Maximizing Your Refund: Insider Tactics To Save When Filing Your Taxes | Tom Wheelwright

Andrew Brill 0:00
Hello and welcome to Wealthion. I’m your host, Andrew Brill. Tax Day is right around the corner. And it’s a day many of us dread. But what if I told you taxes can be fun, easy and understandable? Would it still be a day you want to erase from your calendar? We’ll discuss that more right now.

Our mission here at Wealthion is to help all of us keep and grow our money. But Wealthion is not just a channel, it’s a conversation with our community. So please keep the feedback coming. If there’s something you’d like us to talk about, or someone you’d like to hear from, let us know. And if you could like and subscribe the channel, we’d really appreciate it. So I’d like to welcome in Tom Wheelwright, he is a CPA, he’s the CEO of WealthAbility. He’s also a best selling author of tax free wealth. And Tom believes that taxes can be fun, easy and understandable. And Tom, after reading your book, I’m almost converted to being a tax Okay, guy, but explain to us how taxes can be fun, easy and understandable?

Tom Wheelwright 1:09
Well, first of all, Andrew, they’re just not that complex in, in concept. So the concepts are pretty simple. Remember, it’s your money. That’s rule number one. And it’s not the government’s money, it’s your money. And, and that really, the second one is that all you have to do is change some of your facts in order to reduce your taxes and, and we can get into that a little bit more, but I think they’re fun. If you look at the word refund, just write it down, right in the middle is the word fun. Everybody likes getting a good refund. So to me, taxes are a game, we’re all in this game, we don’t get to choose whether in this game. That’s a fallacy that you can choose to get out of the game. And so I’m just thinking, if I’m in a game, I I’d rather win the game.

Andrew Brill 1:56
I mean, yeah, taxes, I guess can be fun, and you make them fun. And obviously, you know how to deal with those. How do we get out of the mindset, and I find myself saying it. Look, I don’t mind paying my fair share. Everybody’s in that mindset of okay, you know, I’m gonna have to pay the government something. That’s a mindset. And we need to get out of that, according to your book, which I’ve read and was fascinated by.

Tom Wheelwright 2:19
Yeah, it’s it’s really, that this idea that we have to pay taxes, I mean, yes, we’re obligated to follow the tax law. But the idea that the tax law is all there just to raise revenue is a is a fallacy. Most of the tax law is really there to encourage certain behaviors. For example, why do people invest in a 401k? Typically, because they get a tax deduction? Why did they buy a house instead of rent? Typically, because they get a tax deduction? Right. So there are a lot of incentives. And in fact, if you look at the tax law, like I have, for 45 years, you’ll see that the first 30 pages really raise revenue they give you, here’s how much tax pay, they said, everything’s taxable unless we say it isn’t. And they say nothing’s deductible unless we say it is. And then they give you charts and tables, but the rest of the tax law is fundamentally a roadmap for reducing your taxes, it’s an instruction guide, to what are those things that the government wants you to do that if you do those things, you’ll reduce your taxes?

Andrew Brill 3:23
You said, we have to change the facts. And explain this to me a little bit more, because I’d love to change my facts and pay a little bit less. But what are the facts that we’re looking to change?

Tom Wheelwright 3:35
Well, let me give me an example. So any expense can either be deductible or not? Okay, so so if you asked me, for example, is that microphone that you’re looking you’re speaking into? Is that deductible, I’m going well, if that were used in your personal studio, for fun, and entertainment, it would be no, that’s not deductible. But if you use that in your business, to create a podcast create revenue, it becomes deductible. So you’ve just changed the facts, you haven’t changed that you have a microphone in a studio, what you’ve changed is is how you use that microphone and what you use it for. So the key is you have to decide, first of all, you have to have a choice, you have to know what facts can you change, and then you have to decide, do I want to change those facts? Let me give you a simple example. So I love my wife and I love going to Hawaii. All right. And lot of people like to travel, okay, we can go to Hawaii. And if we did certain activities while we were there, that travel would be deductible. Now I choose for the travel sometimes to not be deductible, because I don’t want to spend four and a half hours a day doing business with people in Hawaii. Right? I actually want to take a vacation. And so but that’s a fact. And I’ve had clients that actually have changed what their behave Your was on their travel, just so the travel could be deductible.

Andrew Brill 5:03
So you can actually plan for that. And in your book, you say you need to plan for your taxes or plan your life around, plan certain things around whether things are going to be taxable or not. This is a perfect example.

Tom Wheelwright 5:17
Yeah exactly. You know, the the goal of tax free wealth is really to give you that choice, you know, here’s things that you could do to change your facts, here’s the things you can do, I always tell my clients, I said, I can’t change your tax, I can tell you what facts you need to change in order to change your tax, but you actually have to change the fact. So you’re the one who actually asked to do the work while you’re while you travel, you’re the one who has to, you know, change how you use your automobile, change how you use your house, create your own business, you know, start that that new business on the side, so that you can have a home office deduction. So you can do that, I can’t do that for you. But what I can do is I can tell you all those things you can do to seriously reduce or eliminate your taxes.

