Listen to this week’s episode of the Dr. Friday Show, broadcast live every Saturday at 2:00pm Central on on 99.7 WTN! Aside from Dr. Friday, real estate and finance strategist John Parrott is in the house! Together they discuss the following topics:
- Why Settle Your Tax Issues Before Retiring?
- Hank’s Comprehensive Financial Plan Offer
- Know What Your Risks Are
- Buying Out-of-State Car
- What Is Required Minimum Distributions and How to Reduce It
- Inherited IRAs
- Who Pays the Tax, the Giver of the Money or the Receiver?
Transcript
Announcer: 00:01 No, no, no. She’s not a medical doctor, but she can sure cure your tax problems or your financial woes. She’s the how to girl. It’s the Dr. Friday show. If you have a question for Dr. Friday, call her now. 737 WWTN that’s 737- 9986. So here’s your host financial counselor and tax consultant Dr. Friday.
Dr. Friday: 00:30 I am Dr. Friday and the doctor is in the house. It is a hot Saturday so let’s just keep that fire burning. I’ve got one of my best friends in the office here. I guess this is considered an office, right? The radio station for us it is, it feels like a little bit of an office. Anyways, Hank Parrot Estate and Financial Strategies out of Brentwood, Tennessee. We’ve been working together for 20 plus years. I used to try to keep that number lower and it’s just over it now. So, we have to keep moving anyways, 20+ I have to go with now. Just let that slide at that moment. But we’ve been working together because Hank is a financial strategist that basically he’s awesome. He can look at your financials and if you’re ready to retire, are you gonna have enough money? And he always says, to continue the lifestyle you have today, not something that you’re going to be sacrificing. I have to retire and then we’ll have to downsize and I have to do this. His whole plan is a whole different plan. Huh Hank?
Hank Parrot: 01:25 That’s right. We want to have fun in retirement. We want to thrive, not just survive. It’s not about getting by. It’s about how to enjoy your life. I mean you worked all your life, to build up and be able to have more time, more things that you can do. And so, when we do financial planning with my clients, one of the things we always add in there is fun money. That’s different for each person as far as how much but …
Dr. Friday: 01:50 Absolutely. Depends on their thing, but assuming that someone earlier should come visit you versus waiting until two years before retirement, a little hard to really build up that nest egg at that point. Sooner versus later would be a great time to come in and have that consultation to find out. Are they on track with inflation? Medical costs? Because I know those are two big concerns a lot of people have.
Hank Parrot: 02:14 Most of my clients are boomers, and the most asked question is… Can I retire when I want and be able to at least maintain my current lifestyle? And then add in some things like fun money and then be able at the same time to add. Basically the fun money piece I talk about, Is this. It differs for every person. Do you want to travel? Do you have certain leisure activities that you enjoy? Is it about family things? Maybe you want to do more things around your church. You want to volunteer.You want to be able to give more and maybe go on mission trips. So for every client that comes in, it’s a little different in terms of how it works. But the big question is, Can I do it when I want to do it and not worry about running out of money? This is one of our biggest fears for all of us.
Dr. Friday: 03:04 That’s a concern I think all of us have, no matter what age we’re at, but while we were working, a lot of times we get so wound up I think in living for now, that we forget. Especially my generation or the generation behind me, I think a lot of times we’re not putting maybe enough aside, that’s what I’m saying. Now’s the time to come in and Hank has an awesome deal for my listeners. What are you going to give them?
Hank Parrot: 03:29 A comprehensive financial plan. So, it’s not just a free consultation. We’re not just gonna basically sit around, drink coffee for an hour and wish you well. I’m going to do a plan, and in that plan what we are going to be doing is, looking at an investment analysis, we be part of it. We’ll pull some Morningstar reports, I’ll be able to stress test your portfolio to see what kind of risk you have in there. Basically I can show you over the next downturn in the next bear market. Market drops 40% or 50% I can show you what you can expect in your current strategy and what you’re doing and then show you ways that you can improve that, we look at social security. We answer all the questions. When do you take social security? Medicare, how does that work? What are the best options to take advantage of there? Planning to have the money in hand to pay for healthcare costs to maintain your current standard living.
Dr. Friday: 04:20 Should I have longterm care insurance? Advantages or disadvantages?
Hank Parrot: 04:24 Absolutely. We talk about that as well. So I look at what you have for income, what you have for expenses. We add in for inflation, we take away for taxes. Big Part of it of course is tax planning, which you and I do with all my clients. Then investments and the rate of return. What’s the needed rate of return on your money to attain your goals and what’s your current rate of return and how can we improve upon all these things? So that’s all the comprehensive plan you call my office (615) 376-5325. We’ve got operators standing by, they’ll get your information. And we’ll send you a list of things to bring to your appointment with me when you come in to see me. I’ll also give you a free copy of my book. Seven steps to financial freedom in retirement.
Dr. Friday: 05:05 Because I know even as a tax person, one of the big questions people often come in and ask us about, of course, is social security. Should I take it early? Should I take it later? Now with the new tax laws, longterm care or insurance longterm. It used to be a portion of that was a tax deduction under the medical expense. It still is, it’s just so much harder for people to meet the needs for itemizing that. People are like, is there still a good advantage to it? And I’ve never thought of a tax advantage being the best reason to do anything in life.
