0:01

Hello and welcome to another episode of

0:03

All The Hacks, a show about upgrading your

0:05

life, money and travel. I'm your host, Chris

0:07

Hutchins, and today we're going to help you

0:10

save money on taxes. Now, I think we

0:12

can all agree that taxes are an important

0:14

part of our society, but with the tax

0:16

code currently at over 4 million

0:18

words, which by the way, is about

0:20

four times longer than all seven Harry

0:22

Potter books combined, it is no surprise

0:25

that finding all the completely legal ways

0:27

to optimize and lower our taxes is

0:29

no easy feat. So I

0:31

wanted to invite my friend Ankur Nagpal,

0:33

the founder and CEO of Carry, to

0:36

join me because I've been scouring the

0:38

internet for the best content on 2023

0:40

tax optimization, and I kept landing on

0:42

workshops he's done. We're going

0:44

to cover ways that anyone can offset

0:47

their W-2 income, maximize their deductions, save

0:50

taxes on investments, and so much more.

0:52

At the end, we'll also cover tax

0:54

savings for business owners, and my goal

0:56

is for you to find at least

0:58

one tax strategy in this episode that

1:00

you can use yourself. So

1:02

let's get into it right after this. Did

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LMNT. Ankur,

2:40

thank you for being here. I'm excited to do

2:42

this. Let's go. So you and I

2:44

now from the workshops I've watched from the conversations

2:46

we've had share a passion for

2:49

optimizing our finances. We both started companies

2:51

in the space. Congratulations, yours is still

2:53

in existence. Yeah, I mean if

2:55

you had told me you know 10 years ago

2:57

this is what I'd be doing, I'd be shocked.

3:00

I mean it kind of takes like learning from

3:02

your mistakes to get to this point. But yeah,

3:04

I've spent the last year and a half diving

3:06

deep into this world and now it's something I

3:08

quite enjoy. So I've seen you do a

3:10

couple workshops on saving money and taxes as a business

3:12

owner, as a just normal person who doesn't own a

3:14

business and lots of things. I

3:17

want to dive down all these rabbit holes

3:19

and have this episode for people listening really

3:21

be about all the different ways that you

3:23

can take advantage not of like breaking the

3:26

law but actually finding ways that other people

3:28

are optimizing their taxes so you can do

3:30

it too. I think you share a belief

3:32

that like we should pay our taxes. Yeah,

3:35

absolutely. I mean it's so funny, right? Every

3:37

time I do these workshops with two types

3:40

of people, one type of person is like,

3:42

dude, just pay your taxes. And my response to

3:44

that is if you think about the wealthiest people

3:47

in this country and like who pays their fair

3:49

share, there's a percentage of people that can afford

3:51

the most expensive lawyers and accountants and all these

3:53

people to figure it out for them. And our

3:56

goal is like can we just democratize this information

3:58

and give it to everyone? And then

4:00

you decide what you want to do with that.

4:02

That's one group. The other group wants

4:04

to straight up tax fraud. They come up with

4:06

the most crazy schemes. They're like, yeah, but how

4:08

will the IRS know? And we're like, the goal

4:10

is not to be fraudulent. It's like, let us

4:12

give you all the information and the knowledge because

4:14

the tax code is so complicated. And then you

4:16

decide what you want to do with that. And

4:19

just to be clear, it's probably worth

4:21

clarifying. Neither of us are CPAs. This

4:23

is not tax advice or investment advice

4:25

or anything of the sort. This

4:28

is for informational and educational purposes only. This is

4:30

not tax advice, legal advice, investment advice. You know

4:32

the drill. And I think one of

4:34

the interesting things that I said, I did an episode last

4:36

year about kind of money moves to make at the end

4:39

of the year. I'll defer people to

4:41

there if they want to go beyond taxes. There's some

4:43

other stuff there. I went down a few more rabbit

4:45

holes. But one of the frameworks that

4:47

I really liked was whenever we think about taxes,

4:49

the goal is first try to avoid it, then

4:51

try to defer it, and kind of then later

4:53

in some future year repeat this in case the

4:56

tax code changes. And if you can't do either,

4:58

try to minimize it. I think we're going to

5:00

hit on all three of those. Are there any

5:02

other starting points that you want people listening to

5:04

just kind of have some broad context when

5:06

it comes to thinking about taxes? Yeah.

5:08

So a few concepts to ground in that I

5:10

think are really important. One is I think people

5:13

should know what their effective tax rate is, which

5:15

roughly is just like how much you pay in

5:17

taxes divided by your income. In itself, it's not

5:19

that useful a number. But it's good to see

5:22

for people in similar income brackets what that number

5:24

is and how to reduce that. The

5:26

other thing to touch on because you just said the

5:28

best thing is to avoid it or if not that

5:30

defer it. In some rare cases,

5:33

I do think it makes sense to front

5:35

load it. And the reason for that

5:37

is I also think it's important to think about your

5:39

lifetime tax rate. Sometimes, there

5:41

will be cases where it makes sense

5:43

to pay slightly more in taxes now

5:45

to pay substantially less later. And a

5:48

good example is Roth accounts. Sometimes

5:50

it can make a lot of sense to take a

5:52

little bit of tax now, let that money grow and

5:54

compound. But then over your lifetime, you're paying substantially

5:57

less in taxes. Those are

5:59

important concepts. I also love telling

6:01

people like, don't get too carried away with

6:03

this. Taxes are a part

6:05

of life. I mean, the expression that people refer to

6:07

is, don't let the tax tail wag the dog. As

6:10

an example is, your business can make no

6:12

money and you'll have no taxes, but that's

6:14

besides the point. At the end of the

6:16

day, you don't want to live somewhere just

6:19

to save money on taxes. You live the

6:21

life you want and figure out

6:23

your tax strategy in response to that. Two

6:26

other things. On that point, I did meet someone

6:28

and I want to do a deeper dive on

6:30

this. We're not going to go into it, but

6:32

someone who basically ran their business to the point

6:34

that it made no money. They were doing reselling

6:36

and all this stuff. By lowering

6:38

their margins, they had the best prices, volume

6:40

went up and they were doing more

6:44

than $10 million a year of sales on a

6:46

business that net income went to zero. They

6:49

were putting $10 million on a credit card. All

6:51

of the points in cash back created

6:54

tax-free income. By their

6:56

math, they would have made less money

6:58

by raising the margins and making more

7:00

because they would have had income, but

7:02

it would have been all taxable. They

7:04

played the volume game and won on

7:06

cash back. I would love to see

7:08

the analysis there because with tax back, you get about 2%. It's

7:11

very, very hard for me to see how that

7:13

is the best outcome. But again, I still think,

7:15

don't let the tax tail wag the dog. Live

7:18

the life you want and then figure out your tax

7:20

strategy in response to that. You've talked

7:22

about return on hassle before. Some

7:24

things in tax planning and tax optimization can be

7:26

a lot of work. If it's really just going

7:28

to save you a few hundred dollars, make sure

7:31

you know what you're getting into. Yeah.

7:33

Again, I know some people who want to make

7:36

sure they don't miss a single $14 expense or

7:39

whatever. Again, I think if you're organized, it's

7:41

worth keeping track of all of that. It's

7:44

better to focus your energy on the few things

7:46

that make a really big difference versus trying to

7:48

do every single thing and burning yourself out. Okay.

7:51

So the way I think we're going to break this down, we'll start

7:53

with all kinds of things that

7:56

apply to a broad audience, people who have

7:58

general W2 income, things that apply to

8:00

people in every circumstance will move in not

8:02

to retirement and tax advantage accounts, which I

8:04

know you've talked a lot about because you

8:06

go back a couple of weeks, I did

8:09

an entire episode with Katie for money with

8:11

Katie, we went through every single element of

8:13

tax advantage accounts. So we're actually going to skip over that

8:16

and jump into investments. And there's a lot of

8:18

ways that you can use the style of investing

8:21

and the way you take capital gains and roll

8:23

them over to be efficient with taxes. And then

8:25

we'll end talking about things that apply to business

8:27

owners, including ways that someone who might not be

8:30

a business owner yet might want to think about

8:32

it. I think that's a good plan. So if

8:35

we start with regular people, I think

8:37

one thing that it's important to help

8:39

people understand is not all income is

8:41

taxed the same way. And so let's

8:43

talk about capital gains, because it's a

8:45

totally different type of income. But

8:47

one other common thing that I just

8:50

thought of that I often realize some

8:52

people don't quite understand is marginal versus

8:54

effective tax rates. So I hear some

8:56

people say, I'm in the 39% tax

8:58

bracket, I'm at the top. The way the tax

9:01

code works for anyone not familiar is that it's

9:03

progressive. So the first tranche of your income is

9:05

at the lowest tax rate, and then it goes

9:07

up and up and up, at least with income

9:09

tax, capital gains tax similar, but it actually pushes

9:12

you into a new bucket for everything. So

9:14

just to be clear, your effective tax rate could

9:16

be 28%. But

9:19

your marginal tax rate could be 33% or more. And

9:23

if you're in that circumstance, that actually means

9:25

that the amount of money you'll

9:27

save by reducing your taxable income is higher

9:29

than what your effective tax rate is. And

9:32

so it can be really valuable. But a common

9:34

misconception with some people is if you're in the

9:36

39% tax bracket, and you reduce your

9:40

income to be in the next lower tax bracket, it

9:43

doesn't affect all your income, it only affects that

9:45

marginal amount of your income. Yep, that's

9:47

a really good point. Yeah, there's so many people who are like, oh,

9:49

let me go $1 under a certain bracket,

9:51

because it affects all my income. But no, it's

9:53

only income above that threshold that gets taxed at

9:55

the higher rate. Okay, so

9:57

let's talk about capital gains. All right, so... And

10:00

again, I think the way to think about

10:02

this is I was actually an economics major

10:04

in college. So we actually remember learning this

10:06

quite a while back, but like basic economics,

10:08

ultimately, people make income either through

10:11

their labor, which is your salary or

10:13

whatever, or through capital, which is when

10:15

you invest in something and that asset

10:17

grows in value. Don't ask me why.

10:19

A lot of people can argue that, you know, labor

10:21

should be taxed at a lower rate, capital should be taxed

10:24

at a higher rate, but the way it works in America

10:26

and most of the countries is capital gains are

10:28

not only taxed at a lower

10:30

rate, there's just a lot more

10:32

strategies you have to either defer

10:35

or negate capital gains taxes. So

10:37

as an example, the highest tier

10:39

for long-term capital gains, which is when you

10:41

hold an investment of security,

10:43

anything for over a year, is 20%, as

10:46

opposed to the highest rate

10:48

on your income is, I don't know, 35%,

10:50

a little bit more than that. So in

10:52

general, capital gains when held for a year

10:54

are much more efficient, but you can also

10:56

offset them with other capital losses to create

10:58

this idea of no net capital gain, which

11:01

reduces the amount of taxes. So

11:03

I think for people listening, it's important to know

11:05

that not all types of income are taxed the

11:07

same. So capital gains, obviously

11:09

lower. At a certain level of income, I don't

11:11

know the threshold, there's no capital gains tax. So

11:13

like it's under $100,000 and under, then it goes

11:15

to 15 and then 20. And

11:20

then at the highest end, there's this net investment

11:22

income tax, which adds on a few more percent

11:24

after that. Yeah, the other

11:26

thing worth noting with capital

11:29

gains taxes is these preferential

11:31

rates only apply when you hold

11:33

on to a capital for any

11:35

investment for over a year. If

11:38

you're under a year, it counts

11:40

as short-term capital gains, which is typically

11:42

taxed at the ordinary income

11:44

rate. But if you

11:46

have short-term capital gains, you can still

11:48

use other capital losses to try and

11:50

offset them. So what I tell a lot

11:53

of people is try and avoid

11:55

short-term capital gains because it means

11:58

you could either find ways... of canceling them

12:00

out with losses or potentially holding the investment a

12:02

little bit longer. But the fact that short-term capital

12:04

gains are taxed the same as income means they're

12:06

quite inefficient. And if possible, you want to try

12:08

and avoid paying that. Obviously, you don't

12:11

want to necessarily hold on to an asset for

12:13

an extra seven months that you don't feel

12:16

great about. But if you were at

12:18

360 days and you could hold

12:20

it for five more days, the benefit there is

12:22

going to be really high. But when it

12:24

comes to the end of the year, I think

12:26

one important thing to cover is tax loss harvesting.

