Listen to this week’s episode of the Dr. Friday Show, broadcast live every Saturday at 2:00pm Central on 99.7 WTN! Dr. Friday is joined by real estate and financial expert/friend Hank Parrott. Together, they discuss the following:
- Filing for Tax Returns Before October 15th
- What is SEP IRA?
- Helping Seniors Get Their Tax
- How Much Tax You Can Really Give Out
- Why Tax Isn’t a DIY Thing
- Hank Parrott’s “Seven Steps To Financial Freedom” Book
- New Tax Rules on the 1st Quarter of 2018
- Thrift Savings Plan
- Roth Conversions
- Dealing with Back Taxes
- New Laws on Alternative Minimal Tax
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 Doctor Friday Show. If you have a question for Dr. Friday, call her now! 737-WWTN! That’s seven three seven nine nine nine eight six. So here’s your host, financial counselor, and tax consultant Dr. Friday.
Dr. Friday: 00:30 Good day! We’re Doctor Friday and the doctor is in the house! That’s right. We are here to talk about my favorite subject since it’s called the Doctor Friday Show. I have full control for this next hour and we’re going to have an awesome time talking about taxes, money issues. And I have my best mate in here, Hank Parrott, with estate and financial strategies out of Brentwood and we’re going to include him on some of the calls you might have. Remember if you’ve got questions on estate planning or you’re doing financial planning taxes, obviously my passion in life. And don’t forget, we only have less than three weeks – we have till October 15th to file all those procrastinated tax returns, which includes actually the people in the studio. So have to get ourselves done before that October 15th deadline as well. Exactly. We did make the September 15th deadline, so we’re batting a thousand here, you know.
Hank Parrot: 01:23 As long as you pay the tax by April 15th then when you file your paperwork…
Dr. Friday: 01:28 Exactly. As long as you’re pretty good at estimating, that’s the problem with some people. And I’m a big firm believer, even if you’re not paying the taxes, if you can get them prepared early so you know what’s due, even if there’s a penalty, be prepared. Don’t wait until it’s October 15th and then have that shock, “Oh my gosh, I owe this much money!” Get the number in there. Even if you have to wait to file it because you want to work a payment plan or have some sort of idea going on or whatever situation we have. All right. The phone lines are open. So if you want to give us a call, (615) 737 9986. Looks like we have some callers coming in. Alright! How are you doing Hank?
Hank Parrot: 02:08 Hey, you know, one of the things you’re talking about on that deadline is a SEP IRA. That’s a big deal.
Dr. Friday: 02:13 Absolutely. Why don’t you tell a few people what a SEP IRA is for those that might not know.
Hank Parrot: 02:18 So if you’re self employed, if you have a income, maybe you’ve got a business. I like me, I’ve got a C corporation and I have self-employed income in essence. So that combination, I’m able to take advantage of that and put up to 55,000 this year into my SEP IRA. So it’s one of the nice things about it. If you’re over age 50 you can put a nice chunk into your retirement, you can catch up and maybe if you’re a little behind on that this is a great time after age 50 to take advantage of SEP. Thinking about that 55,000 you know, 55 grand a year.
Dr. Friday: 02:52 And you know 55,000 you could add quite a bit. And also it’s taking you, if you can afford 55,000 I don’t mean afford out of your pocket, but that means you’ve made over 200 and some thousand which also puts you in the higher tax bracket. So you’re in the 24-28% whatever tax bracket. So you’re saving 55,000 at that bracket. Right? So it’s not like you’re saving against 10% or 12% we’re talking to high tax bracket to instant gratification. When you put that money aside, it’s automatically had this growth cause you would’ve given uncle Sam that money, otherwise.
Hank Parrot: 03:22 55 in would be paying close to 20,000 in tax on that money.
Dr. Friday: 03:26 Exactly. So that’s a nice sweet deal. All right, let’s talk about or get Don on the line. Hey Don!
Don: 03:33 One question about my mother’s finances.
Dr. Friday: 03:35 Yes sir!
Don: 03:35 Normally she does not pay income tax. She gets about 14,000 from social security. She gets about the same amount with a military pension. But she now needs some more money. So she has closed and IRA that had about $3,000 in it. So I was told I need to pay taxes on that. Can you clarify that?
Dr. Friday: 03:56 How old is mom?
Don: 03:58 91
Dr. Friday: 03:58 Okay, so mom’s going to qualify for being over 65 so we have 12 two plus the 16 so that’s about 13 – 8 is her standard deduction. So and her social security isn’t going to be…
Hank Parrot: 04:13 How much is her social security?
Dr. Friday: 04:13 14,000 to give you the numbers, Hank. You got 14,000. You’ve got pension for 14.
Hank Parrot: 04:19 50% of that is seven.
Dr. Friday: 04:21 Right. And then, so we’ve got 24 which keeps her below the 17 so she’s below the deduction for the 3000.
Hank Parrot: 04:29 Not likely the need to pay anything on her social security.
Dr. Friday: 04:32 So the 17 and the 13… Sorry, we’re running the numbers really quick here. I know that it doesn’t make a lot of sense to other people on the radio here. It looks like she’s going to pay tax roughly on about, Oh $3,500 – $4,000. Let’s just keep the math simple. $4,000 and so you’re talking maybe 10% tax bracket. So yeah, I’d say roughly between four and $500 would be her taxes. And she would need to file that year, yes.