Andrew Brill 6:02
So it’s, the tax law is actually written, as you say, to save you money. And if you look at things in that perspective,

Tom Wheelwright 6:12
no question. This was really started back in the John F. Kennedy days. There was a little bit of this done before then. But in John F. Kennedy took a look at what was going on the economy. And he felt like we needed to incentivize manufacturing. And so he went out and created this investment tax credit, it was a 10% credit for buying new equipment, manufacturing equipment, and, you know, really it was a test is will this stimulate investment in manufacturing equipment, and it worked. And then Reagan came along, and he looked at, we need to simulate investment in housing. And lo and behold, that worked. Now, recently, President Biden has said, we need to do encourage investment in renewable energy. And so there’s huge renewable energy tax incentives. So it doesn’t matter what side of the aisle you’re on. But all politicians, first of all, the power to tax is probably the greatest power that they have. And suddenly, no, no politician has ever voluntarily given up power while they’re a politician. And so this idea of what we can actually kind of incentivize people to do certain things, like build a business like create, I mean, we saw it during COVID. Right, we saw the the incentives the government gave to the drug manufacturers to come up with a vaccine operation more speed, right? Warp speed, right? Well, those were direct incentives, but most incentives, actually, that the government, hands out are in the form of tax incentives.

Andrew Brill 7:52
So a lot of our viewers are gonna say, Oh, well, you know, I didn’t want to start a business, middle class, are there also ways to train yourself or plan for people who don’t want to own a business or who don’t want to invest in manufacturing and that sort of thing, as you know, President Kennedy did back then are there ways for people to live and minimize their tax burden as well,

Tom Wheelwright 8:18
there are, but remember that investing in drones, just like the stock market, give you much fewer tax benefits than investing directly in what we would call hard assets, like a business, like energy, like agriculture, like housing, okay. But it doesn’t have to be a traditional business. So it doesn’t have to be something that you know, you do from a desk, etcetera. I mean, it could be, for example, you could buy investment, real estate, that is still a business, under the law, you can invest in energy, clean energy, or renewable, or or fossil fuel energy, both of those have big tax benefits, but you have to invest directly, you can’t invest in the in the company that does the investment, the company gets the tax benefit, not you, whoever does the direct investing gets the tax benefit.

Andrew Brill 9:09
So, but someone could set themselves up as a business, I guess, with an LLC, and not get paid on a W two, if their employer is willing get paid on a 1099. And that could have some tax benefits as well.

Tom Wheelwright 9:22
For sure. If you’re an independent contractor, now you have to be a true independent contractor. Because States especially your and as well as the Department of Labor, are pretty careful about this. But you can set yourself as an independent contractor, it actually does a couple of things for you. One is it gives you freedom. If you want more freedom in your employment and your job, being an independent contractor, because then you can do work for somebody else as well. You don’t have to just do it for one employer. I mean, that’s one of the advantages. I see it on in your business. You don’t have a single customer. You have multiple customers, and I think that there’s a lot less risk to having multiple customers. But what happens is that Your your wages are all subject to Social Security taxes, and you don’t get any deductions as an employee. I mean, none, they took that all the way in 2017. So what happens is, is that, for example, during COVID, we all worked from home, a lot of us still work from home, we all worked from home, those who were working from home in their own business, even as an independent contractor got to deduct things like their home office, like their travel, like their cars, like their computers, that kind of stuff. But those who were employees in a home office did not get those deductions. So the fact of being a business owner and independent contractor creates a lot a lot of tax benefits.

Andrew Brill 10:42
So if I was able to if my employer said, okay, you know, I’ll pay you on a 1099, but the health benefits and all like, all that stuff went away, I now have to go out and buy my own health benefits. But could that also be a tax deduction?

Tom Wheelwright 10:55
Yeah, for sure. So So you might, you know, the employer, of course, you’d negotiate with employer, well, you need to increase my, what you’re paying me so that I can go do that. But that is deductible as a self employed person, you do get to deduct your health insurance, that’s a direct deduction. So you don’t lose that tax benefit of deducting your health insurance. Um, you can even set things up so that you deduct medical expenses when you have your own business, which is harder to do when you’re an employee. But, yeah, that, you know, there’s all sorts of tax payments, for example, you don’t have to pay Social Security tax on 100% of the income that you receive into the business if you set up as an S corp. So S corp income is not earned income. It’s ordinary but not earned. So it’s not subject to Social Security taxes, only the wages you pay yourself from that S corp are subject to Social Security taxes. So you can even reduce your Social Security taxes. Oddly enough, even though you’re only paying half of them, as an employee, you can actually reduce them by being self employed.