12:28

Like you said, if you have capital losses, they

12:30

can offset capital gains. And

12:32

if you have $3,000 of capital losses, you

12:34

can even offset your regular W2 employment

12:37

income. So towards the end

12:39

of the year, if you're not already using some,

12:42

you know, robo investing platform that will automate this,

12:44

I feel like it's something everyone should be doing. Yep.

12:47

So here's what I normally do. I'm not going to do

12:49

it this year, because I had enough in losses last year

12:51

that I'm not worried about paying capital gains taxes this year.

12:53

But what I would normally do it is at the start

12:55

of December every year. I

12:58

would open my brokerage accounts wherever they

13:00

are. And I would basically try and

13:02

see what my net capital gains or loss is

13:04

for the year. And if it

13:06

makes sense, try and make the numbers line up.

13:08

Again, we don't want to do irrational things. Don't

13:10

let the tax tailback the dog. But

13:13

you know, if you're going to be at a point where

13:15

you're paying a little bit in capital gains, but there's a losing

13:17

position you would otherwise want to take, it may make sense to

13:19

do that. This was a hard lesson for

13:21

me a year or two ago when I was using

13:23

Robinhood as my primary brokerage and realized it's actually not

13:25

very well suited to doing any

13:27

of this because you can't analyze specific tax

13:30

laws, you can't sell specific tax laws, you

13:32

couldn't even see your net capital gain or

13:34

loss. But any of the adult grown up

13:36

brokerages will let you do that. And it's

13:38

a worthy exercise to figure out what capital

13:40

gains taxes you will have. If

13:42

you're in a position like me where I had so

13:45

much in capital losses last year, because

13:47

it was a brutal year, you can

13:49

actually carry forward those indefinitely. My

13:52

gains this year will be offset with the

13:54

carry forward capital losses from last year. But

13:57

it's a worthy exercise doing otherwise. Just

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16:30

Let's talk about some of the ways that

16:32

people can start to chip away at their

16:34

income, because ultimately, the way the tax code

16:36

works and your filing is, you have your

16:38

income, then you have a bunch of things

16:41

you subtract and adjust it with, and

16:43

then that final amount is your

16:45

adjusted income, AGI, adjusted gross income, and that's

16:47

what you pay taxes on. So one

16:50

of those things is itemizing your deductions.

16:53

Let's talk a little bit about how you can kind of

16:55

optimize this, and whether you should. So

16:57

in general, the government kind of gives

17:00

us a choice. We can either just

17:02

take their deduction, call it

17:04

a standard deduction, and apply it, and I think

17:06

that is 27,000 roughly, if

17:09

you're married, about half that if you're single. And funnily enough,

17:11

I think something like 85 to 90% of

17:14

people just take the standard deduction. If

17:17

you don't, if you choose to take

17:20

itemized deductions, which is you turn down the

17:22

standard deduction, you can take deductions

17:24

for a lot of other things. A big

17:26

one that we'll talk a lot about is

17:28

charitable contributions, which you can't deduct unless you're

17:31

choosing to take itemized deductions. But aside

17:33

from that, things like student loan interest,

17:36

mortgage interest, large medical expenses that I think

17:38

are more than 7.5% of income, some

17:41

random stuff like the cost of doing

17:43

your taxes. I was actually amused to

17:46

find out you can deduct gambling losses if you

17:48

itemize your deductions. But there's a bunch of good

17:50

stuff there. Oh, state and local taxes is a

17:52

big one, even though that's limited to $10,000 unless

17:55

you're a business owner. But I tend to

17:57

think if you either are charitably minded or

17:59

you're taxed. taxes are somewhat complicated, itemized deductions

18:01

usually work out to be a better deal.

18:03

But for everyone else, you can just take

18:06

an automatic, you know, standard $27,000 deduction. Mortgage

18:10

interest being one of the ones that often is

18:12

the biggest. But you mentioned state and local taxes,

18:14

which I can't remember what year it was at

18:16

this point, but a handful of years ago got limited.

18:19

2017. So what happened in

18:21

2017 is you had the Trump Jobs Act, which basically,

18:24

it kind of reiterated the way the American

18:26

tax code works. And the way the American

18:28

tax code works is it benefits two groups

18:30

of people above everyone else, business owners and

18:32

real estate developers. And if you're a real

18:34

estate business owner, even more so, and it

18:36

gave a bunch of benefits to business owners,

18:38

but to make the math work out, it

18:40

created legislation to cap state and local taxes,

18:42

the amount that could be deducted from your

18:44

federal return to $10,000. What's

18:47

worse is if you're married, the limit is still

18:49

$10,000. It's actually worse if you're married

18:52

because you don't get like a collectively higher number,

18:54

with the idea of being this hurt state with

18:56

higher state taxes, which typically tend to be Democrat

18:58

states. But either way, we'll talk about that more

19:01

in the business owners section. Because as a business

19:03

owner, you can actually work around it. But for

19:05

everyone else, if you live in California and pay

19:07

100,000 in state taxes, you can only deduct $10,000

19:09

from your federal return, which

19:12

is a bummer. Yeah, absolutely. And

19:14

one strategy I've heard, we'll talk about

19:16

charitable donations and way to optimize that.

19:18

But you don't have to make

19:20

this decision forever. So I know some people

19:23

who choose to make all their charitable contributions

19:25

in alternating years, pay a few extra mortgage

19:27

payments in alternating years, so that in one

19:29

year, they can deduct as much as possible.

19:31

And then in the next year, they can

19:34

go back to the standard deduction. So I

19:36

think thinking about if you're on the cusp,

19:38

and you're looking at all your itemized deductions,

19:40

and you're like, wow, you're kind of near

19:42

27, then it might be wise to have

19:45

a strategy of putting everything in

19:47

odd years or even years and then swapping each

19:49

year. Yep, absolutely. It's

19:51

on a year by year basis, so you

19:53

can always sort of change. My guess is

19:55

more people will start itemizing deductions slowly as

19:58

interest rates go up mortgage rate I

20:00

think part of the reason standard

20:02

deductions made sense to a lot of people is mortgage

20:04

interest was so low for so long. And as that

20:06

climbs up, I think more people will end up itemizing.

20:09

Okay, that's itemizing standard. One of those

20:12

big ones you mentioned is charitable deductions.

20:14

We did talk about donor-advised funds in

20:16

general in the tax-advantaged accounts, but let's

20:18

talk more broadly about charitable donations and

20:21

how powerful that deduction is. Yeah,

20:23

I think it's one of the few

20:26

things that you have the opportunity to do

20:28

good in this world and get

20:30

rewarded for it, right? I think

20:32

the government is quite generous because

20:34

a dollar donated to charity reduces

20:36

your taxable income by a

20:38

dollar. Super fair, very generous,

20:41

and can be used to offset a

20:43

lot of income. One of the things

20:45

to note is if

20:47

you donate cash, you can offset up

20:49

to 60% of your income. If

20:52

you donate appreciated assets, you can only

20:54

offset 30% of your income. A

20:57

lot of people read that and they're like, oh wow, I should

20:59

donate a lot of cash. But

21:01

funnily enough, it's actually much more

21:03

efficient to donate appreciated assets because

21:06

you're getting a double tax break in a

21:09

way because you're getting the deduction for donating

21:11

the asset, but you're also getting the benefit

21:13

of what would have been the gain you

21:15

would pay if you sold that asset and

21:18

donated cash. So if you

21:20

donate appreciated shares, for instance, you get

21:22

the tax deduction for the entire amount.

21:24

But if you sell those shares, you'd

21:26

have to pay taxes on that and

21:28

only donate the net of tax amount.

21:31

So donating appreciated assets, in my opinion,

21:33

is something that is almost always better

21:35

than donating cash. And you can

21:37

donate all sorts of assets. I mean, public equities

21:40

are a very common one, but based

21:42

on how fancy you want to get, I

21:44

know people who will donate art to a

21:46

museum where they'll pry and buy art very

21:48

cheaply. And if I have a good eye,

21:50

have it independently appraised, it's now worth 10

21:52

times more and you're going to get a

21:55

10 times larger deduction. One

21:57

other interesting thing is, I would maybe

21:59

say you could... extend this to everyone if

22:01

you factor in the fact that there's no

22:03

watch sale rule on charitable donations. And so

22:05

if you're thinking, I want to make a

22:07

$500 donation to a charity, if you hold

22:11

any stock worth $500 that you bought for less than

22:13

$500, forgetting the return on

22:17

hassle here, because maybe at $500, it's

22:19

not worth it. But donating that stock

22:21

is going to save you capital gains,

22:23

and you will not save it if

22:25

you donate cash. Oh, that's actually

22:27

fascinating. I never thought about that. So

22:30

if you wanted to do that, you could

22:32

use that $500 to immediately just rebuy whatever

22:34

you donated and step up your

22:36

cost basis. Yeah, for free. For

22:38

free. Exactly. Maybe the only argument against this

22:40

is if you're very, very old, and you're

22:43

planning on passing these assets down. One other

22:45

great thing about the tax code is that

22:47

you get to step up in your cost

22:49

basis when you pass stocks down to your

22:52

children, so that capital gains tax ends up

22:54

being zero. So maybe in that rare case,

22:56

you could argue that it's equal. But yeah,

22:59

and another way to avoid a lot of the hassle

23:01

here, which I've heard you talk about is with donor

23:03

advised funds. And we talked in this example about $500,

23:05

it would be a pain for every hundred,

23:09

200 $300 donation you want

23:11

to make to call the charity and coordinate

23:13

a stock transfer and work with your brokerage

23:15

firm. So in general, I think

23:17

donating, you can open up a donor advised

23:19

fund, which we talked about a couple weeks

23:21

ago, and donate all of those securities once.

23:24

And this really helps with that alternating strategy,

23:26

right? You could make your donation and then

23:28

have a pool of funds that you could

23:31

both invest so it grows, but then donate

23:33

from whenever and you can kind of separate

23:35

the donating from the giving. Yeah, super

23:37

useful, right? Like again, let's say there's a year

23:40

you want to take itemized deductions in, you can

23:42

front load your entire donation, you can basically do

23:44

the tax planning part of it in

23:46

isolation from the giving part of it. And

23:48

the fact that once money's in a donor advised

23:51

fund, it's invested and is growing also means like

23:53

charity will get more money in the future. So

23:55

it's not like you're taking money away from charity

23:57

or putting money into this pool of funds earmarked

23:59

for charity. It can be invested, it

24:01

can grow, and then you can give it whenever

24:03

is appropriate. If some charities

24:05

don't accept stocks or don't accept crypto or

24:07

have high minimums, this kind of avoids that.

24:09

I think anyone who's listened to the show

24:11

for a while knows that we partner with

24:14

Daffy. It's a donor advised fund. It's the

24:16

one I use. I think of the options

24:18

that the average person can just sign up

24:20

for, personally, I like it the most if

24:22

you're an average consumer. And so you

24:24

can go to allthehacks.com/Daffy and get a free $25 if

24:26

you want. Sweet. I

24:28

mean, in general, charitable donations are something

24:30

that I think makes a ton

24:32

of sense, again, just because it has the benefit

24:34

of doing good in the world while also helping

24:37

in taxes. And it doesn't have to be

24:39

money or stock or crypto, you can donate up to I think

24:43

$5,000 of items, absent kind of

24:45

appraisals and anything. Clothes, electronics, like all

24:47

kinds of things. There are a

24:49

lot of different ways you can choose to value

24:52

them. But you know, that's up to you. But

24:54

definitely something if you're thinking at the end of

24:56

the year, I have a bunch of stuff in

24:58

my house to get rid of, great time to

25:00

go donate it if you'll be itemizing this year.

