How To Live A Tax-Efficient Life

In this blog we talk about taxes and tax reduction strategies, specifically how to live a tax efficient life. I think if there's one area of commonality that binds us all is that we all would like to pay lower taxes. It probably is one of the largest household expenses of people when they are in their regular earning years, when they're employed in the workforce, especially when they're in their peak earning years, when you're paying in peak amount of taxes. So tonight, we're going to talk about things you can do to live a tax efficient life.
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Kevin Zywna, Wealthway Financial Advisors: We are going to talk about taxes and tax reduction strategies that we allude to at the top of every show and specifically how to live a tax efficient life. I think if there’s one area of commonality that binds us all is that we all would like to pay lower taxes. Now, some of us, some people, would like others to pay more taxes but almost everyone wants to pay lower taxes themselves. It probably is one of the largest household expenses of people when they are in their regular earning years, when they’re employed in the workforce, especially when they’re in their peak earning years, when you’re paying in peak amount of taxes. So tonight, we’re going to talk about things you can do to live a tax efficient life.

Structure Your Affairs In Tax Efficient Manner

So you know, first off, taxes are not something that are done in December of every year. Okay, you can’t do your tax planning in December of every calendar year. You also can’t do effective tax planning on April 10, when your tax return is due on April 15. The best tax efficient way to live your life is year round. You need to structure your affairs in a tax efficient manner to begin with, and that means having a general working knowledge of the tax code so you can apply it throughout the course of the year. So that you can structure your financial affairs in such a way to take advantage of tax saving opportunities, increasing activities that you might have to another tax year, and at least delay them further. So first off, you’ve got to structure your affairs in tax efficient manner.

Don’t Let The Tax Tail Wag The Financial Dog

Then a general comment on taxes and tax saving opportunities, at Wealthway Financial Advisors, we do not let the tax tail wag the financial dog. Now it is important to reduce taxes where we can, where it makes sense to do that. But under current law, taxes are a natural consequence of making money and of growing your net worth. So the real bottom line, and what we try to do for our clients and most of what financial planning is, is to grow your net worth. Grow your wealth. Net worth is your wealth, so grow your net worth over time and maintain it throughout the course of your lifetime, so that you have plenty of options at your disposal, power and control over your life in the best sense of those words, and you have ample funds to live a comfortable lifestyle. So the main objective is to make money and grow your net worth. That means we’re going to have to pay some taxes at some point in time. So while it is possible to structure your affairs so that you eliminate all taxes, namely, that means giving away a bunch of money or losing a bunch of money. And that is contrary to building your net worth. So building the net worth is primary, reducing your tax bill is secondary.

Get Your Finances Organized And Keep Good Records

And so in order to do that, some of the main things that you have to be focused on, if this is important to you, is you have to get organized. Get financially organized, stay organized and keep good records. Now the with the advent of online or app based personal finance software, this is becoming easier to do. So personal finance tracking software like Quicken, or Mint, or there’s a host of other ones out there as well that allow you to track all your income, your expenses, those that have tax implications. Your investments, you’re able to track those as well capital gains that occur through investments, dividends, interest, and then any taxable deductions that you are allowed throughout the course of year. If you’re not tracking those things, then you don’t have the ability to reduce your tax bill when you’re not tracking tax deductible activities. Because if you don’t track them, you don’t record them, you don’t claim them. If you don’t claim them, you don’t get to deduct them. So being organized is very important.

Don’t Just File Taxes, Get Tax Advice

At Wealthway Financial Advisors, as part of our financial planning process, we take a look at tax planning and tax analysis. And if there’s one common area of complaint that we get from our client base is, you know, my tax preparer just doesn’t give me any advice. I’d fill out the binder, he hands me back the 1040, I stroke him a check, and we’re done. I don’t know if I’m maximizing opportunities or not. And so this is kind of a common complaint that we hear from everybody. So over the past year or so, we have started doing more proactive tax planning and tax advice for our entire client base. In the past, we’ve always reviewed tax returns for red flags, obvious mistakes, that type of thing, but now we realize we’re just not getting much tax advice from CPAs and tax preparers out there. I know they’re good ones out there. If you’ve got a good one and you’re getting tax advice, you are the exception. Most people, at least according to our experience, are not getting really proactive tax advice. So this is an area that that we deliver for our clients.

