Most people think of tax season as April, but in reality, tax planning needs to be done typically in quarter four of the previous year. What changes do you need to make now to have a productive tax season next year? Welcome in. Glad to talk to you again. Been George with Jake Dozer, member of the Rosewood Wealth Management Planning Team, and got a good conversation about tax planning.
I mean, this is something I know that happens throughout the year at Rosewood Wealth Management, but now that we are into the fourth quarter, as we're recording this video, really time to focus in on some things you can be doing right now before the end of the year, so that you put yourself in a better position for the next year.
So, Jake, I got a list of these things we're going to run through today. I want to start off. With a donor advised fund, why should somebody consider opening up one of these right now? A donor advised fund is something that's a really minimally used but often overlooked tool.
So think of it this way: you're approaching the end of the year, kind of similar to the time that we're recording this video right now, and you have identified that you are going to come into a larger tax liability than you'd like. Maybe you're a business owner, maybe you've had an unexpected windfall this year of selling a home or a business practice. Maybe you just got a quarter in. Bonus, and you're just thinking about, well, my income is at a place where I'm blessed to be in a position where I'd like to lower those taxes by putting some money away, doing something creative. You don't want to wait to the last second.
Well, what do you look to do?
Well, maybe you're interested in giving to a charitable cause, but you're not sure who to give it to yet, or maybe you need to give it to multiple who's, and you're in the place where you need to do it before the end of the year so you can get that tax benefit, but you're not ready to necessarily. All the checks yet, enter a donor advised fund. I was in a situation. I used a donor advised fund last year. Here's what happens: is I want to give money to charity.
I'd like to be able to number one write it off. Maybe you're out there and you've given charitably for a while, and you haven't been able to use a write off because your standard deduction is too high. Maybe again you're in the place where you need to make a gift to offset some sort of gain that happened this year to charity, but you're not sure who you want. To give it to, well, a donor advised fund. Think of it as this way: it's sort of this catch-all.
So, I want to give. I'm going to use a round number: fifty thousand dollars. I don't know who to give it to yet.
Well, I can put it into a donor advised fund today that locks in my tax benefit, and think of it as this sort of holding account where I got the charitable benefit as if I gave it to the the organization or organizations that I care about, but I haven't distributed it yet.
Well, the donor advised fund gives me the tax Tax benefit upfront, and then while it's sitting there, I can invest it if I'd like. But that money belongs to the charity.
So down the road, whether it be a month from now, a day from now, or ten years from now, then I can distribute it later.
So the benefit is I get the ability to give the tax or the the charitable gift, but I don't have to decide who gets it right now, and I get to write the tax benefit off today. Again, the another example is the person who says, you know, maybe I give a thousand bucks every. Every month to my church, but that twelve thousand dollars a year I give isn't enough to to supersede my standard deduction. I don't get to itemize my benefit.
Well, maybe instead of giving a thousand bucks a month, maybe what you do is you give like five years worth of giving all at once, and now that you know five times twelve sixty thousand dollars is enough to exceed. The standard deduction.
Now you get to itemize, but then by putting it into the donor advice fund, you can dole it out slowly over time. On the back end, right?
So again, it's not necessarily about the title, the DAF, the Donor Advised Fund, but rather is this a tool that will assist me in long-term tax mitigation? And that's something you've got to put in place now because January first, you don't get to take do it for this year. There's no retroactive lookback period. That's a big category that we're utilizing a lot of times here at Rosewood.
Okay, yeah, something to ask about if you haven't just considered this, right? Or maybe want to explore this option. For you now is the time to be having these conversations with Rosewood. All right, I know you work with a lot of people that are self-employed business owners, Jake. The SEP IRA.
How many people are aware of that, and why should this be something that's on your list? You know, a SEP IRA is a simplified employee plan. It's a big one. If you're if you're self-employed, there's a few defined contribution or or like four hundred one k type plans out there that are available to you. A lot of times, IRAs can seem underwhelming, like a traditional IRA, in that the limit that you can put money into is smaller.