25:02

And again, falls in line with that alternating strategy

25:04

of, okay, this is the year we're going to

25:06

donate everything in our donor advised fund, give everything

25:08

away, make some extra mortgage payments.

25:10

And then next year, we'll donate from our

25:12

DAF the whole year. Cool. So that

25:14

is charitable donations. There's a couple other

25:17

things I'll touch on, on energy, thanks

25:19

to the Inflation Reduction Act, which we'll

25:21

get to a bit more when we

25:23

talk about solar, they increased the cap

25:25

for lifetime cap on energy efficient improvements

25:28

to your home. So things

25:30

like heat pumps and upgrading windows or

25:32

insulation and furnaces, I think it's a

25:34

$1,200 limit now. So

25:37

if there's any changes you make there, definitely

25:39

look into it because there's a bunch of

25:41

stipulations on different items and how much you

25:43

can get. But that's one. Also in energy,

25:46

solar at your home. So when

25:48

you install solar stuff, any company that's selling you

25:50

solar knows this. And so I'm not going to

25:52

try to go through the details. But if you

25:54

go to any website to buy

25:57

solar, anything, whether it's a Tesla Powerwall or

25:59

Solar Roof, for anything from another

26:01

local vendor, there's that. And then also

26:03

the EV tax credit, you get $7,500,

26:05

but there is a salary cap to

26:07

that tax credit. Is December 31

26:09

a deadline for all of this for anyone

26:11

listening? I believe all of the energy efficiency

26:14

improvements apply based on a calendar basis. But

26:16

a lot of the inflation reduction act benefits

26:18

were through 2033, I believe. And so some

26:20

of these things,

26:23

it's not a take it or leave it, right? If

26:25

you don't get your energy efficient stuff that's done this

26:27

year, you can aim for it next year. And I

26:29

think that's going to be a theme throughout this episode.

26:31

There's a lot of ways that you can limit your

26:33

taxes. And we're recording this at

26:35

the end of November. That doesn't mean that you're going

26:37

to be able to do all of them this year.

26:40

But this is a long game. Yep, absolutely.

26:42

But for a lot of it, December 31 is a

26:44

very important date. So the things that can be implemented

26:46

quickly, it's totally worth looking into. Yeah,

26:49

the charitable donations, I can't remember the percent. But

26:51

like the highest percent of charitable donations, I think

26:53

on a given day in the year is December

26:55

31. And I was talking

26:57

to one of the people on the Daffy team. And they

26:59

said, like, up until 1157, people

27:02

were donating crypto because it's like an instant

27:04

donation, or people were donating, you know, for

27:06

their donor advised fund and putting on a

27:08

credit card like right before midnight. So that's

27:10

one of the few ways to reduce your

27:12

taxable income. But just to be clear, you

27:15

are donating money, like, it's not a give

27:17

$1,000 and somehow make back 1200. It's

27:20

give 1000 create a lot of impact

27:22

for other organizations and get back a

27:25

few hundreds. But for those of us who are

27:27

charitably inclined, it's definitely a win for

27:29

both sides. If there's time at the

27:31

end of the episode, we can talk a little

27:33

bit about charitable remainder trust. Those are weird instruments.

27:35

But those can sometimes, for people who have very

27:37

large capital gains, literally be like you give money

27:39

to charity, but also end up with more money

27:41

yourself. I did an episode I

27:44

think you've done an interview with Manny from Valor

27:46

also. And he and I did a whole episode

27:48

and we went through all these charitable remainder trusts

27:50

and grass and all this stuff. We'll touch on

27:52

it at a high level to on kids, is

27:54

there anything other than 529 for people with parents

27:56

to be thinking about one of the

27:59

strategies that I think makes sense and maybe this

28:01

is more of a business owner thing is I've

28:03

seen a lot of business owners hire their children

28:05

for, again, legitimate jobs, right? You don't want to

28:07

have tax property of a 13, 14, 15-year-old helping

28:09

you with social media. You can

28:12

hire them, pay them, and outside of

28:14

having them get some income and if they're under

28:16

the standard deduction, being able to keep that income,

28:18

what is also cool is it makes them eligible

28:20

to start a Roth IRA because for a Roth

28:22

IRA, you have to have earned income. If

28:25

you are able to have children pretty

28:27

young, 13, 14, 15, start a Roth IRA,

28:29

it starts compounding a

28:32

lot earlier. I think that's something cool that could

28:34

make sense for people that are business owners and

28:36

want to have their children involved in the business.

28:39

Even if you don't, if you have a 13 or 14-year-old

28:41

child, you could encourage them to get a

28:43

job and put that money away in a

28:46

Roth IRA. If you wanted

28:48

to encourage that savings, they could get a job,

28:50

put it in their Roth IRA, and

28:52

you could gift them some spending money. A

28:54

way to backdoor into your kid's Roth IRA

28:57

would be to make them get a job,

28:59

invest the money, and then replace their money

29:01

that they probably as a 13-year-old would rather

29:03

keep and spend. You look

29:05

at the math, putting dollars

29:07

into a Roth that's 13 versus 25, 27, the

29:09

amount of

29:12

compounds, it's totally different. I'm

29:14

already, with a one and a three-year-old, we're already

29:17

like, how do we try to max this Roth

29:19

out as quickly as possible? Definitely

29:21

thinking about that. There's a bunch of other tax advantage

29:23

to count stuff that you could do before the end

29:25

of the year. If you haven't

29:27

put money in a Roth IRA or done

29:30

a backdoor Roth or contributed

29:32

your 401K, I guess in

29:34

that case, you probably only have whatever comes in your

29:36

1231 paycheck. HSA's,

29:38

FSA's. But like I said,

29:41

we've covered a lot of those. The one thing

29:43

I will flag that I've heard you say that

29:45

I didn't realize also on the note of kids

29:47

is that 529s

29:49

don't necessarily have the most tax savings

29:51

benefits in the year you contribute. Though

29:53

some states do have some perks to

29:56

donating. California is not one. I

29:58

didn't realize that it matters which state you

30:00

pick for how you use your funds. It

30:03

absolutely does. Like different states have different rules. What that

30:05

means is different states have different

30:07

rules on what you can spend money on, different

30:09

states have different investment options, and you absolutely are

30:12

under no obligation to pick the 529 from your

30:14

state. If your state gives you a tax benefit,

30:16

you probably should. But for everyone else, just go

30:18

pick a state for the best plan. I've heard

30:20

some people do Utah, Nevada. Those are generally good

30:23

ones. Do some research and pick the best state

30:25

if you're not getting a tax break. Because

30:27

I've heard, you know, they

30:29

passed IRS legislation, I believe that, and

30:32

maybe it wasn't even the IRS, but that you can

30:34

use your 529 for K-12 education, but

30:38

not in every state. And so the good news is, I

30:40

believe that if you have a 529 in a state that

30:43

wouldn't let you, I believe you can transfer and

30:45

roll it into a 529 in a state

30:47

that would. So you're not really restricted that

30:49

much. And if you're in a tax break

30:51

state that doesn't allow it, well donate

30:53

or contribute, get the tax

30:55

break. And then later, if you need it for K-12 education,

30:58

and your plan doesn't allow it, move it to another state.

31:01

Another thing I never realized until quite recently is if

31:03

you're in a state that gives you a tax break

31:06

for donating to 529, you could literally do it

31:08

right away. Like, if you're paying for college tomorrow,

31:10

you could put money to the 529 right now

31:12

and pay it out immediately just to get the

31:15

tax break. There's no sort of minimum holding

31:17

period or anything. I believe you can

31:19

also do the same with an HSA. Not

31:21

that we talked about all the amazing tax

31:23

benefits of an HSA, and you should probably

31:25

hold on to it forever. But if you

31:27

don't have the funds to invest in an

31:29

HSA, but you're eligible, and you

31:31

have medical expenses, you might as well just put

31:34

the money in the HSA and take it out

31:36

the next day if the alternative is not putting

31:38

it in at all. Yep, makes a ton

31:40

of sense. You

31:42

all already heard me talk about our sponsor

31:44

Daffy in this episode. And if you've listened

31:47

for a while, then you know I'm a

31:49

huge fan of them and their mission to

31:51

help people be more generous more often, especially

31:53

during the end of the year when I'm

31:55

trying to make sure I dial in all

31:57

my tax optimizations. I'm such a huge fan of tax.

31:59

I'm a huge fan of Daffy and I've used it for years, but

32:02

if you're not familiar, it's a platform and app

32:04

that helps regular folks like you and me manage

32:07

giving to the charities we care about more

32:10

efficiently, and they do that by helping you

32:12

set up a special tax-advantaged account called

32:14

a donor-advised fund, or DAF. Daffy

32:17

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32:23

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32:29

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32:31

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32:34

and every donation to your DAF is

32:36

a tax deduction, whether it's cash, stock,

32:39

or crypto, though as I said

32:41

before, it probably shouldn't be cash. So,

32:44

if you want a better system

32:46

for giving, head on over to

32:48

allthehacks.com/daffy, and for a limited time, at

32:50

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32:52

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32:55

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so please consider supporting those who

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support us. One thing

34:55

that I know you talk about for

34:57

kind of W-2 employees is non-qualified deferred

35:00

comp plans. And TDCs. And it's something

35:02

I tried at Google and

35:04

worked out, but can you talk a little bit more

35:06

about this? Yeah, absolutely. So

35:08

in my opinion, the people that

35:11

pay the most in taxes are like truly

35:13

high W-2 earners, like people earning high hundreds

35:15

of thousands or even more in W-2, they're

35:18

basically got the highest effective tax

35:20

rate of anyone right there. There's billionaires that

35:22

have a lower effective tax rate than someone

35:24

making $500,000 in a job.

35:28

So what if that is you? What if you're, again,

35:30

in a very privileged position, you have a great life, you're earning

35:32

five, six, $700,000 in salary, what do you do then? Chances

35:38

are if you live in California, New York,

35:40

you're paying almost half of it in taxes.

35:42

So you're probably looking for alternatives. One

35:44

of the alternatives you can do is something

35:46

called a non-qualified deferred compensation plan or an

35:48

NQDC for short, because it's a bit of

35:50

a mouthful. What

35:52

that does is it lets you bifurcate your

35:55

income into money you receive today and money

35:57

you put away for the future. My

38:00

salary dropped to like $30,000 a year. And

38:03

like six months later, I got all of this

38:05

money that I had earned three years before and

38:07

it was great. And at Google, I trusted that

38:09

they weren't going to go bankrupt in three years.

38:12

So great option. So that's a really interesting.

38:14

Yeah, I high W2 very often, you can

38:16

negotiate this and a lot of companies, especially

38:18

big tech employers do these quite often. Is

38:21

it a lot of administrative work for the company to do

38:23

this? Yeah, but anyone that's like

38:25

a Fortune 500 type company that has tons

38:27

of people, they all do it because it's

38:29

kind of a big win and it helps

38:31

them from a recruiting perspective. Any

38:34

other big things outside of investments,

38:36

real estate and all that that we'll get to

38:39

next that W2 employees should be thinking about? Well,

38:42

come to a lot of fit in the

38:44

business owner section. But I've also seen people

38:46

in some cases who have a high W2

38:48

getting the company to bifurcated and also hire

38:51

them as a consultant. So they are both

38:53

a W2 employee and provide consulting services and

38:55

they can do a lot more planning with

38:57

the consulting side. Again, doesn't work always.

39:00

If you're making 250,000 and your employer can

39:02

pay you 150 and then give you 100,000 as

39:05

a consulting job, it's actually probably

39:07

going to save them money in terms

39:09

of employment taxes. So it could

39:11

be pitched as a benefit to them. And

39:14

then the last part of this conversation is going

39:16

to be all about saving money as a business

39:18

owner. You now go from not business owner to

39:21

business owner, which as you said is like what

39:23

the tax code is designed to benefit. So absolutely.