Andrew Brill 12:00
And then you could take deductions off the business or use that business to pay for meals to pay for travel, if it’s travel related all that

Tom Wheelwright 12:08
If it’s business related, right, yeah, there are basically four rules for a deduction. First, it has to have a business purpose. And then you have to it has to be ordinary mean is typical in your business. And the third one, I think, is next to the most important which it has to be necessary, meaning that the purpose of the expense is to create income. That’s the purpose of the expense. And then the fourth one, of course, is you have to document it. I like to say if you pretend to document it, you get to pretend deduction.

Andrew Brill 12:40
That’s a good one. Are there common deductions that the ordinary person doesn’t take someone who’s not set up as a business? Or someone who’s doing their own taxes, so to speak, and says, You know what, I have to figure out how to lower my tax burden. Are there certain tax deductions that people don’t that you typically see people don’t take?

Tom Wheelwright 12:58
Yeah, I’d say the big one is a home office. And that, unfortunately, is probably because their tax preparer told them not to take the home office deduction, which is just silly. Because it’s there, it’s available, it’s in the law, why wouldn’t you take a deduction that you’re absolutely entitled to, and the home office deduction, not only do you get a portion of your, of your of your mortgage, which you would otherwise write, even if you didn’t have a home office as long as you itemize, but in addition, you get to take a portion of your maintenance, you get a portion of your cleaning portion of your utilities, a portion of your internet, so you get a portion of all that. But there’s something bigger than that, with the home office, you actually probably increase the amount of your automobile deduction. And the reason is, because the IRS says that the first trip you take from your home to your office is a commute. And that’s not deductible. If your commute is from your kitchen, to your home office, that’s the commute. And then from there, everything is deductible. So most people I find will increase their automobile deduction by at least 50% By having a home office.

Andrew Brill 14:17
So if there’s someone on a W two that’s working two or three days in an office and a couple days at home, they can deduct part of their home as a home office

Tom Wheelwright 14:26
As long as they’re an independent contractor and they’re not and they’re not an employee. That is correct. If you’re an employee, you don’t get that deduction.

Andrew Brill 14:34
Gotcha. So you had mentioned 401, k’s and putting money in an IRA IRA. What about a Roth IRA? That’s a different story. And I know that that goes in post tax and then grows tax free.

Tom Wheelwright 14:50
Yeah, so so it’s really interesting in in, I wrote a second book called the winwin wealth strategy, and I actually did the I did the numbers I ran the numbers On Roth versus regular 401k. And, you know, it really it depends on does a regular 401k, the tax deduction does it allow you to put more in. And if it allows you to put more in because you don’t have to pay the taxes on it, then a regular IRA, or 401 K probably makes sense for a lot of people, as long as they’re investing in those things that make sense in a 401 K, like the stock market, stocks, bonds, mutual funds, etc. If you’re investing in real estate, don’t be doing 4k, that’s a bad idea. Because you’re just taking the non taxable investment, real estate and making it taxable by putting it into a 401k. As far as a Roth goes, you know, Roth, as most people, I think, understand that the income from a Roth is not taxable. Now, they have the same restrictions when it comes to using debt, they have the same, you know, Roth versus a regular, they have the same restrictions on what you can invest in how you invest. But as far as the tax liability, certainly, if you are going to max it out either way, then maxing out a Roth probably makes more sense than maxing out a regular 401k.

Andrew Brill 16:19
So you talked about using some stuff for real estate, and it doesn’t make a lot of sense. Do you have tax wise? Do you look at good debt versus bad debt? Obviously, you know, credit card debt is just the devil and maybe a mortgage because of the deduction you get is better debt. Is there good debt versus bad debt when it comes to taxes?

Tom Wheelwright 16:41
Yeah, well, I think there’s good debt versus bad debt period. Good debt is, is that the buys an asset producer that puts money in your pocket period. Bad debt is anything that takes money out of your pocket. So I think a home mortgage is actually bad debt, because it does take money out of your pocket, even though you get a tax deduction, it just takes less money out of your pocket, but it still takes money out of your pocket. So don’t think of it as good debt. Good debt is something that produces income. And really the idea on debt when you think about, okay, when does that make sense? If you have an asset that produces income, you probably want more of that asset. You know, whether that’s somebody on your advisory team, whether it’s, whether it’s equipment, no matter what it is, you want more of it, right? Because it’s going to produce more income. So what you typically do is you borrow in order to buy more of the asset. Let’s take, for example, let’s say you’re investing in real estate, okay, you could, let’s say you have $100,000, to invest well, you can invest 100,000 into $100,000 of real estate, pay cash for it, like some people recommend constantly. Or you could go borrow $400,000 in the bank, and buy $500,000 real estate, well, if it’s producing income, and it produces more income than the the, if the if the income rate of return is higher than the interest you’re paying out, then you absolutely want to borrow, if that pays less than the income you’re getting in, then that would be bad debt, because taking money out of your pocket. From a tax standpoint, though, investment, interest is deductible, whereas personal interest is not. So personal interest from a tax standpoint is always bad. And from an investment or business standpoint, at least the government is sharing in the cost of borrowing.