Hank Parrot: 05:35 There are ways that you can cover longterm care that don’t involve just your traditional longterm care policy. There are other ways to do that. Comprehensive Planning is basically looking at all the different things that you’re going to have to deal with in our lot of complexities, taxes being just one of them. Decisions you’re going to have to make. And I can show you basically what kind of outcome you’re going to have in advance. So if you’re deciding to decide as an example. Do I want to retire at 62 or at 66? I can show you the outcome of those decisions. And 20 years down the road to help make it easier for you to make that choice.
Dr. Friday: 06:10 And then I’ll see you do some estate planning. I mean, as far as you will bring in an attorney when it comes time to doing the documents. But you’ll also cover some of that in this as well. Because I know a lot of people they don’t really have, I mean they may have a will if you’re lucky. I can tell your clients because I have hanging out with this guy way too many years as a tax person. The first thing that should not be out of my mouth is, well. Do you have a will or an estate to take care of this? And I can’t tell you how many people, like Russ or Jack, you know, because they don’t. I mean people work, work, work and forget if something happens to you today. What if you were a second marriage? There’s his kids, your kids our kids and things. We’ve both seen stories where things have went to the wrong person, the ex wife gets the life insurance because he didn’t change it, to go to his new wife or whatever.
Hank Parrot: 06:59 [inaudible] Making sure your beneficiacy designation date is one of the more common mistakes that we see all the time where people are disinheriting people in andvertently. An example would be you think you’ve got a will down and you say, well, it’s going to go out this way, but then you’ve got beneficiary designations that bypass the will. We talk about with estate planning and that’s chapter seven in my book, by the way.
Dr. Friday: 07:21 And you’ll get that when you go to meet him, he’ll also give you a copy.
Hank Parrot: 07:24 I’ll give you a copy of that book. And when we get into a estate pie, we talk about the difference when wills and trusts. The five essential documents that formed the foundation of a good estate plan starts with a revocable living trust. Add in a pour over will have kind of a safety net if you will for your planning power of attorney for assets, power of attorney for healthcare or living will, the whole package and work with the attorneys like Russ, like Jack. Brian Howard over at Howard mobile up in Green hills. Number of attorneys that we work with, that we can bring in based on your situation, we can kind of match you up with the best one for you.
Dr. Friday: 07:58 I think a lot of people need to at least start out with those essential documents. You may not think that you’re at a point where you need a trust or anything like that and maybe you don’t. Maybe you only have one 401k and using the power of attorney, you could handle everything in that direction, but you still need to have your wishes in some sort of form of writing and needs to be [inaudible]
Hank Parrot: 08:16 Not Everybody. I think most of my clients have trust, but there is an except as with everything, not everyone.
Dr. Friday: 08:24 I think sometimes it depends. I mean, like I said if all your money is in one basic retirement account, you probably could handle that through one basic distribution, but …
Hank Parrot: 08:34 Real estate. There are people that haven’t recovered from the last financial crisis and saying, I’ll never own a house again and they’re renting. So they rent a house and they’ve got all their accounts in retirement accounts that they can just do beneficiary designations or [inaudible]
Dr. Friday: 08:51 But the fact is you need to know what is best for you. So that’s why you need to do, and this is a free consult guys. So if you’ve got a financial person you love that you think are doing a great job, then get a second opinion. That’s what I always say. It may not be me or may Hank may turn around and say, you know what? This person is watching out for you. They’ve done an awesome job. Might be that he says, this person is making money of you and not doing such a great job, but you want to be the person that has that second opinion. That’s where I think this whole package is.
Hank Parrot: 09:23 At least know what your risks are, if you’ve got. I’ve seen portfolios come in all the time, people bring in their portfolios and we’re looking at them, when we see longterm, long duration bonds. Which can be very risky in a rising interest rate environment, so last year that looked really scary than this year. We’ve seen the Federal Reserve now talking about reducing [inaudible] just dropped them a quarter when and likely to do it again before the years out. So, but do we really think interest rates are gonna stay this low for how much longer before we [inaudible]
Dr. Friday: 09:51 We said that a year ago and I couldn’t believe that they’d actually go down from there. So who knows? I mean, I never thought tax rates would go down. So obviously that’s the whole thing of having such a diversified portfolio is that you’re able to take advantage. Again, I’m using these terms that he taught me, right? Diversified portfolio. I’m a tax person people, but that’s what you’ve always said.
Hank Parrot: 10:11 Understanding what is in your portfolio. So if you see in your portfolio for instance, that you have high yield bond fund, well, that’s another word for a junk bond fund. So be looking out for the risk I don’t go there. That basically companies that are in high yield bond funds typically have companies in it that have low credit ratings. So there’s a higher default risk. And again, it’s just understanding. So what maybe even has worked for you over the last 10 years and the longest bull market in history. What about the next 10? How’s it going to do then?
Dr. Friday: 10:40 And I think also if you’re invested in what is an annuities that we’ve often had these conversations about, there’s like a couple of really great ones and then there’s like thousands of really bad ones.
