Hey everyone. I’m going to be starting out. Today’s live workshop on not just the tax planning series, but understanding your test cases specifically today is what we’ll be talking about. And I’m excited about this because tax planning is basically one of the key areas that a lot of people just are not.
Well, no one on, they’re not familiar with how their tech situation works and it’s super important because there are ways that you can be more efficient with it and basically avoid paying more taxes than you need to. So that’s really the point of understanding your taxes. Not only will you understand and feel more competent.
In clarity as to why you pay so much in taxes, but you’ll also have a great groundwork to know how to navigate these things and control your taxes moving forward. And that’s what I’m really excited about sharing with you today in. So my name is Lucas. I’m a certified financial planner. I started Level Up Financial Planning.
Three years ago now. And I started Power Up Tax Planning Services, really to compliment my clients at Level Up Financial Planning, this gear earlier this year for 2020. And it’s been a lot of fun to be able to help people navigate their financial situation and sure that they’re making informed and competent financial decisions.
And that’s really what that’s all about. That’s about all I’m going to do as far as talking about, about financial planning or, or even the power of line services. This isn’t about to be a sales pitch. Hopefully, a couple of my clients are even on here anyways. So it’s really going to be purely about education information to give you confidence and empowered to control your financial situation moving forward.
So with that, I’ll take you to this exciting slide is the disclosure. So this is required by a law that I provide these things. And so I’ll give you a second to read over there. It looks like I got a comment coming in already, but yeah, definitely feel free to, to read questions. Oh, awesome. I got one of my texts friends in here.
So if there’s ever anything that comes up, that’s outside of my league, I’ll definitely be able to even lean on him too, to provide some information and insights, but. Yeah. So that’s enough time to read the disclosures. Again, that’s just required to basically state that this shouldn’t be taken as specific advice to your situation.
This is more for just making sure that you understand this is educational, and this is for you to start to gain some information by the end of this, you’ll have a good idea about why your texts are the way they are. And why you pay as much as you do, but you might not necessarily be able to go and start doing taxes for 11 after watching this, uh, the person, my friend that’s on here, it’s a lot of time studying.
I had to take a bunch of classes to be really knowledgeable about this, or then even additional kind of studies afterward. But yeah, you should be pretty common about your own specific financial situation or at least know what questions, what. Holes, you can start digging into a little bit deeper. And so here’s popular.
And it makes a lot of sense even now. So obviously president Trump he’s healthy right now are kind of on that trajectory. So initially I wasn’t going to say this because if he was still not feeling well, I didn’t want to, to be distasteful, but now since things are looking good. Yeah. But even Trump has to pay taxes.
He paid $750 in Taxes. How do you think of yourself if this is news to you, you’re probably like what? $750 is all you paid? Yeah, it’s pretty, pretty crazy. Even he had to pay taxes though, even though it’s not nearly what you would expect from someone of his stature and kind of his business background. But yeah,
In this world, nothing can be said to be certain, except for death and taxes.Benjamin Franklin
And even Trump kind of avoid that. Uh, even though he got pretty close, right? You got pretty close as there are with that. Will, I don’t think I’ll be able to get your texts that low, even with any information I provide today. But what I will do is give you a couple of tips and ideas of how you could start to, to move in that direction and just had more control over when you want to pay more taxes or not, because there are some tax efficiencies to be had as you kind of move along.
So the main outlines that we’ll cover today are going to be that the three major tax rates to me that I think matter the most to you, and that you should know, you should be aware of these things, the deductions versus credits and how those things compare. Cause I know a lot of times people think that they’re going to get some type of deduction and all of a sudden there’s been a lot of texts.
Law changes there. They’re always changing. It seems like the last few years. And so you want to get clear as far as what those are. And when they may apply to your situation. So we’ll talk through those examples. Also, just give you a detailed example of how to go through and, and calculate this for yourself as well.
So it’s gonna be something that if you happen to have your, your texts available, you can pull them out and you can kind of follow some of this line by line with us in some instances, And then ultimately how to control your taxes, right? That’s why we’re here. That’s why we’re trying to get this additional information to education because you actually can control these things quite a bit.
So speaking of control things that we can’t control all that much, unless you’re self-employed is going to be the Medicare tax that we pay, the social security taxes we pay. The good news on social security is once your income crosses a certain threshold, you actually stopped paying that social security amount.