39:26

And we'll talk a lot about that. But really, like

39:28

the more you look at the tax code, you just

39:30

realize this country like favors entrepreneurship so much. So my

39:32

sort of parting advice to W2 people always is like,

39:35

think about the side hustle, think about freelance and think

39:37

about sort of expanding your horizons. And if there's a

39:39

business you may want to start in the future. One

39:42

that I didn't even treat like a business, though

39:44

I should, and obviously clear this

39:46

with your company, is there a bunch

39:48

of these networks out there, GLG, GuidePoint,

39:51

where as someone who has expertise in

39:53

an area, I'll put a link to

39:55

a few of the ones I've done

39:57

in the past in the show notes.

39:59

Like they will just reach out to you

40:01

and say, hey, we're doing a study where we

40:04

want to talk to people about their expertise in

40:06

Industry X. And

40:08

they might tell you it's $100 an hour, but

40:10

I've found that you can tell them, nah, 600,

40:13

900, whatever. And all of

40:15

a sudden, you're driving this number up significantly. If

40:18

you do five or 10 of those a year and

40:20

you make 500 to 1,000 bucks each, that could be some

40:24

business income that you can offset. So

40:26

we'll get to that. But when it

40:28

comes to side hustles, that's one that

40:31

I've found the likelihood of you being

40:33

a highly paid W2 employee and having

40:35

expertise that other people from a research

40:37

standpoint might want to pay you to tap

40:39

into, obviously, without giving away

40:42

any kind of proprietary information or breaking

40:44

any NDAs you've signed with your employer.

40:47

That's one way also to get business income. The

40:50

two slight notes that I'll share, one, I

40:53

learned from talking to my

40:55

tax advisor, just in

40:57

general, the IRS statistically returns

40:59

that are signed by a CPA have

41:01

a lower audit percentage. So

41:04

I guess one big question here is, when

41:06

do you think people should consider working with

41:09

a CPA versus doing this on their own

41:11

and using something like TurboTax? I

41:13

think as soon as you have some degree of

41:15

complication. So I would say, if you're a business

41:17

owner that makes six figures, you probably want someone

41:19

looking through it just because you'll save more than

41:21

it is. I think TurboTax is fine if you

41:23

have the simplest financial life ever, which is like,

41:25

which I did for a while, right? I have

41:27

a W2 income and that's really it. And then

41:29

you hit a couple of buttons and let TurboTax

41:31

kind of do it for you. But if you're

41:33

a business owner, if you have real estate investments,

41:35

if you're doing anything kind of interesting, I

41:38

think it's absolutely worth having a CPA. You also

41:40

ideally want to... I know this is hard because

41:42

almost no one is happy with your CPA finding

41:44

someone good because there's a lot of

41:46

CPAs out there that are trying to process the highest

41:48

quantity of returns. And you want someone who kind of

41:50

is up to date. Like again, we talk a lot

41:53

about taxes, but there've been so many people who listen

41:55

to something we say, go to their CPA

41:57

and then the CPA is, oh yeah, actually we should do that.

42:00

You want to find someone good, but as

42:02

a business owner, ideally you want to be

42:04

working with your CPA. But again, there's always benefit

42:06

to listening to stuff like what we're talking about

42:08

and knowing what to ask your CPA, because

42:10

even the best CPAs will say it's a

42:12

partnership, right? It's not like a go figure

42:14

this out for me. It's a partnership between

42:16

you and them. But I will say

42:18

the big thing that a CPA will do for

42:20

you that TurboTax won't. You know, I talked about

42:22

that kind of like alternating strategy. A

42:24

TurboTax is just going to take in all your

42:27

inputs and give you the answer. And they'll fill

42:29

out the forms and they'll ask you the questions

42:31

to make sure they don't mix anything, but they're

42:33

probably not going to bring out the strategy of,

42:35

oh, if you do this thing now versus later,

42:37

it's going to be better or worse

42:40

for your situation. So I think that's

42:42

one. And then I've often told the

42:44

story of the CPA I work with

42:46

was a company called Gelt, and

42:48

they went back and reviewed past returns

42:51

and found mistakes that actually netted me

42:53

like a significant amount of money that

42:55

I was pretty disappointed in my prior

42:57

CPA. So I would say if you're

42:59

a business owner or kind of a

43:02

high income earner, that makes sense. If

43:04

you want to support me, all the

43:06

hacks.com/Gelt, G-E-L-T is their URL. And

43:09

after we use them, I was like, can you guys

43:11

please be a partner with us? Cause you guys have

43:13

been great. So I've been a fan of them. It's

43:16

shocking how many tax returns are messed up, especially

43:18

since, you know, we built a tool to analyze

43:20

tax returns. I ran mine through and like, despite

43:23

being in this space, I found my CPA.

43:25

I'm not going to name them and publicly

43:27

shame them, but there was a year I

43:29

made a hundred thousand dollar charitable contribution to

43:31

my donor advice fund. They skipped it and

43:33

took the standard deduction. So just like really

43:35

bad stuff. The firm that I used that

43:38

made a mistake was a very reputable firm

43:40

and they just made a mistake. And I've actually

43:42

talked offline. Mine is a reputable firm too, maybe

43:44

it's the same one. And

43:46

funny enough, I've talked to a few people

43:48

that have very complicated tax situations who make

43:51

a lot of money. And they

43:53

actually hire two firms to prepare their taxes

43:55

each year and compare notes because it's just,

43:57

even with the best firms, people make mistakes.

44:00

Like, we built a really simple tool that literally just

44:03

upload your tax return and it shows you all

44:05

the numbers in a nice format and that's how I found

44:08

it. Because like, who's going to look through a tax return?

44:10

Yeah, so I played with this tool. It's

44:13

at decode.tax. Can you touch on

44:15

the privacy side of it? Because I know one

44:17

thing that when I first used it, I was

44:19

like, God, do I really want to upload a

44:21

return with my name, social address and all my

44:23

personal financial details? So I mean, a

44:26

few different things. One, you can always remove your

44:28

name and all of that from the return itself.

44:30

The tech basically, it's OCR, it scans for the

44:32

important numbers and pulls them. But beyond that, a

44:34

few different things. One, you can delete your data

44:36

at any point. So what a lot of people

44:38

do is they'll upload it and then just immediately

44:40

delete it. Two, even if you don't delete it,

44:43

we don't share that data with absolutely anyone. Like,

44:45

it's literally just stored in our database. Third is

44:47

like no identifying information is stored as we're storing

44:49

that data. You know, we're just like pulling the

44:51

numbers and storing that part. But yeah, a lot

44:53

of people just end up deleting it right after

44:55

because obviously privacy and stuff is super important here.

44:58

What I did was the preview app on Mac

45:00

has a really good redacting tool. And so

45:03

I just pulled it up, redacted, redacted, redacted

45:05

and ran through. So it's still a work

45:07

total be fine. Yep. I got all

45:09

the numbers out of it. So I'll link to that tool in the

45:11

show notes. And we mentioned CPAs. One

45:13

stat I learned recently was that because the

45:15

IRS publishes a lot of stats that return

45:18

signed by a CPA end up having a lower

45:20

audit risk. So I would

45:22

just say if your tax situation is very

45:24

complicated, just another one in the corner of

45:27

go with the CPA. And then

45:29

this is a bit of a strange note. But

45:32

recently I was trying to kind of model

45:34

out a couple alternatives of what

45:36

to do for taxes. And I found

45:38

while I wouldn't have them prepare a

45:40

tax return or write anything for you,

45:42

chat GPT is really good at tax

45:44

questions. Like really, really good. And

45:46

so I had a question around S corp

45:49

elections and whether it made sense and how it

45:51

would affect my future social security benefits. And it

45:54

took my verbal input, built out a model, explained

45:56

it. So I would say if you're listening to

45:58

any of this and you have questions. Don't

46:01

replace your CPA with AI, but

46:03

absolutely ask chat GPT questions and

46:05

the results are pretty good. Again,

46:08

I do want to caveat though, they're pretty good. Like

46:11

we for instance, when we built our tax tool, we actually

46:13

first loaded a lot of it into GPT.

46:15

We got a lot of good data, but at

46:18

the end of the day, every once in a while, could

46:20

be one in 100, one in 1000, AI does kind

46:23

of hallucinate right now. So don't let that be the

46:25

be all and end all of advice, right? Actually

46:27

use chat GPT as one data point, but

46:30

it can't be the sort of sole deciding

46:32

factor in any sort of strategy you do.

46:34

And again, so we actually ended up pulling

46:36

out the AI component for now. It

46:38

just needs to be kind of tightly leashed a

46:40

little bit because once in a while, it would

46:42

just kind of do bad things. If you're

46:45

asking a question, like how does

46:47

capital gains tax work and you want someone

46:49

to explain it to you, where previously it

46:51

was like find a friend or pay your

46:53

accountant a high hourly fee to explain things

46:56

to you. I think that's where it's becoming

46:58

pretty handy with me. Absolutely. But

47:00

don't tell it like, what should I do for taxes and

47:02

then blindly follow its advice without kind

47:04

of double checking with a CPA or whatever. Absolutely.

47:08

Okay. So another big area is investments.

47:10

And I think a lot of the things

47:13

in this area apply broadly to everyone. You

47:15

don't need to be a business owner for

47:17

many of them. So maybe let's jump in

47:19

and start with kind of the one you

47:21

highlighted is who the tax code is for

47:23

and it's people that are involved in real

47:25

estate. Yeah. There are two

47:27

big categories of people that like the tax code

47:29

benefits like as an asset class, I think real

47:31

estate is amongst the most tax advantage asset class

47:33

out there. The one other thing that may compete

47:35

is like startups, especially with the

47:37

new sort of QSBS rules. But those

47:40

categories are just like tax advantage asset classes

47:42

that have all these benefits built into them.

47:45

Should we dive into real estate? Yeah, let's

47:47

do it. Cool. Let's talk

47:49

about owning your own home. Even that

47:51

is something that the government clearly wants

47:54

us to do. For instance, you can

47:56

take not a lot of money, but

47:58

$10,000 out from any retirement account. at

48:00

any time to buy your first home. It

48:02

doesn't matter if you're 25 years old, 35 years old, 45 years old. You

48:05

don't have to wait for retirement to do that. When

48:07

you sell your home or a home you've lived

48:10

in for two out of the last five years,

48:12

you pay no taxes and up to half a

48:14

million dollars if you're married on the gain for

48:16

that home. Even the way

48:18

mortgages kind of work, it gives

48:20

you the ability to lock

48:22

in a predetermined interest rate protecting

48:25

you from rising interest rates in the

48:27

future. If interest rates fall, you can

48:29

always refinance it. All while mortgage interest

48:31

in turn is tax deductible. So all

48:33

of these things have been created to

48:36

really get Americans to buy a

48:38

home. As a result, I think something like 50%

48:40

of people in this country own their home, which

48:42

is a staggering number compared to the rest of

48:44

the world. And that's just for your own home.

48:46

When you get into commercial, there's a whole

48:49

other bunch of benefits. The

48:51

one thing that I find, obviously

48:53

as I explain it, you have to be

48:55

in a fortunate financial position, but that $750,000

48:57

limit. So

49:00

for people who don't know, you can deduct your home mortgage interest

49:02

up to $750,000. However,

49:05

there is a tactic that I've learned

49:07

from a lot of people who have

49:09

significant savings where one

49:12

of the other things that is deductible

49:14

in the itemized deductions is investment interest.