Hank Parrot: 10:51 [inaudible] Look a thousand different annuity products. Variable annuities are one of those. If you hear bad press about annuities, that’s typically one. But there are others very variable annuities, you’re investing in the market, you’re taking the risk of the market, but in addition to that, with no guarantees, you have higher fees. And those fees, I’ve always calling companies to see what their fees are. With clients, they come in with their variable annuity, we just call the company and let them tell them, you Know. There you go, I know the questions to ask to get you the answers you need and that’s one of them. So you’ll see fees that are three and a half, four and a half percent a year. It’s very difficult to make money with those kind high fees.
Dr. Friday: 11:32 Just rates going down and fees going up.
Hank Parrot: 11:34 You’ll see this is limited [inaudible] there are other annuities that aren’t that great too, that can also have high fees. So it’s important to do an analysis.
Dr. Friday: 11:40 That’s why I say get an analysis. Because if you’re not at your full retirement, [inaudible] or maybe you are but you need to know what those risks are. So you can’t think, oh I’ve got this money. Because I remember sitting at the table last week or so with a gentleman that thought he had some money set aside in an annuity and when he came to you and you started looking at it, it wasn’t what he thought he purchased.
Hank Parrot: 11:59 Right.
Dr. Friday: 11:59 That’s the problem. Sometimes people get or think they’re hearing or told something and then the product doesn’t end up being what it was, they though it’s a continuous life or something. [Inaudible]
Hank Parrot: 12:11 They put different riders on them that, you know, promise income or something [Inaudible] and then you get these numbers. It’s just a mathematical construct and you have to recognize it’s not real money. It’s like, if you take it as income, they’re going to base the income stream on say, I don’t know [Inaudible] like $400,000 but the actual cash value, I mean, what the annuities worth? If you didn’t want to take money out it’s 250. Your thinking you’ve got all this money [Inaudible]
Dr. Friday: 12:37 I was sitting there when he was talking about taxes and I heard him. And you can tell he was just shocked that this was what he thought he had gotten and you know he wasn’t getting what he thought. All right, we’re going to take our first break. If you’d like to call Hanks’ office (615) 376-5325 for the first 10 callers, (615) 376-5325. If you want to join us here in the studio, ask him some questions. Maybe you’ve got a friend that has some tax issues. I’m an enrolled agent, licensed with the Internal Revenue Service or we love taxes here. (615) 737-9986 is here in the studio. (615) 737-9986. We’ll be right back.
Dr. Friday: 13:24 Alrighty. We are back Live in studio phone number here in the studio. If you’ve got questions. (615) 737-9986. I’m an enrolled agent. Licensed with the Internal Revenue Service to do taxes in representation. Which basically guys, means I’m really good at one thing dealing with the IRS. So if you’ve got tax issues, if you’re trying to figure out, I’ve got back taxes, I don’t know where to start. I’ve got divorced and I didn’t want to file taxes for a number of years because well I just kinda hated the whole world. Whatever might’ve been the reason or the situation, you know, now’s the time to get the handle. I mean if you want to get back on your feet, one of the things you really do have to get back together on is taxes and they are making deals, is not as easy as some of these commercials sometimes say, Oh, if you owe more than $10,000 we can help you. Yeah, we can help you figure out how you’re gonna pay the IRS sometimes or we can help you actually save money with the IRS. So, if you want to get, join us here (615) 737-9986 (615) 737-9986. I have got one of my favorite mates in the office here with me on the studio. I don’t know why I keep saying office. I guess is because we show up at each other’s offices so much, Hank and it’s Saturday. I shouldn’t have to work on a Saturday, even though what? For 10 years now. I’ve worked Saturdays [Inaudible] We’re going to be doing Sunday radio for, what is it called? The retirement report as well. So, Hank does a TV show on news channel five plus, and it airs Friday mornings between eight and nine. It’s live and you can do a call in and everything with him. It’s called the retirement report. If you don’t know who’s on my show. And then he now has a new radio show on 15 tin boat. There’s also an FM station.
Hank Parrot: 15:10 98.3 WLAC. That’d be all I see. Okay. So 98.3 on FM dial in 15, 10:00 AM the retirement report. You just, and that’s on two to three on Sundays. And then the retirement report, the news channel five plus a Comcast channel 250. You can live stream it. You can go onto the website and live stream the show as well. Ties 3:00 clock on Friday, 1:00 o’clock on Saturday and then 10:30 on Sunday and 5:00 o’clock on Sunday.
Dr. Friday: 15:39 Okay. So it’s right before us. All right, we’ve got Dennis on the phones real quick. Let’s hit Dennis. Hello Dennis.
Caller: 15:47 Hello Dr. Friday.
Dr. Friday: 15:49 Hello Sweetheart, what can I do for you?
Caller: 15:51 Well, I have a sales tax question. Is that okay?
Dr. Friday: 15:55 Perfect.
Caller: 15:58 I live in Mount Juliet. And I’m considering buying a vehicle in Georgia. The question is, can they force me to pay Georgia sales tax?
Dr. Friday: 16:13 No, in fact. Well, they can if you are buying the vehicle and driving it from the state. So if you go to a car lot in Georgia and buy it and it’s not shipped to you, now I know a lot of people will say it. I’m an out of state person. I shouldn’t have to pay it. But Tennessee law at least is, if a person comes on that lot and they buy it and they drive it from the lot. It is not considered an out of state sale unless you’re military. Now military is a little different situation. But for you and me, Dennis, the normal person. Then what happens is you pay Georgia state which is actually lower than our state sales tax anyways. You’d still have to come here and pay the difference.
