Episode 144
Tax Deductions – How to Get More!
This episode of Ditch the Suits Podcast delves into the intricate world of financial planning, particularly as the year draws to a close.
Hosts Steve Campbell and Travis Maus discuss practical actions that individuals can take before the end of the year, emphasizing the importance of understanding capital gains and the potential benefits of tax loss harvesting.
The discussion highlights the distinction between short-term and long-term capital gains and the associated tax implications, guiding listeners to make informed decisions about their investments. Moreover, they introduce charitable giving strategies, such as Qualified Charitable Distributions (QCDs) and Donor Advised Funds (DAFs), which can empower listeners to support their favorite causes while optimizing their tax situations.
As the conversation unfolds, Travis and Steve challenge common misconceptions about capital gains and tax strategies. They encourage listeners to reflect on their financial decisions and consider how different approaches can impact their tax brackets and overall wealth.
The dialogue transitions into a discussion about gifting to children, addressing the nuances of instilling financial responsibility and planning for future generations. Steve and Travis underscore the significance of understanding one’s financial landscape and utilizing strategic gifting to enhance not just individual wealth but also family legacy. This episode stands out as a comprehensive guide for anyone looking to navigate the complexities of year-end financial planning, leaving listeners with actionable insights to improve their financial well-being.
Transcript
Welcome to Ditch the Suits Podcast where we share insights nobody in the financial services industry wants you to know about.
Steve Campbell:We're here to help you get the most from your money in life.
Steve Campbell:So buckle up and welcome to Ditch the Suits.
Steve Campbell:Welcome in to Ditch the Suits podcast.
Steve Campbell:Steve Campbell here with Travis Moss.
Steve Campbell:Folks, we're getting closer.
Steve Campbell:We're in the middle of holiday season.
Steve Campbell:Appreciate you stopping by if you are brand new to Ditch the Suits.
Steve Campbell:I serve as the chief brand officer at SEED Planning Group.
Steve Campbell:Travis serves as our chief executive officer.
Steve Campbell:We operate seed, which is a fee only financial planning firm.
Steve Campbell:Fiduciary obligation to put our clients best interest first in digital Suits is all about us bringing years of experience, conversations, working with people just like you that have big life questions.
Steve Campbell:Am I doing the right thing?
Steve Campbell:Am I okay helping you make sense of what you can do to get the most of your money in life?
Steve Campbell:And this has been a fun series.
Steve Campbell:Last episode in it, Travis, I don't want to steal any of your thunder, but why don't you talk about really these practical insights and why they're important this time of year.
Travis Moss:Yeah.
Travis Moss:So this might be the credential or.
Travis Moss:Not the credential, the acronym episode.
Travis Moss:We've got a couple of, we got QCDs popping back in.
Travis Moss:We got donor advised funds or DAFs.
Travis Moss:We're gonna have a little bit of fun with the terminology.
Travis Moss:But, you know, the last two episodes we did, we talked about, we've got 11 actions or things that we can do, some best practices that we can do before the end of the year as we're getting ready for next year that really help us focus on how do we move the ball forward.
Travis Moss:Right.
Travis Moss:How do we make these little changes.
Travis Moss:And what we're hoping is out of these 11 things, people have one or two things maybe they can implement.
Travis Moss:I know that some of the, like, especially in the last episode, some of those started to get a little bit complicated because they're not, they're nuanced to a situation.
Travis Moss:And so because they're nuanced, it's hard to say everybody in this situation or everybody in that situation or in, you know, this is, you know, it's really hard to do the entertainment thing and say everybody should just have a Roth, because not everybody should have a Roth.
Travis Moss:Right.
Travis Moss:Everybody should have an ira.
Travis Moss:Not everybody should have an ira.
Travis Moss:It depends.
Travis Moss:Everybody should have six months in savings.
Travis Moss:No, not everybody should have six months in savings.
Travis Moss:Like, it depends on the situation and what else you got going on.
Travis Moss:So anyhow, we've got our final four that we wanted to bring out today and the four of them that we're actually working on, we're going to dig into capital gain strategies, a fun idea called tax loss harvesting.
Travis Moss:So some of you are probably aware of that and some of you maybe have heard that before and aren't sure what that means.
Travis Moss:Charitable gifting strategies using QCDs.
Travis Moss:We'll come back to remember what QCDS are.
Travis Moss:We covered it last episode, but we'll cover it again.
Travis Moss:DAFS securities and Checks.
Travis Moss:So don't worry if you don't know what any of that means.
Travis Moss:We'll get you up to speed and then we'll finish with a little bit of gifting to the kids.
Travis Moss:We finished our last two episodes with 5:29, which is really about the kids.
Travis Moss:We're going to finish this episode as well.
Travis Moss:Maybe giving the kids a Christmas present.
Steve Campbell:It's all about the kids in our, in our warning in our last episode.
Steve Campbell:Right time of year, holidays.
Steve Campbell:Don't fall asleep.
Steve Campbell:Don't let these things go by.
Steve Campbell: se once we strike midnight on: Steve Campbell:So last four, final four, final countdown.
Steve Campbell:We're going to get into it.
Steve Campbell:You had started with capital gains, so you're in capital gains.
Steve Campbell:Why don't you help people also understand like what are capital gains and then understanding what would be involved into year end capital gains rates.
Travis Moss:Yeah.
