taxes were even filed to say, “Hey, I paid $50,000 in taxes last year and my draft return says, wait, $130,000 in taxes? Wait, is that right?”
Just to have that, “Okay, does this make sense?” Maybe something changed during the year and that does make sense, but that’s one of those things that you can do whether you have a tax preparer or you’re doing it yourself, just as kind of that gut check of is this even directionally what I expected?
Micah Shilanski: You know, Steven, this kind of ties into another myth that we were chatting about, which is that tax software is always accurate because most of the… I love that laugh right there. That tells us the answer right there. But one of the things that the tax software often says is that it’s guaranteed 100% accurate or some version of that. However, that’s not exactly… Well, I’m sure that’s their guarantee. Otherwise, they’re going to help you out. What’s your experience with tax software? Has tax software ever made a mistake? Have you ever heard about mistakes being made in tax software? Not inputs. I’m talking about the actual calculations.
Steven Jarvis: Yeah. So I’ve been doing this for quite a long time, but I still remember the first year I prepared tax returns that literally the first week on the job, one of the things that was shown to me was how to override the software. Just right out of the gate, I’m immediately taught how to manually override the software because we knew of all sorts of places where the software just wouldn’t get it right on its own. And so there are ways to go in. Even the fancier software that the tax professionals use, there’s ways for them to go in and just override anything they want because the tax code is so complicated and ever-changing that the software companies know that it’s not all going to be right.
Micah Shilanski: Yep. So it’s great that they offer a guarantee that says if there’s a mistake, that the follow-up with that is they’ll probably pay your penalties if it’s wrong, but you still owe the taxes. But this is something where you need to know what’s going on. You as the taxpayer need to know. So Steven, one of the things I would suggest to my listeners… and I love it to push back or different thoughts if you have it… is one thing is anytime you’re doing something new, you’re changing tax preparers, you’re changing software, you had a job change, you did a transfer this year, you retired, anything new, that should warrant a little bit more time reviewing your tax return when it’s getting prepared because who knows what got transferred over or not transferred over? If you’ve had cost basis, maybe it moved over to the CPA. Maybe it didn’t. If you retired, did they find the 1099? Did you tell them you were retired and there’d be a 1099? Did they pick up a transfer versus a rollover? I mean, there’s a million things that could go wrong in any one of those scenarios.
Steven Jarvis: Yeah. Like you said, that’s just the start of the list. There are so many the other things with carryover losses, and the list goes on and on. And so yeah, when you have big changes, that’s a great time to take a step back. If you’re a DIYer, that might be a great time to just for one year work with a tax professional.
The other thing I’d highlight is that yeah, software can make mistakes at times, but the software sometimes, especially some of the DIY softwares, will intentionally give you recommendations that may not be in your best interest. Not maliciously, but let me give you an example of… Worked several times recently with tax preparers who were using TurboTax. And certainly not the only one who does this, but the software doesn’t want you in a situation where you’re paying penalties and you think it’s their fault. And so they’re going to be really aggressive on what they recommend to you. So I recently was looking at a tax return to somebody who’s still working. 99 and a half percent of their income was from W-2 wages. They had a little bit of interest. That was it, W-2 wages.
But their income had gone up that year. And so they prepared their taxes using TurboTax and they get this nice letter on top of their tax return that says, “Hey, here’s the estimated payments you should make next year.” And it was thousands of dollars. And if this taxpayer wasn’t working with someone who could tell them differently, they would see this letter and think, “Okay, great. I need to start making quarterly estimated payments of thousands of dollars to the IRS.” When in reality, what’s probably in their best interest is to just change their withholdings.
Micah Shilanski: That’s such a great tip right there because quarterly tax payments now, it’s be, “My returns become more complicated once a quarter. I need to do all these things.” When, if your paycheck, I mean, your income is dictated by your paycheck, whether that’s from OP… By the way, this applies to retirees, I would think too, Steven. So it’s not just a W-2 that’s still working. When you’re retired, your W-2, your pension comes in as a 1099-R. Your Social Security income comes in as a 1099-SA. So you’re getting these Social Security income checks. You’re getting these pension checks that are coming in. You could also have your withholdings set correctly to make sure that you don’t owe taxes or overpay too much at the end of the year. Right?
