﻿Alright, everybody, I’m Logan Allec, I’m a CPA, tax season is coming to a close, and you might
be thinking, “OK, so what do accountants do the rest of the year?” and the answer, outside of
helping people with their back taxes which is the majority of my practice, if you owe back taxes,
I tell you in the description below how to reach out to me, but other than that
we do a lot of planning. Because if you’re doing your tax planning for this year,
Twenty-Twenty-One, in April Twenty-Twenty-Two right before you file your return,
you’re doing it wrong, and you’re going to miss out on some tax savings,
you want to get ahead of this stuff because a lot of tax planning for Twenty-Twenty-One has
to be done in Twenty-Twenty-One, outside of maybe contributing to a Traditional IRA or a
SEP IRA if you’re self-employed or an HSA if you have a qualifying high-deductible health plan,
there’s not a whole lot that middle class taxpayers can do after year-end to save money on
taxes for that previous year. I get so many emails from high-income wage earners, saying, “Logan,
I’m preparing my taxes in TurboTax and oh my gosh, I owe tens of thousands in taxes! What can I do?”
Well, sometimes the taxpayer made a mistake in the tax software that creates a huge number,
but other times that’s what you owe, you sold some appreciated stocks or you had some other
form of income that you haven’t paid taxes on yet or you’re underwithheld on your W-2, and sorry,
outside of the basic stuff, Traditional IRA if you’re eligible for the deduction, HSA if you’re
eligible, outside of the very basic stuff, there’s not a whole lot I can do for you about last year’s
taxes given that last year is done. That’s why you need to plan this stuff out before hand,
well before the end of the year, and especially in a year like this one with a new administration
with aggressive tax goals. So today I want to talk about five middle-class tax planning strategies in
light of the Biden tax plan because so much of the focus about this plan has been on the aspects of
it affecting the wealth, the slicing of the basis step-up at death, the reinstatement of the 39.6%
top marginal rate for households making over four hundred thousand dollars a year, and by the way,
we don’t know if this would cut in half to two hundred thousand for singles, we don’t know.
But in any event, in most parts of the country, a household with an income of over four hundred
thousand is not middle class, and so all this buzz, you hear it, but it doesn’t really apply
to you directly, directly. Same thing with the 39.6% capital gains rate if you make over a
million dollars a year. I don’t care if you live in San Francisco or Manhattan, if you make over
a million dollars a year, you’re upper class, I think we can all agree on that. So in this video I
want to talk about five middle-class tax planning strategies in light of the Biden agenda. Now,
I must caveat this by saying that the Biden tax plan is not one unified piece of legislation yet,
there are some proposals from various members of Congress that cover some aspects of it, will those
become part of the final plan, I don’t know, so until we see a unified piece of legislation here,
I’m just going off the fact sheets from the White House, Biden’s speech to the joint session of
Congress, and proposals put forth by various Democratic members of Congress. So planning
strategy number one, reduce your withholdings in light of a potential SALT cap repeal. We know that
repealing the ten-thousand-dollar limitation on the itemized deduction for state and local taxes,
including property taxes, is in the crosshairs of many members of the Democratic caucus.I dedicated
an entire video to this back on April 27. Speaker Pelosi hails from California. Leader Schumer hails
from New York. Those are high-tax states with high property values, their constituents want
to see the ten-thousand-dollar SALT cap repealed. If this happens and they don’t make it effective
until tax year Twenty-Twenty-Two, and you run up against the ten-thousand-dollar SALT cap,
look at your 2020 Schedule A, look at line 5e, if it’s ten-thousand-dollar even,
then you ran up against the SALT cap. So if this passes, we don’t know, and it’s effective
beginning in Twenty-Twenty-Two, you might want to adjust your W-4 to take less withholdings out
so you can pay your Twenty-Twenty-One state taxes in Twenty-Twenty-Two when you’re eligible
to deduct more than ten-thousand-dollar of state, local, and property taxes because paying
the in Twenty-Twenty-One hits you up against that ten-thousand-dollar limit. Depending on your state
and how they penalize you, it might even make sense for you to pay an underpayment
of tax penalty to your state for Twenty-Twenty-One for underwithholding
if the value of that additional deduction in Twenty-Twenty-Two exceeds the underpayment
penalty. That’s very state-specific, and you really have to run the numbers there. And again,
no one knows the future, but this is just something to keep your eye on.
If it starts looking like this SALT repeal is a slam dunk for the Dems, hmm, maybe it’s time
to reduce your withholdings on your Form W-4 with your employer. Number two, be smart with
the timing of your charitable contributions, and this kind of ties into what I just talked about.
So let’s paint this scenario. You are married and you file jointly and together with your
spouse you paid twenty thousand dollars of state income taxes and property taxes in 2020,
and that was pretty much on the money what you owed. And you’re also a big giver,
and in 2020 you gave ten thousand dollars to your church or some other qualifying organization.