Andrew Brill 18:41
So let me get this straight. If I bought a rental unit, and I’m paying I more he’d put more a little bit of a mortgage on that. But my expenses are less than my expenses are less than what I’m taking in, is the interest on that mortgage tax deductible because it

Tom Wheelwright 18:59
It is and it doesn’t have a limit. So unlike your home mortgage interest, remember, we’ve got the seven or $50,000 limit, right? Same with property taxes, right? We have this $10,000 limit on tax deduction, you don’t have those limits. When you’re talking about rental properties, example or business, you don’t have those same limits.

Andrew Brill 19:18
Wow. So what do you suggest people do with their mortgages? Obviously, people are, you know, you go my house, you don’t have all that cash to plop down. You try and pay that off sooner rather than later. That’s one of those debts? Yeah, I would assume you try and pay off?

Tom Wheelwright 19:30
You know, I think I think houses are very personal. I think you decide, you know, from a pure investment analysis, what you do is look at what’s the interest rate that I’m paying on that mortgage versus what could I earn in the market, and if I can earn more in the market safely, then I should be putting a mortgage on the house because that makes it good debt because then I’m taking that money that I would otherwise put down on the house and I’m putting into investment that makes more money than the entry was cost me. So it’s the same analysis is with rental property.

Andrew Brill 20:03
So let’s talk about since we’re on property, let’s talk about real estate taxes. And I know that every time I get my tax bill for my real estate taxes, I kind of beat my head against the wall. And then I read your book, and I’m like, You know what? I’m gonna go and challenge my taxes, people don’t understand that they can do that sort of thing. So you talk to us about how to lower your nut when it comes to real estate taxes.

Tom Wheelwright 20:27
Yeah, it’s really interesting property taxes, that’s your county assessor, that assesses the real estate taxes. And you really ought to check how you’re taxed versus your neighbors. Because you can use them. If you have a neighbor that’s got a similar property to yours, and they’re being taxed less. You can go in the county assessor, they will reduce your taxes, you can challenge the value of the home, right? You can say, Well, look, my home’s not nearly worth this. And this is a really good time. You know, like today, this is a good time to challenge that value. Because home prices have skyrocketed in the last couple of years. And county assessors tend to lag in changing the valuation on your property tax bill. So you may find that your home has gone down in value, but the property the county assessor has not reflected that in your tax bill. So absolutely. Don’t just put that don’t just file that property tax notice away, make sure you take a look at it say okay, I’d like to go in because you’re going to look at everybody else’s taxes as well. It’s public knowledge on on the county assessor website, just go and look is, am I paying more tax than somebody else? If I am, maybe I can reduce my property tax bill.

Andrew Brill 21:41
But they have, they have a tricky way of dealing with your taxes, they don’t look at like, if I own a house that’s worth $600,000, they give it a value, and then they tack on or they they look at a percentage of that value. So if they see that the value is coming down, they up their percentage so that they think that they’re winning, or you feel like they’re winning no matter what,

Tom Wheelwright 22:01
yeah, they can. But in most states, most states have limitations on how much they can raise that percentage. So for example, in Arizona, we have two different values for cash value, unlimited cash value, and the limited cash value, they can raise the full cash value, but they can’t raise the limited cash value. So it does get a little complex, there are property tax consultants that you can go to, and they will just do it on a percentage of what they save you. And so it really doesn’t cost you anything. And not only that, but they’ll save it and they’ll charge you the first year. But you know, if you’re reducing your value that probably gets reduced for a very long time, not just one year.

Andrew Brill 22:41
So you know, you’re talking about people who deal with property taxes, what have you, you know, here I am Andrew brill, and I need to go find a tax accountant or an accountant that knows taxes. Tom, what am I looking for? Because I’m gonna go out and find an accountant. I’m gonna say, okay, you know, can you do my taxes? But that’s not the right way to do it. You need somebody who actually like you, who has been studying the tax law for so long. You want to make sure they know the tax law. How do you how do you figure that out?

Tom Wheelwright 23:10
Well, you know, first of all, I think the most important thing is what questions they ask you? Are they asking you real questions? For example, you know, by reading my book that if you’re going to change your tax, you have to change your facts. So they should be asking you a lot about what your facts are, and what your perspective facts are. So one of the things I always like, I like to see a tax advisor who will ask how do you make your money now? And what are you planning to do with your money when you make more, because how you invest your money has a bigger impact on your taxes than how even how you make your money. And so it’s really the quality of the questions. To me, one of the thing I would add here, Andrew, is that if you find if you run into a tax advisor who sounds, you know, like, they want you to think they know it all, I would run away because no tax advisor knows everything I learned early on in my when I was getting my master’s degree at the University of Texas. I had a professor said the thing about tax law is the more you know, the more you realize you don’t know. So you want you want a tax advisor who’s always learning that isn’t, you know, relying on old information. I mean, to hear people say that, for example, a home office is a red flag. This is somebody who has not learned something new in 30 years. Because it used to be it used to be a red flag. It’s not anymore if you do it right. So things change. So you want a tax advisor who really is staying up on the law and really is asking the questions.