Tax Planning Vs. Tax Preparation

So really, what is tax planning? Tax planning refers to the review of your tax return to identify potential planning opportunities, both now in the current year, and in future years, so that you can keep your lifetime tax liabilities as low as legally possible. And this is different than tax preparation. So tax preparation is done by yourself, or a CPA, or a tax preparer. That’s about compiling your tax data and filing your tax return. And so that’s just more focused on keeping you compliant with current tax law and paying what you are required to owe. But tax planning is more forward looking and looking for opportunities to reduce what you owe.

How To Use Your Tax Returns To Find Financial Opportunities

Tonight, we’re talking about taxes, tax reduction strategies, and how to live a tax efficient life. It starts with acknowledgment that tax reduction strategies are year round. You can’t wait until the end of the year to properly implement them. You’ve got to be aware of them throughout the course of the year if you want to take full advantage of them. And I was discussing a little bit about what tax planning is at Wealthway Financial Advisors. To expand on that subject a little bit more, why is tax planning important? Well, it’s pretty obvious to most people. Like I said earlier, it’s one of the biggest expenses that we all face in our daily lives, and so they touch every part of our financial life. In our firm anyway, the tax return is a financial fingerprint. So it’s completely unique to each and every individual, and it provides very valuable clues and information, all of which is buried throughout dozens of pages, hundreds of numbers and so delving into our clients’ tax returns, understanding where you might have opportunity gives us valuable, actionable opportunities so that we can have deep, meaningful conversations with how to maybe make changes or tweaks in your financial life. And then we can help demystify the world of income taxes, and help maybe shed a light into the tax opportunities that you have at your disposal.

Who Can Benefit From Tax Planning?

Most people don’t really think about taxes. They don’t want to think about taxes until the end of each year. And I don’t blame them. I don’t. I understand why that’s the case, but like I’ve said, if you want to reduce your taxes, you’ve got to think about it year round. And so who can benefit from tax planning? Well, basically everyone who pays taxes, and that’s almost everyone. So everyone who pays income taxes can benefit from having a professional review of their tax return, see if there’s any relevant planning opportunities. At Wealthway Financial Advisors, we already approach everything from a relatively tax efficient standpoint – the way we set up client accounts, the way we manage money for our clients. But even if we can’t bring any excess tax saving opportunities out of the tax return, at least we give our clients the peace of mind of knowing that we have reviewed it professionally. They are doing the best they can. And there is a little solace in knowing that you’re living your life as tax efficiently as you can.

What Are Some Tax Benefit Opportunities You Could Uncover?

So what are some of the types of opportunities that we usually can identify in practice? So most of these, the most obvious ones are retirement vehicles – taking advantage of retirement plans. I’ll delve into that a little bit more later on, but charitable giving strategies for our clients who are charitably inclined, you know, just stroking a check to a charity is fine. It’s good if you’re charitably inclined, giving should come first, but right after that should be how can you benefit from your tax your charitable giving strategies. Can you benefit by lowering your own tax bill? Sometimes you can, sometimes you can’t. With today’s higher standard deductions in the tax code, most people are finding that their regular everyday run of the mill charitable contributions are not tax deductible anymore because the standard deduction is so high that it just makes more financial sense to claim the standard deduction instead of itemizing their charitable deductions. But there are other ways of going about that as well, to lower your tax bill.

Capital Gains, Roth Conversion Strategies And Taxes

Also realizing capital gains, obviously Investment Management is a big part of what we do, what we deliver for our clients. And from investment gains comes capital gains. Capital gains are subject to capital gains taxes. Now those capital gains taxes are at lower rates than ordinary income, so they’re preferred. And to incent investing in businesses in the US and abroad, and to help your own self out financially by investing for long term growth. Sometimes Roth conversion strategies present themselves as a much more complicated calculation than most people realize. But Roth conversion strategies are something that we take a look at for our clients.

What To Evaluate In Your Taxes

Tax credits that our clients may be eligible for, there’s kind of a host of obscure ones that you might not be aware of. We scan tax returns for those tax credits, just in case we have clients that are eligible. And then, of course, we can also run projections to see how potential changes may impact upcoming tax liability. So maybe it’s a change in filing status, from married to divorce or single to married or dependents. If you are adding a dependent, or one is leaving the nest and graduating from the house, maybe you’re losing a dependent, sale of a business, sale of a home, stock option exercises, all those planning opportunities we can do projections on before they even happen, so we know what the tax ramifications are. At least we go in with our eyes wide open, and if we can look to save some tax money, we have the opportunity to do so.