Caller: 16:55 When I registered the vehicle?
Dr. Friday: 16:56 Yes sir. I think it’s like seven in a quarter or something in Georgia. Dahomey to that but it’s like seven or eight more like 9.25 to 9.75
Caller: 17:08 Well the sales tax on a vehicle here is non the entire.
Dr. Friday: 17:11 It isn’t, you’re right. It’s 7% on the entire vehicle and then 1.45 or something like that and then it’s like $32 and 44 up to the first 1600 and then the second 1600 or $3,200 we have to pay those differences. So you’re right, it’s 7% on the basics, but you have additional $80 of additional tax on top of whatever that 7% is roughly.
Caller: 17:39 You know. That doesn’t sound right because I’m placing the vehicle and using in Tennessee.
Dr. Friday: 17:47 Yes. But I mean like I say, Tennessee law doesn’t really know that all they know is that you came to a car lot in Tennessee. I’m using Tennessee law instead of Georgia because I don’t really know Georgia law. But in Tennessee, if you drive and come up, buy a car off one of our call outs and you’ve got an out of state license and you’re saying, well this is going to be an out of state car. The car by law is supposed to be shipped to that person but on a vehicle and taken out of state and then it’s considered an out-of-state sale because they don’t know. How many people are driving the streets today with Georgia licenses in the state of Tennessee. Do you know what I’m saying? They don’t know for sure that you’re really gonna take it out of state. That’s the state side of the conversation.
Caller: 18:30 Georgia law might be different.
Dr. Friday: 18:32 Georgia law may be different. You maybe will go there with a Tennessee license and say, I’m buying this and I live in Tennessee. Here’s my address, here’s my driver’s license. They may say, fine, we’ll not pay. We’ll treat it as an out of state sale. And then when you register it here in Tennessee, you will pay the 7% plus those little extra dollar amounts.
Caller: 18:51 All right. Thank you very much.
Dr. Friday: 18:53 I’m sorry it wasn’t a ton of help.
Dr. Friday: 18:55 Let me know that way I’ll have a better answer for the next person that asked that question because I don’t really have a great one for you, Dennis. Sorry.
Caller: 19:02 I’m gonna go see Atlanta play New York mets. Let’s go Mets.
Dr. Friday: 19:08 [inaudible] All right buddy. Go see you. Such a sportsy. Alright. Back in the studio here with Hank. Hank, I have a question for you. Required minimum distributions. What does that mean?
Hank Parrot: 19:21 Yes. So understanding how retirement accounts work. If you have an IRA, traditional IRA or a traditional retirement plan, like a 401k could be a set by IRA too, by the way. Simple IRA, the 401k , 43B, 457, basically anything that’s got these tax deferrals that you’ve been able to take advantage of. That you for federal employees in the military, you’ve got a thrift savings plan. This also works the same way. The exception would be Ross, Ross are not subject to required minimum distributions. Whether it’s a Roth.
Dr. Friday: 19:57 They weren’t deferred.
Hank Parrot: 19:58 Right, exactly. [Inaudible]And is paid already the tax you paid the tax, put it exactly right. It grows tax free and there’s gonna be some real advantages that can come from having a Roth. We use that a lot in planning when we’re talking about taxes. Not just taxes today, but taxes over your lifetime. Roth can be a big help to you as far as tax efficient income in retirement and when it comes to require minimum distributions. The important thing to understand is that at age 70 and a half, you have to start taking those required minimum distributions. And what that is basically the IRS saying you have to take a distribution. You have to take money out of those retirement accounts. The exception being if you have a retirement account, say a 401k that is, or TSP or something, and you’re still working past the age of 70 and a half. Then at least on that account, you don’t have to take the RMD. Soon as you retire, you immediately have to take RMD on that account. But now if you have other accounts, just because you’re still working past 70 and a half, have you got an IRA or a four one k from a previous employer than the one you’re at now. You have to take RMDs from that. If you do not, it’s a 50% penalty. So if you needed to take a $10,000 a requirement and distribution and didn’t, yes $5,000 tax penalty. Plus you have to pay tax on it, plus you’re still gonna make you take it out and paid tax. So you can’t avoid it. Now understanding on this rule of 70 and a half, so if you turn 70 and a half, let’s say this year as an example, technically you have until April 1st of 2020 next year to take that requirement and them distribution. Most people take it in the year in which they turn 70 and a half. The reason is when you turn the next year you’re going to have taken RMD as well. So if you wait until April 1st you’ll have to take an RMD for that 70 and a half from the year before I’ve taken then and then before the years out, you’ll have taken another one for that year [Inaudible] going up.
Dr. Friday: 21:46 [inaudible] That’s a reason a lot of people should sit down and talk with you. Because I have been in his office at times when he’s like, no, no, no, we’re going to wait untill the April 1st because maybe the person retired, they are in that year and they’ve got higher income and it’s going to drop or that you’re doing something, a conversion in one year to help save the money, whatever. But I have seen it, It’s not simply. Well, then I had one guy that we just did the math and it was just as easy for him to do it this year because his income bracket, if he did twice his contribution, they kicked him out to a higher bracket.