Travis Moss:So those who have heard like our last series that we did or actually two series ago because of the, the order of things, we did a whole series about capital gains and capital gains rates and you know, some of the tax policy that people are suggesting out there.
Travis Moss:But to make this really simple, for most people, capital gains is the difference between what you paid for something and what you sell something for.
Travis Moss:So if you buy something for $100 and sell it for $200, you have a hundred dollar capital gain.
Travis Moss: taxes you get a thing called: Travis Moss: And that: Travis Moss:If you have that type of investment account and it'll go, it says what your dividends are and what your interest is and what your capital gains are if they're short or long term.
Travis Moss:All those types of things we're not going to get into short or long term today because it doesn't matter for the sake of.
Travis Moss:Well, I guess it does matter for this conversation.
Travis Moss:So let me back up on that.
Travis Moss:Long term capital gains are happen when You've owned the asset that you sold for more than a year.
Travis Moss:Yep.
Travis Moss:Short term happens when you've owned it for less than a year.
Travis Moss:So if you have short term capital gains, you actually pay regular income taxes on it or ordinary income taxes on it.
Travis Moss:When you have capital gains, you pay the capital or long term capital gains, you pay the capital gains rate on it.
Travis Moss:Two totally different tax rates.
Travis Moss:Short term capital gains, higher tax rate, long term capital gains, lower tax rate.
Travis Moss:That's all you need to know about that.
Travis Moss:Long term capital gains tax rates are 0, 15 or 20% currently.
Travis Moss:That's the way it currently works.
Travis Moss:And depending on how much money you have or how much income you have will depend on if you pay 0, 0 for part of it, 15 for part of it, 15 for Part of it, and 20 for part of it, or 15 for all of it, or 20 for all of it.
Travis Moss:Just it depends on how all the rest of your taxes work.
Travis Moss:So a lot of times what I have discovered is most people don't actually understand how the capital gains system works and they don't understand how to calculate those taxes.
Travis Moss:And I've actually worked with tax professionals that don't understand necessarily how all that works.
Travis Moss:So that's what capital gains tax rates are.
Travis Moss:Now back to what we've talked a lot about with projections and financial planners.
Travis Moss:If you've got assets that are subject to capital gains rates, so if you own investment properties, rental properties, those types of things going to be subject to capital gains.
Travis Moss:If you have a brokerage account that's not related to being like in a retirement account, it's just after tax money, maybe you got an inheritance and you bought a bunch of Apple stock or something like that.
Travis Moss:Right.
Travis Moss:Those are things that are subject to capital gains.
Travis Moss:And what happens a lot of times people say, well, I don't want to sell my stock because I don't want to pay the capital gains taxes on it.
Travis Moss:And okay, but there's not a lot of ways around paying capital gains.
Travis Moss:And we'll talk about that for a second.
Travis Moss:But number one, do you understand what your rate is?
Travis Moss:Number two, if you looked forward.
Travis Moss:So let's say that you're in these low tax situations like we talked about with the Roth conversions, and you're going to be in a much, much higher future tax situation.
Travis Moss:So you could potentially pay 0 to 15% on the capital gains right now.
Travis Moss:You don't know it because you're not doing the tax planning, but if you looked at it, you'd be able to figure out how much would be zero.
Travis Moss:How much would be 15%?
Travis Moss:Or if you wait too long, you're probably going to pay 15 to 20%.
Travis Moss:So the question there is, and I always ask people, how old are you and how soon do you think you're going to die?
Travis Moss:Because if you have money that's invested in something that has a big gain in it, you've made a ton of money on it, good for you.
Travis Moss:You win, right?
Travis Moss:That's the whole idea, is to make a lot of money and you won't sell it because the taxes, you can't use it now.
Travis Moss:You can go get a loan against it in a lot of situations and stuff like that.
Travis Moss:Then you're paying interest rates, interest.
Travis Moss:So you got to decide, do I want to pay taxes or interest?
Travis Moss:But more importantly, when you're, when you're thinking about how old you, there's, there's, there's two ways out of capital gains right now.
Travis Moss:You give it to charity, you don't have to pay capital gains on it or you die and your kids get a step up.
Travis Moss:Otherwise, if you want to use the money, you're either going to be paying interest on a loan against it or you're going to be paying the capital gains tax.
Travis Moss:The question is if you've done good with a stock or a building or something like that.
Travis Moss:Remember I talked about, it's kind of like whack a mole.
Travis Moss:Where's the tax popping up?
Travis Moss:Is it better for that tax to pop up now or is it better pop up later?
Travis Moss:This kind of like, woe is me.
Travis Moss:I gotta pay taxes.
Travis Moss:I'm just against taxes.
Travis Moss:That's a stupid attitude because somebody's gonna get those taxes.
Travis Moss:And if you said, well, no, I'll just wait, okay, so if you're 60 years old or 65 years old right now and you're in good health, you're not diagnosed with terminal cancer or something like that, right?
Travis Moss:And you're thinking, okay, I'm looking forward to the next 30 years of my life.
Travis Moss:You know what the average life cycle or life cycle of a correct.
Travis Moss:Of a Fortune 500 company is?
Travis Moss:So a company you'd probably have stock in is it's less than 16 years right?
Travis Moss:Now, that company that you own that you don't want to pay the taxes on, very likely will not be around in 30 years.