Well guess what? Because the Tax Cuts and Jobs Act back in 2017 made the standard deductions so high,
your 2020 standard deduction for married filing jointly was twenty-four thousand, eight hundred
dollars. And the total of your itemized deductions was only twenty thousand dollars, a combined
ten-thousand-dollar for your state, local, and property taxes because that’s the limit and the
ten thousand dollars you gave to your church, so you just took the standard deduction in 2020,
those tax payments and charitable giving didn’t do anything for you.
But what if the SALT cap is repealed, beginning in Twenty-Twenty-Two not Twenty-Twenty-One?
In that case, you would itemize your deductions in Twenty-Twenty-Two but not Twenty-Twenty-One. So,
in that case, it might be advantageous to you to consider deferring making those charitable
contributions until Twenty-Twenty-Two when you would get a tax benefit for them. So instead
of making a ten thousand dollar contribution in Twenty-Twenty-One and not getting a benefit for it
because you don’t itemize due to the SALT limit, and then making a ten thousand
dollar contribution in Twenty-Twenty-Two that you do get a benefit for, consider
making a twenty-thousand dollar contribution in Twenty-Twenty-Two that you will get an itemized
deduction for on all of it, ideally, Dems are looking to maybe cap itemized deductions in other
ways through a 28% benefit cap, bringing back the 3% Pease limitation, so there’s definitely room
for a tax professional here to work all this out, but at a high level, that’s something to consider,
deferring deductions that you can’t itemize in Twenty-Twenty-One due to the doggone SALT limit,
deferring those deductions until Twenty-Twenty-Two. Third, recovery
rebate credit planning. Let’s say that you did not get the third stimulus payment, let’s say you made
more than the maximum threshold because you made eighty thousand dollars in both 2019 and 2020. If
you were single and you made seventy-five thousand or less, then you qualified for the full thing.
If you made more than seventy-five thousand, your stimulus payment was reduced incrementally
until you hit eighty thousand of income, at which point you were completely ineligible.
Well, if you were excluded from the third stimulus payment based on income or you only got a partial
payment, then guess what? You have another shot at getting that full fourteen hundred dollars through
the Twenty-Twenty-One recovery rebate credit. So it might pay to do a little planning here.
How can we reduce that eighty thousand of income you have? You say, “I’m a W-2 wage earner,
I don’t have a business I can drum up deductions for.” Ah, but what about beefing up your 401(k)
contributions at work? What about opening a Traditional IRA to get that income down? What
about an HSA? These are all strategies I talk through with clients and I go over in my Prosper
course, link in the description below, there’s a coupon code down there as well for my loyal
YouTube viewers. So that’s something to think about, track your income throughout the year,
consider how to minimize your Twenty-Twenty-One income if you’re on that stimulus cusp, you make
a little bit more than seventy-five thousand as single or married filing separately, you make a
little bit more than one-twelve five hundred as head of household, or you make a little bit more
than one hundred and fifty thousand dollars as married filing jointly. Another easy way to do
this is to defer your year-end bonus. If you receive something like a holiday bonus at the end
of the year, maybe discuss it with your employer to say, “Hey, for tax purposes, can you pay me
this in Twenty-Twenty-Two after the new year rather than before the end of Twenty-Twenty-One?”
See what they say. Number four, if you’re a real estate investor with considerable gains
in property, I’ve talked on this channel about my first real estate investment, it was a four-unit
here in the Los Angeles area that I bought in the 2010s putting only 3.5% down, FHA loan. That thing
has significantly appreciated since I bought it, and I’ve contemplated 1031ing it into an 8-unit
or something like that. And I know many of you are sitting on rental properties as well
that may have appreciated significantly over the past decade. And as I mentioned
when I went over the White House Fact Sheet on the American Families Plan on April 28,
Biden is targeting 1031 exchanges for gains greater than five hundred thousand dollars,
it says, “The President would also end the special real estate tax break — that allows
real estate investors to defer taxation when they exchange property — for gains greater
than Five Hundred Thousand Dollars.” So if you’re sitting on a rental property
with significantly more than five hundred thousand in gains in it and you want to level up,
maybe it’s sitting in California or New York or Hawaii, you got all that appreciation on it,
but now you want cash flow, that’s not my strategy right now at this point in my life,
that’s why I’m not big on dividend stocks like a lot of folks, oh look at my dividend portfolio,
I’m not about that, I don’t want to pay more taxes than I have to, but maybe you’re older
than I am, and you want to transition to a more cash-flow-based portfolio, and you want to get
out of this property you have with a million in equity and you want to sell that and take
that cash and dump it into a cash cow apartment building in Indy or Cleveland or Pittsburgh or
somewhere like that. If that’s the case, you probably want to start talking to a CPA and a
qualified intermediary about that transaction sooner rather than later because you might be
looking at gain recognition for the portion of your gains over five hundred thousand dollars even
if you do a 1031 exchange if Biden gets his way. And finally, number five, if you have back taxes,
you really want to deal with those sooner rather than later, if you saw my video from April 27,
“The IRS Is About to Get a Whole Lot Meaner,” you know what I’m talking about. You know that Biden
wants infuse the IRS with eighty billion dollars to beef up audit and collections activities.