Um, you get a little bit further outside of, and then all of a sudden the additional Medicare tax kicks in. So those are things to be aware of. If you’re self-employed, if you’re a freelance contractor and you’re responsible for pain, you’re. Employment tax, you actually pay double that. So it’s going to be 15.3%.
That’s important to be aware of. That’s one thing I shot a lot of people when it’s their first year being self-employed. Oh, yep. I’m withholding my social security and Medicare, but you’re probably only withholding half of what you thought you were going to need to cause you actually have to pay double.
You may not realize this, but if you are an employee or when you were an employee, your employer is actually paying that other half for you when you’re an employee. So that’s why. Um, it’s actually, the government receives a lot more than what we just pay into social security and Medicare for our records.
So the three major tax rates that to me, I think matter the most, it’s your marginal tax rate. So. Why there’s a couple of different rates to be aware of. So in the United States, we have taxes some that’s called a progressive. So it means that you pay different amounts of taxes on different levels of income.
So I’ll provide you an example. So it’ll be a lot clearer, but it just means that just because you’ve received a hundred thousand dollars in income, if your marginal tax rate where you land is. 22%. That doesn’t mean you’re paying $22,000 in taxes for federal taxes. Cause it’s progressive. You’re actually gonna pay at a much lower rate.
I then it’s going to incrementally get up as your income phases up. And so it’ll be different rates for different. Parts of that a hundred thousand dollars earned basically. So we’ll dig into examples. So you can see that capital gains rate that’s important because a lot of my clients and just a lot of people have investments.
You might have investment property that might even have a home that you’ve lived in and it’s appreciated and value. Sometimes you might end up having to pay taxes when you sell these things. If you have employer stock. So that’s when capital gain rates come into play. The cool thing is that it’s way better, way more favorable than that earned income that you received.
So we’ll look at those and see how they compare. Then the thing that I think is supercritical and crucial is to understand that your effective tax rate, because we are in that progressive system, you’re not paying that 22% on all a hundred thousand dollars. That means that there’s a lower tax rate that you end up paying and it’s called your effective tax rate.
We’ll talk through how to calculate that.
So first let’s look at the marginal tax rates and you can see here, this is for single filers. Um, I won’t spend too much time on this cause it’s just pretty much reading the numbers and kind of where you fall in, but, it describes that first about $10,000 or so you’re going to be paying at 10%.
Then the next, uh, $30,000 or so you’ll be paying at 12% and you kind of progressively grow through there. And so that’s, it means even if you have a hundred thousand dollars in income, you’re not going to be it 24% on all of that. You’re just going to pay that on the threshold that it crosses of that 85,005, 26.
And. Not gonna work through the joint filing one, but because you’re married, filing jointly. If that’s the case, they give you more wiggle room, right. They allow you to receive more income before you get kind of hit by those taxes. So essentially double most of the time every now and then there are some tax laws that change.
And sometimes the married filing jointly. Isn’t exactly double of the single, it depends on what’s going on in Congress, right? What kind of hodgepodge tax laws that are trying to force you. Cause sometimes these things don’t make sense and we’ll probably see that on some things here soon. So the capital gains mean tax rates.
It gets a little bit more complicated. There are short term capital gains. And then there are longterm capital gains, short term is one year or less. So if you held something exactly one year and sold it, you’re still in the short term, you actually need to go one day over that. That’s important to know that was always on my, my text questions in school.
And, and I think I got it wrong once and I’m one of those people that I like to learn from my mistakes. And so I’m like, Oh, it’s one year and a date in order to get that preferential longterm. And that’s when you hold it greater than one year. So at least one year in a day, then you qualify for longterm capital gains tax rates and the difference.
And the reason why you want that to be the case is, as you can see this one small enough, I was able to put the single filers and joint filers side by side, but these are the capital gains tax rates. So if your income happens to be less than 40,000, you actually don’t pay anything. Once even once you go there, there’s a huge range.
It’s almost $400,000 range where you can go up and only pay 15% on those capital gains. And so that’s way better than if you, again, going back, looking at those marginal tax rates that you could be paying. If you’re paying 24% on your income, that goes over a hundred thousand, but you’re able to sell.