Don: 04:58 Okay. She’s never filed before. Well, in her senior year she’s never filed, so I’ll need to get a regular 1040…
Dr. Friday: 05:05 Yeah, you just do a straight 1040. You could even probably do an easy… Do you know if her, I mean, cause every year, theoretically she should have filed if she had a pension? If the pension is taxable…
Don: 05:17 In the second year, she’s had that.
Dr. Friday: 05:18 Oh, okay. Okay. Because the pension being 14,000 is putting her partly into a taxable situation. Minimal. And it may be that there’s not a lot of tax coming out, but if it’s a military pension, sometimes those aren’t fully taxable…
Hank Parrot: 05:32 Is this a survivor benefit? Is that why she just had a short term?
Don: 05:35 A disability kind of pension.
Dr. Friday: 05:38 Oh wait… If it’s military disability it’s not taxable? Yeah. So it may be… And again, we’re working off the radio without looking at the documents, but the time will come at the end of the year. Find out if she actually even receives anything on the military pension. If she doesn’t, military disability is not taxable usually.
Don: 05:56 Okay. It all goes towards her r. She lives in a facility, a senior facility, so that money goes to… [inaudible]
Dr. Friday: 06:04 So she’s not gonna have any taxable income.
Don: 06:08 Okay. That’s what I thought. It’s just that they told me, I thought I’d better check.
Dr. Friday: 06:12 Yeah, no, she’s not going to have any taxables. I didn’t realize. Yeah, she’ll be fine. She won’t have to worry about paying any tax on that additional 3,000 she took out.
Don: 06:21 Grand. Thanks to clarify.
Dr. Friday: 06:22 No worries. Thanks for calling. Appreciate it. All right! Are live here in studio. So if you’ve got a question again, we have Hank Parrott here, so we’re going to kind of pick his brain a little bit and we’ve got like 20 questions he’s brought in and it’s a really cool little questionnaire. We’ve been working on his live or a TV show on every Friday. Well repeats a few times, but basically Friday mornings between eight, nine a news channel, five plus. Then on Sundays he also has a radio show on WT, no, WL…
Hank Parrot: 06:51 Yeah, it’s a WL… WLIC. So it’s a 98.3 on FM dial and 90 or no, 1510 rather on am. So it’s simulcasts that’s on Sundays from two to three. And then the TV show is Friday just [inaudible] the Retirement Report, that’s on News Channel Five Plus. That’s live Friday mornings 8 to 9 and then on Saturday you can catch – excuse me – Friday afternoon [mic’s off] and at three o’clock on Saturday. And then again Sunday it’s 10:30 and 5. So as she said, repeat through the week and we talk about all things related to retirement including, you know, how to keep more of your money in your pocket, which is , again, as we say, it’s not just what you make, it’s what you keep. And that means reducing taxes.
Dr. Friday: 07:39 Well, taxes are a big part. I mean, when people put money in, they defer most of it cause they’ve used either a SEP IRA or a standard IRA, a simple 401K, all those vehicles to, to say, but a portion of the money in there is Uncle Sam’s. So the question is, how much is really what you love to play that game? How much and how little can I give uncle Sam and still keep the money growing?
Hank Parrot: 08:03 Yeah cause, you know, this is the other thing for many people. It’s a choice. You can, you can easily pay more in tax and you’re legally required to pay simply by not knowing certain strategies that you can employ to help you reduce your taxes. And in particular, you know, I ran into a client this past week that has – he’s retiring, he’s got a 401K. In his 401k, he’s got some company stock. Turns out that that company stock, there’s about a hundred thousand dollars in gains, a little over a hundred thousand dollars in gains that of what his cost basis is versus what the value is. So we’re going to do, when we roll that 401K now into an IRA, there’s something called NUA – Net Unrealized Appreciation. What this allows us to do is basically set up a brokerage account and we can move that stock. We have another lot of really, really very strict rules on how you do this.
Dr. Friday: 08:58 This is not a do-it-yourself situation. We put that out there, yes.
Hank Parrot: 08:58 Yes, not do it yourself. Seek professional help on this one. But what we do is we can set up then an IRA to take certain of the moneys and a brokerage account to take the company’s stock. We move it in kind.
Dr. Friday: 09:12 Now I’m going to make a wild guess. Does he have to pay tax or it’s tax free because of the depreciation or…?
Hank Parrot: 09:18 What he has to do is on the basis, on his cost basis, he’s pulling that out. That’s taxable in that year. But now, let’s say in this situation, he’s got $100,000 in cost basis, $100,000 in gains. He moves it out, he pays out 100,000 is taxable in that year. However, now when he sells the stock, he’s only getting on that hundred thousand yeah. So how we do it now, now we’ve got capital gains rate in his situation because of the different pools of money we have to work with, we’ll be able to take us to sell that stock out over time. Exactly. Zero tax. So we’re going to say, it’ll save him probably $25,000 in taxes.
Dr. Friday: 10:00 Right. And that’s the kind of thing, I think, that most people – and that’s why I love having you on the show, or I love having our radio and show and TV show. It’s not always about, I know a lot of times people think, well, it’s all about, Oh they need clients or whatever. You know, it’s about advertising. It really isn’t. I mean, I think after doing this for eight years on the radio, you’ve been doing the TV show for almost 20 years or something, right?
Hank Parrot: 10:21 13, 14 now, yeah.
