What does the $1.8 billion Realtor lawsuite mean for real estate?
The hosts dive into a discussion about the recent Realtor lawsuit concerning real estate fees, exploring its implications on the industry and potential impacts on the real estate market.
Interest Rates:
The team analyzes current interest rate trends and their effects on the market.
Economic Slowdown and Possible Recession:
An overview of the economic landscape, addressing concerns about a slowdown and the potential for a recession.
Planning Tips to Prepare for Next Year:
The hosts offer valuable tips for financial planning in the upcoming year, emphasizing proactive measures to secure financial well-being.
Tax Planning:
A detailed exploration of tax planning strategies in preparation for the new year.
Flexible Spending Account (FSA):
Assessing the FSA balance to make informed decisions about healthcare expenses.
W-2 Withholding:
Guidance on checking and adjusting W-2 withholdings for optimal tax outcomes.
Retiree Considerations:
Advising retirees to stay ahead by fulfilling estimated tax payments to avoid penalties.
Capital Gains and Losses:
Cautionary advice on offsetting large gains with losses and navigating wash sale rules.
Required Minimum Distributions (RMDs):
Ensuring RMDs are met to avoid penalties and stay in compliance with retirement account regulations.
Salary Deferrals, IRA Contributions, and Donations:
Discussing strategies such as salary deferrals, IRA contributions, and charitable donations to optimize tax benefits.
Gifting and Appreciated Stock:
Exploring gifting limits, charitable distributions, and the potential advantages of donating appreciated stock to charity.
Closing Thoughts:
The episode wraps up with a recap of key insights and a reminder to stay proactive in your financial planning.
WWM Financial is an SEC Registered Investment Advisor
The opinions expressed in this content are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Have you made a mistake with cryptocurrency and not planned for the taxes? Learn how to understand the tax implications surrounding cryptocurrency without understanding the tax code. This little-known podcast helps you understand your taxes from trading cryptocurrencies.
__________________________________
FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
__________________________________
Full transcription below:
Steve Wolff:
Well, welcome to today’s podcast on cryptocurrency taxation. I’m Steve Wolff. I’m here with my partner, Catherine Magana. We’ve got a special guest here today who actually knows something about crypto taxation, because we certainly don’t and that’s Josh Cahan, who’s a CPA, graduated from University of North Carolina in Charlotte and with, I believe it was a finance taxation degree. Is that right?
Josh Cahan, CPA:
Accounting degree.
Steve Wolff:
Accounting degree, and then you started your own firm. Tell us a little bit about yourself, Josh.
Josh Cahan, CPA:
Sure. After graduating from college at UNCC, I just went on to work at several accounting firms to kind of get my feet wet and just decided to go off my own. I’ve been doing it for over 20 years now.
Steve Wolff:
All right. How long have you actually been doing crypto?
Josh Cahan, CPA:
That has really started around 2017. That’s when I really started to get into it and that’s had a huge impact on investing and now it’s kind of growing and growing as you can tell right now.
Steve Wolff:
Exactly. Well the crypto market’s been growing. Let’s get started a little bit. The first question I have is, why does somebody need a special CPA for crypto taxation?
Josh Cahan, CPA:
That’s a great question, Steve. One of the biggest things about taxes is, they usually have guidance and people have been doing taxes forever and it’s pretty straightforward for the casual person doing tax returns. But now with crypto taxes, there’s not a lot of guidance. There’s a lot of gray area and that is one of the main parts that I get clients is they say, “Well, I know I’m supposed to be taxed on income, but how do I do it?” That’s really the start of a conversation from there.
Steve Wolff:
When you say guidance, you’re talking about from the IRS.
Josh Cahan, CPA:
Exactly. Correct.
Catherine Magaña, CFP®:
Josh, what is the number one myth or misconception that people have that are investing in cryptocurrency when it comes to crypto taxes?