Steven Jarvis: Oh, definitely. This example happened to be a W-2 employee, but I love that you brought up Social Security as well because so often, taxpayers aren’t even aware that they can withhold taxes from their Social Security because when they applied for Social Security, the Social Security administration never told them they could have taxes withheld. But yeah, withholdings is just… It’s a preferential way for so many reasons to be paying your taxes. The IRS gives it favorable treatment. But also just kind of from a behavior and piece of mind standpoint, knowing that that’s taken care of, that that’s out of the way, that we’re not having to set aside funds, we don’t inadvertently miss a quarter. I tend to very strongly recommend that where we can, we’re doing withholdings and not worrying about estimated payments.
Micah Shilanski: One of the things that we often talk about with our listeners, Steven, is I love that you’re talking about withholdings versus estimated payments. It’s so much easier. In addition to that, one of the things to think about for our federal employees is TSP and OPM. So the pensions coming in from OPM. Now the pension will absolutely allow you to withhold federal income tax by default, but it does not by default suggest to withhold state income taxes. And there’s a lot of states that are still going to tax your retirement. So with OPM, you got to be proactive in that withholding. Just because you retire, they may continue federal. They will stop your state tax withholding. But the TSP, the thrift savings plan will not withhold state taxes. They will only withhold federal income taxes. So if you have a TSP and you’re doing a distribution and your TSP is state income taxable to you, you’re going to have to make these quarterly tax payments that are going to be coming up because the TSP office will not do that.
Steven Jarvis: Micah, what that makes me instantly think of is another myth that comes up quite often for both working taxpayers as well as people get into retirement, this idea that taxes are going to go down and get simpler when I retire. I mean, that’s just the tip of the iceberg, but you just highlighted there that that’s not automatically that my taxes went up, but they certainly got more complicated because when I was working, all of those things were just withheld directly from my paycheck. I didn’t have to think about it. On 1st and 15th, here’s how much goes into my bank account and HR or whoever takes care of the rest for me, and everything’s great. And now, all of a sudden, I’ve got these other things I’ve never had to worry about before that I’ve got to make sure getting paid, and that I don’t take it as a bonus that suddenly state taxes aren’t withheld. So, “Hey, I’m getting more money. Oh wait. Now I’m on the hook for that still.”
Micah Shilanski: “Now I’m on the hook for a lot of taxes still.” Yeah. Well, let’s transition. I want to talk about what are some changes have come up for 2022 that affect some of our taxpayers. But before we jump into that, something that comes up quite frequently, Steven… and I’d love your opinion on this, especially with your CPA hat on… is what I call letting the tax tail wag the investment dog.
So what do I mean by that? So sometimes… And we had a client that this happened last year. She had a tremendous amount in savings bonds, which is outstanding, 150 grand. A lot of that, about $134,000 or so, was taxable interest, and she never wanted to cash those bonds in because she didn’t want to pay taxes on the money. However, the bonds expired several years ago. I should say matured. So she’s getting zero interest on the money. So she has a bunch of money, over $100,000 tied up getting 0% interest, but doesn’t want to change because she’s worried about the tax implications, which I understand, I don’t want to make light of. That’s a lot of taxes you’re going to have to pay on that money. So when does it make sense or does it ever make sense to let the tax tail wag the investment dog?
Steven Jarvis: Yeah. I like that analogy. The other way I like to think about it is that taxes are an important passenger on the bus. They’re not the driver. And that’s with my CPA hat on. I talk about taxes all day, but I know and constantly remind people that taxes are not the most important consideration. We need to consider them so that we’re not overpaying the IRS because no patriotic awards for that. But that can’t be the primary driver of our decision-making. So I mean, that’s a great example, working with that client. I come across people who don’t want to sell investments or sell the stocks they own, whatever it might be, because, “Ah, then I’ll have to pay taxes.” Yes, but did you ever stop going to your job because you didn’t want to pay taxes? It’s just this different mindset of yes, taxes are a part of it. And there’s things that we can do to hopefully reduce that a little bit. But we can’t let that fear of having to pay the IRS prevent us from making other important planning decisions.
Micah Shilanski: And the other part of it too that I like to look at is whenever we’re doing tax planning… And of course, push back on any of this if you had a different opinion, Steven, but whenever I’m looking at tax planning with a client, I always like to say, “You know what? This isn’t a one-year question. This is a 10, 20, 30-year question.” Now with that, we can only plan with the tax law we know today.”