Some assets, some investments that you have, and only pay capital gains on that only on the portion of the gains too. That’s always something that a lot of people forget is when you have a capital gain situation, you are only going to be paying capital gains taxes on the gain from what you purchasing your purchase price is called the cost basis.
So that’s important to be aware of. I see a lot of people freaked out when they have employer stock purchase plan, or if they had RSU that vested. One thing that happens is once you’ve had those for a while, you do have a cost basis. So you’re not paying a hundred percent of that, that value that you sell it for in capital gains tax rates.
It’s going to be a portion of that. You take the sale amount for that investment minus what your cost basis is, how much you originally paid for it, or how much you originally paid taxes on it. If it’s like an RSU that vested right. And then basically you only pay that 15% or 20% on that I’m out. So it’s not nearly as bad as yeah.
Sometimes people freak out about, so you can feel a little bit better than those capital gains rates are awesome. Stay tuned. Right? There’s an election coming up. Uh, one of the last workshops I’ll do is what’s the impact that the election might have on your taxes, because. They’ve been trying to get rid of these capital gains tax rates.
So right now, this is the law as 2020, but that’s subject to change moving forward. And if that’s the case, we’ll, we’ll definitely be getting some updated workshops for that. So this is going to show you how to calculate your effective tax rate. Talked about the marginal tax rate. We talked about capital gains, and now this is how you calculate your effective tax rate.
You at that end of the day. So 2020 ends, there’s not going to be too much wiggle room as far as how you can change your tax obligation. There’s a few. Instances where you can with retirement accounts, HSA contributions. Sometimes you can travel back in time, um, all the way up until April 15th of the following year, but for the most part, most of your tax situations and bit.
So whatever that amount is, you divide that by your total income for the year. And that’s what your effective tax rate. And I’ll give you an example here. So let’s say that you owe $6,000 in taxes for 2020 and your income, your total income for the year was a hundred thousand. That that was pretty easy.
I’m trying to use easy numbers here. And so the, the effective tax rate is 6%. That actually is not that bad. So, uh, every now and then I’ll run into clients that make about that much. And if they’re married, filing jointly, if they have kids, sometimes you can get that effective tax rate to be pretty low.
And that’s a big difference on what you may think you would be in like 22% at 24% break at about that range. So it’s important to know these things and see how they compare. And then it just kind of empowers you to make that decision of what should we change this? Should we try to increase how much we’re paying in taxes?
Okay. Because there might be some benefits down the line, uh, if we’re doing like wrath accounts or, or something like that, or should we decrease it and reduce our taxes and we’ll go through a couple of examples of how you can do those things. So the big tax reducers, uh, other than that, just making less income, which no one, no one wants to do.
I think that’s one huge. Yeah, the there’s that papular saying, right. More money, more problems. That’s definitely the case, but taxes are only a portion of the income that you earn. So very rarely will you be penalized in taxes. There are some instances and we’ll actually cover this in the taxes and retirement workshop.
That’s in being a couple of weeks, but there’s some instances where you receive. More income and it’s, it’s brutal when it comes to taxes. But most of the, if we’re just talking about your marginal tax rates, you’re not gonna, you’re still gonna end up with like 70% more income than you’re expecting. Even when there are taxes.
Some more income is always a good thing, even if there is more taxes associated with it, but how you can reduce taxes as well. Deductions there’s tax deductions. That’s going to reduce your taxable income. That’s different than tax credits. Tax credits reduce your taxes. And if you guys remember back to when you were in math class, that’s a greater than sign in the middle.
So credits are always greater than deductions. If you receive $2,000 tax deduction, that is not the same thing as a $2,000 credit. So most of the time the credits are going to be way more valuable when you’re trying to compare those things side by side like that. And here’s an example of why that’s the case.
So if I’m using the same income levels for both, and just, I’m always going to be using a hundred thousand, just to make the math easy on everyone. So income for deductions, we’ll focus on that left side for now a hundred thousand. Let’s say they get a $2,000 deduction. And so now their textbook income is 98,000.