Josh Cahan, CPA:
I think the biggest thing about crypto is all the noise that you have in this crypto world, if you want. You get information from the government that don’t want it. You have big investors like Warren Buffet that say it’s bad. There’s just a lot of miscommunication and misinformation, so people don’t know. They get all this news from the media saying, there’s hacks and scams and people are losing Bitcoin or Bitcoin is down 50%. There’s a lot of negativity and misinformation. I think that’s one of the big things that when you look at the crypto world, it’s not all negative. There’s a lot of good to it. I think that’s one of the misconceptions is that, people don’t take the time to really learn about what it really is.
Catherine Magaña, CFP®:
We see now a lot of big companies, I was just reading Microsoft, PayPal, Whole Foods, Starbucks, Home Depot, Etsy are taking payments now from Bitcoin. Can you elaborate a little bit about that, maybe on the other end of it? Obviously that’s a transaction if you’re buying a good and the taxation on that.
Josh Cahan, CPA:
Right. This is kind of the part that really doesn’t make a lot of sense from tax purposes, because if they want to use this coin, you’re basically saying you have a taxable transaction. For me, it’s one of those things that people have to take in consideration that, it’s not just like buying a car with cash. If you’re buying a car with Bitcoin, there’s an extra step and you have to kind of report it. That’s kind of where I come in to advise you saying, “Hey, you need to report, this. This is what you need to do.” It’s just an extra step.
Steve Wolff:
Josh, what happens if you don’t report it?
Josh Cahan, CPA:
Well, you’re supposed to, that’s the big thing. As my advice to a CPA, when you’re dealing with it, just know what you’re supposed to be doing and go to see an advisor and you’re supposed to report it because it’s a taxable transaction. Go ahead.
Steve Wolff:
How does the IRS know about your crypto in the first place?
Josh Cahan, CPA:
Well, they can subpoena records from whoever that gets these transactions, and I’m not a technical person, but basically the transactions can be easily traced if you have the right information.
Steve Wolff:
Is that because of the blockchain technology?
Josh Cahan, CPA:
Exactly. It’s all open out there. Anybody can see it. You might not see exactly who it’s going to, but you can trace where it’s going. That’s one another big misconceptions, if you will, that the IRS can’t find it. Well, they can, they don’t really want you to know that. But they can find it if they want to.
Steve Wolff:
So big brothers, a lot they’re watching. Is that what you’re saying?
Josh Cahan, CPA:
That’s exactly. It’s just a harder step to get, but it’s not like cash where it’s gone, it’s harder to trace, but if the Bitcoin, it’s out there on the internet where you can trace it.
Catherine Magaña, CFP®:
Is there any software or something that people could use to kind of track some of these types of investments using the cryptocurrency that you know?
Josh Cahan, CPA:
Yes, there definitely is. It really kind of depends on what platform you’re using, what kind of trading you’re using. The problem is, there are so many different ones out there. There’s so much new technology and investment vehicles in this world that it’s hard to keep up with.
Steve Wolff:
It’s funny you said that because as I was preparing for this particular podcast, I was looking, everything has its own language. Every business has its own language. I started looking at things like Airdrops and Hard Forks and then DeFi and NFTs and mining and staking rewards and all that. I have no idea what most of this stuff even is.
Josh Cahan, CPA:
Right. Most of that stuff is new. To try to get the government, that is typically slow to react to these things, to give guidance is the problem. The other thing is, when people come to us, they need us to advise them. I think that’s important for us as advisors to say, “Look, there’s a way that we can knock out the noise and focus on what’s good for your investment types.” I think that’s important for all of us to understand that, there’s a different terminology and it’s new, but it’s coming and it’s here. It’s going to be here for a while, so we might as well kind of learn to live with and actually help our clients.
Catherine Magaña, CFP®:
I think it’s interesting because, once again, going back to the transactions and if more companies start using Bitcoin or different cryptocurrencies, then the investor really needs to track and have records. Because once again, they’re going to be tax consequences on this and the IRS is going to want to get paid or they’re going to their taxes on that. I just think it’s interesting in what’s to come. I definitely think the reporting or having somebody that’s working with you to help you navigate through this is definitely important. Could you mind sharing a little bit about maybe I guess, a lot of people that own cryptocurrency or Bitcoin, or also there’s this Stablecoins, perhaps there’s some interest and they obviously need a report on that as well. Do you mind commenting on that a little bit?