Dr. Friday: 10:21 Been a while! Cause I know we’ve known each other for 20 years and we did get radio, we first met there. So we love the educational side as well is all I’m saying. Part of – if you get anything from our shows and you’re able to go, even if you have your own tax person, your own financial person, if you’re able to sit down and ask them these questions, “Hey would this be good for me? Hey, would this work out for me?” And well one, if they don’t really know the answer or if they, you know, kind of hee-hawed around a little bit, you might want to get a second opinion. And this is another reason I love having Hank; because I get free things when he’s on my show. So Hank, what are you going to offer my listeners?
Hank Parrot: 10:56 There you go. All right, so here’s if you have an adviser, one of the things we talked about, it’s not a do it yourself. If you’ve got someone you need. When we’re sharing things like these strategies, like NUA as an example, you need to get in with someone that understands that and if you don’t have someone we can help you that way. So if you want to call my office, the number is (615) 376-5325. What I’ll do when you call the office comprehensive financial plan. So when we talk about all these different strategies, we’ll send you out a checklist of things to bring to my to your appointment with me. In that appointment, I’m going to take a look at your income, your expenses, your assets, your liability. We’re going to take into consideration of course, taxes, inflation rates of return on your money.
Hank Parrot: 11:37 We’re going to stress test your portfolio to see if there’s some hidden risks in there. You may not be aware of when you’re coming off of the longest bull market in history. And I say coming off of because eventually we will, right? When that time happens, you know, it’s one thing to say, well how have you done over the last 10 years? If you haven’t done well, then you shouldn’t be in the market anyway cause you’ve got some, you know…
Dr. Friday: 11:57 You’re in trouble. This is a bull market right now.
Hank Parrot: 11:57 When you’re investing in this market and you’ve not done well, there’s a problem. But going forward, we don’t expect the next 10 years to be like the last 10 years. And there’s some things that we can help you with there. In fact, the market is average 13% a year over the last 10 years. But if you look over the last 20 years, that average drops down to about four and a half percent a year.
Hank Parrot: 12:17 But there are ways that you can improve that and reduce your volatility and risk at the same time. That’s all part of the planning as well. So if you give a call again to my office, (615) 376 5325. When you call in we’ve got people standing by, they’ll get your information, send you out a checklist of things to bring to your appointment with me. And when you come in to see me, I’ll also give you a free copy of my book, Seven Steps to Financial Freedom and Retirement. It lays out a lot of some of the strategies we’ve been talking about as well as the whole planning process itself. It’s about how to attain and maintain your standard of living quality of life. No matter how long you live, never have to worry about running out of money.
Dr. Friday: 12:55 There you go. It’s the perfect plan. All right, we’re going to take a quick break. If you want to join the show, you’ve got questions. Maybe you are invested into some sort of funds or annuities. Not like something he can really break down, but if you’ve got some basic questions, give us a call here or if you’ve got tax question. Remember you only have a few more weeks. In October 15th we’ll be here. (615) 737-9986 is the number here in studio (615) 737-9986 we’ll be right back with the Dr. Friday show.
Dr. Friday: 13:27 Alrighty! We are back live here in studio! Remember, if you have a question, (615) 737-9986 (615) 737-9986. Okay. So we all know that the new tax rules came into effect as of the first basically [quarter] of 2018. It was the most far reaching reform since 1986 – that’s older than some of the people that have even been around for my listeners – impacts nearly every person and business. So you know, when you did your 18, a lot of people were maybe not as surprised. Some were really surprised. There was a lot because they changed the payroll on your W2’s partway through the year. I think it was like may that we actually got the tax code switch. So I don’t think people had a full effect of how I was going to actually put more money in their pockets. And then most individuals had a temporary and individual changes that we have and we’ll cover some of those in the next couple shows we do or whatever. But they’re temporary. This whole code is going to expire for individuals in 2025. Business-related changes will not expire. It added a about 1.8 Trillion to the budget. What’s your opinion on that one?
Hank Parrot: 14:37 This is the thing. They say that they added that to the deficit and and the last thing we need is adding more money to the deficit. No doubt about it. But I think at the same time there are other changes that have been made to broaden out the tax base. So if you’ve got more and you see that with low unemployment rates means more people working. More people working, more people paying into the system. Both disregard the payroll taxes which, by the way, we’re seeing some positive benefits already because social security a couple of years ago was already paying out more than it was taken in. Now we’re back in the black on that. So more payroll taxes coming in, more income taxes being paid. So broaden out the tax base just like they did in the 80s and you’re going to help pay down. That will balance out some of that’s spending, if not all of it.
Dr. Friday: 15:25 And I agree with you, I think, I think when you hear adding to the budget, because I mean, let’s be honest, it seems like both parties loves to spend money. And the one thing I think most Americans would love. Well we can’t live our lives that way, we can’t do it in our own household budget. If we can’t afford it, we can’t buy it. But yet the government just does, you know, I mean, and then they say, “Oh, we’re going to do this.” So…
Hank Parrot: 15:46 They’re in a position to give themselves a raise by raising our taxes, right? They can give themselves more money which we, most of us, don’t have that…
Dr. Friday: 15:46 We need to elect terms and we need to elect, we don’t need to be paying you the rest of your life because you serve two terms. I mean, the term limits would be eliminated. Actually the money will save on not having to support politicians for the rest of their lives because they’ve served. Make it so that, you know… It used to be an honor. It was an honor to serve your country. Like our military guys do. Other girls and guys do all the time. Most of them that serve for six years do not get a lifetime support because they served. Okay. You know that for experience, right?