Travis Moss:So if you look at that and go, I'm not going to sell because I don't want to pay the taxes.
Travis Moss:I'll just wait 30 years till I die and then I'll leave it to the kids and they'll get the Step Up.
Travis Moss:Number one, they're coming after the Step up and just about all the tax legislation that they're trying to pass every single year, they're debating about whether or not take away the Step Up.
Travis Moss:But number two, you're making a bet that that stock actually retains its value.
Travis Moss:And there's lots and lots of examples where that doesn't work out well.
Steve Campbell:Let's take a quick break to hear a word from your sponsor.
Steve Campbell:This episode is brought to you by Seed Planning Group.
Steve Campbell:If you're looking for a life giving experience working with a financial planner, then Seed is here for you.
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Steve Campbell:If your goal is financial freedom and independence without sales products or really glorified salespeople, then check out Seed Planning Group.
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Steve Campbell:Well, and I think that's a helpful explanation at the beginning of how capital gains work and really understanding that another big word that we sometimes hear is tax lost harvesting.
Steve Campbell:And, and I think this one's confusing because even if you work with a financial advisor, they'll say on one end we don't give tax advice, but then they'll say, hey, we're implementing tax loss harvesting so help us understand maybe the value of taking advantage of this.
Travis Moss:So what they're really saying is we're going to run a portfolio with a, with a buy and sell strategy that is designed to make the results of the portfolio tax neutral.
Travis Moss:So what they're trying to do is take advantage of losses in particular positions to wipe out gains in other positions, which on the surface sounds great.
Travis Moss:And what's happened is lots of people have said, well, that must be good for everybody and in all situations.
Travis Moss:So you go and you sign up for a program.
Travis Moss:They're like, the big value here is we do tax lost harvesting.
Travis Moss:I think that there's some fundamental issues with this.
Travis Moss:We have clients all the time, like I, I don't want to pay as much income tax as I've got a loss in my portfolio, sell that loss so I can take the loss.
Travis Moss:You are now making an investment decision for a tax reason and it's not a good reason.
Travis Moss:And what I mean by that, let's say that your, your Valero stock back during COVID is down 70%.
Travis Moss:So you sell it so you can write off the.
Travis Moss:So you can get a capital gains loss at which you can only offset against the same type of income.
Travis Moss:So if you don't have the same type of income, you can't even use it all.
Travis Moss:You can only use like up to 3,000 of it.
Travis Moss:But let's pretend you can use it all.
Travis Moss:And so you deduct that loss.
Travis Moss:So capital gains you pay taxes on, capital losses you get to deduct up to a certain amount in certain circumstances.
Travis Moss:So you say, okay, let me deduct that.
Travis Moss:And now you're deducting it, you know, against a 12 or 22 or 24% tax bracket.
Travis Moss:But you took a massive loss.
Travis Moss:And so this investment that you have, what's the likelihood that that investment wasn't going to recover?
Travis Moss:But now you don't have it anymore, you had to sell the investment.
Travis Moss:And the way that what's called wash rules work out, you can't just buy that same account rate back up or that stock right back up.
Travis Moss:You have to wait 30 days.
Travis Moss:Otherwise they wash your cost basis.
Travis Moss:Basically it just adopts into the new position because they know you're gaming the system basically.
Travis Moss:So you have to be out of it in 30 days.
Travis Moss:If you look at where most returns come with stocks, if you miss one or two days with that stock, you miss most of the returns.
Travis Moss:So you know, on like a yearly basis or a longer term basis, you could take a, like take the s and P500, you take out like the top 10 days, you've missed half, half of the returns over the last decade or something like that.
Travis Moss:So you have to be really careful with trying to time it and making investment decisions for no other reason than I'd like to take the tax loss.
Travis Moss:Unless you have something really legitimate to use the tax loss for.
Travis Moss:In a good investment, I call a horizontal strategy.
Travis Moss:I need to get an equal or better position going forward.
Travis Moss:And what I mean by that is if I've got a stock that is if I were to appraise the company, because all companies can be appraised, just like your house can be appraised and it appraises at 100, but it's right now selling for 60 cents on the dollar.
Travis Moss:So it appraises at 100, but selling for 60, I need to get into something that's got the same type of profile where I can make that 40% back.
Travis Moss:If I bought it at 100 and wrote it down to 60, and there's nothing wrong with it, it's just the price is wild, right?
Travis Moss:I need to be able to hold that till it goes back up to 100.
Travis Moss:So if I sell it out to tax loss average, to take the loss, I need to put it back into something that has the same profile, that has the same capability going back up that 40 in the same timeframe.
Travis Moss:And that's normally extremely hard to do because you can't buy the same thing.
Travis Moss:And if it's mutual funds, you can't buy fundamentally the same fund.
Travis Moss:So if you have an S&P 500, you can't go S&P 500.
Travis Moss:S&P 500.
Travis Moss:It would trigger your wash sale, even if it's a different company's fund.
Travis Moss:So what I look at with tax loss harvesting is you have to know your personal situation and your personal tax projections.
Travis Moss:Back to our tax planning that we've talked about and back to our current versus future projections.
Travis Moss:Number one, do you need a tax loss?
Travis Moss:Does it make any sense?
Travis Moss:How is it going to actually help you?
Travis Moss:There might be things that you could sell that you could say, hey, you know, there's so much volatility, this is great.
Travis Moss:I could sell that one and I could buy that one.