Steps Toward Tax Efficiency: Invest In Retirement Vehicles

So what are some of the very specific things that you can do to help run as tax efficiently as you can?  The first and foremost is, and we talk about this all the time here on the radio show, saving for retirement. So if you are employed with a company that offers a retirement plan, typically a 401K or a 403B or a TSP, those are some of the biggies. But there’s also some other ones that you might not be aware of, a SEP IRA, a Simplified Employee Pension, Sep IRA, a Keogh IRA. Don’t see too many of those anymore nowadays, but they still exist. Or a simple IRA, and that one we do see somewhat frequently at smaller companies, less than 100 employees, a simple IRA savings plan.

So if you have any type of company retirement plan available to you, then you have tax saving opportunities, but only you can take advantage of them. You have to contribute to your company sponsored retirement plan in order to get the tax break. And all of these plans, regardless of the alphabet soup of the numbering or the lettering of the type of plan, all of them offer current tax breaks for the contributions to the plan, so you essentially are deferring your income that you get today into a company retirement plan, and by so doing, your taxable income is reduced by the amount that you contribute to the company retirement plan.

Steps Toward Tax Efficiency: Take Advantage Of Company Sponsored Retirement Plans

In addition, most companies match a certain portion of the contributions that you make to the retirement plan – that is free money. Free money from your employer that is just sitting there waiting for you to claim. But you have to take action, and you have to contribute a certain amount of your paycheck. For most people, that’s about 6% of your gross income that you would contribute from your paycheck, and most plans match about half of that, so another 3% leaving a total of 9% of your gross income that you are deferring from current taxes. If you invest it properly, in the retirement plan, and enjoying future growth.

What Are The Minimum Retirement Plan Contribution Amounts?

And just for some planning purposes, the maximum amount that you can contribute to most standard company retirement plans this year, $23,000 this year in 2024 and if you are age 50 or older, you can contribute another 7500 so a total of $30,500 you can shelter from current taxation today, the easiest way to get a tax break.  We’re talking about one of the easiest and best ways to lower your current tax bill. Contribute to your company retirement plan. Not only do you get a tax deduction, but you most likely get a company match of free money, and then you can invest the money in the company retirement plan so that it grows, tax deferred, tax free while it’s in the plan, tax deferred until it comes out of the plan.

Steps Toward Tax Efficiency: Invest In IRAs

So there is step number one, that’s the easiest and best things that everyone can do, and if you don’t, well, first of all, if you don’t have access to a company sponsored retirement plan, because maybe your employer doesn’t offer one, then you can always contribute to an IRA, an individual retirement account, whether that’s a traditional IRA, where you get a tax deduction For the contributions you make into the plan today, or a Roth IRA, where you don’t get a tax deduction for your contributions to the plan today. But when the money comes out of a Roth IRA, it is not subject to taxation, so it’s still a tax efficient vehicle and a tax reducing vehicle over time. So if you don’t have access to a company retirement plan, anyone can contribute to an IRA. And if you don’t have access to a plan, you can get a tax deduction for your contributions to an IRA. This year 2024 you can contribute $7,000 to either traditional or Roth IRA. And if you are age 50 or older, you can contribute an additional $1,000 so a total of eight in this tax year. And even those people who do have access to a company, sponsors or. Retirement Plan, you still may be eligible for contributions to an IRA or Roth IRA, depending upon your income limits as well. So in addition to maxing out your company retirement plan at, say, $23,000 this year, you can also put another 7000 in an IRA if you qualify.


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Steps Toward Tax Efficiency: Maximize Medical Expense Deductions

All right, so that’s one of the biggies. Then the next thing we want to try to look to do is maximize deductions. What actions can we take that we are able to deduct from our gross income so that the tax calculation is lower than it otherwise would be? Some of the obvious, most common deductions that are available are medical expenses. So if you have significant medical expenses in one calendar year, then you might be able to use those to deduct from your gross income or contributions to certain IRAs, like I was talking about charitable contributions, are usually they’re eligible to be deductible. So these and other types of expenses you want to be on the lookout for to see if you as part of your normal life.

Steps Toward Tax Efficiency: Consider Charitable Donations

I was like, go back to what I said at the beginning of the show. We don’t let the tax tail wag the dog. You know, I have heard somewhat jokingly from some clients over the years that, you know, I want to pay zero tax to the federal government. I’m sick of Uncle Sam reaching in my pocket. Okay, all right, yeah, understand. But what that usually means is you’re going to have to give away a bunch of money or lose a bunch of money, because those are tax deductible activities. And if you do, if you give enough away, then you can wipe out your tax bill, but you do so at the expense of your own net worth. And that’s really not the name of the game. So look to maximize deductions where they make sense, where they fit your lifestyle, but don’t necessarily rearrange your affairs in such a way that you’re doing it just to get the tax deduction, because you’re probably doing that expense of your net worth.