If they’re in the marginal tax rate of 22%, that’s, that’s only saved some $440. So that deduction, obviously it saves them money. That’s good, but it’s not going to be quite as good as the. Tax credit. So we’re gonna look at a taxable income of a hundred thousand. Again, keep that, even this time, it’s a credit that they’re going to receive for 2000 and the marginal tax rate is still 22%.
We’re trying to keep these things pretty similar. Other than you see the tax savings, it’s actually still that $2,000. So 2000 is definitely greater than 440. And in case you need to see where I’m looking at it, edit some fine from Lidl. Images there to call those out for attention. So when it comes to a deduction, we’ll talk about deduction specifically here for the next couple of sides.
So for the deductions, first thing that you’ll realize is there’s, you have to choose, or basically it will be chosen for you. Once you kind of look at how things go, there’s the standard deduction. And that just means that there’s set amounts already provided by the IRS that says, yep. You can reduce your income by this amount.
If you’re in an individual, you see it’s 12,400. If you’re joint filing 24,000 hundreds, if you’re head of household, that’s 18,006, six 50. So that’s how much, you’re just able to reduce your right off the top. That’s that’s free. Basically. You’re paying 0% taxes on that first chunk of dollars, uh, for the standard deduction, right?
Most of the time with the tax laws that it happened in 2017, most people are going to take the standard deduction every now and then you get to the spot where you actually have enough itemized deductions to take itemized deduction. So in this situation, it’s standard or itemized, you basically have to choose between the two.
You’re always going to take the higher one. The thing with the itemized is. The biggest thing that happened in 2017 is they kept the state and local tax. So if you think about your state income tax yeah. If you think about property taxes, those things tend to be pretty high sometimes, especially in some parts of the country.
And those are capped at $10,000. So. Are ready. You’re going to have a hard time. If you’re married, filing, jointly, trying to find another $14,800 of income to get above that normal standard deduction you’d receive anyways, as married, filing jointly, the other itemized deductions, you get to add in there to see if we can cross that threshold.
Is the home mortgage insurance or interests? Um, charitable contributions is a big one. Uh, there’s going to be a specific workshop for that one. I tried to paint all the ones, I think add the biggest value and the most. Planning opportunities and strategies around for my workshops at standalone. So we can get into the weeds with those and then medical expenses as well.
So those are really the key ones every now and then there’s some other ones that are less known and less common that will probably fall into there. But yeah, if the numbers don’t add up for your itemized deductions to be greater than your standard deduction, you’re going to take the standard deduction.
Luckily, there’s still a few other standalone deductions that even if you do the standard deduction or you didn’t the itemized deduction, you still have access to some of these other common deductions. So you can still deduct. Tuition. Um, all these things may have limits. So you always want to look into that and see if there’s any income limits that apply or just limits in general.
If you had a million dollars intuition, there’s usually caps, right. And these types of things. And so, yeah, just be aware that the tuition usually is a deduction cap, student loan, interest contributions. That’s a big one. If you’re eligible. And HSA contributions again, if you’re eligible, there’s a few of these things that you can tack on top of specifically the IRA contributions, if you’re allowed to make them and the HSA contributions you have until April 15th of the next year.
So those are the few situations we can actually go back in time and still, it could be 2021 in April, and you could go back. And reduce your 2020 taxes. So that’s something I always like reminded people as an opportunity if they have too much cash or, or something like that, that they don’t necessarily need.
We can do some of these fancy things. Again, credits are going to be more valuable from a pure dollar dollar standpoint. These definitely usually yeah. Income limits. So that’s something you want to be aware of. So there’s the education credits. There’s the lifetime learning. There’s American opportunities.
They have different. Limits. They have different timeframes that you can use them. So it’s important to be aware of there’s the child tax credit. I was going to throw some pictures of my kids up here and just say, Hey, this is $2,000 child tax credit. This was 2009 child tax credit, and this is $2,000 child tax credit, any valuable tax credit.
Um, obviously kids are more expensive than $2,000, so it’s, it’s it never makes sense to have children purely for the tax credit. But at least there’s some kind of government incentive or, or help, I would say in some of those childcare costs that you might end up running into, um, child independent care credit.
That’s something that you may be eligible for. And a lot of people have been able to use recently. I then earned income credit. That’s typically for lower income earners, but if you have a year, if you’re unemployed, there, there’s some instances where you may cross into these things for one year only. And it could be a good tax planning opportunity if your income dramatically falls.