Hank Parrot: 22:16 We look at what your income is, what the tax in fact. So let’s say if you’re 70 and a half, we look at how much you’re going to pay in tax. If you take the RMD and if you don’t take the RMD, then we look at the next year and we say, how much are you going to pay in tax if you have 1 RMD or if you have 2 RMDs and then we just do the math. And if it’s going to give less tax to wait and take 2 RMDs in a year, and sometimes that does work out that way, then of course that’s what we’re going to do. Always about minimizing taxes and now we also look forward so we know that. Let’s say I’ve got clients coming in, in their sixties and they’re saying, okay, we know that you’ve got that RMD or even in their fifties for that matter and get that RMD looming at age 70 and a half and we know you’re going to have and I can do the calculation again, do the math. We can do an estimated rates, return on your money, determine how much your accounts are going to grow to by then, how much the RMD is going to be on that amount. Then look at what that’s going to affect you as far as your taxes. And if that’s going to push you up into a higher bracket as an example, especially going from let’s say 12 to 22 then we want to revisit that. Let’s say, can we do some things now? Roth conversion strategies and other strategies that we utilize to minimize that RMD. Maybe bring you back down into a lower bracket so that longterm, it’ll save you taxes. So we don’t just look at this year, but over the next 10, 15, 20 years.
Dr. Friday: 23:31 When we come back from this break, he’s going to tell you a way of actually reducing your RMD by doing something with that money that would actually save you and help someone else at the same time. Hopefully that’s a good taser. Allright, and if you’d like to reach his office because the first 10 callers is gonna get an awesome free package, he doesn’t offer it to everyone. (615) 376-5325. His operators are standing by (615) 376-5325. We’re going to be right back with the Dr. Friday show.
Dr. Friday: 24:12 Alrighty. We are back live in studio. I’m Dr. Friday and enrolled agent with the Internal Revenue Service. Pretty much what I do. Taxes, representation. Kind a like super woman, between you and the IRS, little shield. And I’ve got Hank Parrot here in the studio with me. [Inaudible] Alright, let’s see if we go with, I think it’s Windle. Hey Windle.
Caller: 24:35 Hi, how are you?
Dr. Friday: 24:36 I am awesome. What can I do for you sweetie?
Caller: 24:39 Well, I’m listening to your discussion about RMDs and I take advantage of the tax break with the RMDs by sending a portion of it directly to charities [Inaudible] in my church.
Dr. Friday: 24:52 Oh man, Wendle. You gave the secret a way. That’s awesome. That’s exactly, you won’t believe how many people come in my office and have never heard of it. It wasn’t always permanent in the tax law. So was something we every year had to sometimes figure out if it was gonna happen. But that’s awesome. That’s exactly what we were hoping someone would say, Yes.
Caller: 25:13 Well. My question is, my son in law inherited his mom’s IRA and she had an RMD and if he were to send that directly to charities, Does he can get the same tax break that I would? He’s only like 51 years old.
Hank Parrot: 25:34 The QCD actually applies to your own account and an inherited IRA is not your account. Inherited IRAs even though you have to take the requirement of distributions, when you inherit them, no matter how young you are. And it’s a different table, it’s a more aggressive tables. So you’re taking a bigger amount out on the inherited IRA. But you can’t do rollover as you can’t do Roth conversions. There’s a lot of restrictions on an inherited IRA, that don’t apply, of course, to your own Ira. And that’s one of them. So that qualified charitable deduction that you’re able to take on your own RMD on your own retirement account, allowing you to give directly to that charity and thus not have to pay, not count that. Requirement distribution in your income does not apply on inherited and be careful too. Because the asset protection pieces another one that we deal with quite a bit with your own retirement accounts, you have both state and federal laws that help protect you and any kind and number of bad things. Life might throw your way. First, wintery lawsuits, bankruptcy tax, tax problems, a divorce, any of these things that could put your assets at risk. [inaudible] Your IRAS and retirement accounts are protected. However, not for inherited IRA. This is another advantage that trust can provide. As far as, you know. If you’re going to leave retirement accounts to your children, if you set up a trust during your lifetime, a revokable trust and have it left in trust to them, they can get the asset protection that goes with that.
Caller: 27:10 Very well. Thank you very much. Wasn’t exactly what I wanted to hear.
Dr. Friday: 27:14 Exactly. Unfortunately he never came back to any good point. Did he there. Thanks Wendle. Appreciate the call buddy.
Caller: 27:21 Sure. Thanks.
Dr. Friday: 27:28 Alright. So he did come back. So will be recap for everyone that may not understand. So if I have to take my requirement on distribution at 70 and a half, what is [Inaudible] was a qualified, just to make sure you understand how this works.exactly. Because the rules are,
Hank Parrot: 27:44 Exactly. Because the rules are pretty strict on it. If you don’t do it correctly, you can end up paying tax on what would otherwise been tax. So an example, what happens when I’ve got a number of clients who do it. What we do is we notify the custodian, whoever, wherever the money’s at, that we’re going to do this. We provide them with the name of the charity. There tax ID number, so that every address, all the different information for the charity. The money is actually goes out to the individual that has the IRA made out though to the charity. And then they can give it on to the charity.
Dr. Friday: 28:22 Now, if I would take a $100,000 dollars out, I can’t just give that all the charity.