Travis Moss:And that's a wonderful horizontal move.
Travis Moss:My portfolio is not going to get dinged at all.
Travis Moss:But if you look at it and you say, man, I'd really be taking a step back with my portfolio to do this.
Travis Moss:You probably shouldn't do it.
Travis Moss:It's going to cost too much, Harm.
Travis Moss:So think about it like this.
Travis Moss:Let's say that you could save $10,000 in income taxes by taking the loss.
Travis Moss:Like you could actually save 10,000, which means you got massive losses, right?
Travis Moss:Because that's, that's the actual tax deduction component of it or the net result.
Travis Moss:But in order to get the $10,000 in tax savings, you had to lock in $100,000 loss in your portfolio.
Travis Moss:Good for you.
Travis Moss:You didn't pay taxes this year, bad for you.
Travis Moss:You now have a hundred thousand dollar hole in your portfolio.
Travis Moss:You have to figure out how to make up.
Travis Moss:And this is where you know the intersection between understanding investments, tax planning and financial planning all comes in.
Travis Moss:So you can see how you have to do the financial planning and tax planning.
Travis Moss:But people go like, oh, we don't do investments, you just buy index funds or whatever, or we just buy ETFs.
Travis Moss:And then they talk about tax loss harvesting and stuff like that.
Travis Moss:You have to understand investments because you're buying and selling something that makes money based on what it actually Is so when you buy Visa or MasterCard or Apple or even the S&P 500, there's a real value to it and a real price.
Travis Moss:And you have to understand that if you don't understand that all you're doing is gambling, they say, well, the monkey can throw the dart at the wall and do just as good as most mutual funds if you're gambling.
Travis Moss:The context of that discussion is way.
Travis Moss:I mean, it's a horrible contextual discussion.
Travis Moss:They're comparing apples to oranges.
Travis Moss:If I were to take a random sampling of every investment out there and just throw a dart at the wall.
Travis Moss:Yes.
Travis Moss:But if I were to slim that universe down to the actual quality component of that universe, now expertise does actually matter.
Travis Moss:And so it's like, you know, the devil's in the detail of that argument.
Travis Moss:But it's so important with tax loss harvesting.
Travis Moss:Could it help you?
Travis Moss:Yes.
Travis Moss:Could it hurt you?
Travis Moss:Yes.
Travis Moss:It's not for everybody.
Travis Moss:You have to actually go through the process of saying, you know, maybe tax loss harvesting for some things will help you and for other things that would hurt you and you want to use it situationally.
Travis Moss:Yeah.
Steve Campbell:And again, I'm just thinking about the listener who's never heard somebody talk about the things that you have that's maybe kind of marveling at it because their experience has been going to a tax preparer and saying, I want to limit my taxes as much as possible.
Steve Campbell:So the preparer looks at what they have and says, okay, then sell this to get you to where you are.
Steve Campbell:They're not understanding the totality of the entire comprehensive financial picture in a way that you described.
Steve Campbell:So I think what you're trying to help people understand is get somebody that's going to talk to you the way that Travis Moss just did.
Steve Campbell:And I think that, again, tracking along, we are on number 10 now out of 11 practical things that we can do.
Steve Campbell:Hey, it's the holidays.
Steve Campbell:You know, maybe we're all feeling a little bit more benevolent.
Steve Campbell:We want to give away.
Steve Campbell:We want to help charities.
Steve Campbell:We want to help good causes.
Steve Campbell:Maybe many of us are just writing checks and send them away or giving somebody cash.
Steve Campbell:Hold on just a little bit.
Steve Campbell:Let's talk about charitable giving and maybe some things people can look at.
Steve Campbell:Travis.
Travis Moss:Yeah.
Travis Moss:And if I can indulge just two more points in the last one, I've had people go to tax preparers and had a tax prep CPA tell a client, why would you ever sell those investments?
Travis Moss:You would have so many taxes.
Travis Moss:Just leave them as they are.
Travis Moss:They're they're not an investment professional.
Travis Moss:They are not licensed or credentialed to give you investment advice.
Travis Moss:And if you're 60 years old and somebody tells you to own a stock for the rest of your life, they are not qualified to talk to you.
Steve Campbell:Yeah.
Travis Moss:So just right there, you stay in your lane, I'll stay in my lane type of thing.
Travis Moss:So I think that that's just really, really important to be aware of.
Travis Moss:And there was one more kind of tack onto that.
Travis Moss:So if you give me just a quick half second, let me collect my thoughts on that a little bit.
Travis Moss:So we've had clients who have come to us and they've been doing tax loss harvesting for years.
Travis Moss:And what that means is they've been.
Travis Moss:Every time something's down or negative, they sell it.
Steve Campbell:Yep.
Travis Moss:So they're always selling things when it's down.
Travis Moss:What's the number one rule of investing?
Travis Moss:Right.
Travis Moss:Sell when it's up and buy when it's down.
Travis Moss:Tax loss harvesting is triggering them to always sell when it's down and basically just essentially have to find a replacement.
Travis Moss:So a lot of times you're buying when something's up, or at least up more than the other thing was down.
Travis Moss:And so when you look at the performance on that, you have to be very careful that you don't have severely muted performance.
Travis Moss:You may save tax dollars, but if you have a large enough portfolio like we have illustrated, the loss of a percent or two, total performance on that year in and year out could be devastating or even more.
