So let's just get right into it.
What are some things that people can do right now?
Because you handle thousands of tax returns for people.
What are some things that you're seeing right now that people can do,
actions that they can take as we head into these tough times.
Like everything else?
Tax planning, you have to take into account what's happening in the economy.
So right now, for the past, you know, decade and especially
the last few years, we've had a lot of high income years for a lot of folks.
And so as we go into the next
year, in 2023, potentially 2024, if you have lower income years,
they're strategies you can do to take advantage of that.
So one one strategy that comes to top of mind.
If you've heard of Roth conversion, yeah.
So if you've got a retirement account, typically
when if it's a traditional IRA, it's taxable when you withdraw those funds.
So the benefit of a Roth conversion is that you convert it
from a traditional IRA to a Roth IRA.
And what that does is that means because now it's a Roth, it's
essentially the opposite of a traditional IRA.
So once you withdraw those funds, it's tax free.
So what you do in a Roth conversion is you wait until you have a lower income year
and you convert the traditional IRA to a Roth IRA.
And when you do that, it's typically taxed
at whatever your tax rate is for that year.
And then once you do it, it's a one time tax hit.
I see.
And then later, you can withdraw that tax free.
So why you would do that in a low income tax year?
Because obviously your tax bracket would be lower in that year.
So it makes more sense to do the conversion when you're not going
to have as much taxable income compared to last few years.
If you've had higher income.
It wouldn't make sense to do that.
So this will work really, really well for somebody that's like commission
or somebody that's been flipping, that's made a lot of money,
that's heading into next year where that might be a dry year.
They could do a conversion when they're having a low tax year.
Right. Right.
Right. Year.
I think it's actually.
And and so they would be you would be taxed.
How how what would the tax be on a conversion?
So it's typically just taxed out whatever your ordinary tax rate is.
So if you remember your tax the tax brackets, they're phased in, right?
We have a low tax bracket of 10% and it goes all the way up to 37%.
And so depending on your income, you're taxed at a different rate. So
the highest rates, 37.
So if you were in the highest tax bracket
on a Roth conversion, you would pay it at that 37% rate.
If you're in a low tax bracket, you're going to pay it at that lower tax rate.
Okay.
And another thing you can do is you can defer income from Iraq.
So in other words in other words, if you're going to it's part of the strategy.
So you can actually take you can actually convert your Roth or convert to a Roth.
I should say in the following year and bump
the income on something on a deal, let's say, down the road.
Is that right?
Yes. To keep your income low for that year.
Yeah.
If it made sense for you to hold off on that deal,
especially if it didn't make sense in the current environment and
wait until things recover a little bit and then sell, then.
Yeah, that absolutely makes sense.
Yeah. So let's let's walk through that.
So let's say you had a deal that you were trying to sell
and let's say you're in October, November, you could actually say,
I'm going to put this thing in escrow, but I don't want to close until January 2nd.
So that you're bumping that income into the following year.
Right.
So that's that's that would lower your income for the current year
and it would be better for that Roth IRA conversion.
Yes, exactly.
And that's an easy strategy to I mean, I see it all the time where
someone will have a sale on, you know, December,
whatever it is, 20th or something, and how easy it is
typically to set that date initially for some point in January.
And and I actually saw it recently too on on something else
kind of switching topics, but I want it in front of,
you know, everyone's mind, especially with how values still,
even though we may be heading into a recession now,
value is still compared to five years ago are much higher.
So if you have a personal residence
that you've been living in, remember that you
if you've lived there for the last two out of five years,
you can still exclude any gain on that sale.
So for single filers, that's 250,000 of gain
that you can exclude for married, it's 500,000.
That's a good point.
That's huge.
So because you have to stay there two years, right?
Right. Exactly.
And I've seen people where they get to.
Right there and they forget that.
Right. One year in ten months.
Okay.
So let's let's explain that really a little more clearly.
What this means is, is if if you buy something and you're in it for two years,
there's a $250,000 exclusion.
Exclusion. If you
sell it, let's say, in one year,
11 months, you miss out on a $250,000 exclusion.
Correct.
And just to be clear, in the tax world, exclusion,
it's under it's not like a 1031
or like a retirement account where you're deferring the tax on it.
It actually means it truly is excluded from your income tax forever.
That's huge.
Yeah, that's huge.