Yeah. Yes. It’s obviously not a good thing that there’s not that much income coming in, but there’s some strategies you can use to actually take advantage of that situation. So that’s something I’ve done with my clients when they reach those different periods. So this wouldn’t be a full example. So if you did happen to get out your taxes from last year, you can kind of follow around or follow along mostly with this.
So. This is gonna go straight through it. If your income’s a hundred yeah. Thousand dollars, I’m going to use the example as a single file or just to kind of keep it nice and easy. Obviously, if you’re not a single filer. You’re going to want to look at a married, filing jointly tax bracket to see what your marginal tax rate is.
But I’m going to show you all the way through here and you’ll see some pretty identifying information that you can run these calculations yourself. So whatever your total income is, that’s reported on your W2’s. Also, if you, you have that. Employer stock purchase plan. If you have dividends, things like that, some of the times, these things flow through to your income as well.
So in this example, they’re going to receive an HSA deduction. They contributed 2000. They’re going to reduce their income by 2000, they are going to take the standard deduction of 12,400 there that gives them the adjusted gross. Income of 85,600. And so taxes before credit, I’m going to show you the taxes right here.
It’s that 14,622. But now probably more importantly, I’m gonna show you how we get to that number. So each one of these things here. We’re starting with the 85,600 because of the standard deduction. So that standard deduction, that chunk was free money. You’d pay 0% on that first amount, but now we have 5,600 let’s go and figure out how this progressive taxes I’m work works.
And so the first 10% bracket you’re gonna pay now $187 essentially. Then the next bracket going to pay 3,629 for that chunk of that 85,000. Then you’re still going to be in the 22% bracket. You’re gonna fill that up completely as of right now. And that’s 9,987, and then look at it. They just kind of limped into that 24% tax bracket and they only pay $17 once it gets to that stage.
So that’s how. We came to that total at 14,006 22. That’s why it’s progressive because if we had a flight tech system and you were in the 25% bracket, you’d pay 24,000. Um, obviously if there was that deduction, that standard deduction, that wouldn’t be the case. It would be a little bit less, but I even in this situation, it’d be pretty, pretty sizable.
The progressive taxes provides a lot of tax planning opportunities though. That’s why I enjoy it. It’s it makes it complex. But once you know, what’s going on, then that it makes it really cool and fun to be able to navigate these things. So that’s how you find out what your normal tax is due would be, but then you get to apply any tax credits.
So this person has one child that they had the child tax credit for. And so that reduces their total tax liability to. 12,622. So if you remember, they limped into that 24% tax bracket. So that’s their marginal rate, but again, they’re not paying 24% on that full a hundred thousand. They’re not even paying the 24% on the 85,600.
I ended up paying is 12. 0.6%. That’s your effective tax rate. And that’s important to know because a lot of times people think that I’m in the 24% tax bracket that I’m paying $24,000 in taxes. And that’s not the case. They’d never actually pay attention to their tax forms or when they’re completing those.
And there’s, again, just a lot of opportunity, whether you’re in retirement, whether you have unique income years where you can actually play some games, you can create some efficiencies when it comes to your tax planning strategy. And so here’s a couple of ways that you can impact and control your taxes probably in ways that you haven’t even realized.
And so basically, even though we’re close to the end of the year, I still factor in there’s about 15 different ways that you can control your taxes. You can reduce your taxes, you can do some stuff right now that would be tax neutral. You can offset some of the taxes. So I, one of the big ones is while have stock options and I don’t want to have to pay taxes on them.
So I don’t want to exercise them yet. Yeah. Well, there’s ways you can offset those funds by contributing to your far, okay. Contributing an IRA, contributing to HSA there’s ways where you can move these things around and offset taxes. So it’s not as painful. And so that’s important to be aware. Cause I think so many times people make horrible financial decisions because they don’t want to pay more taxes.
Well, there there’s ways around it. There’s. So many different ways around it. It’s crazy. And there’s texts, efficiency things. So speaking of text efficiency, we’re heading towards the end of the year. If you had stock that has gone down in value and it’s outside of a retirement account, you can sell those things.