Travis Moss:Because if you're always selling the losers just because they're down for the year, you're always selling, though.
Travis Moss:Okay, so jumping forward to charities.
Steve Campbell:Yeah, we're just trying to be benevolent over here as listeners.
Steve Campbell:But I do want to say, folks, that if you will bear with me, there was also a series where we did some six different.
Steve Campbell:I think things that you could do to add 1% to your overall portfolio.
Steve Campbell:I think what you were just talking about leading up to that is again, if you are taking those losses 1% per year, how detrimental they can be.
Steve Campbell:We had also expressed that if you do 1% better each year across six areas, what you can really add to your bottom line.
Steve Campbell:But now want to talk about being benevolent, and now we want to talk about giving back to charities and good causes.
Steve Campbell:So.
Steve Campbell:So, Travis, I think with this.
Steve Campbell:We've talked about this for almost over four years.
Steve Campbell:There's a lot of people that want to do the right thing.
Steve Campbell:They want to give back, but maybe the methodology for how they going it, this is where a light bulb goes off and they go, geez, guys, I didn't even know about some of these things.
Steve Campbell:So talk to us about these letters and these acronyms and what they mean.
Travis Moss:And I'm going to, I want to make it easy too, because I'll talk about these letters and acronyms and most likely where you're going to be able to benefit from them.
Travis Moss:QCDs, qualified charitable distribution.
Travis Moss:We talked about this in the last episode.
Travis Moss:You can do These when you're seventy and a half, if you have RMDs or not.
Travis Moss:If you have RMDs, if you have IRAs, you cannot do it out of the retirement account of work.
Travis Moss:It has to actually come out of an ira.
Travis Moss:So you might have to do an IRA rollover, but you can do QCDs.
Travis Moss:This year the amount's up to 105,000.
Travis Moss:So you can actually take up to 105,000.
Travis Moss:If you're of an age where you have to take RMD's required minimum distributions.
Travis Moss:So everybody has an age where they have to start taking those.
Travis Moss:Or if you've inherited an IRA and you're over 70 and a half, you're already taking distributions, but you can offset the required minimum distribution by this amount.
Travis Moss:So if you had an RMD of $40,000 that you had to take before the end of the year and you do $40,000 to your favorite charity right out of your Iraq, you now don't have to take any more money out.
Travis Moss:A dollar for dollar offsets it.
Travis Moss:But you also don't pay tax on any of the $20,000.
Travis Moss:So those clients that have, or anybody out there, I guess they don't have to be clients of ours, but anybody out there who's got charitable interests and their favorite charities doing like a capital campaign or something, this is a wonderful way to help fund that type of stuff because you get that, you know, just incredible power of just off the top tax deduction.
Travis Moss:So that when you're 70 and a half, that is the, in my opinion, up to $105,000 worth of gifting.
Travis Moss:The best way to gift.
Travis Moss:Yeah, it is.
Travis Moss:Maybe somebody's got a better idea.
Travis Moss:I'd love to hear it.
Travis Moss:But that is so powerful and so effective in so many different ways.
Travis Moss:If you're 70 and a half and you have IRAs and you gift, gift out of the IRA, stop writing checks.
Travis Moss:Stop it.
Steve Campbell:Yeah.
Steve Campbell:And just a super practical what you do and what we have people do is put together a list of the organizations that you'd like to Give money to give us the dollar amounts.
Steve Campbell:And then we will prepare the paperwork to make sure that wherever you have an ira, these checks get cut Right.
Steve Campbell:From the IRA to your organization.
Steve Campbell:So they stop coming to you and then you lose out on the tax savings.
Travis Moss:Yep.
Travis Moss:And why people don't do it, I don't know.
Travis Moss:It's just, it's.
Steve Campbell:They just don't know.
Steve Campbell:They just don't know or they don't have a professional that's telling them, because I don't do tax planning, that that's something that they can actually do, right?
Travis Moss:Yep.
Travis Moss:So that's number one thing.
Travis Moss:You're over 70 and a half.
Travis Moss:That's also when we go back to like the Roth conversions and we talk about overconverting.
Travis Moss:Right.
Travis Moss:Convert up to maybe what you think that you're, you're going to be gifting in the future and leave that money in there.
Travis Moss:Don't, don't convert money that you're otherwise going to give to charity.
Travis Moss:Right.
Travis Moss:Like leave that money in the IRA and give it all to charity.
Travis Moss:Have fun with it.
Travis Moss:DAFS donor Advised Funds.
Travis Moss:These are for the folks that give a meaningful amount per year.
Travis Moss:Let's say you give at least $5,000 per year to charity, qualified charities, and you do it every year.
Travis Moss:And you have money outside of retirement accounts that you could gift, whether it be cash or stocks or whatever it is.
Travis Moss:So you open a donor advised fund, which is really just an account at a charity.
Travis Moss:So.
Travis Moss:And you normally do it through a foundation.
Travis Moss:So you go to find a foundation if you don't have a foundation.
Travis Moss:Like if you have an account at Schwab, Schwab has a foundation, Fidelity has a foundation.
Travis Moss:You can open accounts for them.
Travis Moss:Your local community probably has a foundation.
Travis Moss:You got to check the fees on all these things because they can get expensive.
Travis Moss:But you can open a charitable account called Donor Advice Fund.