All right, consider charitable donations. I mentioned that one.

Steps Toward Tax Efficiency: Leverage Tax Deductible Loans

Review interest expenses if you pay interest that is not tax deductible. Interest on an auto loan or credit card is not tax deductible. However, interest on a home equity loan, a home equity line of credit, can be tax deductible if structured properly. So, instead of, say, getting a car loan, paying the interest on that which is not tax deductible, maybe open up a home equity line of credit, use that home equity line of credit to purchase the car, and then that home equity interest may be tax deductible. Depending on your facts and circumstances. So there’s a trick that you can use to try to rearrange your affairs relatively effortlessly to accomplish the same thing, buy a new car, but then make the interest tax deductible.

Steps Toward Tax Efficiency: Review Social Security Benefits

Okay, review Social Security benefits. So if you collect Social Security, you may benefit from some strategies to reduce or defer taxable income. If your non Social Security income exceeds certain levels, then it can trigger taxation of a higher percentage of the Social Security benefits. So that’s kind of a lot of words there. What I’m trying to say is one of the reasons why we say that you probably should not claim Social Security early, before your full retirement age, which for most people now is either 66 or 67, the reason we say, “don’t claim it early while you are still working,” is because it subjects most, if not all, of that Social Security payment to taxation. And even further, can reduce some of that Social Security benefit if you’re taking it before your full retirement age. So working and claiming early Social Security benefits is typically not tax efficient.

If you’re going to stop work completely, then that opens up the possibility of claiming Social Security early and making it tax efficient. Or you simply delay receiving Social Security benefits each year that you do delay taking your Social Security benefit beginning at age 62 then your benefit increases about 8% on an annualized basis. So delay while you’re still working up until full retirement age then an opportunity may, at full retirement age, while Social Security may still be taxable if you’re working, but at least it won’t be reduced at full retirement age. So a more efficient way to claim Social Security benefits.

Steps Toward Tax Efficiency Keep Good Records

Pay attention to record keeping. I mentioned this at the beginning of the show. Make sure you keep complete records. If you don’t keep the records, if you don’t get organized and you don’t keep the records, you don’t claim them on tax returns, you don’t get the benefit. So you have to commit to a certain amount of administration if you want to get full advantage of tax deductibility, you know your tax preparer is not a magician. He or she cannot pull numbers out of thin air. At least they’re not supposed to. What they can do is take your receipts, your documents, your statements, all those financial breadcrumbs, financial trails, that make up the fabric of your financial life. And then compile those and arrange those in such a way that they may be tax deductible, but you have to make the commitment to organize your financial affairs. Keep the records, make sure that they get to your tax preparer in a timely fashion, not at the last minute. All those things, all those steps, have nothing to do with tax deductions or tax deductibility. It just has to do with administration around the event of filing your taxes. But most people just don’t bother to do that. It’s too much of a hassle. It’s a pain. And you’ve got to have a file system and then put it in a box somewhere in the closet or in the drawer in your office. And then you hope your kids don’t spill chocolate milk on the papers that are on the dining room table. And so all of it is kind of a hassle to keep up with. But if you’re serious about wanting to live a tax efficient life, then it’s one of the things that you really need to do.

What Are Some Tax Deductible Loans?

Tonight we’re talking about how to live a tax efficient life. And right now, we’ve got a caller on the line –  Bill in Virginia Beach, question about home equity line of credit?

Caller: Yes, Kevin, not more than two hours ago, I was in my credit union asking this very question, and they told me that you could not deduct HELOC interest for an automobile.

Kevin Zywna, Wealthway Financial Advisors: You are right, Bill the credit union is right. I overstepped the tax deductibility on a home equity line credit. That’s the way it used to be, but in one of the myriad tax code changes we had, I think it was about three or four years ago, only that the interest that is attributable on a home equity line of credit to improving your home is tax deductible, so the opportunity to purchase a car and do that is no longer the case. So my mistake on that one, sorry. Thanks for the clarification.

Caller: Is there a capability in an automobile loan where the interest is tax deductible?

Kevin Zywna, Wealthway Financial Advisors: No, not currently under current tax code.

Caller: Okay, good enough.