Andrew Brill 24:47
So, you know, I agree with you and I think that that those are great questions that to ask and make sure that you’re getting to the right place, but what happens if you get to that person who or even not If the government says, okay, you know what Tag you’re it, you get audited. And I think a lot of people when they do their taxes are like, Oh, don’t do that don’t do that. I’m afraid of an audit. I don’t want to get audited. I think that’s on some a lot of people’s minds when they go to do their taxes. Like I’ll pay it just leave me alone.

Tom Wheelwright 25:19
All right, so I have a, I have an exercise for us. Okay, you’re ready for this? Yes. Okay, repeat after me. I will never,

Andrew Brill 25:29
I will never

Tom Wheelwright 25:30
speak to

Andrew Brill 25:31
speak to

Tom Wheelwright 25:32
the IRS,

Andrew Brill 25:32
The IRS.

Tom Wheelwright 25:34
that is the best way for you to never have to worry about not it’s not your job. It’s my job. And if you have I would tell you, if you find a tax advisor, or tax preparer Who’s afraid of an IRS audit, you need a new tax preparer tax advisor, because we’re the professionals we have, you know, a good tax advisor has way more experience than an IRS audit way, way more knowledge than an IRS auditor. So it’d be like going to LeBron James and saying, hey, you know, what? Could you take on, you know, this college student who wants to play me one on one, could you be my sub, and that’s what you want to do you want you want the real LeBron James, of tax advisers, and you want them coming in and working on your behalf, you don’t actually have an obligation to ever talk to the IRS, you can give somebody else that authority, you can give me that authority, you can give my advisers that authority that work on in, in our our wealth ability advisors. So you can you don’t have to do that. And that’s how I think you stop being afraid of an IRS audit, have a good tax advisor has your back.

Andrew Brill 26:44
Now that that’s I get that and you know, how do you find the eye? You know, you explain to me how you find that person is with it with the questions they ask. And it’s do you have to keep you know, what happens? If you get audited? Is it you know, do you have to keep documentation? Do you make sure that everything is on the up and up? And, you know, I there’s ways to explain everything? And it’s like you said it’s your facts. But let’s say you get audited, what’s coming at you?

Tom Wheelwright 27:16
Well, so So the first thing that they’re looking for is do you have documentation for those deductions, those credits that you took. That’s why I said earlier, pretend documentation gives you a pretend deduction, the IRS will never get to whether you’re entitled that deduction, if they can’t, if you can’t give them the documentation, because you don’t have the documentation, you’re not entitled to the addition. One thing to remember is that you have to prove that it’s deductible. It’s not deductible, and then they have to prove it isn’t. Remember the rule is nothing’s deductible, unless that unless the law says it is. So you have to prove that exception to the law that says your expenses deductible. And that’s why that documentation is so important. i This actually goes back to your tax advisor, your tax preparer who and your tax advisor, by the way, should be the same person, or at least the same firm. Because I find these days that a lot of tax preparers do not retain the documentation that their clients give them. They don’t maintain the work papers. I think that’s it. I think that is a huge mistake. I think it’s a mistake to have a tax preparer who doesn’t maintain that documented mentation, there are very large firms, you would be shocked because you would know them that they do not retain documentation for their clients. So you have to retain it, because it is not assured that your tax preparers retaining that now we do, you know, our advisors are retain the documentation. But that’s, frankly, I’m finding it less and less common among tax preparers retain their copy of their clients documentation. So you do have to maintain that. Other than that, really, once you handle and you want to be careful about what you give the what you give the IRS. So I find that this is why I don’t want you to talk to the IRS because you’ll give them too much you’ll cause cause them to have questions. I actually had a situation I had a friend who was being audited, and they given everything to their CPA and the CPA hadn’t even looked at it. They just turned it over to the IRS. And the IRS auditor come goes goes to her supervisor and says I don’t even know what to do with all this. And the supervisor says you’re right, you’re not experienced enough. We’re gonna give this to a much more experienced auditor. So the CPA actually caused more audit problems because they turned over too much information. We’re only required turn over information that IRS requests so we don’t ever turn over information the IRS isn’t asking for and then even how you turn over that information can be important. So this is why I think having that you know really good tax advisor in your case AP can make it can make or break you.

Andrew Brill 30:03
Yeah, I know, my tax advisor keeps everything digitally, I have all the hard copies, I keep them in a file for seven years. And you know, they’re gonna go, I’m good to go. So let’s get into life planning a little bit. You know, you have people that are getting married, or there’s another life event, they’re having a baby. How do you plan? I know, I know, you, you have to plan and it’s about your facts. How do you plan for all?