Travis Moss:Now the cool thing about that is you get to be the director.
Travis Moss:You're the boss.
Travis Moss:You also are the donor.
Travis Moss:So you send the money into the fund and you get to deduct that.
Travis Moss:And then once the money's in the fund, it gets to be reinvested.
Travis Moss:If you gave it stocks, the stocks get to be sold.
Travis Moss:Nobody pays the taxes because it's a charitable fund.
Travis Moss:And then you don't actually have to give the money to charity all at one time.
Travis Moss:You could say, hey, I put 50 grand in this thing, but I'm going to invest it and let it keep growing.
Travis Moss:And I'm going to give five grand every year to My favorite charities.
Travis Moss:So the reason why you would use that is because most people aren't taking advantage of itemizing their deductions because of the way the current tax laws are.
Travis Moss:So if you're going to give $5,000 a year away every year and you don't itemize, you're not getting any tax benefit for that period.
Travis Moss:And if you're too young to do it from the QCDs, how do you do this?
Travis Moss:So if you have enough money to, say, pay the next five years worth of charitable gifts, then what you do is you group all that up at one time, you send that over to the donor advised fund, and now maybe you have a much larger tax deduction and you might actually get to itemize.
Travis Moss:And so let's say before you weren't itemizing any of it.
Travis Moss:Now out of all that, you get to itemize maybe an extra $20,000.
Travis Moss:Well, that's still a tax deduction on $20,000.
Travis Moss:Maybe you could combine that with some more Roth conversions in a higher tax bracket and get, you know, two for your money on that.
Travis Moss:Basically the other things that you can do is you obviously can get cash or securities.
Travis Moss:So if you're not in a situation where you can do a donor advised fund and you're not in a situation where you can do a qcd, but you have stocks, and maybe you've been selling the stock so you can give them to charity, stop doing that.
Travis Moss:Or maybe you've been taking the dividends and giving them charity.
Travis Moss:You're paying taxes on these things, right?
Travis Moss:You can actually give the stock straight to the charity.
Travis Moss:The benefit to that is it'll go into whether or not you can itemize.
Travis Moss:But charity won't pay taxes on the capital gains.
Travis Moss:And you can buy the stocks back up if you want in a different account.
Travis Moss:So if it's your favorite stock, you could buy it up, but then it'll have a different cost basis, you'll have the higher cost basis.
Travis Moss:So the next best thing to do out of those is the securities and the last is cash.
Travis Moss:So if you can't do any of those other things, then you do cash.
Travis Moss:Cash is like the worst way to get as much as it seems.
Travis Moss:Like, you know, I just write a check and it feels so good, it's so nice and so easy for them.
Travis Moss:You're missing out.
Travis Moss:And so if you say, well, it doesn't matter, it's not about me.
Travis Moss:I'm the one gifting.
Travis Moss:Look at it this way.
Travis Moss:If I could show you how to get an extra $2,000 on your tax return.
Travis Moss:Because the way that you gift, you could give $2,000 more a year to your favorite charity.
Travis Moss:So if it's really not about you and it's only about the charity, in short order, you could figure out how to actually give the charity more money.
Travis Moss:And if you happen to work on a nonprofit on a board or work with a major gifts giver and stuff, and they're not having conversations with their donors like this, you really need to tell them to have a timeout and say, hey, when you have somebody come and give you money and they're like over the age of 70 and a half, and you know they are, ask them, hey, why do you give us cash?
Travis Moss:Just so you know.
Travis Moss:And give them a little pamphlet on Iraq QCDs, and give them a little pamphlet on how Donor Advice Fund worked, and give them a little pamphlet on how you can accept securities and how to do it, you know, and.
Travis Moss:And that, I think is a significant value, not just to you, but to the charity, whoever, whatever reason you're gifting, you can get more out of it.
Steve Campbell:Hey, and here's a little shameless plug.
Steve Campbell:These are things that I actually help make for organizations.
Steve Campbell:So if you are helping with a nonprofit and would like a little giveaway card, just send us a message and say, hey, Steve, help me put one together.
Steve Campbell:But, Travis, you had mentioned something, and I want to make sure that I understand it, because I would call this a stat hacking within financial planning.
Steve Campbell:You had talked about if you know that you're going to be making qualified charitable distribution.
Steve Campbell:So let's say it's $10,000, but you were also going to do a Roth conversion?
Steve Campbell:Is this how it would work if you were planning to take $25,000 in a Roth conversion, but now you've discovered with a QCD that you want to give 10, would you only take 15 in the Roth conversion and leave 10 still in the account?
Steve Campbell:Because you're going to give that away?
Travis Moss:Well, the qcd.
Travis Moss:The qcd, yeah, it depends.
Travis Moss:So if you had to take an rmd, the QCD would allow you to convert more money to a Roth.
Travis Moss:And people get confused with this.
Travis Moss:You cannot take an RMD and convert it to a Roth.
Travis Moss:But just because you're taking an RMD doesn't mean that you're not in an advantageous position to do a Roth conversion.
Travis Moss:So let's say that you're taking a $20,000 RMD and you still have room to convert another $18,000 to Roth, and that'll keep you in the 22% tax bracket.
Travis Moss:If you do a $10,000 QCD, it's going to reduce your RMD to $10,000.
Travis Moss:And so before you had the 20,000 plus the $18,000 in taxable room.