Hank Parrot: 16:23 Exactly. No, that’s not the way it worked. I mean there’s some nice benefits when you get out of the, you know, for me the army when I got out of the army I was able to, you know, GI bill, that kind of thing. So there was some, you know, you put in. For me, I was a volunteer so I was in three years. And then, you know, for me, I also determined not where I want to spend the rest of my life. All the respect for those that make that choice.
Dr. Friday: 16:44 Absolutely. There are people that, I mean, just like any profession, there are some that basically are great at, they live it and they, you know, and I have some that did the 25 years, retired from the military. I’m full, full military retirement or whatever, went into self-employment, have built very successful businesses. So they’ve got a dual lifestyle, I guess you would say in that kind of scenario. So that it does work for some.
Hank Parrot: 17:06 A lot of clients that are in the Guard, National Guard and Reserves, federal employees, those that in fact do both were you know, they’re called basically techs. These are people that are federal employees and also National Guard members at the same time. They’re going to have two pensions. They’re going to have a military pension and they’re gonna have a federal pension and there’s all kinds of rules. And this is the other thing, these aren’t necessarily the biggest of pensions. You know, you’re getting like 1% per year of service. So that means if you put in 20 years, you get 20% of whatever your high three, that’s not gonna, you’re not gonna be able to live on that. Right. Even with social security.
Dr. Friday: 17:44 Sounds good. It sounds good. Yeah. Well that’s what it used to be. A lot of people that used to love to work. I mean like the IRS or the government, right? Because you do your time in a sense and then you had that pension, you had that security. But from my understanding and with a lot of my [people] idea with at the IRS, it’s not as good as it used to be, right? I mean it just isn’t the same. I mean if you got in earlier it was fine, but people going to work now for the IRS and things, I guess they’ve changed a lot of the different rules…
Hank Parrot: 18:10 The rules have changed. And there was a time, you know if you go back to mid eighties is when it changed over from the civil service retirement system to the federal employee retirement system and that’s when back with CSRS, you did not have social security, but you do have a pretty good sized pension. They want it changed over. Now you’re paying in both to social security as well as paying in for your federal….
Dr. Friday: 18:31 You’re getting it from both sides in a sense.
Hank Parrot: 18:33 The employee is contributing to those things. So they’re getting, you know, basically yeah, they’re paying a certain amount for the pension as well as for social security.
Dr. Friday: 18:41 And now you deal with military, individual people that TSP, I mean, cause that’s sort of a unique part of the retirement code.
Hank Parrot: 18:50 Yeah. TSP, basically Thrift Savings Plan, is a really nice 401k type plan. It’s got some nice features. It’s index funds. So from that standpoint you’ve got better investment options than most 401ks we’ll give you. So from that, and their target funds, because they’re made up of index funds, again, are, are more beneficial. There are still even better ways that we can do asset allocation, even more diversification with than the limited funds they have. But a 401k it’s one of the best ones out there.
Dr. Friday: 19:20 Gotcha. All right. So if you have questions, maybe you are thinking about retiring and maybe there’s some questions you’re like,” Hmm, what do I need to know if I’m – am I really ready to retire?” When should I take my social security, which is at least once a week in my office and I don’t even deal with state planning. You know, and that’s the kind of thing that, remember when Hank does this free evaluation, that is awesome because usually he charges $1500 to $2,000, but for individuals listening at first, 10 callers are going to get this for free. And basically all he’s going to do is he’s going to take your information, even if you have a financial person or a tax person. Second opinions never hurt, especially when you can get it from an expert and it’s free. Okay? So get the comparison.
Dr. Friday: 20:02 Find out if there’s something you’re missing. At least then when you can walk back to your financial person and say, Hey, I love the plan. It’s a great plan. You have more secure… Or maybe you might want to come back and say, “Did you know there’s a lot of costs in this and there’s a little bit too much risk at my age? Should I really still be vested in this?” It’s a tool that you can use to make your finances more stable because sooner or later all of us are going to have to retire and we need to know, are we ready? All right. So let’s go back to our questions here or maybe I should say, start with them since I keep tackling and never do it. All right. First one, tax deductions you counted on in the past have been eliminated. Huge for my truck drivers, right guys?
Dr. Friday: 20:40 If you were employees and you did a 2106 employee reimbursements for anyone that, not necessarily my truckers were one of ones in my profession, they get hit a lot. I’m sure there is a lot of people that took miles. Maybe they use their personal car, they were able to write it off. It disappeared. So that did have a big impact. I had people that lost 20,000 $30,000 worth of deductions so that, you know, that was a 10, 12, $14,000 hit to them. And very little warning because it kind of dropped off on December. We didn’t really know about it until January. It didn’t give people a lot of time to make alterations. The W2’s, I don’t think people really knew it was going to happen. So I had several people that ended up owing a lot more. So seven items you should know about the new tax deduction and rules. Here’s the first one, your tax rate likely dropped. I’m liking this. So when I say, and I always love the way Hank says this better than I do, but we always read numbers. So 2% to 4%, it doesn’t really sound like much, 2% so it’s like 2 cents on a dollar. You know, what does that mean?