And that's why a lot of people like there are lots of people
that that will buy something, rehab it, stay in it two years and then sell it.
But it's two years in one day.
Same thing with, let's say, something that you're building.
A lot of people do this.
They build a new house, they stay in it for two years
and they keep going because they get to see exclusion.
So it's a tax strategy that people use a lot.
Right, exactly.
And so you could even I mean, if you you could actually pair that
with the Roth conversion that we're talking about, that was so
you could sell your personal residence if you've been in there
for over two years, exclude that gain.
And even though you're in actual income, not your taxable income is higher
because it's not included in in your tax return,
or at least not reported as taxable income in your tax return.
Your income rate is still low and still would make sense to do that.
Roth.
So said another way you could you could make 250 grand on a flip,
have an exclusion if you're in it over two years and still convert the Roth
that same year, because year basis would be zero.
Right? Yeah, exactly.
So, hey, is it a crazy. I know.
I mean, you've been hanging around with me too much.
That's why we're always as you know, you guys may or may not know.
I'm talking to Eric, if not every week, every other week.
And we're meeting a lot.
And this is all we talk about is what kind of deals
do you have closing, what kind of income you coming in?
Can you move any of it to next year legally if you can't?
What do we need to do this year and how can we offset it?
Right. Yeah. No.
And that brings up another great point.
And I was actually just talking about this to a group.
But when you're choosing your CPA, when you're working with your CPA,
a lot of people, you know, when they come to me,
if if maybe they've been working with someone else.
Third biggest complaint typically is, hey, I hear from them once a year
when he hands me in my tax
return, says, this is what you owe,
and then I don't hear from them for another year.
And I think it's important to remember that you should stay at the front
of your CPA's mind by checking, you know, it's like everything else.
It's a relationship, right?
So having a relationship with your CPA, whether it's, you know,
take them to lunch every quarter or something with them,
even if it's a planning meeting and just let them know what's going on
and make sure that you're working with someone
that that ask you questions
and is trying to figure out these little things that they're really
you know, you're hiring them to look out for you, right?
I mean, you need to know some of it
so you can kind of guide some of the information you're providing.
But ultimately, you need someone that's looking out for what you have going on and
and telling you that these roles exist and helping you plan around them
so you don't miss them.
Well, I tell you, I'll tell you a great story,
a very good friend of mine that's not in real estate at all.
They they actually just retired and they moved to Arizona.
And they're friends of mine from high school, of all things.
And they bought a home next door to them.
You know, they bought a home down here and they love it.
And then their neighbor moved out and they said, you know,
we have a bunch of cars, we're going to move in as a renter.
And so they bought the house.
They did a bunch of capital work on it,
and they moved somebody in just like a lot of people do all the time.
And I was chatting with them and I said, Hey, you know, I don't know
if you realize, but, you know, you can write off
some of those capital capital work against your income.
And have you had it
have you asked about bonus depreciation, cost, segregation or anything like that?
And they're like deer in the headlights, right?
They're like, What are you talking about?
I'm like, I don't think you realize like what you've got here,
you've got something that could actually provide a nice offset to your tax.
And so they called their CPA, who they've used a long time and they're like, saved.
They're here like, you know, give me your receipts
or I could do your tax return.
I'm like, you didn't fire that person because you got to have
somebody that's an advocate for you because those are real things.
Those are that that is real money that you're walking away from
if you don't take advantage of that. Do you see that a lot?
All the time and and that reminds me of some recent stories.
So, you know, just like Ken said,
there's a lot of things you could leave on the table.
And if you talk to your CPA and you ask them
about bonus depreciation and they don't know what you're talking about.
Yeah, yeah, exactly. Codify the decision.
Yeah, exactly.
And there's all kinds of just little buzzwords
if you if you want to call them that, that you could say.
And again,
a lot of these CPAs that have been around for a while,
especially if they're getting closer to retirement age, the tax laws are changing.
So rapidly.
I mean, we the
the laws change multiple times a year and there's constantly updates.
So if you don't have someone that's actually keeping up with those changes
and they're working in the early 2000s, it looks completely different.
And so you really have to watch out for not getting stuck
because yeah, they may be cheaper, but there's a lot of times you're probably
leaving more on the table in terms of tax savings than you are saving on
on the bill with someone that's not keeping up with these tax law changes.