Yes, they say that this is to target the rich because that’s the politically correct answer,
but you know as well as I do that the IRS has no problem slapping liens on houses
and garnishing wages for people who are not rich. So if you owe back taxes, I strongly encourage you
to watch the video, essentially a training I made on the offer in compromise, which
is the most useful tool that you have for dealing with back taxes, there is a link to that video
right up here at the top of the screen as well as in the description below, I will be creating more
content about offers in compromise, installment agreements, other tax relief strategies here on
the channel, so make sure you’re subscribed and make sure you stay tuned for that. And finally
here’s a bonus for you, we already covered five strategies, but now let’s talk about a strategy
for the rich, so this last one isn’t directly for middle-class folks, but if you have friends
or relatives who are wealthy, talk to them about this stuff, they might have their heads in the
sand especially if they are newly rich and they don’t have a network of tax and legal
professionals surrounding them to keep them abreast of this stuff. Tell your rich friends,
rich relatives even that they need to update their estate plan, that they need to talk to
their estate planning attorney if they are not already because for rich folks the implications of
this Biden plan if it passes looking anything like what Biden and some other Dems are pushing for,
the estate planning implications are huge with the proposed butchering of the basis step-up at death,
a reduction in the lifetime exemption, huge implications for the wealthy here. Also, if you
have friends making more than a million a year, they might want to think about gain harvesting
in Twenty-Twenty-One if they have significant personal cash outlays they know are coming up
next year in Twenty-Twenty-Two. For example, let’s say that next year in Twenty-Twenty-Two
Mr. Millionaire is going to need to cash out of their stock portfolio a few hundred grand to pay
for young Digby’s Lambo for his sixteenth birthday next July, well Mr. Millionaire might want to cash
out before the end of Twenty-Twenty-One so he can pay tax on his long-term gains
of twenty-three-point-eight percent, that’s the statutory twenty percent rate plus the three
point eight percent Obamacare surtax, rather than than the forty-three-point-four percent
if he cashed out in Twenty-Twenty-Two assuming the increase in capital gains tax rates for those
making over a million a year isn’t effective until Twenty-Twenty-Two. And, sure, Mr. Millionaire may
lose out on some gains in the market, but do the math here, let’s say Mr. Millionaire is cashing
out three hundred thousand dollars of stock that he has a one hundred thousand dollar basis
in so that’s a two hundred thousand dollar gain. If he cashes out in Twenty-Twenty-One
at the old rate of twenty-three point eight percent, that’s a forty-seven thousand,
six hundred dollar tax on that for federal tax purposes. If he cashes out in Twenty-Twenty-Two
and the Twenty-Twenty-Two rate on that is now forty-three point four percent,
that’s an eighty six thousand, eight hundred dollar tax on the same gain.
That’s a thirty-nine thousand, two hundred dollar difference. So track with me here, let’s say young
Digby turns 16 in July Twenty-Twenty-Two, that’s when he needs that Lambo, so in order for Mr.
Millionaire to get the Lambo by then he’d probably have to sell stocks in June at the latest if he
wanted to keep all those stocks invested so he can enjoy an extra six more months of appreciation
assuming the market appreciates between January and June Twenty-Twenty-Two. So if Mr. Millionaire
kept the three hundred thousand invested all the way through the end of June Twenty-Twenty-Two
rather than selling in December Twenty-Twenty-One, assuming a fairly aggressive 10% annualized rate,
Mr. Millionaire would only have an additional fifteen thousand dollars in appreciation on those
stocks that were worth three hundred thousand dollars in December, compared to the thirty-nine
thousand dollars in additional tax, so you can see that this is a case where being tax-informed
is absolutely essential right now for your rich friends. So even though you may be middle class,
if you have rich friends who don’t have a network of tax and legal professionals in their corner
looking at this stuff for them, planning for this stuff in anticipation of major tax changes here,
tell them, send them this video, I’m sure they will appreciate it immensely. Alright, folks,
that is what I have for you in this video, you know as a CPA I live and breathe this stuff and
I will keep you updated on what you need to know in anticipation of potential major changes to the
tax code, thank you so much for watching, and I encourage you to check out these other videos
over here to keep learning more because when it comes to taxes, knowledge is money, buh-bye.