One of the things that I really try not to do is to get into theory land, proposal land. There’s going to be an administration. There’s going to be exchange, whatever politics you’re talking about, about saying, “Well, what if they change the rules?” Well, great news. They can change the rules whenever they want. Congress can change the rules at the stroke of a pen. We have no control over that.
So really what it comes down to is what are the laws we have today and how do we plan for those? So an easy example is, you know what? In 2025, 2026, our tax laws expire, they get repealed, and they go back to previous rates, which are presently higher than they are now. Now whether that’s going to happen or not, that’s conjecture. But we have the law today that says, “Okay, these tax laws are going to expire and it’s going to have a negative effect. So what decisions should we be making now if we think our taxes are going to go higher based on current tax law?”
Steven Jarvis: Yeah. Because that really highlights that a lot of the decisions we make around tax planning come down to timing. Maybe you’re sitting on some strategies you haven’t told me about, but most tax planning strategies are not some clever way to make the IRS think we don’t exist and avoid taxes altogether. It’s being intentional about the timing of income or deductions so that we can take advantage of relatively lower income tax years for us. And so when we think about it that way, then we can really take advantage of those points where we can make a decision and stop thinking about it as, How much of a refund can I get this year?” And instead of think about it of, “Hey, if I’ve got $100,000, $150,000 in bonds, at some point I’m going to pay the taxes.”
And one of the questions I like to ask or can state ways to think about it with clients is, “Hey, taxes can do one of three things. They can go up, they can stay the same, or they can go down. For a lot of our planning decisions, if they go up or stay the same, then accelerating our income can be incredibly advantageous. Are you concerned that tax rates might go down?” And so just kind of putting a framework to this of how do we think about this because just waiting forever, I mean, the IRS is only so patient. They’re going to come get their due at some point. But do we want to be intentional or are we just going to wait for that to happen to us?
Micah Shilanski: Perfect. I love it. Well, Steven, let’s transition and talk a little bit about changes that have taken place this year in some of our taxes. And there are some great things that have taken place. For one, you and I were just talking before this about charitable deductions. There was a change in charitable deductions?
Steven Jarvis: Yeah. So it’s 90-ish percent of tax payers take the standard deduction, which means that they aren’t getting a tax benefit from giving to charity, which again, to your point in about not letting the tax tail wag the dog, tax benefits should not be why you give to charity.
Micah Shilanski: Amen.
Steven Jarvis: And so 90% of taxpayers take standard deduction. They’re not getting any tax benefit from their charitable contributions. But in 2020, the Congress decided, “Hey, $300 of your contribution can still be tax deductible. And in 2021 for married filing jointly couples, is up to $600.” So know that the-
Micah Shilanski: Ooh, doubled.
Steven Jarvis: … tax benefit on… Yeah. The tax benefit on $600 deduction is not life-changing, but hey, may as well get it.
Micah Shilanski: Yeah. If you give the money, might as well get the deductions. They set the rules, but we get to play the game. And another thing too is sometimes, Steven, I feel with some clients that used to itemize, but now with the new rules of such higher standard deductions… and maybe you have what those numbers are… is with such higher standard deductions that we can do is they feel penalized. They feel like, “Oh man, I can’t write off the house now. I can’t write off these deductions.” But when you run the math, that’s actually not the case. The standard deduction was more beneficial or am I missing something?
Steven Jarvis: No. In most case… I mean, that’s why 90% taxpayers are taking the standard deduction. It’s because it’s higher than those previous itemized deductions. And I can relate to the emotion. There was something just kind of reassuring about, “Yeah. I had to spend all that money on my house,” or, “I took all this time to support organizations in my community.” It is just this nice validation of, “Oh, and I get a tax benefit.” So now it’s a little bit disconnected. But for most people, they are better off with that higher standard deduction.
Micah Shilanski: Absolutely. And so a simple way to think about this would say, “Hey, if you had a $20,000 deduction or a $26,000 deduction, which one would you like more?” Well, $20,000 was your itemized, but now you can do a standard at 26. So there’s a little bit of emotional… But let that math sink in a little bit when you’re looking at these numbers to help make the decision because it’s money, especially tax money. It’s even more emotionally charged when we’re talking about this. So really looking at those numbers makes a ton of sense. What else? What other changes have taken place this year that our listeners should know about?
Steven Jarvis: Yeah. So just like most years, the tax brackets usually get adjusted slightly every year. And so as you look at the income ranges that put you in different ordinary income tax brackets as well as the capital gains brackets, those all shifted slightly for 2022. The Medicare premiums did go up somewhat this year, just so you can expect that and know that’s going to change a little bit.