49:17

And so that would be if you take out a margin

49:19

loan and invest that money, the interest

49:21

you pay to borrow money for the purpose of

49:23

investing is deductible. Well, one thing that a lot

49:25

of people have been doing, especially in California where

49:27

there's a lot of cash buyers, is if you

49:29

buy a home in cash and

49:32

then you do a mortgage after the fact,

49:34

the money doesn't actually go to the seller

49:36

because you already bought the home. So

49:38

what happens is if you bought a $2 million

49:40

home, then you refinance it, which

49:43

is kind of technically what's happening because you've already bought

49:45

it. Let's say you keep $500,000

49:47

in as equity, you're going to get a $1.5

49:49

million wire into your

49:52

bank account. And if you take that $1.5

49:54

million, and one thing that's

49:56

very important is that you need to be able to trace

49:58

the path of your bank account. of it. But

50:01

if you take that $1.5 million and go

50:03

invest it, put in a brokerage account, put

50:05

it in Treasury bills, whatever it is, now

50:07

to the IRS, you can classify the

50:09

interest you're paying to the bank as

50:12

investment interest because it is a loan

50:15

that you invested the proceeds of. And

50:17

that's one tactic to increase the interest

50:19

deduction limit of 750,000 on real

50:22

estate. That's genius. That's another thing I

50:24

never knew. That's awesome. The

50:26

other way that's going to be really relevant

50:29

to people as homes appreciate, especially

50:31

if your home appreciates and the interest rates

50:33

drop, is this doesn't have to be, I

50:35

can buy the whole house with cash. Let's

50:37

say you buy a home and you buy

50:39

it for $500,000 and

50:42

it goes up. Because if I

50:44

remember correctly, the $750,000 limit is locked in at the price when

50:49

you first get the mortgage. And so

50:51

if your home appreciates, you can do

50:53

what's called a cash out refinance, which lets you

50:55

take equity out of the home and refinance your

50:57

mortgage. Very few people are going to be doing

50:59

that right now because interest rates for almost everyone

51:02

are higher today than they were when they got

51:04

their home. But in the future, interest

51:06

rates drop. And now you have really low

51:08

interest rates again, and your home

51:10

has appreciated or even you've paid it off enough

51:12

that there's a lot of equity value. When you

51:15

do that refinance and you get that money out,

51:18

it's going to be hard in many

51:20

cases to claim your new mortgage interest

51:22

as deductible to the full extent, because

51:24

it's higher than it was when you bought your home. But

51:26

if you take that cash out and you invest it, similarly,

51:29

if you work with a CPA, you

51:31

can validate this and make sure you're

51:33

doing it correctly. But you can classify

51:35

the cash you took out and that

51:37

portion of your mortgage as investment interest

51:40

and it qualifies as an itemized deduction.

51:42

The big important caveat is you have

51:44

to follow what's called interest tracing guidelines.

51:46

I'll try to link in the show

51:48

notes to a couple articles about this

51:50

tactic and interest tracing, but you really

51:52

want to be able to show here's

51:54

the money it went into this other

51:56

bank account that I opened separately. It

51:58

didn't get co mingled with my ex expenses

52:00

and all of my personal finances, and then

52:02

it went directly into an investment. So in

52:04

the future, when interest rates are lower, you

52:07

may want to cash out refinance. That's

52:09

a tactic. But for people right now

52:11

who have a lot of cash and are buying

52:13

a home and are scared about these interest rates,

52:15

and their mortgage is going to be over $750,000,

52:17

you could potentially, if

52:20

you're at the highest tax bracket, kind of

52:23

cut the mortgage rate in half if you

52:25

can make it deductible beyond $750,000. That's

52:28

awesome. Is there a cap

52:30

on the maximum amount of investment

52:32

interest income, interest costs that you

52:34

can deduct? Yeah. So

52:37

you need, and again, not a CPA, but

52:39

my understanding is that you need to deduct

52:42

that investment interest expense from investment income. So

52:45

the cap would be how much

52:47

income did the investment generate? Generally,

52:50

and the advice I got from a

52:52

CPA was that it's not just the

52:54

income from that investment, it's all of

52:56

your investment income. But typically, if you

52:59

figure interest rates are

53:01

usually not that far off from your

53:03

investment returns, so as long as this

53:05

isn't all of your investments, you are

53:08

likely to have more investment income. Got

53:11

it. But presumably, your investment income

53:13

is like what's been realized, right? Like

53:15

you could theoretically... Yes. Yeah. So

53:18

it would have to be interest paid out or dividends

53:20

or realized capital gains or anything like that. But

53:22

I would imagine that for most people who are buying a home

53:24

where the mortgage interest is above $750,000, they are probably in a

53:26

situation where... And

53:30

they have the cash to buy a

53:32

home using this tactic. They probably also

53:34

have investments that are spitting off investment

53:37

income to deduct from. Makes a ton

53:39

of sense. All right. Let's pivot

53:41

to commercial real estate. So again, if

53:43

you look at some of the well-used people in America,

53:45

you'll find that a lot of them eventually end up

53:48

buying real estate. Some of them start with it, but

53:50

a lot of them eventually end up buying real estate.

53:52

And that's because commercial real estate just also gives you

53:54

a ton of benefits. And just to

53:56

be clear, when you say commercial real estate, you don't

53:58

necessarily mean buy an office bill. building. You mean

54:00

buying real estate as a business?

54:03

As a business activity, you're right. That's a very

54:05

good clarification. And yeah, I should by that I

54:07

mean not your primary home, but real estate you

54:09

invest in as an investment. That's probably better work.

54:12

Or a rental property? Yep. Basically, any real estate

54:14

that you're buying for the purpose of making

54:16

an income rather than living in it yourself. So

54:18

a few different things that are important to touch

54:20

on. One is we could have covered this

54:23

in the capital gains section as well. But if

54:25

you have a capital gain, you can actually

54:28

defer paying taxes on the capital gain until

54:30

2026 by investing in an

54:32

opportunity zone. I don't know if you've covered

54:34

that in previous episodes. That

54:36

is one where if we did, it was briefly.

54:38

So let's touch on that and then talk about

54:40

kind of more broad real estate investing.

54:43

Oh, yeah, we'll talk about opportunity zones

54:45

real quick. The way they work is

54:47

the government wanted to incentivize investments in

54:49

certain underdeveloped areas. And you

54:51

can basically take dollars from any capital gains

54:54

short term or long term and within 180

54:56

days invested in

54:58

what's called a qualified opportunity zone fund, which is

55:00

a fund to develop properties in

55:03

these qualified opportunity zones. What's fascinating

55:05

about these opportunity zones is at least in New York,

55:07

I don't know how it works in other cities is

55:09

a lot of them have

55:11

happened to be in very trendy areas because they're

55:13

based on 20 year old census data. So

55:15

like I live in Williamsburg, which is a trendy

55:18

neighborhood in New York now it wasn't so much

55:20

20 years ago, but a lot of parts around

55:22

here are characterized as an opportunity zone. So I

55:24

know a lot of people that have set up

55:26

qualified opportunities on funds themselves and are

55:28

buying these properties. And this gives you two

55:31

big benefits. One, you can defer paying capital

55:33

gains till 2026. But more

55:35

than that, if you hold on to that investment for

55:37

10 years, you get an automatic step

55:39

up in basis. What that means is 10 years

55:41

from now, whatever the property is worth, that's your

55:43

new cost price. Or if you were to sell

55:45

at that price, there's no taxes. So it's

55:48

kind of a cool strategy if you end up

55:50

at a point where you have a large capital

55:52

gain, and you are interested in commercial real estate,

55:54

as well as all the other tax benefits we're

55:57

going to talk about that can be combined with

55:59

opportunity zones. Okay, so that means like

56:01

if I bought Tesla stock and I'm now sitting on

56:03

a big amount of Tesla stock that's up 10X,

56:06

but I don't want to hold it anymore, I

56:08

can sell it, invest those proceeds in an opportunity

56:10

zone, hold it for 10 years, and

56:12

kind of avoid all those taxes. Yeah,

56:15

you get an automatic step up in basis, which we

56:17

talked about happens at death, but otherwise, it's very rare

56:19

to get an automatic step

56:21

up in basis and you do that and you get that with

56:23

opportunity zones. Again, I wouldn't do this

56:25

unless you're interested in real estate and would

56:28

be investing in real estate already because again,

56:30

this does take time. But

56:32

otherwise, if you are interested, it's absolutely worth thinking

56:34

about at least looking up what are the opportunity

56:36

zones in your city, you can always Google the

56:38

name of your city opportunity zones, see a map

56:40

like the one in New York is very favorable.

56:42

So I know a lot of people that have

56:44

been doing it. But cool, that's opportunity zones outside

56:46

of that. Let's talk about some of the bigger

56:48

benefits of investing in real estate for income. Two

56:51

very big ones that are super important.

56:54

One is this idea of a 1031

56:56

exchange. And

56:59

what that means is if you buy

57:01

a property as an investment, and then

57:03

sell that property, you have

57:05

the opportunity to take the entire pre-tax

57:07

proceeds. So whatever you'd make from selling

57:09

this, the entire amount into a

57:12

bigger and more expensive property without

57:14

paying any taxes. What's cool is

57:16

you can kind of do it an unlimited number

57:18

of times. You can start with $100,000 property than

57:20

a $200,000 property and kind of keep buying bigger

57:25

and better properties while continually

57:27

deferring taxes. And the

57:29

other thing is, you can keep doing that.

57:31

And someone might think, well, what if I need the money, but

57:33

a lot of these properties are going to be spitting off money

57:35

throughout the year. So it's not that you don't have a way

57:38

to make money from your real estate, it's just that you can

57:40

avoid the taxes on buying and selling. Absolutely,

57:42

makes a huge difference. The

57:44

other big category of why

57:47

people invest in real estate is this

57:49

idea of depreciation. Some people go

57:51

far enough to call it the eighth wonder of the world. The

57:54

way depreciation works is when you buy any physical asset,

57:56

let's say you buy a building, it

57:58

loses value over time. depreciation

58:01

refers to the loss of value over

58:03

time and some people call

58:05

it a phantom loss because it's not

58:07

taking money from your pocket but this

58:09

building has lost some value year-over-year because

58:12

it's older and worthless and you can

58:14

claim that as a loss either

58:16

against your real estate income if you're just doing

58:19

this as something on the side or

58:21

if you somehow can classify yourself as

58:23

a real estate professional, you can use

58:25

that depreciation to actually offset other income

58:28

as well. Okay

58:30

so we can depreciate I believe there are

58:32

some things if you do a cost segregation

58:34

study you not only can depreciate over the

58:36

life but you can actually accelerate certain items

58:38

and take it all up front or 80%

58:41

of it up front and I think I heard

58:43

you saying another thing that in certain cases you

58:45

can depreciate 20 to 25% of the entire value in the

58:47

first year. Correct.