Travis Moss:So that 10,000 that otherwise would have been part of the RMD that you cannot put into your Roth now can go into that Roth conversion bucket, bang a rang.
Travis Moss:So you can, by doing that qcd, you can increase that.
Travis Moss:Now if you were doing the stock contribution one, if we said, look, maybe we're under RMD age, right?
Travis Moss:We're under, like if you're 73 now, you'd be doing RMDs.
Travis Moss:So you're under a certain age, you're not doing RMDs yet, and you have room to do like a $30,000 Roth conversion while keeping yourself in that 22% tax bracket, or pick your tax bracket, whatever your favorite one is, and you are able to do a large enough donor advised fund contribution or a large enough stock contribution straight to a charity.
Travis Moss:Because sometimes with a donor advise, that's really if you want to stretch it out over years.
Travis Moss:But if you're just going to do a huge lump sum gift, right, do not sell the stock and write the check.
Travis Moss:Give them the stock.
Travis Moss:So let's say that you give them a stock in a way that reduces your income by $40,000.
Travis Moss:So you had $30,000 get to 22%.
Travis Moss:Now you've given this big gift that you're able to deduct and pull that number back down.
Travis Moss:You can add that 40 back to that 30.
Travis Moss:Now you can do a Roth conversion for 70,000.
Travis Moss:You're still paying the same amount of income taxes you probably otherwise were going to pay.
Travis Moss:Or pretty close.
Travis Moss:I mean, you got to do the math on it, depending on the situation, but it just opens up room.
Travis Moss:Everything's still within that 22% tax bracket.
Travis Moss:Or you know, if you're in the 24, in the 12, it just gives you more room.
Travis Moss:So yeah, you can.
Travis Moss:By understanding how these different things work, you can make, I mean, not only could you save on the capital gains, could you get better deductions, could you.
Travis Moss:You can also do Roth conversion.
Travis Moss:I mean, there's so much stuff you can start do when, when you start putting these concepts together.
Steve Campbell:Dang.
Steve Campbell:It's like when you nerd out with Money man and you start stacking ideas on top of each other.
Steve Campbell:It's like, whoa, whoa, whoa, help me understand all of this.
Steve Campbell:And again, I think this goes back to.
Steve Campbell:Because it's easy to look over there and say, man, why has everybody else got more money or wealthy?
Steve Campbell:It's because when you understand these principles and how they apply.
Steve Campbell:Jess, one of our planners says all the time financial planning is a lot like playing Tetris.
Steve Campbell:It's just kind of understanding how the shapes go together and your situation is going to be different from mine.
Steve Campbell:That's different from another person.
Steve Campbell:So I think it's really important to understand what pieces you are so you can play Tetris.
Steve Campbell:But hey, at Ditch the Suits, we like to finish talking about kids.
Steve Campbell:So we're going to give you point number 11 in this series, Practical Takeaways Talking about gifting to kids.
Steve Campbell:And we've gone over charities, but why it's important to think about gifting to kids.
Steve Campbell:Hey guys, Steve Campbell with Ditch the Suits want to take one quick moment to make a big ask.
Steve Campbell:If you haven't already.
Steve Campbell:Travis and I would love for you to subscribe to this podcast.
Steve Campbell:But if you haven't, also, we would love for you to leave a five star rating and review.
Steve Campbell:Your rating and review will let other podcasters know that the show is worth their time.
Steve Campbell:So let's get right back to the episode and thanks for listening to Ditch the Suits podcast.
Travis Moss:So with kids, and this comes up a lot, you know, and every family dynamic is unique and you got to look at your kids and you got to think about, you know, what situation do you want to put the kids in?
Travis Moss:Is a healthy situation to give to them or isn't it?
Travis Moss:But chances are if you're healthy and your kids are healthy and you're going to leave your kids in inheritance someday, you know, when you pass away in your 90s or long, you're going to live, your kids are going to be in their 70s.
Travis Moss:So at that time, it's wonderful that you gifted to them, but what the heck did that do for them?
Travis Moss:So first and foremost, understanding your projections, kind of where you're going to end up and what does it actually cost you to gift.
Travis Moss:And then the other thing is to think about, if you do gift to the kids, what does that gift turn into?
Travis Moss:So if you gift to the kids and the money turns into them being able to fund retirement accounts or something, it turns into more wealth.
Travis Moss:If you gifted the kids and they get to go on family vacations they otherwise wouldn't go on, it turns into experiences.
Travis Moss:And that's a form of, you know, it's really a form of wealth if you give to the kids and the kids blow the money because they're irresponsible or they buy booze and, you know, drugs and that kind of stuff.
Travis Moss:Well, then you shouldn't have gifted to the kids or you should stop gifting to the kids.
Travis Moss:Right.
Travis Moss:So it's kind of situational, but part of that is understanding.
Travis Moss:Do you have enough?
Travis Moss:And I think this normally happens for couples when they get near their 70s and they're looking at the size of the RMDs and the fact that they don't want their RMTs in the future and because they don't want to pay the taxes on it.
Travis Moss:Like, what am I supposed to do with all this money?
Travis Moss:It's like, yeah, it's time to start giving it away.
Travis Moss:But when you give money to kids who are responsible, that kid, that money also has a value.
Travis Moss:And although it doesn't grow on your statement, it grows on their statement.
Travis Moss:Yeah, right.