Josh Cahan, CPA:
Sure. I guess just for a general purpose is when we’re talking about taxable transactions is, if you go and buy Bitcoin with Fiat or cash, that’s not a taxable transaction. If you use Bitcoin to buy a different coin, then that is a taxable transaction. Now, it’s a lot easier to buy these coins now than it used to be. You can have a lot of transactions that you’re buying that you’re accumulating these coins, where you don’t have to pay taxes. That’s your point of the Stablecoins and interest. There are coins that you can stake, if you will. That is a taxable transaction that you need to record. It’s kind of just like dividends or interests on a regular money market.
Catherine Magaña, CFP®:
Just making sure people understand, like you didn’t just buy this Bitcoin and let it go. Obviously, there’s other factors and things that you want to bring to your CPA to work with you and help you make sure you’re reporting. Because I think once again, sounds to me that a lot more people are investing in this type of currency and it’s just making sure that they understand what’s the tax consequences.
Josh Cahan, CPA:
Definitely. Especially when the interest rates are a lot higher than what you can get at a bank or savings. I mean, it’s nice.
Steve Wolff:
It seems like record keeping is really crucial here and correct me if I’m wrong. Well, actually, maybe I should ask the question. If you buy something on one platform, first of all, can you sell it on another? And if you do, how do you track all this?
Josh Cahan, CPA:
That’s a good question. When you transfer a coin to a different exchange or wallet or whatnot, it’s not a taxable transaction right there because you’re just moving funds to a different vehicle basically, or a different platform. There’s nothing taxable there. It’s just when you sell that coin or you swap it for a different coin, that’s when it’s becomes taxable. Now the tracking, all these softwares for the tax softwares, they can use different technology to bring that transaction into the computer software where it can match the transactions of the buying and the selling. Like right now, there’s tax softwares that do a really good job about that. Every year they’re getting better and better about it, because there’s just so more transactions. Yes, it’s almost impossible to do it without tax software.
Steve Wolff:
Which software do you think is the best one to use?
Josh Cahan, CPA:
Like I said before, though, it really depends on you, what you’re investing and how you’re doing it. One of the better ones is Koinly, spelled with a K instead of a C and that’s good for individual investing. That’s one.
Steve Wolff:
K-O-I-N-L-Y?
Josh Cahan, CPA:
Yeah, that’s one. There’s some other ones that I use just for my purposes, like Lukka and Ledgible and then there’s CoinTracker and Cointrader and ZenLedger. I mean, you really have to know your investor and you need to know what coins and platforms they’re using because different ones specialize in different items.
Steve Wolff:
I know this hasn’t been around very long, the whole cryptocurrency thing, but has it been around long enough? I’ll get it out. Has it been around long enough that you’ve had the IRS maybe come to you and say, “You can do this or you can’t do this,” or are they still kind of in the dark about what’s going on?
Josh Cahan, CPA:
Well, they do have some notices on the IRS webpage, so that’s kind of a guidance. It’s very loose in a lot of things that are happening now. There’s just a lot of things that like the NFTs that are out and there’s a lot of gray areas. But from one perspective they do say, “Hey, this is taxable and you got to record it.” But the gray areas are, “well, we don’t know exactly all the time where to put that.” Even the question on the tax return this year was confusing that you had to mark if you were dealing in transactions with crypto, which makes sense. If you read it, you’re like, okay. Then if you go into it further, they’re saying, “Well, if you’re just buying it, that doesn’t really count,” but that doesn’t make any sense because you are actually doing something. Even they are really kind of confusing and that’s why it would be great if the miscommunication, if they could get it clear and hopefully they will within a couple years.
Steve Wolff:
I’m a little curious, if a CPA or your tax person doesn’t really have a background in this, how do they do your taxes?