58:49

So again back to Trump

58:52

2017 Jobs Act that Trump did again

58:54

I mean who is Trump like who are you trying

58:56

to favor real estate developers is a big part of

58:58

it so what he

59:00

did is you can take any property let's

59:02

say we have a building I

59:05

can get what's called a cost segregation study and what

59:07

that is it's a study it'll cost a few thousand

59:09

dollars someone will come look at my building they'll be

59:11

like one this is the cost

59:13

of your land and the land can never

59:15

be depreciated everything else has depreciated to zero

59:18

but land does not lose value but everything

59:20

else they'll come up with like oh your

59:22

windows are worth X dollars your HVAC is

59:24

worth Y dollars and anything that

59:26

has a schedule of less than 15 years

59:28

like all of these things are typically have

59:30

different schedules anything less than 15 years 80%

59:32

of it can be depreciated

59:35

year one out of 2023 next year it drops

59:37

at 60% but the upshot of all

59:40

of this is very often you can buy a property

59:43

and get almost 20% of the purchase

59:45

price as a year one deduction which

59:48

is very relevant because sometimes that your

59:50

cash down payment is also 20% right

59:52

so it's a very very efficient way

59:54

of building wealth for people that are

59:56

interested in it and the

59:58

income from this or the lack of

1:00:01

income because you've deducted all of it, is that

1:00:03

only from your real estate taxes

1:00:05

or can it also go off your primary income? So

1:00:07

this is where it gets a little bit

1:00:09

tricky, right? So in general, for most people,

1:00:11

let's hear a W2 employee, this will help

1:00:13

offset your real estate income. But

1:00:15

let's imagine you wanted to

1:00:18

offset your other non real estate income,

1:00:20

there's a few sort of ways it

1:00:22

can happen. I say this

1:00:24

facetiously, but like when people with a high

1:00:26

W2 salary ask me like, okay, I'm fortunate

1:00:28

to save money in taxes, I'm like, marry

1:00:30

a real estate professional. But

1:00:32

very often, that does work very well because if

1:00:35

you or your spouse are a real estate professional,

1:00:37

you can offset all your income

1:00:40

with depreciation. But

1:00:42

being a real estate professional is hard, it takes 750 hours a year,

1:00:44

and you have to show

1:00:46

that this is your primary job. So

1:00:49

it's very, very unlikely you can qualify

1:00:51

if you have a high W2 to

1:00:53

also qualify as a real estate professional,

1:00:55

which is why having a spouse as

1:00:57

a real estate professional can be a

1:00:59

very potent combination, right? Someone who has

1:01:01

a high paying tech job, for instance,

1:01:03

pairing with a real estate professional, y'all

1:01:06

can buy investment properties and use that

1:01:08

depreciation to not pay any taxes on

1:01:10

like the other spouse's Facebook salary, for

1:01:12

instance. So super effective combination. And

1:01:15

are there any other ways to be able to do it? There's

1:01:17

another way which is if you

1:01:19

use the property for primarily short

1:01:22

term rentals, and you're somewhat

1:01:24

involved in running that process, the

1:01:26

IRS takes the stance that that's an active

1:01:28

business and as a result, you can offset

1:01:31

regular income. So it's a little tricky, but

1:01:33

I have seen people pull it off where

1:01:35

let's say they own a building, they're staying

1:01:37

in one of the floors, another floor is

1:01:40

an Airbnb, and they're using that depreciation. So

1:01:42

the short term rental loophole also exists. We

1:01:44

could talk about it a little bit in the business owner

1:01:46

section, but I've also seen people buy real

1:01:49

estate with their business. So if they have

1:01:51

an office buying the office building, if they

1:01:54

have a storefront buying that physical asset and

1:01:56

using that depreciation against their business owner income,

1:01:58

even if it's not connected. to real estate. And

1:02:01

if you needed one more reason to know

1:02:03

that we're favoring real estate, I believe if

1:02:05

you have a side hustle that is freelance

1:02:08

work, you have to pay self employment taxes.

1:02:10

But if you have a side hustle that's a rental property, you

1:02:13

don't. Is that right? Yep.

1:02:15

It's crazy. But yeah, no self employment

1:02:17

taxes on rental income. It's crazy. Okay, so that's

1:02:19

real estate. One that I think

1:02:21

a lot of people here haven't heard

1:02:23

talked about on the show that is

1:02:25

relatively new but really, really interesting is

1:02:27

solar. Commercial solar. Back

1:02:29

to Biden's Inflation Reduction Act, there

1:02:31

were a ton of incentives created

1:02:33

for solar investing.

1:02:37

And as it stands today, I still think of

1:02:39

solar as a subset of real estate, it's sort

1:02:41

of a type of real estate, but commercial solar,

1:02:43

in addition to depreciation,

1:02:46

also gives you tax credits. And sometimes tax

1:02:48

credits can be up to 40% of your

1:02:50

investment. And

1:02:53

worth noting, a tax credit is not

1:02:55

the same as a tax deduction. A tax

1:02:57

deduction reduces your taxable income. So you save

1:02:59

your tax rate into the tax deduction. A

1:03:02

tax credit is a dollar for dollar reduction

1:03:04

in taxes paid. So it's super,

1:03:06

super powerful where let's say you invest a million dollars

1:03:08

and get a $400,000 tax

1:03:10

credit that directly reduces your taxes by $400,000. That

1:03:14

can be applied moving forward. It can also go back a

1:03:16

couple of years. Super, super powerful

1:03:18

because when you combine that with depreciation

1:03:21

and typically commercial solar also spins off

1:03:23

income, very often, you're getting 70

1:03:25

to 80% of the money back in

1:03:28

tax savings right away with the income that's

1:03:31

coming in and compounding on top. Yeah.

1:03:33

So if you're a high W2 earner or

1:03:35

a business owner with a lot of income,

1:03:37

I have not seen

1:03:39

a strategy for reducing your taxes that

1:03:42

is better than solar. It's

1:03:44

wild how big the effect is. And again,

1:03:46

just to quickly break it down, you get the tax credit,

1:03:49

you get the depreciation, a lot of it can

1:03:51

be the depreciation can be front loaded and bonus

1:03:53

depreciated as well. And then typically

1:03:56

these projects will pay like 5% of solar

1:03:58

for your investment every year. based

1:04:00

on the energy generated from the solar projects for 20

1:04:02

years. So you kind of get that back as well.

1:04:05

And a more advanced tactic I've seen people do is

1:04:07

you can take that income and put that back into

1:04:09

a tax advantage account and not even pay taxes on

1:04:11

the income itself. So lots of levels to this. But

1:04:15

does it need some amount of solar

1:04:17

professional similar to real estate? Yeah.

1:04:19

So if you want to offset your active income, which

1:04:21

most people would want to, you

1:04:23

want to ideally be classified as a solar

1:04:25

professional. But the advantage is being a solar

1:04:28

professional is maybe 10 times

1:04:30

easier than your real estate professional because

1:04:32

solar professional, you need 100 hours a year,

1:04:34

which is about eight hours a month, which

1:04:36

is not that much. I mean, you probably

1:04:38

have to tour the site a couple of

1:04:40

times, go to a solar conference. It's a

1:04:42

lot easier to hit a solar professional status.

1:04:45

Real estate professional is really, really hard. You

1:04:47

can't half-ass it. Solar can kind

1:04:49

of be the side hustle that you do and

1:04:51

hit solar professional status. And where

1:04:53

do you find these projects? Like commercial solar projects,

1:04:55

is there an easy way to find them? We've

1:04:58

been partnering a bunch with Valuer. I know you had

1:05:00

money on your podcast as well. They have a bunch

1:05:02

of solar projects. They've been doing that. So I've been

1:05:04

working a lot with them and other providers. Okay.

1:05:07

We'll link to that in the show notes. But you said

1:05:09

earlier investing in startups is pretty lucrative. So let's run through

1:05:11

that a little. Yeah, absolutely. So

1:05:14

there's probably the most

1:05:16

generous tax break by just raw size.

1:05:19

It's something called QSBS or Qualified

1:05:21

Small Business Stock. And

1:05:23

that allows anyone who either invests

1:05:25

in a startup, works for a

1:05:27

startup, or starts a startup. And

1:05:29

there's a few rules. It has to be a qualifying startup.

1:05:31

It has to have less than 50 million in assets when

1:05:34

you invest or buy shares. What you

1:05:36

can get is no taxes and up

1:05:38

to $10 million when you sell that

1:05:40

stake as long as you hold your

1:05:42

shares for five years, which is massive.

1:05:45

It's something that I personally benefited from when I

1:05:47

sold my last company. But interestingly, it

1:05:49

also applies to people who invest in these startups.

1:05:51

So it's something that I've seen awareness has spread

1:05:53

to more people who are doing this. But

1:05:56

it's a $10 million break from federal taxes and

1:05:58

in 42 states. but

1:08:00

you can win big, but keep it to

1:08:02

a small single digit percentage of your network.

1:08:04

Absolutely. Because the odds are not

1:08:07

in your favor. But I believe if

1:08:09

you do lose money, you can also write

1:08:11

it off as a startup investment. The

1:08:13

actionable thing here is I think more

1:08:15

for startup founders where what

1:08:17

I have done this time and I would encourage

1:08:19

other founders that they're listening to is be conscious

1:08:21

of the five-year clock and try and make sure

1:08:24

employees participate in it. I'll give you an example.

1:08:26

At my last company, we gave our early team

1:08:28

stock options. So a lot of them didn't exercise

1:08:30

it until year one or year two. And as

1:08:32

a result, they weren't at the five-year mark, even

1:08:34

though it had been six years since we sold

1:08:36

the company. This time around, I'm giving

1:08:39

everyone shares they can buy upfront and get

1:08:41

the QSBS clock started sooner for them. That's

1:08:43

something actionable. Yeah, if you work at a company,

1:08:45

and it's not the valuation, it's

1:08:47

the assets. But if you work at a

1:08:49

company, my wife worked at

1:08:51

Lyft. And by the time we realized

1:08:53

this, the company had already raised more

1:08:55

than $50 million, it was too late.

1:08:57

So if you're just an employee of

1:08:59

a company that's assets are worth less

1:09:01

than $50 million, that's a good time

1:09:03

to think about exercising your stock. But

1:09:05

one investment tax break around exercising stock

1:09:07

is if you work for a company

1:09:09

and you hold incentive stock options or

1:09:11

ISOs, a lot of the challenges

1:09:14

around taxes and where you might want to work

1:09:16

with a CPA is that when you exercise that

1:09:18

stock, you can trigger something called AMT, which is

1:09:20

the alternative minimum tax. But there's usually

1:09:22

a threshold every year where you

1:09:25

could exercise some of your stock

1:09:27

without triggering additional taxes. And

1:09:29

so that's a way that early on in

1:09:31

the lifecycle of a company, if you're holding

1:09:33

incentive stock options, you can start to slowly

1:09:36

exercise them without any additional taxes. Yep,

1:09:38

you said everything I need to there. A

1:09:41

couple quick other ones that I'll share in

1:09:43

the investment space. So one, there are a

1:09:45

lot of government securities that save you money

1:09:47

on state and local taxes with

1:09:49

high interest rate environment. One thing I didn't talk

1:09:51

about in the past, because that wasn't the case,

1:09:54

investing in treasury bills or funds that

1:09:56

invest in treasury bills or state muni

1:09:58

bonds can save you money. you taxes

1:10:00

on the gains. Obviously, those

1:10:02

come with some risks depending on what state you're in

1:10:04

and what type of investment, but that

1:10:07

is one way to limit your investment taxes.

1:10:09

That's a really good point, especially because some

1:10:11

people will look at a high yield checking

1:10:13

account offering 5% or

1:10:15

whatever, buying the equivalent

1:10:17

yield or more in, let's say,

1:10:19

a mutual fund that only invests in treasuries.

1:10:21

And if you live in California, New York,

1:10:23

you're saving an additional 10% by going with

1:10:25

the treasury mutual fund versus your high interest

1:10:28

checking account because of not paying

1:10:30

state taxes. And

1:10:32

that's not 10%, like

1:10:34

5 plus 10, 15%, but boost that return. So

1:10:36

like divide the number by 0.9 if

1:10:39

you're in the highest tax bracket. Up there,

1:10:41

nice. If you're getting 5% on your treasury

1:10:43

bill fund, it's like you're getting 5.5% or

1:10:45

similar in

1:10:47

the high yield savings account. Another one for

1:10:49

someone who has a lot of stock

1:10:51

in an individual company, there's

1:10:54

these things called exchange funds. So there's

1:10:56

one that I recently came across called usecash.com.

1:10:58

I don't have any affiliation with them. They

1:11:02

basically pool together investors who

1:11:04

have large positions in companies that are

1:11:07

in the tech sector. They

1:11:09

let you contribute your Facebook, Microsoft, Amazon,

1:11:11

Netflix, whatever stock to a fund. And

1:11:14

in return, you get shares of that

1:11:16

fund without triggering any taxable situation. So

1:11:18

if you are really, really heavy on

1:11:20

a tech stock from an employment or

1:11:23

an investment, you want to diversify, but

1:11:25

you don't want to realize capital gains

1:11:27

right now, you can use a company

1:11:29

like Cash or any other exchange fund

1:11:32

and find a way to push out

1:11:34

the capital gains, but also diversify. Do

1:11:36

you know what their fees are? I love exchange funds, but

1:11:39

most of them I've seen just have such high fees. So

1:11:42

similar to I think what you guys

1:11:44

are doing with Cary, what we did

1:11:46

at Wealthfront, it's leveraging technology to bring

1:11:48

down the cost of a lot of

1:11:50

these things. And so in the

1:11:52

past, I can't remember what their fees are,

1:11:55

but I'm looking on the site, 0.4 to

1:11:57

0.8% management fee

1:11:59

based on. contribution. No performance fee, no

1:12:01

sales fee. Okay, cool. Yeah, that's

1:12:03

definitely much, much better because the

1:12:06

products I've seen pitched are 1%

1:12:08

to 2% or so high. Point

1:12:10

date is still probably a tad higher than I'd like, but yeah,

1:12:12

it's definitely moving in the right direction. And

1:12:14

then last, we talked about trust. I think

1:12:16

we'll skip over all the different types of

1:12:19

trust you can use to offset capital gains,

1:12:21

to move stock places so you get access

1:12:23

to money. Go back and listen to the

1:12:25

episode I did with Manny from Valor. I'll

1:12:27

link to it in the show notes. And

1:12:29

I think that's it for everything non-business owner.