Tom Wheelwright 30:26
Well, so true story. So my wife and I have been married nine years now. And she was hesitant to get married because she knew her taxes would go up. And she was right, her taxes, Minden, mine were already high enough in the first place, but her taxes went up. And because there is a marriage penalty, it’s a true penalty, you can pay as much as 30 to $35,000, more being married than being single. So if taxes are a motivator for you, and you don’t care whether you have a ring or not, or have a marriage certificate, then you may want to think twice about that. It’s a bizarre, it’s absolutely a bizarre disincentive to getting married. So that is a consequence. Having children that has less of a consequence than it used to we used to have, we used to have personal exemptions for our kids, we don’t have those right now, because we have this this large standard deduction instead. So it’s a little odd that having children we think of them now, some states still do. I know that Georgia, for example, held that a fetus gets a tax exemption, because they’re under their law, a fetus is a person, so they get a tax exemption, while the mother is pregnant with the with the baby, even before the baby’s born. So states also have tax laws. Remember that state, your state tax law can be big, if you’re in California, or New York, very big, even in other states, it’s, you know, the average tax rates are for a state is about 5%. And that, you know, that’s 5% of your total income, that can actually be a pretty serious number. So don’t forget the state taxes.

Andrew Brill 32:16
So that little kid now grew up and is on its way to college, what is there something that look, I’m going to pay all this money to college, please, Thomas, tell me something there was we can deduct, because we have a little one going to college,

Tom Wheelwright 32:31
you know, there’s there’s actually a lot of things you can do and and a lot of good options, you know, if you’re going to if you want to, and if you’ve got a business, and they can work in your business, you can actually pay them to work in your business, they’re going to pay at their own tax rates, which could be they get their own standard deduction if you pay them, which is, you know, for like $14,000 now, and they don’t pay income tax on that. Now, you could still take that money and put it into a Roth IRA, for them, right or a Roth 401 K for them? Well, if you do that, that grows tax free, and remember that you can take, after five years, you can take the amount of money you put in to the Roth 401 K, you can take it out with no penalties. So you could actually use the principal portion of what you put in what the child put in for their education over the last 10 years, for example. And that’s not taxable when they take it out. So they could actually use their Roth for their education. Another thing they could do is they, you know, instead you could pay them and they could invest in real estate, they could, they could have their own business. I mean, there are a lot of kids, I mean, pull up tick tock for about 50 seconds, and you’ll find 50 different kids that have businesses and they’re doing very well. And and so, you know, helping your kids understand finance and actually working with them on investing themselves rather than you investing I think is a huge tax benefit. I mean, there’s always, you know, I mean, if you if you if you don’t want to think about it, you know, you’re not really interested in investing and you just want to put the money away, then you can consider a 529 plan with 529 plan. I’m not a huge fan, because you don’t have a lot of control over it. Fortunately, you can, you can roll it over to an IRA, which is nice, up to a certain amount. But it’s pretty limited. Remember, remember it’s a state, it’s the state requires certain types of investment parameters around it. So pay close attention before you do a 529 plan. But there’s a lot of ways to help your kids invest that you don’t pay taxes now they don’t pay taxes in the future.

Andrew Brill 34:49
And if you need those coal Tom will write from WealthAbility and he’ll help you out there.

Tom Wheelwright 34:54
There you go.

Andrew Brill 34:55
So talk to me a little bit about health savings accounts and flexible spending. ounce and because there’s employers that offer those things pre tax that can also help you out.

Tom Wheelwright 35:05
Oh, they’re great. So health savings accounts, I mean, of course, you have to have the right plan, and you need to make sure that you can do it. And you actually have to use the money. I mean, that’s actually the key is because if you don’t use it, you lose it. And so what you’re going to do, like on a health savings account, is you’re going to say, well, how much money do I spend, like on deductibles on on other medical expenses that are not covered by my insurance, and then you can actually get a health savings account, the your employer actually withholds from your wages, puts it into the health savings account, and then when and then you get reimbursed for that health savings account for those expenses. And it’s not taxable to you. So that’s a way to deduct metal medical expenses, because otherwise, you’ve got the seven and a half percent floor, right of your income. So if you make $100,000, you don’t get to deduct the first $7,500 of your medical expenses. But with a health savings account, you get to deduct every dollar, to the extent of that health savings account. Flexible Spending Accounts are similar. So anything you can do to use pre tax dollars, instead of after tax dollars for expenses is a good idea.

Andrew Brill 36:16
So that’s one way to put your money to work for you. You’re taking it out pre tax, you’re paying your medical bills with it. Let’s say I have investments, where am I putting my money, obviously, real estate, you talked about other other places to put my money that can help it grow and make my money? Well, you know, I often use the phrase you need your money to work for you is just as hard as you work at your vocation. But are there places to put my money where I can maximize a tax benefit, but also see my money grow?