Hank Parrot: 28:25 Has to be your required minimum distribution. So, if your required minimum distribution is $100,000 . I don’t know, what would that be? $100,000.
Dr. Friday: 28:34 I think it’s about up to a hundred thousand that you can actually give on a qualified charitable, but the most important part of that was, I wanted to make sure. Because some people take extra money out of their retirements.
Hank Parrot: 28:45 You might have a $20,000 or $40,000 RMD as an example. And maybe you want to give all of that to the charity or to even more than one charity for that matter. Or you may just say I will give [Inaudible]. A lot of people are doing their tighing that way. Maybe the tithing is less than the total [Inaudible]
Dr. Friday: 29:01 Under the new tax law. The problem is you’re going to get the standard deduction. So if you’re a married couple, and let’s just say under the age of 65 you’re gonna have $24,000 now if you’re over the age 65 which you would have to be to take requirement of distribution. So it’s just like $26,000 some dollars that you have as that. So if you think about you’re going to get that $26,000 but if you always give 5,000 to your church, if you do it through this required minimum distribution, and then you do it through the qualified charity deduction, then you’ll still get all $26,000 you don’t have to worry about meeting any kind itemization. You’ve automatically reduced dollar for dollar the deduction.
Hank Parrot: 29:45 Yes. And it has to go direct from custodian to charity in essence then the check has to be made out to the charity. If you just take your distribution and then give a contribution to your church or whatever charity. You’re going to pay tax on, that’s going to be taxable income to you. You’re going to have to meet that high standard deduction before you can get into itemizing before you loosing it.[Inaudible]
Dr. Friday: 30:08 I mean at that age where most people are probably not. I have a lot of people, many of your clients extremely great givers, don’t get me wrong. But even if they’re giving $20,000, they’re still not going to be itemizing because they don’t have any mortgages at that point and everything else. So this way they can reduce both of them and take full advantage. And you have to make sure it’s a 501 C3[inaudible] I just want to put that out there. It has to be a legitimate nonprofit. It can’t be, your neighbor. You’re trying to help bail out or someone on the street that you’re trying to help get back on their feet, all great causes. But this particular thing has to be registered with the IRS as a 501 C3.
Hank Parrot: 30:44 And you’re talking savings probably somewhere between $2,500 to $4,500 on $20,000 as an example.
Dr. Friday: 30:51 Exactly. So another way, let’s say I do that. Let’s play a little game. So I’ve got an RMD that’s $30,000. I’m taking $20,000. Give me a two This qualified and I only make $60,000 now afterwards. And this is already taking the standard deduction out just to keep math simple. So, but I’m a married couple. And I think I might want to convert a Roth. Would this be a good time to have that conversation under this little scenario? I’m not locking you into.
Hank Parrot: 31:21 Yeah. And here’s an example of what that is and where you’re going of course is if your income is under for a married couple, okay? If your income is under a hundred thousand a year and there’s a little bit of a cushion here under 300 or 400 for depending on your situation, so $100,000 a year though, we’ll stay with that. Then you’re in a 12% bracket. So in this scenario, if you get $60,000 is the amount of tax, okay? Or the amount of taxable income and you’re put the charity aside, that’s taking care of. Now we can talk additionally about Roth conversions. If you’re only gonna pay 12% tax, these goes back to my original premise about your RMDs may be down the road being much higher and this is where the strategy can come in because if they’re going to push you up over a $100,000 and you’re gonna be in a 22% bracket, that’s a huge savings potentially in taxes. Another thing in terms of this. There’s a sunset provision in the current tax code that we have currently is gonna revert back to the prior tax plan. Well, basically the law was enacted, so that means that 12% bracket it’s gonna go up to 15% and 22 is going to go up to 25. So even that alone can be another reason to pay the tax today to avoid having to pay as much later.
Dr. Friday: 32:34 Yeah, or just I love the other part where if something happens to you and your family inherits. I mean inheriting a Roth IRA versus just the window called and talked about the inherited IRA. What’s the difference if I inherit a Roth IRA? What the difference would be?
Hank Parrot: 32:47 Hugh difference. This is one of the things we were talking in that situation about requirement distributions. If it’s your Roth, you don’t have to take any money out. So that’s another advantage. You don’t have to take money out. You can let it grow throughout your entire lifetime. If legacy planning is part of this for you and you want to leave that to your children and they’re going to get tax free money and that means [Inaudible] it’s kind of like you’re setting up almost a pension form in a sense, this is the exception by the way. No RMDs during your lifetime on a Roth. However, for the people that inherit that Roth, they will have to take RMDs just like any inherited IRA or Roths plan, but no taxes. They don’t have to pay. It’s tax free income to them. You’ve just created a great opportunity. Who loses in this situation? What’s going to happen with tax rates? If not in your lifetime, do you expect they’ll go up or stay the same? If you expect their gonna go up? It’s a good time to pay your taxes if you think about during your children’s lifetime and your grandchildren’s lifetime? What brackets might they be in? If you can create tax free money, the only one, what are you doing? You’re disinheriting one person and one person, and I say person, one entity in one entity [Inaudible]
Dr. Friday: 33:55 IRS, good old Uncle Sam. We would love to all have that advantage. So that’s the kind of planning Hank does. I mean it’s always fun, because we love to play those games or I love to play these games with him, give him scenarios. Usually that’s because my clients have called me with scenarios that. What if I do this? And I’m like, let me call Hank. Because again, I am not a financial planner. I am a tax person. And my goal is to usually get your taxes as low as possible every year. So if you’ve got a good tax person, they’re probably going to come to you and say every year. Do you want to contribute to your IRA? Because if you do, you put $6,000 in, you might save a $1,000 or $1,200 or $2,000 depending on your tax bracket. And that’s going to give you instant gratification and your money’s growing automatically. Doesn’t mean it was the best advice for longterm financial planning. And that’s why I love having Hank on the show because that’s about as far as my financial planning goes. I do try to get people to consider the Roth if they’re in the lower brackets. But, I’m not an expert at it and maybe it’s not a good advice, you need someone. So you need to go ahead. The first 10 callers that call Hank (615) 376-5325 They’re gonna get what?