Hank Parrot: 21:42 If they’re referencing there is an example, if your tax rate went from 15% down to 12% that’s a 3% drop, right? But if you think about it, that’s actually a 20% drop in amount of money you’re paying tax. So in other words, if I paid 12% and I’ll just use easy numbers, right? If I’m paying 12% on a hundred thousand dollars okay, there’s 12,000 if I pay it on it versus 15,000, all right? Again, a 20% reduction, I saved $3,000. Now, the actual numbers would be more like 50,000 on that. So it’d be about half. But there’s, if you get, if you get the idea, the concept here, when you’re talking about a 3% change in the bracket, that’s a 20% savings in your taxes. And that’s the same when you go up the bracket. So you’re 12% or what was 15 is now 12, what was 25 is now 22 and so on. What was 28 is now 24. So depending on where you fall in that, and then understanding the way these brackets also worked. So…
Dr. Friday: 22:44 Yeah, they, they kinda changed a little bit of how much went in between them. Like, you know, zero to 20 was, you know, 10% or whatever. And they’ve played a little bit with those. So when it gets the higher brackets, because I have a little disagreement. Yes. People making more money. Obviously they’re working their way cause we’re a progressive tax code. So they’re working their way through all of these, you know, 12s, 22s, 24s, 26s all the way up to 37 now instead of 39.6. So obviously if you’re in that higher bracket you are going to save tax dollars versus an individual that may have only been in 15 and dropped to 12. It doesn’t make a difference. It’s still money in our pocket and that’s a huge savings for most of us. And the reason they did that gives us more money to put back in the market, put more money so we can either pay off debts or to reduce things.
Hank Parrot: 23:27 It’s about, you know, helps with growth. It helps in a number of ways. And you know, we still have a spending problem in our country obviously. And this is one of the reasons that you know, there’s a deficit that size that it is, is not because they’re not collecting enough taxes. It’s they spend way too much, way more than they collect. And that’s where the real problem lies. How can we cut spending to help the situation. Broadening the tax base, changing, making it easier for corporations to grow their businesses and pass that through as well. And we’re seeing that kind of thing.
Dr. Friday: 23:58 Anything that they do now is going to take several years to get the feel for it, right? It’s just like if you make a change in your budget and you know, you pay off something, you don’t feel it instantly, it usually takes you two, three, four months before you realize, “Oh, I’ve got a little bit extra money in here because I’ve paid down this debt or I have less of this.” Right?
Hank Parrot: 24:16 And this is where, as individuals, we look at that and it’s frustrating. But here’s the thing is if you understand how this tax code works, we can’t stop Congress from doing what Congress does. We can just, you know, vote responsibly, I guess. But beyond that, what can we do individually? What can we do personally to reduce our taxes? And there are a lot of different things, a lot of strategies that you can employ so that you don’t have to. Even if they are creating problems, how do you protect yourself? In fact, even more so. If there’s a chance that we’re in historically the lowest tax rate we’ve seen like ever, okay? So if you think about that, what can you do when tax rates eventually do go up? Tax rates go up in the future. How can you position yourself to pay less tax?
Dr. Friday: 25:01 How can we take advantage now. And offer one more time?
Hank Parrot: 25:04 Sure. First 10 callers to my office. (615) 376 5325. Would you like to pay less tax? Is there anyone out there? If you want to pay more tax, you can write this address but this is it. Every, all of us feel like we already paid too much tax. Even with historically low tax rates. And if you understand certain strategies, you can make sure that you pay less. You can make sure that you follow the law. Of course, we don’t want you to get in trouble at all, but there are strategies that can help you and there are strategies you can play. We talk about Roth conversions. This is a fantastic strategy. Talking about Washington. This is probably one of the best things come out of there.
Dr. Friday: 25:45 We come back, we’re actually going to talk a little bit about how he can do some of that. We’re gonna take a quick break. If you want to join the show. (615) 737-9986. We’re going to be right back with the Doctor Friday Show.
Dr. Friday: 26:02 Alrighty! 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, which basically is the only thing I do. So it means if you’re getting the love letters, you haven’t filed taxes in a number of years or maybe you have a few problems and you’re just not too sure how to get started cause sometimes life happens guys. And you really just eventually have to say I’m drawing the line in the sand. I’m going to do this and there are steps we’re going to take to help you get back on your feet. And believe it or not, the IRS has plans for you. Some are good, some are bad, but it matters of how you approach it. It’s just like any other business or any other profession. If you know what is expected and what we can do, it’s a good thing.
Dr. Friday: 26:44 And sometimes, I hate to say it, but when you’re in your worst position, when you don’t have a lot of money and you don’t own real estate and, at the bottom, in a sense you’re like, “That’s when we really kind of need to talk to the IRS!” If you have a house with a lot of equity in it, you have a 401k, you have a lot of cars, you’ve got money in the bank, you just don’t want to pay the IRS? Hate to tell ya, not as easy to get that 10 cents on the dollar deals. So you need to put some thought into what you’re going to do and how you’re gonna do it. All right. As promised, I want to tell you a little bit about, or Hank and I have been working together for over 20 years. I used to draw the line in the sand at 10 just because I didn’t want to, but now it’s 20. One of the things I probably learned from him is how he does these Roth conversions. Again, your tax person, at least this tax person, does not do financial planning at all. I did taxes, but we work a lot together because sometimes things that your financial planner does is going to affect your taxes. Sometimes you’re prepared for it and you’re like, okay, I’ll pay tax now so I don’t have to do it later. And that falls into how this Roth works.