And that could, uh, be a loss, a loss that you can carry on to your income. After you have gained somewhere else, you can offset the tax losses to offset the gains and just kind of reset those things so that you never have. A painful year, where all of a sudden you have to sell things and it’s high income year.
All of these things you’re up and you’re just paying a lot of capital gains, taxes, or even floating into ordinary income taxes. So there’s a huge ways that you can create efficiencies and paying taxes now to afford in the future. I know it doesn’t sound like it makes sense, but there’s a lot of value in certain instances where that makes sense.
That’s going to be the very next topic next week, next Thursday. So definitely if this has been opening your eyes and you want to find out more. Next week, we’re going to talk about traditional IRA accounts, traditional 401k, traditional 401k accounts, but more specifically, more importantly, the Rath IRA or the Rath 401k.
There’s some huge value, especially when it comes to planning opportunities there. And I kind of highlighted some of these things, but basically those, those descriptions, those ways you can reduce, create more efficiency, offset. Most of those things you can do within these kinds of categories, retirement accounts.
Health savings account employers, doc charitable gave in non retirement assets like employer stock and things like that. So 15 ways basically within these few areas of windows and you can do a lot of them cool things. It does help as you move through your career and you have more things to toggle and pull, but yeah, and in your curve, there’s a huge advantage to just doing the right things, making your taxes efficient as possible because then you get a lot more flexibility later on in life.
And so here’s just a couple of the, the next upcoming workshops that we’re going to talk about. Definitely. Let me know if you have questions, comments, I’m glad that we kind of covered ground pretty quickly. This hopefully gave you some insight as to why you pay them on a text that you pay and how you might be able to start triggering these things in and maneuvering them and controlling them though the way that you want.
But yet next week is to me, should you have a Roth? We’ll talk about traditional 401ks, traditional IRAs as well, but the Roth is definitely going to be the focus and highlight. Yeah. Give texts strategies. So if you’re gifting to charity, if it gets into friends and family, uh, children, that that’s going to be the taps we’ll cover there.
If you’re approaching retirement, taxes retirement is and be a huge one because social security gets texts, potentially there’s Medicare premiums go up. There’s a lot of things that happen. If you have early retirement. And you have to pay for your own health insurance. There is some huge value in tax planning before that, because you can reduce your premiums pretty substantially.
If you have a good text diversification, good tax efficiency and have a plan going into it. And then there’s an election coming up this year, hopefully nothing gets delayed or, and we’re able to keep this on track. But after that, that Thursday, after that election, We’re going to talk about what that potentially means for your taxes.
So do we think things are gonna change? Does that change? Some of the strategies we’ve been talking about, stay tuned and definitely reach out. Let me know if you have, even if it’s not here, you can shoot me an email. You can find me on social media, let me know what things you want answered. And if I can answer it pretty quickly, I might just do it there.
But if it makes sense, I can incorporate it. Into these future workshops. And you can see there’s a couple of different ways. Again, this is not meant to be a sales pitch at all, but if you want personal finance resources, I created a lot of free content. This workshop being just one of those ways, I do it.
I have a podcast. I’ve showed you guys. I have cheat sheets. Not all of them have made it to my website just yet. I probably am behind an upload, some of those resources, but if you’re following me on social media, basically you’re catching those things. As I’m creating them. As, as my clients are asking me questions, that’s really one of the things that drives the content I create.
If I get the same question more than once, more than a handful of times, I’m like, okay, Uh, I, I know, I know the answer, so let’s make sure more people know about these things. So they feel more confident about their financial situation. There’s the tax planning I do. I’m only taking on limited clients. So if that’s something you need, definitely they reach out.
But, um, obviously there’s plenty of different ways you can have your taxes done, right. Oh, hopefully this gave you a lot of information as to just understand. And even if someone else is doing your taxes, even if you’re using TurboTax or something, you just have a better understanding of, well, why are they asking me these questions?
How are they relevant? How’s it actually helping or hurting? And you can always shoot me an firstname.lastname@example.org and yeah, hopefully, totally. You guys obtain a lot of value, reach out as questions. Uh, I’m here as a resource for you and. Um, yeah, I look forward to these next few workshops.
I’m excited about tax planning and I just basically controlling your situation so that you always know what’s going on and, and are doing the best thing for you. Never pay more in taxes than you need to. Thanks for joining me today.