Kevin Zywna, Wealthway Financial Advisors: Yes, all right, but thanks for that call Bill, and thanks for straightening me out there. That used to be the case, that you could use home equity line of credits for anything now that interest-only tax deductible if it’s used to improve your home property. Damien, you had a question.

Prioritize Building Wealth Over Reducing Taxes

WNIS: The phrase that you’ve brought up twice on this show and a number of times in the past, I’ve heard it elsewhere in my life, too – don’t let the tax tail wag the dog. What in the world does that mean?

Kevin Zywna, Wealthway Financial Advisors: Right. So, a lot of people I have found throughout the course of my career are very passionate about paying as little tax as they possibly can. And, like I’ve said a couple times on the show, there are ways to go about doing that if that is your primary objective. Very simply and easily, you can give away a bunch of money to charities, to qualified charities, and or you can lose a bunch of money in bad investments, bad business deals. Those are deductibles from your tax bill. And there are others to be a little bit more serious. I mean, there are other very complicated tax structures that one might set up with the help of a tax attorney, if your finances were large enough. There are some complicated creative strategies you can undertake. But most of these you are doing at the expense of your own net worth. Like giving away money and losing money, or tying money up in complicated instruments – it means you don’t have it. You don’t have it to use. It lowers your net worth, or it ties up your net worth.

And that’s contrary to what we’re typically trying to do from a financial planning and investment management standpoint. What we’re trying to do is grow people’s net worth, give them more money, allow them to have more options with that money. And that’s going to mean paying some tax. So if you let the tax tail wag the dog, you’re cutting off your nose to spite your face. You’re hurting yourself more than you’re hurting Uncle Sam, you know. So don’t let the tax tail wag the dog. Look for tax saving opportunities when they present themselves in the normal course of your life and in your daily finances. But don’t try to bend your life too much to just lower taxes, because you’re going to do it at the expense of your own net worth. And that’s what I mean by don’t let the tax tail wag the dog.

WNIS: No, that makes a lot of sense. Many, many, many years ago, somebody on the show said, to a caller that was worried about the taxes they had to pay on this money that they made because they sold a house and made money on and they said, hey, hey, if you’re paying more taxes, it’s because you made more. Be happy about that, celebrate and just do what you got to do.

Kevin Zywna, Wealthway Financial Advisors: Not going to change it, right? I know. I mean, we pay tax on money we earn or money we make. And despite what, I’m certainly not trying not to get too political here, but despite what a certain segment of the population believes, the more you make, the more they take the rich do pay a lot in taxes. They pay hundreds of 1000s, sometimes millions, of dollars, in taxes. The rich pay a lot of money in taxes because they make a lot of money, and the tax code is expertly designed to ensure that that happens on a consistent basis. Can there be years when somebody who’s very wealthy doesn’t pay a lot in taxes, absolutely, but that is typically an anomaly, and it’s typically because they had a bad business deal, or they had to write off some losses in one area of their life, and so that that’s why it happens. It’s not because they’re cheating the government or doing something nefarious. It’s just how the tax code works.

Tax Strategies For IRAs

I want to just speak to one very specific area of tax saving ability that we use a lot in our practice. And that’s for people who are receiving their required minimum distribution. So people who are now around age 73 have to start taking required minimum distributions from your traditional IRAs or 401Ks each year. A certain amount has to come out of those, which means that money that comes out is then taxed at your current ordinary income tax rates. So, for some of our clients who have really large IRAs, their required minimum distributions can be substantial. And for some of our clients, even though they’re substantial required minimum distributions, they might not need all of that money. And so for those who are charitably inclined, (well, I guess, first of all, we do the planning in advance). And so when you might be in your early 60s, you don’t have to take those required minimum distributions. So you’re 73 but we can project ahead on what those required minimum distributions are likely to be, and if they’re large enough, they could start kicking you up into higher tax brackets. So one of the strategies we can use is to start withdrawing money earlier, before the required minimum distributions. Not earlier, before 59 and a half, but before you have to take those required minimum distributions. That gets more out in the lower income tax brackets and less that comes out later in higher income tax brackets. And for those who are charitably inclined, you can donate directly to a charity from your IRA qualified charitable distributions as a portion of or all of your required minimum distribution if you donate directly properly, then that money never shows up as ordinary income, therefore it’s never taxed. It’s more valuable doing it that way than claiming it as income and then trying to deduct it from your tax return. All right, that’s all we have time for tonight. Hope you learned some things about how to live a tax efficient life, but remember, don’t let that tax tail wag the dog.


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