One of the other changes that doesn’t necessarily happen every year is that the required minimum distribution factors actually changed for 2022. And the IRS doesn’t like to make anything simple. And so they increase the factors, which means you actually pay a little bit less. Essentially, the IRS decided that we’re all going to live just a little bit longer. The good news here is that since the end result is that you would pay a little bit less than you might have otherwise, if you don’t take any action, most likely, you’re going to end up paying more than you should have, which is better than paying less than you should have and getting penalized because the IRS, for some reason, reserves their most significant penalty for retirees when it comes to required minimum distributions.
Micah Shilanski: And this is really important too because RMDs, these required minimum distributions, if you calculate between all your various accounts, you have a $20,000 required minimum distribution. In some cases, you could take that all 20 grand from one account and be fine. In other cases, you can’t, and each account is different. You might have three or four different RMDs you have to take, maybe even more than that if we think about a complex situation. So really important with RMDs, one of the things, Steven, we always encourage our clients to do, we always run a calculation so we know basically where it should be, but we always reach out to the custodian. That’s a person that has the money, Schwab, Vanguard, TSP, et cetera. We find out from them exactly what their calculated RMD is. And we do this for a couple of reasons, is one, we want to match our numbers and make sure they’re right, but we also want to know what numbers in a 5498 or anything else they get is getting reported to the IRS to make sure the client’s not being penalized or overpaying in taxes.
Steven Jarvis: I love the recommendation to reach out to the custodian because this is definitely an area where taxpayers, especially DIY taxpayers can easily make mistakes because while Google has lots of great information, hundreds of millions of search results, just the other day, as I was looking at some of those changes, went to Google the because hey, they’ve got a really great search engine. The first result that came up that was a link to the IRS website, which a lot of people are going to think, “Hey, it’s the IRS website. That must be the most accurate.” The first IRS result was for a worksheet for RMDs that was multiple years old because not only did it have the wrong factors, it was talking about, “Here’s the RMD you need to take when you turn 70 and a half.”
And for listeners to your show, I’m sure you talk about this often enough that they all know that well, RMD starts at 72 now. And so when these things change, the information a lot of times takes a little while to catch up. And so calling the custodian is a great recommendation to just really make sure you’ve got this dialed in.
Micah Shilanski: And especially with the penalties being so severe.
Steven Jarvis: So severe.
Micah Shilanski: The penalty, 50%, five zero, half, half of what you were supposed to take out plus taxes on the entire amount. So it could be 75, maybe even 80% in some cases of that dollar amount you’d have to give to the IRS. And my justification again, from going to the custodian, if I get the number from the custodian and I do what the custodian said, and the custodian was wrong, at least I have something to go back on the IRS. That means I need it in writing. I need it in documentation that if all of a sudden the custodian… I’ll pick on TSP. I’ve never had this issue with TSP by the way, but I’ll pick on them. Let’s say they said their RMD was 20 grand. You took out 20 grand and your RMD was actually $26,000 and TSP made a mistake.
Well, I’m going to at least go to the IRS and try to get out of this penalty because the custodian made an error. Now, whether the IRS is going to go for it or not, this is a different discussion, but at least I have something on my side to try to avoid the penalty versus if I made it up, if I was told about it, if I wrote it down wrong, I don’t have a leg to stand on.
Steven Jarvis: Yeah. It’s a great, great recommendation to go to the custodian. Love that.
Micah Shilanski: All right. So Steven, let’s talk about another one, another change for this year which affects a lot of our retirees at 65, which is Medicare. A couple of things come up with Medicare Part B, Part B as in Bravo. And this is the one we jokingly say you don’t have to have, but you just have to have in retirement. So for those of you that have Medicare Part B, you’re going to see a couple of things. One, your premium increased this year. So you’re going to notice that. But also the IRMAA, the earnings limitation on how much you can earn this year, also changed. You can make a little bit more money before you get bumped into a higher bracket. Is that right?
Steven Jarvis: Yeah. So in general, those are driven by inflation is how the IRS decides on that. But yeah, both of those are important things to remember that even if your income didn’t change at all, just across the board, the premiums all went up. And then looking at those income limits… Because we talked earlier about, as you get into retirement, it could be the first time you have choices you can make about timing of your income, and that’s something to be aware of as well, that is you’re deciding how much of a distribution to take or when to recognize certain income. That’s just, again, another factor to consider. And to your point earlier of not letting the tax tail wag the dog, just because we’re going to cross into another IRMAA bracket into another higher threshold of how much Medicare premiums we pay doesn’t necessarily mean we’re not going to do it, but at least we go in with really clear expectations and we know what’s going to happen.