Hank Parrot: 35:03 A comprehensive financial plan. So this may be two or three visits to get this done for you. We’re going to look at what your income is, your expenses are. We’re going to look at your assets, your liabilities. We’re going to talk about inflation and taxes and how they’re going to affect you. So we’ll show you what your expenses are. They will then show you 10 years what it’s gonna take. So, for instance, if you need $100,000 a year to live on now. That means in about 10 years, you’re gonna need about somewhere around $135,000 a $140,000 just to buy the same things that you’re buying at a $100,000. Do you have a plan in place to make sure that your income goes up to keep pace with inflation? And then of course taxes, which are going to reduce down that income. So we factor that in. Based on all these things, I can show you what your financial future is based on, the things you’re doing today, and then help you with strategies to improve that picture, to make sure you’re going to be able to attain and maintain your standard of living and quality of life no matter how long you live.
Dr. Friday: 35:57 Alright So if you want to have one of those free consults, (615) 376-5325. All right, we’re going to take our last break. If you’ve been holding your breath and you wanted to talk about taxes, money issues. Maybe you have a question about something other than financial planning, Hank is Outta here. (615) 737-9986 the number here in the studio, (615) 737-9986. We’ll be right back.
Dr. Friday: 36:26 [inaudible] We are back live in studio. I’m Dr. Friday. I’m an enrolled agent licensed with the Internal Revenue Service to do taxes and representation. Now’s the time to think about is it time to do your taxes? If you haven’t filed your 2018? Obviously we only have, if you filed an extension until October 15th. Don’t forget business owners, if you have a 10 65 , 20 11S standard forms. Any business return is going to be due September 15th. So assuming again that extensions have been filed. If that’s the case, you need to make sure the file, but also preparing for 2019. I mean, I can’t tell you how many people get on these systems where they’re basically working on 18 until almost September and then they’re starting to work. It’s hard to really give great advice if you don’t have good financials. So you need to at least take the time to either set up a system in house, hire an outside bookkeeper, do something that’s going to help you figure out. Are you making money? Because when you wait until the end of the year and then your tax person is telling you that you’ve made money and you’re sitting there no, I haven’t. No, I haven’t. I don’t have that money. So where is it? And you forget the money it cost for you to pay your rent, your mortgage, your car payments, your kids’ private schools or your dentist bills or whatever else it takes to survive in the world, depending on who or what you are. It’s still needs to be accounted for and I will tell you. We had an interesting audit that went through our office. I’ve been at this 20 plus years and one of the biggest things that I felt when I was done with this particular audit was that maybe I wasn’t pushing hard enough. The importance of good tax records, you know. All the dollars that go through a bank account for a business owner. And that could include your personal accounts. If you ever get audited, every dollar that goes through your account is got to be accounted for, period. Also, lifestyle is being taken into account. So if you’re a person that owns several pieces of real estate, if you have multiple mortgage payments, different ways, and it doesn’t sense you’re making $50,000 a year, but you own $1 million in real estate. Unless there’s a way that you have achieved that through inherited money’s something. The government is going to look at that as, there is cash. There is unreported income coming someplace. Right now we have a big thing and that part of what came of this was house flipping. So there’s quite a few people that are house flipping and that is generating some serious income reporting because they don’t know what the cost is, right? So, all they’re seeing is 10 99 S’S that show that this person sold the $285,000 home.
Dr. Friday: 39:11 They’re selling five to six of these every year, they’re doing it for three or four years. Not Everything is being reported straight out and so tracking that income, making sure that income is totally documented. Which means if you’re doing a house flip [Inaudible] ideally my bookkeeper just set up somebody and he basically says every house needs its own bank account. Needs to have a new bank account every time you do a house so that way you can do beginning to end, purchase to closing. And that way you can justify every single thing that went into that house and you have a good paper trail. It’s this thought, not to say that’s going to be all the records you need, but it’s a thought. My boy Melton, I bet this is my . Hello?
Caller: 39:51 Hello, Dr. Friday. How you’re both going?
Dr. Friday: 39:54 We are good. Hank had a sneak out. He had a busy day today apparently, but he did make a little time for me. But Melton, I know exactly who you are. So, what kind of trouble are you causing?