Hank Parrot: 27:46 Exactly. So I had a client in this past week as an example. And we do these all the time, so I’ll use this one simply because it’s kind of a classic. He’s got money in what we’d call non-qualified brokerage account. In other words, it’s money that he has saved. He’s already paid tax on it. So he’s just paying tax as he goes along on the investment income from it. And if he sells some of these stocks or stock mutual funds in the future, they’re going to be subject to capital gains tax rather than ordinary income tax rates. He also has, I think, it’s about a million and a half in a 401k and then a lump sum pension that we rolled into an IRA. So he’s got different pools of money in a Roth IRA. So what we’re looking at, how can we convert, turn some of those tax deferred dollars into tax free dollars and use the money it’s in the taxable dollars.
Hank Parrot: 28:35 That is the brokerage account to help pay that and minimize the taxes as we go along. So we’re balancing out how much can we do and why would we. You know, one of the reasons for doing it in his situation is when we look ahead to how much that IRA is going to be worth in, you know, when by the time he reaches 70, those RMDs are going to be like a hundred and I think it was 120,000 or $130,000. Right? So plus his pension plus other… Social security and everything, right? So it’s going to push him into a bracket where he’s paying more and more attacks on his IRA distributions. We were talking about how much of those money’s in your IRA or your 401k are actually yours. When his situation less was going to be his because he’s going to be paying more in taxes. But if we do these Roth conversions and we do that where he’s only paying 12% tax and we still maintain the income he needs by balancing out those taxable dollars.
Hank Parrot: 29:28 We’re able to pay 12 cents on the dollar instead of what will then be 25 cents more on the dollar. So cut his taxes in half by doing this kind of strategy. And then we just have to calculate at, well how much do we do balance out the income needs and how much over what period of time. Then we redo the projections for the IRAs and we get him down where we cut his his required minimum distributions in half, get those down and at 50,000 to 60,000 a year instead of 120,000 plus a year. And that’s gonna save him now taxes over his lifetime.
Dr. Friday: 30:02 Absolutely. And I know there’s been several cases and I know individuals may be only have 200,000 or 300,000, and they don’t need the, the money out of their IRA and maybe they’re living off of a small pension and social security. They’re happy with what they have, but you have more than once taken those because they can, again, they can convert. Some people converting IRAs for zero, because again, their lifestyle, they are making it, they have enough money in their tax deferred or social security. But why leave the money on the table when they can inherit tax free money if, you know, or if they need it for something later in life. I mean…
Hank Parrot: 30:37 Roth conversions are all about either eliminating taxes or minimizing taxes. And it’s the same thing when we’re looking at capital gains. If the more options that you have available when you’ve saved, when you’ve prepared for retirement, the more we can utilize strategies to help you minimize taxes and still gain income. So an example, we talk all the time about staying in the 12% bracket, which right now is a little over $100,000 for a married couple. So for a couple of filing jointly, what you want to do is we can keep going to 12, and then let’s say I’ve got clients or income needs are greater than that. They might say, well, I need 120,000 that to live on, so this isn’t gonna work for me. Or 150, or whatever the number might be. And we’d say, okay, well let’s look at your other resources and we can take income. Maybe we sell off some things and keep it down to 12 pay zero tax, right? But now you’ve got income that you don’t have to pay tax on. And we, as long as we keep your taxable income under a hundred, we can have your actual income, sometimes be $120,000 to $150,000 or more.
Dr. Friday: 31:36 And then this is where the tax person often has a problem. We’re a financial person. He’s looking at a 5, 10, 15, 20 year picture based on what the current tax laws and all the different things. We’re looking at instant gratification, right? My job is here’s your tax bill. Hey, if you put money into your IRA, you can reduce your taxes. Usually the biggest thing I can offer, because it’s something they can still do after the end of the year as long as they have it. So these are the kinds of things. And then normally, you know, I mean, you want to come in and all I can tell you is before you make any big decisions, you take money out of an IRA and pay off your mortgage. Thinking, Oh, I don’t want to have to have, you know how many times we’ve heard that, right Hank?
Hank Parrot: 32:17 Oh, and today, rates are so low. I mean, you’re talking about mortgage rates at 3%.
Dr. Friday: 32:20 “I don’t want the note!” That’s what I hear always. And I’m like, seriously, you’re earning 4% to 5%. Let’s just say it’s sitting in a fairly safe investment. You’re paying 3% to 4% on a mortgage. It’s paying for itself and you’re making money on someone else’s money. That’s simple math. You don’t even have to think. But I have more than one person. Their biggest note is their house note. And so when they hit retirement, they don’t want to write that check. It’s that simple. So I mean, but if, if you’re in your 50’s now and this is your goal, by the time you hit retirement, then you need to have a plan. How am I going to do that? And still not take out $150,000 in the year. You retire paying, 25% tax on that. You know, and maybe taking a big hit in your retirement at that point to lose the control.
Hank Parrot: 33:07 I mean this is the thing. It’s just being smart with your money. I mean in the end the goal, of course, is to pay less taxes to keep more of your money in your pocket. And that means on your investments as well. And that means if you’ve got, yeah, we want to pay off debt and especially high interest debt. Absolutely the best thing to do! Credit cards, you should never pay them off every month if you’re using them for convenience or whatever. Car notes the same thing, those typically are higher. Get rid of them. But if you’re talking about a mortgage and you’re talking again at these historically low rates that you can lock in now that will, interest rates will go up.