Micah Shilanski: I can find an easy example. Just had a client that was selling a rental property, and they were going to go from $150,000 a year to over $340,000 a year because in that one year, they had $200,000 of gain. Now you may not thinking, “Okay, I don’t have a rental property. I don’t have to worry about this.” Okay. It could be a piece of land. It could be stocks appreciation and value. It could be a distribution from your TSB because your kids need money, or you’re buying a second home. There’s dozens of these examples. But all of a sudden it doubled their Medicare payment. So Steven, to your point, maybe it’s not something we should worry about, but also in a planning point, if I know about it in advance with a lot of clients, I take a distribution in December, I take another distribution in January.
The client was only a few days apart in getting all the money that they needed, but now is able to keep them under the Medicare premium so their Medicare premium didn’t double. So there’s clever ways that we can do this if we’re forward-looking. So you got to be cognizant of the tax effects. We can’t let it be the driver. I love that analogy used. But we got to be cognizant of those passengers, those tax effects that we have to say, “Great. Maybe we steer a little bit left or right different because maybe it’s going to save us 1,500, $2,000 in taxes.” And you know what? If I had to get my money over 10 days and it saved me $2,000, maybe that’s worth it. And that’s the power of tax planning.
Steven Jarvis: Yeah. And to me, the other piece of that is… That’s best case scenario, that there’s something we can do and we can avoid it altogether. But for me personally, especially since there’s a delay in that when IRMAA is assessed and then when we see the premium go up-
Micah Shilanski: Two years later. Right.
Steven Jarvis: Yeah. Two years later, we’re going to suddenly see, “Oh, my premium just doubled.” To me, there’s a real importance in knowing that’s coming even if I can’t change it, especially if I work with an advisor or tax preparer. I’m going to be furious with that person if my premiums double and then you come back to me and say, “Oh, well, yeah, we knew that was going to happen. It’s fine.” Well, if you knew that was going to happen-
Micah Shilanski: “Oh, we just didn’t tell you about it.” Right. Yeah.
Steven Jarvis: “Yeah. We just didn’t tell you.”
Micah Shilanski: Yeah. So really, really important. All right, Steven, this podcast is all about action items for our listeners. It’s great information. Hopefully, it’s fun. If you’ve made it this far, jump on here, give us five stars, because come on. If you’ve made it this far, you got to be loving the podcast and taxes because who doesn’t love taxes? I know everybody does them every year. That means you got to love them. All right. Maybe that’s a little stretch. But Steven, we want to focus on action items our listeners can take this week to improve their retirement. So I’ll go first on this. I’ll say the first action item is know how your taxes work. Don’t expect you to be an expert. But you should know how your 1040 comes together. You should know what things affect your taxes, retirement, distributions, changing jobs. You should know those things and make sure you’re articulating them to whoever is helping you prepare your return.
Steven Jarvis: Yeah. Such a great recommendation there. The one that comes to mind for me is that every taxpayer needs to know who is actively looking at their taxes each year. For some of you, that might be you. Maybe you’re a really committed DIYer and you’re taking the time to, like Micah has suggested, learn how your taxes come together. But there needs to be someone in your life who’s proactively thinking about taxes. And if you have a tax preparer or financial advisor you work with, don’t take for granted that they do that by default. You need to ask questions of them to make sure that someone is looking forward to this next year, to the next 5, 10 years.
Micah Shilanski: I love it. You know what? And I’ll say the third action item, if you’ve enjoyed Steven and his tips that he’s given you on taxes, then you should go follow him. He has a podcast with another great financial advisor, Ben Brandt, and the podcast is The Retirement Tax Podcast. Is that right?
Steven Jarvis: That’s correct. Yeah. Ben and I have a lot of fun talking about taxes, and this same focus on long-term thinking, getting ready for and through retirement. So it’s The Retirement Tax Podcast. You can find it on Apple Podcast or Spotify, wherever else you listen to your podcast, or retirementtaxpodcast.com.
Micah Shilanski: Excellent. Well, Steven, thank you so much for joining us, and to our listeners. Happy planning.
Steven Jarvis: Yeah, happy planning.
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