Travis Moss:Or if it's an experience, is growing on their ledger, their lifetime experience ledger.
Travis Moss:So.
Travis Moss:But here's what we want to think about with the kids.
Travis Moss:We've had clients that do this, and I think that this is, again, going back to.
Travis Moss:We've talked about in previous episodes, getting the kids involved in planning.
Travis Moss:Let's say that your kid is a really good kid and they're doing everything they're supposed to do.
Travis Moss:They get their first job out of school.
Travis Moss:They're making 60, 70 grand, and they're doing their 401k and they're getting their match.
Travis Moss:They're putting six grand away.
Travis Moss:They're getting a match for it.
Travis Moss:They're doing everything they're supposed to be doing.
Travis Moss:You are of an age now where you're no longer allowed to put money in a 401k.
Travis Moss:You can't get a tax deduction.
Travis Moss:And in fact, you're being told you need to take money out and pay the taxes on it now because you're going to pay a lot of taxes in the future.
Travis Moss:So you're in a situation where you can't take advantage of some of the.
Travis Moss:Like, you can't put more money in a Roth.
Travis Moss:Right.
Travis Moss:You can only convert money to a Roth, that type of stuff.
Travis Moss:But yet you still have to pay taxes on some of this money that's coming your way because, you know, you buried that, you know, whack a mole, and now it's showing up and you got to deal with it.
Travis Moss:So if you've got kids that, you know, have a good head on their shoulders or have a good advisor or something, if you give a kid who's making 70,000 or 80,000 or 100,000 or 40,000.
Travis Moss:Whatever you say.
Travis Moss:Look, I'm going to give you $20,000.
Travis Moss:Live up to $20,000.
Travis Moss:Put your 401k in that, in that Roth, that 401k Roth.
Travis Moss:I want you to take your paycheck and I want you to max out that 401k Roth.
Travis Moss:I will replace the take home.
Travis Moss:So if your take home was $1,500, that's now going into your Roth at work.
Travis Moss:You know, if that's the difference, give the kid fifteen hundred dollars a month to cover that.
Travis Moss:They are funding something you can't fund anymore and they can't afford to fund with money they otherwise will pay taxes on and you will pay taxes on for the rest of your lives.
Travis Moss:Get it in the best possible vehicle.
Travis Moss:So when we have some families that they got it together like this, like they're.
Travis Moss:The kids talk the par.
Travis Moss:You know, they, they try to help each other.
Travis Moss:They're pretty sound smart kids and stuff.
Travis Moss:It's okay to say, look, are you max funding these?
Travis Moss:And make your gifts pointed.
Travis Moss:Then if you don't want to give them money to go on vacations and stuff, give them money to fund their retirement accounts because you can't anymore and you're in the distribution phase where all it does is create more taxes.
Steve Campbell:I think I got lost on the.
Steve Campbell:Or stuck on lifetime experience ledger.
Travis Moss:I mean, I made that up today.
Travis Moss:That was, that was a new one.
Travis Moss:I like that though.
Travis Moss:I think I'm gonna, that's on a.
Steve Campbell:T shirt if you guys don't know.
Steve Campbell:We, we have this kind of internal saying at seed when Travis says stuff.
Steve Campbell:It's, it's.
Steve Campbell:We, we're gonna put it on a T shirt.
Steve Campbell:But, but lifetime experience ledger, I, I just think that's cool because again, it's easy to come here and want to get, you know, financial insights that will help you.
Steve Campbell:And we're definitely going to do that.
Steve Campbell:But we always kind of forget the life component to this whole thing that you still have to find the balance between excellence, experiencing a life that you feel good about.
Steve Campbell:And some people want to leave a life and a legacy when they're no longer here.
Steve Campbell:Some people want to be able, I mean, partner when you even just said when you're a certain age.
Steve Campbell:When I'm 90, my kids are going to be 60.
Steve Campbell:That's really hard to think about.
Steve Campbell:But that's the reality of it.
Steve Campbell:And as a father, I want to make sure that they're well prepared and their families doing the things And I want to see them experience it through my eyes while I'm alive.
Steve Campbell:I think there's a lot of people out there, but as they come to this end of this year, celebrating the holidays with their family, they're looking around at their loved ones.
Steve Campbell:They don't know if they're doing the right things by giving them these 11 insights.
Steve Campbell:Maybe all 11 don't apply, but I'm sure if you even took just a handful of these and started to evaluate your 401k, the overspend or undue spending stacking of ideas, this is the stuff that gets me excited every day to come back here and do this work.
Steve Campbell:Because this is real planning that really helps people run a money business, which all of us run.
Steve Campbell:At the end of the day, let's make sure we're being good stewards of what's passing through our hands so that there's no one else to look around and say the government did it or that person did it.
Steve Campbell:Take ownership of what's right in front of you.
Steve Campbell:And if you don't understand it, get in touch with Travis and I head over to ditchthesuits.com shoot us an email.
Steve Campbell:Let us know what you need help with.
Steve Campbell:We are here to help inspire you.
Steve Campbell:So partner, great job.
Steve Campbell:11 practical insights.
Steve Campbell:We're coming to the end of the year, folks.
Steve Campbell:Coming up on year four of Ditch the Suits.
Steve Campbell:Holy smokes.
Steve Campbell:As always, thanks for being our guest on Ditch the Suits.
Steve Campbell:And until next time, thanks for stopping by.