Well. If you're self-employed, there's a couple other options, including the SEP IRA, where you can put more money into an IRA than the average bear because you're in this category. A SEP IRA is one of them. A SIMPLE IRA is another, and then a Solo 401k is another. And the semantics of each one doesn't matter as much.
Although here's an example: in a SIMPLE IRA, you could put something like 25% of your company revenue. Or up to nearly sixty thousand dollars in a year, whichever is lower.
So it gives you this much larger window of contribution and therefore tax savings or or deferral at least than a simple IRA or a traditional IRA where you can only put like seven thousand dollars in change. Maybe a solo 401k. You think I don't have a 401k? I don't have an employer.
Well, you can make your own 401k for pretty inexpensive with anybody: Fidelity, Vanguard, Schwab.
So on and so forth, where you can have your own 401k, and sometimes if your business structure is right, you can make a contribution and you can match your own contribution from the business side of the house and get some tax deferred and advantages.
So you should look into that. You know, if you're in the place where you've got an accountant that's just filing, but you're a business owner and you're not getting any forward looking planning around what's my business structure, what type of retirement accounts can I use, what ex Leveres can I pull, so to speak, to make sure that I'm in the most tax advantaged place? We should have a conversation, or you should, at minimum, have a conversation with an accountant that knows what they're talking about. Gotcha. We're talking about some things you can do now to reduce your tax bill for the new year.
What are those being? Checking your tax withholdings right now.
So I know, kind of at this point now, as we got into October, Jake, you kind of know, kind of where you stand with income, right? And kind of probably project it out much better than you could begin the year.
So what are some changes that maybe you could make here that could help you out?
Next year.
Well, I see a lot of times, especially as people retire, is they think, "Oh, well." And this is oftentimes the case with like the first or second year, they say, "Well, I'm not working anymore, and so it's just too complicated to try to withhold taxes from my Social Security or my pension or my investment withdrawals." So, you know what I'm going to do is I'm just going to pay all the taxes at the end of the year.
Well, technically, taxes that you earn—I'm sorry, income you earn—the tax on that is due in the quarter in which it's received, not the. Year, and so most of us think it's due annually because we file annually. But in reality, the IRS has a fiscal year they follow, and you owe taxes on that income in the quarter in which you receive it. And so you need to be having a conversation, oftentimes with a financial advisor and/or your accountant, to figure out what are the estimated tax payments or what withholdings should I make so that I'm not underwithholding, and that that underwithholding doesn't result in a penalty on top of the taxes I owe. Oh.
That's a common thing we see. Abby, our accountant, and I were just discussing it that this morning with a client who owes about ten thousand dollars in taxes, which would trigger a six percent penalty on the amount that they should have paid in advance.
So, don't be caught without being prepared, and not only owing those taxes, but also getting a penalty on those taxes. That's just unwise planning.
Now is the time for open enrollment as well.
Well, some people have going through going through that process, considering their options for next year, which is why now is the perfect time to start talking about next year's HSA, the Health Savings Account. Right, a great tool, but now is a good time to be planning for it. A hundred percent, an HSA, a health savings account. It's such a powerful tool. In fact, it's honestly one of the most powerful tax tools that exists.
Even though it's often underutilized.
Now, this is not like the close cousin, the FSA, the flexible savings account, which is use it or lose it. Meaning, if I put money in there and I don't end up using it for certain medical expenses, the money goes away. I don't get to keep it. That's not the case with an HSA. It is yours permanently.
An HSA. You put the money in. You get a tax benefit up front. You get a tax deduction. Equal to the dollars you put in, it grows tax deferred like a traditional IRA or a 401k.
But then the distributions come out tax free when used for qualifying medical expenses, kind of like a Roth.
So it combines the best of both worlds. I get tax deferral up front like a traditional IRA, but then I get tax free on the way out like a Roth IRA.
Well, how is that possible? It's just the HSA, the Health Savings Account, and so you can. Use the HSA to pay for your ongoing medical expenses, like your deductible or out-of-pocket max, your copays, or if you really want to get ahead of the game, you could use it almost like an additional retirement account and treat it like a medical. Investment account. You can invest the balance of your HSA.
Oftentimes done at Fidelity. It's one of the better custodians for that, as far as flexibility and ease of use.