Dr. Friday: 33:39 I mean, your house is likely not to depreciate. Likely. You know what I mean? There are certain types of homes and all that, but 90% of people that own a home, if you brought it the right market, you’re likely to have it still there. So this is security against that mortgage where my car is going to depreciate. Right, right. So if I have a note on a car, as soon as I drive off the lot, it’s depreciated from what I basically purchased it for and it just goes downhill from there. So credit cards, of course you’re paying interest on clothes that you’ve owned for two years because you haven’t paid your credit. You know, credit card often it gets pretty sad. And my mom wants it down and gave me that whole lecture on when I first started the business and I built it on credit cards because the interest was zero basically, right?. So borrowed and borrowed and started paying off just the interest portion and, and she’s like, “You do realize you now own those jeans four times, you know?” And I’m like, “Yeah, that wasn’t a good plan.” So really need to understand. Hank, before we take this last break, once you get us one more time on the deal you’re going to give my listeners.
Hank Parrot: 34:33 Sure. Thanks. So for the first 10 callers, if you call my office, the number is (615) 376-5325. We’ve got people standing by to take your information. They’ll send you out a checklist of things to bring to your appointment with me. And that checklist is gonna be, you know, the things we’re going to look at. Again, your income, your expenses, your assets, your liabilities. We’ll send you out a little checklist as well as some paperwork to fill out. You send that in, you bring that in. And when you come in to see me, I’ll also give you a free copy of my book, “7 Steps to Financial Freedom and Retirement”. Again, it’s a comprehensive financial plan at no charge to you. First 10 callers, (615) 376-5325.
Hank Parrot: 35:11 I can show you your financial future based on the things you’re doing today and then share strategies with you of how to improve that future to make sure you’re able to, again, obtain, maintain your standard living quality of life no matter how long you live. Cause it’s not just about getting by, right? We don’t want to just survive in retirement. It’s not about a week. We only need to spend this month. Exactly. We want to thrive, we want to have fun money. We want to get out there and enjoy those leisure activities, the fun stuff that, you know, check off the bucket list, whatever it might be for you. That’s what retirement should be about. And that’s what this planning will help you with.
Dr. Friday: 35:45 All right? So when we get back, we’re gonna talk a lot more about taxes. If you’ve got questions on tax returns or if you’ve got questions cause you haven’t filed taxes and you’re like, “Oh, I don’t even know where to start.” Remember we don’t take your name and number so no one’s gonna know who you are unless you tell us. So you can give us a call. (615) 737-9986. We’ll be right back.
Dr. Friday: 36:09 Alrighty. Back live in studio (615) 737-9986, (615) 737-9986. The number here in studio. If you want to talk about taxes, I’m an enrolled agent, licensed with the internal revenue service, city taxes and representation. We do a lot of offer and compromises, payment plans, non collectibles besides just getting people caught up. Because you cannot deal with the IRS if you’re not in compliance. So the first thing that has to be done is really, there’s two things. One, you’ve got to do all the taxes, right? So if you have back taxes and it may only be going back 6 years or 7 years or even if you haven’t filed for 20 years, we may not have to go all the way back to that. But once we actually get down to that, then we are going to actually… I guess I’m hearing music in the background. Sorry, I’m taking it to that level. So anyways you’re gonna actually have the… I’m sorry. Can you turn down the music in the background? Thanks.
Dr. Friday: 37:13 But we’re going to actually be able to take you, get you all caught up on your taxes and then we’ll be able to go and do what you need to do forward, right? So the past is done. We can’t change the past, we can’t do anything besides comply with what the IRS is requiring. And then we want to move forward. We’ve got to get you guys onto a payment of every month or every… I have people that pay once a week. But you’ve got to make those estimated payments or changed the W2s so you have more withholding, whatever the situation might be. So that you eventually going to stop having to pay taxes every year. I mean, most of the time it’s us entrepreneurs, the people that are self-employed, that have to make, since we’re responsible for our own taxes, we don’t necessarily always have all the money coming out of Paychex unless we’re in corporations.
Dr. Friday: 37:59 And then we can actually control it a little bit. But corporations are the only one. I do want to reiterate. A lot of times I’ve see people in LLCs that are being treated as partnerships and those people are actually taking paychecks. That is not the way the tax law is written. A partnership and a sole proprietorship, you’re supposed to take draws and you pay your own taxes afterwards. You go on in payroll when you have a corporation, C Corp or sub S Corp. Now there are LLCs that can be hybrids and treated as a corporation. And therefore if it’s treated as a corporation under federal law, you can be an employee. But if you are a LLC and you are a member or an owner of it, you are not supposed to be on payroll. So just bringing that up because it seems to be often the same thing.
Dr. Friday: 38:43 One of the biggest things that the IRS has been putting out for most of us to make sure we’re giving to the individuals is be sure you have met the right amount withheld, especially for the purpose of this year. So when you’re doing your 2018 taxes, if you owed money and you had a W2 instead, of claiming maybe married and one maybe you should go to married and zero, have a little bit more come out. That way, then you have some control over the thing. And I know there’s people out there that still do this, but I’ve never been very good at myself. In fact, I’ve never really tried. But there are some people that live in the world of bonuses, so they play with their withholding. So when they get their bonus, maybe they claim married and six and then they’re really married in zero.