Tom Wheelwright 36:45
Yeah, actually, in book, one wealth strategy actually go through seven investments that government will pay you to make. That’s the subtitle of the book. And it starts with, really the big four. And the big four would be business, which we talked about extensively real estate, which is long term, rental real estate, it’s not fixing flips, okay, that’s a business. But rental real estate, the third one would be energy. And the fourth one is agriculture. But there are a couple of others that provide some really interesting tax benefits, particularly for employees who don’t want to do those alternative investments. One is life insurance, life insurance away for money to grow tax free. It’s technically tax deferred, but because, you know, eventually you’re gonna die. If you actually have life insurance, like whole life, universal life, that grows, that actually grows in what the surrender value is, when you die, it’s not taxable. So you can actually make that permanent. So that’s actually one tax free investment. And another one would be, of course, your IRA, your 401 K. So these are things that employees can do. And you can max those out. And remember that you actually do pay less tax, I used to think you didn’t, but I ran the numbers. And you actually do pay less tax on a on the money you put in. And the reason in a foreign K. And the reason is, is because you’re the last dollar you earn is taxed at your highest rate, which means the first dollar you deduct is deducted at your highest rate. So let’s say your top marginal rates 32%. Well, that means that $10,000, you get a $3,200 tax benefit. But when you take it out, when you retire, you get all the brackets. So that means you get a 0% bracket, you get a 10% bracket, you get a 12% bracket, you get a 22% bracket. So you’re getting these, you’re getting the benefit of the brackets when you take it out, but you get the benefit of the marginal tax rate when you put it in. So it actually is a benefit, a net benefit to be investing through a 401k.

Andrew Brill 39:02
Is there a benefit to you know, we talked about the marriage tax? Is there a benefit to being married filing separately?

Tom Wheelwright 39:09
Not usually. That’s pretty unusual. It’d be where like, one spouse has a lot of medical expenses, for example. And so and they have less income, so that you end up because your tax rates stay the same, right? You don’t get lower tax rates because you’re married filing separately. The government figured that out a long time ago. So you don’t get that benefit. But what you can get is sometimes you can get more deductions. If you because like itemized deductions tip a lot of them have thresholds. And if you don’t meet that threshold combined, you might meet at separate and that would be the one time that you would really get that when it would make a difference but I will tell you in 45 years I probably seen at work three times.

Andrew Brill 39:57
Probably not worth it. But you know We talked about going to college. And I know that a lot of people are college is expensive. I have one in college, I know about college being expensive, and you apply for financial aid, and it’s all about your adjusted gross income and all your expenses. And that’s how you also get taxed is on your adjusted gross income to a degree. How do we lower our is? Are there tax benefits to lowering your adjusted gross income? And how it ways to do that to try and get that financial aid that we could all use?

Tom Wheelwright 40:29
That’s a very astute question. I will say I haven’t had that question for a while. Thank you. We have two different numbers on our tax return, we have adjusted gross income and taxable income. And taxable income is simply adjusted gross income minus your standard deduction or your itemized deductions, right, whichever is higher. But adjusted gross income. That’s the the number that’s used for a lot of different tests. In the tax law. It’s what’s used to determine your earned income credit, part, partly to determine determine whether you get an earned income credit, it’s used to determine whether you get a 20% qualified business income deduction for a business, it’s used to determine how much your medical expense deduction, we were just talking about that seven and a half percent, it’s used to determine that, during COVID, it was used to determine whether you got the $1,400 check from the government or the $600 check from the government. And so that AGI is is a big deal. And there are some things you can do. Certainly, the biggest thing is to you reduce your AGI with your invest, you know, putting money into your 401 K that reduces your AGI. You reduce it by investing in business, real estate, Energy, Agriculture, etc. And, and, and, and then there are a few items that are actually now we used to get alimony to reduce our AGI. If you’re getting divorced, now you don’t get alimony anymore. It’s not taxable to the person who gets it, but you don’t get to deduct it. If you got married long. Back prior to 2018, you still get to deduct your alimony. So there are some things you can do. But that AGI Actually, I’ll give you another example. Whether you get to deduct your investment losses, because of depreciation from real estate, can be impacted by your AGI. If your AGI is over $150,000, then you don’t get to deduct. If you’re just you know, a little bit active in your real estate. You’re not a real estate professional. But if it’s an if it’s $100,000 or less, you get deduct up to $25,000 of those losses. And so it does have a very big impact. So that’s a very astute question.

Andrew Brill 42:55
So I wanted to ask you about estate planning, and how to protect yourself in your later years. You know, some people obviously pass on earlier, but you want to look, you work hard for your money, you don’t want to give it to the government upon your passing, you want to make sure that your kids are taken care of. You talk about estate planning in your book, talk to us a little bit about how we can go about protecting all of our assets.