So you should look into how am I using my HSA? Am I using it? Does it belong alongside my IRA or four hundred one k in preparing for retirement? Huge tool. Yeah, big tool to be talking about and considering.
All right, another one here. The RMDs. Do not forget about your RMDs. A great reminder for a lot of people because. Hey, we get to the end of the year, and all of a sudden, people are often scrambling to try to get these done.
Oh, I mean, around Rosewood, John and I talk about RMDs in January, not in October, November, December.
Now, don't get me wrong; we have a list to make sure if somebody hasn't gotten back to us that we're double checking our work. But keep in mind, your RMD, your required minimum distribution, starts when you're age seventy-three, unless you're born after nineteen sixty, in which case it starts at age seventy-five. That's when the government forces you to withdraw money from accounts like retirement accounts that haven't been taxed yet, whether you want it or not. Why? Because they want their tax revenue.
That's something that can make your income tax bracket go up. It can make your therefore pay more taxes. It can make your Medicare premium go up.
Now you get what are called Irma surcharges. Watch out for that. A lot of times, people, especially the first year, let that creep up on them. How do you take advantage of proper planning around? RMDs.
Don't wait until you're forced to withdraw money. Start making a plan well in advance so that you're never forced to withdraw money and pay more taxes later than you could have paid now. Similarly, you also want to make sure you're not doing it at the end of the year where you don't have a lot of time to get it processed. And furthermore, be aware that if you don't take your RMD out in a timely manner, it is a fifty cent on the dollar penalty, fifty percent. Penalty, huge.
Take that money out. The government wants their taxes. I know it's no fun, but it's better to pay your taxes than pay fifty percent in penalties on top of taxes. Yeah, it's insane how how steep that penalty is. That's why you do not want to make that mistake.
All right, got one more on my list here for for planning items. Again, these are December thirty first deadline items. Obviously, tax loss harvesting is a big one and one that kind of happens every year. And also, Roth conversions. Right now is a good time to have a conversation about that.
A hundred percent. You know, a lot of times what we're doing at Rosewood is we're having conversations throughout the year. You know, we as a firm are have a huge tax emphasis because we're retirement planners. Is how am I going to withdraw money and tell you where to take it unless I can tell you the tax implications? To that end, we have an accountant on staff to help us with those things.
So a lot of times, what we're doing in the spring is when we're filing your taxes, is we're looking ahead through the rest of the year. We're planning out your RMDs. We're Planning at your charitable giving that is planned, then towards the end of the year, towards maybe the end of quarter three or beginning of quarter four, right around this time of the year, we're looking at okay, did the year pan out the way you thought it would? Is there any adjustments that we need to make? Let's implement the charitable giving that may need to offset some income that you didn't expect, like bonuses or an inheritance or the selling of real estate or something like that, and let's also be Proactive is what remaining space do we have in what we've identified as your existing optimal tax zone for us to be able to intentionally fill up so you're not filling up higher tax brackets later through things like Roth conversions.
So it's not only looking backwards at what is my tax consequence last year and earlier this year, but it's looking ahead between now and the time I pass away. How do I pay the least amount in taxes? That's what we're. Focusing on to be as comprehensive as possible in your tax planning situation. Yep, and that tax planning, the best tax planning rarely happens in April.
Right, happens throughout the year. Right, but now, especially as we close in on the end of the year, take the time to examine all these opportunities, see what works for you, have that conversation with Rosewood or whoever you work with to make sure you're doing the most you can to keep as much as you can next year. That's what it's all about.
So again, tax planning just one piece of the overall puzzle, but a very important one. For everyone, so get in touch. You have any questions? You can do that by using the link in the show description. Phone numbers down there as well for you.
But we'll have more content coming out next week. Please subscribe if you're watching us on YouTube or listening listening to us on your favorite podcasting app. We appreciate that support as always, and look forward to talking again. Jake, appreciate the time as always, and we'll do some tax planning here soon. Yeah, thank you, Ben.
We'll talk to you next time. Carolina Wealth Stewards, doing business as Rosewood Wealth Management, is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.