1:12:32

So we talked a bunch earlier about

1:12:34

ways to generate business income if you're

1:12:36

not already starting a side hustle, getting

1:12:38

into real estate, even asking your employer

1:12:40

to help you out by making some

1:12:42

of your income, 1099

1:12:44

income, consulting income instead of just

1:12:46

W2 salary. And then

1:12:48

obviously, they're start a business. So let's

1:12:51

talk about things for people who've started those

1:12:53

businesses or want to in the future and

1:12:55

why that's really valuable. Let's start

1:12:57

with the benefits of the QBI deduction.

1:12:59

Yeah. So I mean, again, if you

1:13:01

ever want to prove that the tax

1:13:04

code is rigged for business owners, consider

1:13:06

two things. Again, both are from the

1:13:08

2017 Trump Jobs Act or whatever. One

1:13:11

is the QBI deduction where they basically

1:13:13

decided to give a bunch of business

1:13:15

owners a free 20% deduction just because

1:13:17

there's some rules around it for high

1:13:20

income earners specifically and how you optimize

1:13:22

that. But for most people, it's an

1:13:24

automatic up to 20% deduction right there

1:13:27

just for being a business owner. The other one

1:13:29

that we talked about a little bit before is, if

1:13:32

you're not a business owner, you actually can't deduct more

1:13:34

than $10,000 worth of state and local taxes.

1:13:37

But in response to that, a lot

1:13:39

of states created legislation that lets you

1:13:41

pay an elective tax from your business

1:13:44

entity whereby you can pay the entire

1:13:46

state tax amount through your business entity

1:13:48

and thereby bypass the $10,000 limit and

1:13:51

get a deduction for the entire amount

1:13:53

of state taxes paid. That's

1:13:55

a pass through exemption, I believe, right? If

1:13:57

someone's looking to kind of up

1:14:00

more. Every state has structured

1:14:02

it a little bit differently, like the rules vary a

1:14:04

little bit by state, but yeah, in a lot of

1:14:06

cases, it's an elective tax. So if you're in California,

1:14:08

if you are in New York, if you're in a

1:14:10

high income state, and most of your

1:14:12

income is business owner income, make sure your CPA is

1:14:15

doing that or make sure you're thinking about that because

1:14:17

in a lot of cases, it's an elective tax. So

1:14:19

if you don't know, you're not going to do it

1:14:21

and you may miss out. This is another

1:14:23

great place where TurboTax is not going to say, hey, do you

1:14:25

want to do this other thing? It's going to say, hey, did

1:14:27

you do this thing? Can they pass on

1:14:29

property tax or is it only state income tax?

1:14:32

I think it's primarily state income tax or anything

1:14:34

attributable to the business. So my guess is that

1:14:36

something property under the business is probably fine, but

1:14:39

not if it's under you individually. Also some states

1:14:41

are fine with LLCs, some states require S-corps. So

1:14:43

it depends a little bit on that. While

1:14:46

we're on the topic of QBI, which we briefly talked about,

1:14:48

if you're a high income earner, which I think is 160,000

1:14:50

singles, 320,000 as a couple, your QBI is also limited by

1:14:57

50% of the wages paid. And

1:15:00

if you have an S-corp, for instance, we didn't talk a

1:15:03

lot about, maybe we will later, there

1:15:05

may be a temptation to pay yourself

1:15:07

the lowest W2 salary possible. But because

1:15:09

of QBI, sometimes you would want to

1:15:11

pay yourself a slightly higher W2 salary

1:15:14

to maximize the amount of taxes you

1:15:16

save on. So my recommendation

1:15:18

overall is if you're a high income

1:15:20

earner, have an accountant, have someone qualified

1:15:23

run the calculation on what is the

1:15:25

precise amount you should pay

1:15:27

yourself because there's one specific dollar number

1:15:29

in salary that will reduce your taxes

1:15:31

because you have to balance self-employment taxes

1:15:33

and QBI to find the perfect number

1:15:35

that results in the lowest amount of

1:15:37

taxes. The team I was

1:15:40

working with at GELP, I have a spreadsheet that

1:15:42

we just went through and the result was the

1:15:44

amount of money I should pay myself as a

1:15:46

salary was higher than I had expected. Correct.

1:15:49

And that's what happens with QBI. Exactly. And

1:15:51

again, if someone's like, okay, what do I really need

1:15:53

a CPA for? This is a great example. Making that

1:15:56

one number correct is so important. Yes.

1:15:58

And just to be clear, I love this stuff. and

1:16:00

we've been talking about it for over an hour.

1:16:02

And I still looked at that spreadsheet and said,

1:16:04

I'm so glad someone else was preparing this for

1:16:07

me. And again, like if people are curious, I

1:16:09

mean, we for instance, are releasing online resources to

1:16:11

self calculated just people are curious, but the idea

1:16:13

is like, use this as a guide have a

1:16:15

professional actually run the numbers, you don't want to

1:16:18

do it yourself. But we

1:16:20

talked about S-corps. And this is a

1:16:22

decision I was making recently. But one

1:16:24

of the things is when you

1:16:26

have self employment income as a business

1:16:29

owner, you are subject to pay your

1:16:31

self employment taxes entirely yourself. And that's

1:16:33

your social security, your Medicare, which

1:16:35

your employer usually picks up half of.

1:16:38

And so the advantages of making sure

1:16:40

you're electing for an S-corp election are

1:16:42

that you split your net

1:16:45

income into salary and owner distribution.

1:16:47

And the salary is subject to those self employment

1:16:50

taxes, but the distribution isn't how important is that?

1:16:52

How much savings could that be? Depends

1:16:54

a lot on how much you earn. For me, $100,000 in

1:16:56

net income is when it sort of enters

1:17:00

no brainer territory. I know some CPAs will or

1:17:02

people will do it at 70, 80 K. But

1:17:06

to me, it goes back to return on hassle. And

1:17:08

an S-corp is undoubtedly more hassle than

1:17:10

an LLC and payroll costs, all of

1:17:13

those your CPA will charge a little bit

1:17:15

more could be maybe $1,000 a year. So to me, $100,000 a year

1:17:17

is the point at which it sort of makes sense.

1:17:21

And then as you get higher and higher, it just

1:17:24

scales further up from there. And that's

1:17:27

$100,000 in net income. The

1:17:29

one caveat I should add, not

1:17:31

relevant to most of the universe, but in our

1:17:33

universe is very relevant is New York City has

1:17:35

a higher tax on S-corps, it's

1:17:38

about 8.8%. So it wipes out a

1:17:40

lot of savings. So I know

1:17:42

a few people that have listened to these podcasts

1:17:44

in New York City signed up for an S-corp

1:17:46

and ended up with higher taxes. So for New

1:17:48

York City S-corps, maybe chill, your thresholds are a

1:17:50

little bit different. But for everyone else, about 100,000

1:17:53

in net income is where it makes sense. I

1:17:55

ran the math on this. This is actually the

1:17:57

model I built with chat GPT. But one other

1:18:00

factor I never hear anyone mention is

1:18:02

that by lowering your salary, you

1:18:04

are reducing the amount of Social Security

1:18:06

credits you earn. So, the

1:18:09

way Social Security is calculated in the

1:18:11

US is actually much more complicated than

1:18:13

I thought, but it basically looks at

1:18:15

your top 30 earning years and

1:18:18

you get credits for how often you've earned and how

1:18:20

high you are in that peak. I believe right now

1:18:22

it's somewhere around like 190,000, but don't quote me on

1:18:24

that number.

1:18:27

If you reduce your income to 100,000,

1:18:29

you are going to get less

1:18:31

Social Security benefits in retirement if

1:18:33

Social Security benefits TBD on the

1:18:35

future of the entire program. But

1:18:37

just know that that is one

1:18:39

implication of pairing yourself a lower salary

1:18:41

through an S Corp is that you

1:18:44

will earn lower Social Security benefit in

1:18:46

retirement. However, I built an

1:18:48

entire model to factor precisely this

1:18:50

in. And at the end

1:18:52

of the day, the savings you get if you turn

1:18:55

and invest that and earn a modest return would outweigh

1:18:57

the delta of your Social Security benefit unless you live

1:18:59

to like 130 or 140, which there are people trying,

1:19:01

but I'm not planning on. That's

1:19:06

a break even point. The other thing

1:19:08

worth pointing out while you're on that topic is

1:19:10

same with solo 401k contributions. We'll talk a little

1:19:12

bit about solo 401k soon, but that is limited

1:19:14

by how much you pay yourself in W2 as

1:19:16

an S Corp, which is another reason you want

1:19:18

to have someone find the perfect number for you.

1:19:21

For me, the math was if you pay

1:19:23

yourself at least 66,000, you

1:19:26

can through a combination of pre-tax employer

1:19:28

contribution and after tax, mega backdoor, Roth,

1:19:31

rollover, you can make sure you get

1:19:33

that. But if you don't pay yourself

1:19:35

at least the threshold, there's not a

1:19:37

way to max it out. Exactly.

1:19:40

So that's S Corp. Another big thing and

1:19:43

something that I think every non-business owner is always

1:19:45

jealous of is business owners are walking around saying,

1:19:47

oh, I got all these business expenses. Let's talk

1:19:49

about some of your favorites. Yeah, so big easy

1:19:52

one, right? Let's imagine two people. One is a

1:19:54

W2 employee that works from home. The other person

1:19:56

is a business owner that works from home. Guess

1:19:58

what? deduct the pro

1:20:00

rata square footage of their home office, which

1:20:02

the WT employee who also uses their home

1:20:05

office as much cannot. So pro rata rent

1:20:07

or mortgage can be deducted, which is pretty

1:20:10

substantial, right? Like some people's home office, especially in

1:20:12

New York, can be 15, 20% of their overall

1:20:15

square footage. You can deduct

1:20:17

15, 20% of rent, mortgage, utilities, cleaning,

1:20:19

all kinds of miscellaneous things there. I've

1:20:22

also seen some homeowners actually rent

1:20:24

their home to their company, potentially

1:20:26

for a meeting or an offsite

1:20:28

or whatever. What you can

1:20:30

do then is you can actually pay yourself rent

1:20:33

from your company and if you do it for

1:20:35

up to 14 days a year or less, pay

1:20:37

no taxes on the gate. 14

1:20:39

days, you can rent your home even not to your business and

1:20:42

pay no taxes, but as a business owner,

1:20:44

you also have the benefit that money from one hand into

1:20:46

another. And one thing that

1:20:48

I learned from my accounting firm is that

1:20:50

you do not have to use square footage

1:20:52

as the calculator. So I looked it

1:20:54

up and it said... There's two methods. There's two methods.

1:20:56

There might even be more. I read the code right

1:20:58

before we got on. It said you can use square

1:21:00

feet or any other reasonable method if

1:21:03

it accurately figures your business percentage. And

1:21:05

the one that sometimes does a better job

1:21:08

is percentage of rooms. So

1:21:11

if you have five rooms in your house and they're of

1:21:13

roughly equal size, then it can be

1:21:15

one fifth. That's potentially a

1:21:18

way that you could increase

1:21:20

your home office deduction, especially

1:21:22

if your home office is on

1:21:24

the smaller side of the other rooms in your house.