Caller: 40:04 Hey, look here. I was working out at the AC[Inaudible] y and I had a guy there and he said. Did you know that if you give money away to your children or whatever, you have to pay taxes on it. I say, what are you talking about? He said, I think the giver has to pay taxes and the receiver has to pay taxes. I said, I don’t think you’re right about that, I said. He said , yes it’s, it depends on their amount. I say, well, I tell you what, I know where I can get an answer from, so I’m calling you for that answer. If you give money, let’s say to your children, maybe $20,000 to $30,000 is the giver having to pay taxes on that or the receiver or how does that work?
Dr. Friday: 40:41 Well, right now. The limitation for your lifetime of giving is like 11 million or something like that. I can look that up really quick, it’s several million dollars anyways, the gifting at this moment. So, the fact is no one’s going to pay you. You would have to file, if it’s over $15,000. There is a gift tax return that you would have to file, so that you report and it would start coming out of your lifetime giving minimum. Other than that, the only reason either person would pay tax would be if that person took it out of an IRA or something and it wasn’t already taxed, Right? So they would have to pay tax on the money, but it would always be the giver that would be the person taxed. The person receiving would never be taxed as far as having any kind of tax, in the gift tax return would also be. So, right now married couple 11 [Inaudible] uh, blah, blah, blah, estate tax, exemptions, gift tax, unified. So it is 5,000,049 per person. So I think most people are going to have a difficult time gifting over $5 million.
Caller: 41:54 I see what you’re saying. I think he had his amount being about right at about $30,000 that he wanted to give his daughter, but he was concerned about having to pay taxes. What I’ll explain to him that he’ll have to go all the way up to close to 11 million before he had to pay any taxes, is that right?
Dr. Friday: 42:09 Right. But if he gives one child $30,000, he would have to file a gift tax return report, that he gave her $15,000 above the minimum, right? He may choose if the daughter is married, give the husband $15,000 and give her $15,000 That we keep them under the minimum and it’s not reportable.
Caller: 42:31 I see. Okay.
Dr. Friday: 42:32 You know, but if it’s only only child and he’s doing $30,000 it’s not going to tax him. It’s just going to come out of his $5 million lifetime gifting, that we’re entitled to.
Caller: 42:45 Hey, sounds good. I can’t wait to pass that information on him and thank you so much.
Dr. Friday: 42:48 Thank you sweetheart. Thanks for listening. Appreciate you. Bye. We are live here in studio while just for the last four minutes or so. Life is going fast. Gotta love it. So, I was talking about being an enrolled agent. If you have IRS questions or you need help with the internal revenue service or maybe you just haven’t really filed taxes in a number of years and you’re ready to get started on that. I kind of specialize in that seems like. Because if you’re ever going to make a deal with the IRS, the very first thing you have to do is get current with the government. And that also means pain, estimated taxes. So as I was saying about proper documentation, making sure that you’re doing all the right paperwork. I get it, people. I mean, you’re self employed, you’re one man team sometimes or you may have a crew of people, but it’s difficult to keep track of everything. But I will tell you, life is simpler. If you have someone that’s going to be doing the documentation. If you ever have to go through an audit, recreating that information is not something most people want to have to deal with in small business owners. A lot of times they have a tendency to just kind of do the best they can. Maybe is the easiest way to say that because it’s not always the best this should be. Sometimes there’s documentation, receipts that aren’t done, and nowadays with cell phone guys. Pictures can be taken of receipts turned into a PDF, you can keep them saved on your phone. Mileage can be done electronically. So we have mileage charts from when you’re doing the things. So, is ways of keeping track of and saving different receipts and those receipts can come in hand as well from when returning things. Get in the habit of good documentation that could save you thousands of dollars in an audit. I had a person that came in just last week, they handled their audit. I have to look at the paperwork. I’m not even sure if they really handled it and just let the IRS assess and see and do it. But the bottom line is this person was a courier and they had a lot of deliveries, but instead of maintaining a really good log, they didn’t have any kind of proof, even though they were courier and the only way they made money was delivering. They didn’t have any real documentation. Now the government does Law in the sense of an audit or whatever a recreation, as long as you label it that of your hours or your time based on the best you can. So that’s what we are working on. So it’s really important to do the best you can while it’s happening. Get pictures and create PDFs of all your receipts. Try to document meetings if you’re going to go to dinner or if you’re taking someone out. Document who you did it with, staple the business card or the person you’re with. Try to find a way because two, three days, even weeks later, you forget what you’ve done because you’re so busy being an entrepreneur. I get it. But you really do need to have somebody and nowadays the IRS is really trying to [?] like I was talking about those home flippers, that kind of thing is something that is just really difficult, because they don’t know if you go to home depot to buy things for yourself or for your business, no one really knows. So if you need help doing your bookkeeping or with help with your taxes, you need to give me a call. My office number is (615) 367-0819 that’s directly to me (615) 367-0819.
Dr. Friday: 45:59 You can also email me. Sometimes that’s the easiest way to do it. Friday like the day of the week friday@drfriday.com friday@drfriday.com check out my new website, it’s really cool and you can also email right off the website directly to me in case you didn’t catch that email. And you can see a little bit more who I am, what I do and what I might be able to do to help you. If you’ve got a friend, feel free to refer them. It’s a way that works. Make sure we keep people out of tax issues, it’s the best way to do it. So again, you can reach me at (615) 367-0819 call you later.