Tom Wheelwright 43:25
Well, right right now the estate tax exemption is really high. I mean, it’s, it’s like $13 million per person. So if you’re married, it’s like $26 million. So it’s a very high, very few people are subject to estate tax right now. As a population. I have I have a I had a friend once who used to call the estate tax the stupid tax said because you only pay it if you’re not paying attention, right? It’s maybe the inattention tax would be a nicer way to say it. But it’s really easy to plan for. Here’s the thing about estate planning. Even if you don’t have an estate tax, you need to do estate planning, because you want to have a goodwill. If you have small kids, you want to make sure that they have a guardian representative. You’d like to avoid probate because you don’t want when if when you die, you don’t want the pirates, what to call the pirates and the predators coming out and going after your family and saying, Hey, I got a deal for you. Right because that probate that’s so probate is simply the mechanism the court uses to change the title from you to the person who inherited the property. So that’s what probate is about. And it’s public. And there are people that make a living, going after the people who are you know, now they’re there, they’re tearful, they’re sad, and these people go after them. They are predators. And so I don’t like probate. I know it’s not hard. And estate planning attorneys will say well, it’s not a big Dealing anymore, I will say I still think it’s a big deal because I think your privacy for your loved ones is a big deal. And that’s easy enough through a trust. That’s a simple living trust. It’s very inexpensive. I think most people should have a living trust, unless you’ve only got a few assets. But if you’ve got a house, you probably need a living trust. If you have any, any significant stock investments outside of your 401 K, or your IRA, you probably need a living trust. So those those things are basic estate planning. If when when you started making more money, and you start accumulating more assets, you get a little older like me, then you do start thinking about how can I do this? I will say one of the things about estate planning, which I don’t ever hear other tax advisers talking about, and that is that how what you do with your money when you die, or what you’re going to do with your money, when you die can have a major impact on how much tax income tax you pay now, so we frequently think of estate tax is separate from income tax, there are separate parts of the law, and you have estate planning attorneys and you have income tax accountants, right, typically, those are the two parties. But the two together, when you have the estate planning attorney work with income tax advisor, you can actually have a really good result on your income tax. So don’t think that estate tax only affects estate tax, it also affects income tax.

Andrew Brill 46:29
So my last question is You talked a lot about investing in agriculture or energy, how does one go about doing that?

Tom Wheelwright 46:36
You know, energy is pretty easy. I mean, let’s look at putting solar panels on your house. I mean, that’s an investment in energy. If you it, what’s interesting is, so to go back to the business, if you have a rental property, and you put solar panels on your rental property, you not only get a tax credit, but you also get a tax deduction. If you put them on your personal residence, you only get the tax credit. So you basically you double the amount of the tax benefit, because you put it on a rental property instead of putting on your own property on your personal residence. So again, having a business, having that direct investment can have a major impact. But there’s a lot of things you can do. I mean, you can buy, you know, if you’re thinking about buying electric car, you got that $7,500 deduction, I’ll give you one little trick there, if your car doesn’t otherwise qualify, because either your incomes too high, or for some other reason. Other than that it’s an electric car, it’s still gotta be an electric car, you might consider leasing it, because leases actually have better tax laws, then ownership. Leases have better tax benefits and ownership these days when it comes to that $7,500 tax credit. So you can avoid some of those limitations by leasing that. The other thing you can do, of course, and you put a charger in your home, and you get tax credits for that too. And don’t forget, your local utility probably gives you tax, you know, some savings. And your, your state may give you tax savings for these as well. So it’s not just the federal.

Andrew Brill 48:13
Well, there’s many, many ways to save money. Tom Wheelwright, thank you so much for joining me, I know that I have learned a ton, and I’m gonna go change my facts, because I obviously want to save money on my tax bill. And I know you have a podcast tell us about your podcast.

Tom Wheelwright 48:28
I do. It’s the weldability show. And we it’s every week, and it’s found wherever you can find podcasts. And we also have, I also have a YouTube channel for that. And then if you want the you asked about tax lawyers, we want the easy button. The easy button is we actually have a franchise of tax advisors, CPA based franchise and just go to wealth builder.com. And we’ll find you a one of our franchisees who actually studies with me.

Andrew Brill 48:54
And I know the 15th is coming up. Can we find you on social media where you give out tax tips?

Tom Wheelwright 48:59
Absolutely, I’m pretty much everywhere these days. I’m probably obnoxiously everywhere.

Andrew Brill 49:07
Aw, I appreciate it. I appreciate your time. And I know that a lot of our viewers are going out and putting solar panels on their roofs and investing in agriculture. And they’re obviously gonna go and buy rental properties like I’m gonna go and do. But Tom, thank you so much for joining me. I really appreciate it the the insights were invaluable.

Tom Wheelwright 49:25
Thank you.

Andrew Brill 49:26
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