1:21:26

It might give you a slight edge there. Yeah.

1:21:29

And outside of that, you can deduct all

1:21:31

the other things that you need to run

1:21:33

your business like phone, internet, conferences,

1:21:35

travel to and from conferences,

1:21:37

software. One of the

1:21:39

things we always saw at my last company

1:21:42

is towards the end of the year, a

1:21:44

lot of business owners would email us and

1:21:46

ask us if they could buy annual plans

1:21:48

and prepay for the next year or sometimes

1:21:50

more the software because they could then free

1:21:52

buy it, reduce their taxable income

1:21:54

for the year while prepaying their expenses for

1:21:56

the next year. So as a business owner,

1:21:58

you can deduct all these things to the... degree, I actually have

1:22:01

some people that have either

1:22:04

expensive hobbies or things they're interested in

1:22:06

now conspiring to start businesses around it,

1:22:08

because then those things can start becoming

1:22:10

tax deductible. Like I have a friend

1:22:12

who's a travel blogger, who can write

1:22:14

off all his trips, because he legitimately

1:22:17

makes money by teaching other people how

1:22:19

to travel and things like that. A

1:22:21

few other funding health insurance, if you

1:22:24

provide health insurance for your family, it's

1:22:26

a business expense. And then because

1:22:29

we like credit card points on all the

1:22:31

hacks, if it's related to your business, the

1:22:33

annual fees on those credit cards

1:22:35

is a fair business expense. And

1:22:38

then deducted from your business income can

1:22:40

be the employer contributions, correct? Any employer

1:22:42

contributions to your retirement account? Yeah,

1:22:45

I mean, basically, you can choose whether to

1:22:47

make them pre-tax or post-tax, but both employer

1:22:49

and employee contributions can be pre-tax if you

1:22:51

choose. And then you said

1:22:53

the prepaid expenses for the next year. I would

1:22:55

even go as far as to say there are

1:22:57

some companies where if you reached out and said,

1:22:59

hey, we've all seen those calculators buying something online

1:23:01

that say, here's the monthly price, here's the annual

1:23:04

price. As an individual, it's like,

1:23:06

maybe you do it for the savings, but as a

1:23:08

business, you can do it for the savings and the

1:23:10

deduction. And one way of looking at

1:23:12

it is like, okay, cool, I can pay for this

1:23:14

with my business and this business expense, and I save

1:23:16

money there. Another way of thinking

1:23:18

about this is, wow, you can now choose the

1:23:20

best benefits in the game. You

1:23:22

can pick the exact health insurance you

1:23:24

want. You can customize the best retirement

1:23:26

plan you want. You can pick

1:23:29

and choose like literally and set everything up just the

1:23:31

way you want to, which I also think is a

1:23:33

really cool benefit that you wouldn't have with a corporation

1:23:35

where you have to pick their retirement plan, their health

1:23:37

plans and all of that. And a lot of cases,

1:23:39

often the same for your family. Exactly.

1:23:42

And so just to clarify, so everyone knows,

1:23:44

Anker, you didn't pay me to do this

1:23:46

episode, right? Like, this is not an

1:23:48

ad for Kerry that you guys said, hey, we'll give you

1:23:51

some money if you do an episode about taxes, right? No,

1:23:53

absolutely. I mean, it's a match made in heaven. But the

1:23:55

fact is, you've been using the platform now for a bit

1:23:57

and it's been great to onboard you there. I

1:24:00

started this company because I

1:24:02

was trying to set up a solo

1:24:04

401k, which in my opinion, is the best retirement plan

1:24:07

in America. And I honestly wanted to find a good

1:24:09

provider. And they all kind of sucked. And we had

1:24:11

to then build a platform. But that was not the

1:24:14

goal. It just sort of happened after

1:24:16

searching the internet high and wide for something that

1:24:18

did exactly what we wanted it to. Couldn't find

1:24:20

it, so built it ourselves. So the reason I

1:24:22

clarified that is because I will share, I had

1:24:24

actually opened up a solo 401k with another

1:24:27

provider. I paid them the fee to set it

1:24:29

all up. And they sent me

1:24:31

like all these documents, I had to go to

1:24:33

a fidelity office, like an actual branch with papers,

1:24:36

we got it all opened up. And right before

1:24:38

I funded it, I got connected with Cary. And

1:24:40

I was like, Whoa, this is exactly what I

1:24:42

was looking for. I never ended

1:24:44

up getting them to give me back any of

1:24:46

the funds for starting up. But I did open

1:24:48

a Cary account. I've now since rolled all of

1:24:50

the 401ks that my wife Amy and I have

1:24:52

had at Google and other employers

1:24:54

into my Cary 401k. And I think the

1:24:56

product is great. Cary is not a sponsor

1:24:59

of the podcast, though I will be hitting

1:25:01

up Ankur for the indefinite future to try

1:25:03

to see if we can make that happen.

1:25:05

But as a member of Cary, they have

1:25:07

a bunch of content. And you guys have

1:25:09

been putting out all these workshops on tax

1:25:11

savings for business owners, on even

1:25:14

some stuff on credit card points, and all kinds of

1:25:16

stuff. And when I saw all the content you're putting

1:25:18

together, I was like, Wow, I want to do an

1:25:20

episode on end of the year kind of tax savings

1:25:22

and everything. Why not have you on? So I'm really

1:25:25

glad you've been putting out that content, because I've appreciated

1:25:27

it. And I'll link to some of the things that

1:25:29

people can watch and some of the workshops they can

1:25:31

sign up for. And we'll absolutely link

1:25:33

to Cary. I think if

1:25:35

you use all thehacks.com/Cary, there's a good

1:25:38

deal on the pro plan right now,

1:25:40

which gets you a handful more perks

1:25:42

over the base plan. But I don't

1:25:45

know, I just really like the platform.

1:25:47

Like it's become my solo 401k both

1:25:49

for pre-tax Roth, everything. Nope.

1:25:51

I mean, again, that makes us so happy to hear that.

1:25:53

We've been working on this for a year and wanted to

1:25:56

build something that kind of leveled up the game. I mean,

1:25:58

if you had actually gone through with the fidelity... I

1:26:00

don't know if you realize they would want

1:26:02

you to deposit paper checks though for whatever

1:26:04

reason. I literally have three

1:26:06

paper checks from Fidelity in my hand right

1:26:09

now. Three checkbooks they sent me because they're

1:26:11

like, if you want to do anything, here's

1:26:13

how you do it. And it

1:26:15

was just so ridiculous. Yeah, it's super

1:26:17

old school. In terms of the content and education,

1:26:19

frankly, look, I've been learning this stuff myself over

1:26:22

the last year, 18 months. And

1:26:25

teaching it, sharing it, coming on this podcast, talking

1:26:27

about it is kind of reinforcing my learning as

1:26:29

well. So it's been cool to be able to

1:26:31

learn this. And every once in a while, I'll

1:26:33

read about something in the tax code and I'll

1:26:35

either tweet it or something like, wow, do you

1:26:37

know it works this way? And honestly, it's just

1:26:39

been great for me and a bunch of people

1:26:41

to get smart about these things and get educated.

1:26:44

Well, in the spirit of learning, I've got

1:26:46

one more really cool thing that we didn't

1:26:48

talk about related to QSBS that you may

1:26:50

or may not know. But

1:26:53

again, if anyone's interested, they can

1:26:55

find everything you guys are doing

1:26:57

on the website, which I will

1:26:59

redirect to a special deal at

1:27:01

allthehacks.com/carry, C-A-R-R-Y. But on

1:27:04

QSBS, which was the last thing on this

1:27:06

talking point list I had, we already talked

1:27:08

about it as an investor, you briefly touched

1:27:10

on it as a business owner. But

1:27:12

the thing that you didn't mention is that you

1:27:15

get the greater of $10 million or 10X your

1:27:19

investment. And that rarely

1:27:22

comes into play for most people because

1:27:24

10 times the investment to beat 10

1:27:26

million, you'd have to put a million

1:27:28

in very rarely as an individual investing

1:27:30

a million dollars in a company that

1:27:33

isn't already passed that $50 million of

1:27:35

asset level. So

1:27:37

it's not often talked away. But as

1:27:39

a business owner, the ultimate strategy is

1:27:42

to start an LLC, assign

1:27:44

all of your IP to

1:27:46

that LLC. And

1:27:48

then at the point that you end up

1:27:50

raising money and converting to a C corp,

1:27:52

which is, as you said earlier, absolutely a

1:27:54

requirement. If that happens at

1:27:57

a point where the value of the stock from the LLC is

1:27:59

$10 million, LLC is worth,

1:28:02

let's say as close to $50

1:28:04

million as possible, but definitely under.

1:28:07

Prices, rights, rules, right? You don't

1:28:09

want to go over. You do not

1:28:11

want to go over. Then your cost

1:28:14

basis of your investment, which you contributed

1:28:16

not as dollars from your bank account,

1:28:18

but as shares in your LLC becomes

1:28:21

the cost basis. So it's possible to

1:28:23

get right under $50 million if you

1:28:26

own the company outright yourself, which

1:28:28

means that you would actually get $500 million

1:28:30

tax-free. Or

1:28:33

if you and your co-founder were able to do this

1:28:35

and split it up, you could see how that would

1:28:37

go higher or if someone else in your family had

1:28:39

those shares. So that would

1:28:41

mean that it is possible to

1:28:43

use QSBS to get a tax-free

1:28:45

$500 million or slightly

1:28:48

under. Yep. It's crazy. I

1:28:50

mean, the things to be careful of there is you

1:28:52

don't want to go over $50 million at all. So

1:28:54

if it means $40 million, $45 million, that's totally fine.

1:28:57

You also have to be relatively confident in a

1:28:59

good exit because the benefit would only kick in

1:29:01

after your cost basis. So if you actually end

1:29:03

up selling the company for $50 million, you

1:29:06

actually won't get any QSBS benefit at all. So you have

1:29:08

to be pretty confident in the company's going to do really,

1:29:10

really well. I highlight

1:29:12

it not as the strategy that might

1:29:14

make the most sense for everyone, but

1:29:16

that there is a way to get

1:29:19

right up close. If you play your

1:29:21

cards right, this particular tax benefit could

1:29:23

generate half a billion dollars of tax

1:29:25

gains or slightly under, 10 times the

1:29:29

number that has to be less than 50. But

1:29:31

it's pretty wild what the tax code

1:29:33

can do if you just understand it.

1:29:35

And I'm really appreciative of you being here to

1:29:38

help me explain a bunch of these things to

1:29:40

people so that they can take advantage of it

1:29:42

and not be in the vast

1:29:44

majority of people who don't learn these

1:29:46

things because we haven't grown up millionaires

1:29:48

who've had access to all these resources

1:29:50

our whole lives. No, absolutely. Look,

1:29:52

that's the mission, right? I'm a first generation immigrant here.

1:29:54

I learned about all this literally while selling my company.

1:29:56

And I'm like, wow, there is so much stuff here.

1:29:59

We need to make just available and accessible to everyone

1:30:01

or at least the people who care enough to kind

1:30:03

of read and follow this. So yeah, thanks for having

1:30:05

me. It's been a blast. Yeah, thanks

1:30:07

for joining. If

1:30:10

you couldn't tell from my voice, I was

1:30:12

so excited to be doing this episode. I

1:30:14

love thinking about ways to optimize taxes. I'm

1:30:16

so glad Akra was able to join us.

1:30:18

I really hope you found some practical and

1:30:20

tactical ways that you can apply this to

1:30:23

your own life and your own tax situation.

1:30:25

So thank you so much for joining me. If

1:30:28

there's one final favor I have for anyone

1:30:30

during the holiday season, if you want to

1:30:32

go ahead and leave us a five-star rating

1:30:35

and review in either the Apple Podcast app

1:30:37

or Spotify, it would be so awesome. I

1:30:39

really appreciate it. Other than that, thank

1:30:41

you so much for joining and listening. I will see

1:30:43

you next week.