Dr. Friday: 39:26 So that way they don’t have as much to come out for their things because a big chunk of your money will come out when you do your bonus. Just keep in mind that the IRS is getting smarter and smarter. There’s been a whole batch of letters coming out where they’re making individuals that are married and they have, you know, children to be claimed single and zero, which is the maximum amount to be able to, to take out. They’re changing on because they’re finding out that people are maybe not paying in enough withholdings and they’re, they’re playing a little bit with it. So just make sure that you have the correct amount for your tax bracket coming out. Life can be so much easier if you understand how much you need to have. Now remember that was a big change in 2018 for the standard deduction.
Dr. Friday: 40:06 We went from 60 to 50, I believe it was, to 12,000 $200 or whatever. It’s 12,400 in the 2019 year. So we’re going to have a little bit more of the standard deduction, but we lost the personal exemption. So for individuals, example myself who itemized anyways and I don’t have children, so it was just myself, but I lost $4,050 under the current tax law because I still itemize and I did not get the personal exemption that really hurt more. Especially with my clients, people with larger families, people that may have been itemizing in the first place but had two or three people living in the household at the same time or more. And then they ended up with a lot more lot less I should say, of withholding for standard deduction and personal exemptions. So that was a, a big deal.
Dr. Friday: 40:58 So you have that on as a situation. So again, standard deduction this year be 12,000, it was 200. It was from 63 50 back in 2017. A married couple was 24, four, and in 2017, that was $12,700. And the personal exemption obviously is gone so we don’t have that any longer. IRS as middle-class families earn a combined income of $71,000. Standard deduction and exemption reduced taxable income is about 35. Under the old tax law, you would have paid right around $2,300. Under the new standard deduction in lower tax brackets, there’ll be about a savings of $1,910. So that’s what the new tax law is doing for the standard family. I’m not sure if that worked out as well under the newest tax laws. I mean, mathematically that’s correct. That’s exactly the way it would work. But I know with most of my people, I will say that almost every client of mine with exception of individuals that had 2106 or not reimbursed employee deductions, those individuals, and most of those in my world were truck drivers that were employees and we were able to take the per diem and some of their licensing and stuff that they had to pay out of pocket.
Dr. Friday: 42:17 And of course in 2018 we were not able to do that. So those were, those exemptions were reduced and it really did hurt individuals. So if you have tax questions, if you’re getting ready to file your 2018 taxes, remember October 15th is a huge deadline for all of us. And I do want to reiterate, even though you did not file, I mean, hopefully first you filed an extension because without that extension you do not have, your taxes were due back on April 15th. So if you don’t have an extension, your taxes were due. Boom. That’s one thing. Second thing on that conversation is if you do have an extension, they are due October 15th, but your money was due by latest April 15th. Most likely your last estimated payment, which would have been January 15th of 2019 would have been when your taxes should have been paid.
Dr. Friday: 43:13 All we’re extending when we get an extension is the paperwork. So if you owe money and you’re just delaying it, that’s one thing. Many of my clients, including Hank’s clients as well, part of the reason for extensions is that they can maximize their set contributions being able to extend past that April 15th deadline to be able to put the money into the taxes. So very important to be able to understand how, where to put your money. And you know, I mean, let’s be honest, if you can defer $50,000 a year into a retirement account that can be a very profitable situation. AMT, I don’t talk a lot about it, but it is a very big part of the tax code, especially for many of my clients. Alternative minimum tax exemptions did get a higher kick under the new tax law.
Dr. Friday: 44:01 Some people may have noticed that in 2018 if they’ve always had to pay alternative minimal tax. So the new law allows $71,700 for a single person and it was up from the $54,300 and 27. That’s a big hit, 111,000 for a married up from 84, 5. The increase of the standard deduction means many households won’t itemize deductions and won’t get hit with AMT tax because part of the alternative minimum tax, it’s actually a second tax code that runs in conjunction with our current tax code. And the reason for that tax code was initially put in and it’s like the, you often hear this when you talk about taxes was to help level the playing field. So they were saying that people that may have had high mortgage, lots of property taxes, huge contributions, especially mortgage in those things. They were getting a better deal.
Dr. Friday: 44:53 I’m not too sure how you figured that when you consider the fact that they were in debt to take off that interest, but they were getting a lower taxes because of those debts. So they’re saying, “Wait, if you make over these dollar amounts in 2017, it would’ve been 54, 85 thereabouts, you’re going to need to have to pay the, we’re going to take some limitations on your schedule a and theoretically charge you this other code called alternative minimum tax.” I often saw it with stock sales, especially when they were from a business stock sales. So that way you know, you go from a standard deduction in this, in the ordinary income rates, which would have been what, 15 and 25 back in 17, but AMT tax was taxed at 24%. So it was a little bit more hefty. Most people according to this that so few are AMT.
Dr. Friday: 45:45 So if you’re a higher amounts of them, the foundation tax foundation said 10 million, 3 million, 10 million households were subjected to the AMT back in 2015. Less will be affected under the new tax laws. So it might be interesting to see what we have. All right, we’re getting close to the end of the show. So if you have tax questions and you do a little bit shy or you’re out there enjoying this wonderful Saturday that we’re having, all you have to do is pick up the phone. You call me Monday morning at (615) 367-0819. That’s my direct phone number, (615) 367-0819. You can also email me firstname.lastname@example.org. Again, email@example.com. Or check me out on the web again, brand new website, drfriday.com and it’s a, it’s a way for you to be able to get out there. Hope you have a wonderful Saturday. Talk to you later.