Josh Cahan, CPA:
Right. I guess this kind of goes back to what we are supposed to do as tax return people. Basically, you’re giving us the information and we report it. We have to take your word for it. Now of course, over the years, the IRS has put more and more pressure on professionals about making sure that’s the right information, but it’s really up to the individual to make sure that they know what they’re investing in and at least record it on a tax software and get it to the appropriate people or ask questions.
Catherine Magaña, CFP®:
Josh, do you mind talking a little bit about the cryptocurrency tax rate? Obviously, the fluctuations in current cryptocurrencies and potentially maybe investors don’t realize that there might be paying ordinary income or do you mind just elaborating a little bit on that just with the tax return?
Josh Cahan, CPA:
I guess real quickly, and we’re talking about investors right here, not traders or people doing business that, that’s their business doing trading. It’s more you and me just casual investors. Basically, you kind of follow the capital tax rules for that. Kind of depends on whatever income you’re in, that you get the tax preferred long term capital rates, either zero, 15 or 20, or if you’re short term, then you’re just ordinary income tax rates.
Catherine Magaña, CFP®:
I was thinking that’s important to know, especially if you bought in and then you traded, obviously the market, the fluctuations, that investment. So just making sure that they understand potentially it could be ordinary income.
Josh Cahan, CPA:
Exactly.
Catherine Magaña, CFP®:
And being able to pay that tax later.
Josh Cahan, CPA:
Sure.
Steve Wolff:
It sounds like the IRS is trying to treat this like any other transaction as far as capital gains, losses, et cetera, is that right?
Josh Cahan, CPA:
Right. I mean, what they really want is people to report this. Because I think there’s another misconception that everybody is making tons of money in crypto, which is not really true. It’s just so new that they don’t know. They’re trying to see what people are doing because you can invest a small amount of money in crypto, keep trading it a thousand times each month and that’s a million dollar transactions, but it’s really not. It’s only a thousand dollars. You’ve kept on trading over and over again. They’re saying millions of dollars. Well, it’s not really because it’s only a thousand dollars trading back and forth all the time for an individual. They get these big numbers in their head that maybe some people do it, but the actual gain or loss is probably minimal.
Josh Cahan, CPA:
That’s when I’m seeing a lot of people come to me and say, “I got this IRS notice. I’ve traded three million dollars in crypto, and there’s no way I’ve only invested maybe five grand.” I was like, I know. That’s why you have to put all this documentation. You have tens of thousand of line items on the tax return saying, “That was a dollar, that’s another dollar.” Hopefully they can see that not a lot of people are doing that. There’s not a lot of dollars there. It’s just, I guess the transaction part of it, because a lot of people that invested early want to hold it so they can even make more money later on.
Steve Wolff:
If you wanted to gift crypto, is there a limit to how much you can gift without paying taxes?
Josh Cahan, CPA:
Well, it’s just kind of like the same gifting rules that we have for everything else. I mean, I think it was like 15 grand that you can actually gift to somebody without having a tax return done. They follow the same rules and that’s basically what we’re looking at for most of the tax transactions. If they don’t have something special for crypto, then it falls back into what there’s normally a taxable item.
Steve Wolff:
What about something like the non-fungible tokens, the NFTs? I’m glad that was funny.
Josh Cahan, CPA:
No, it’s not funny because it’s one of those things that, like you said, it’s new and they have no guidance on really how it should be taxed. You kind of have to fall back and say, “All right, what exactly is this? Is this a digital asset or not?” Without getting too complicated, there’s not really a clear answer. You could go between capital gain or collectable tax rates. It really depends. You have to look at the transaction and that’s just for investors, that’s not a special classification for dealers or people that are in the business of dealing with art. It’s a lot.
Catherine Magaña, CFP®:
I mean, I know obviously there’s different states, we’re obviously in California, but is there anything that we should be thinking about on a state level or is it just kind of state by state, we have to look?
Josh Cahan, CPA:
It’s definitely state by state, but it’s also, most of the states either follow the federal, so it’s like one of those other things. It’s just, well, if it doesn’t classify it as anything, then you just treat it how it normally is treated each state, unfortunately. Although the Federal’s kind of a mess already, I would hate to see the states get involved to make it even more so.
Steve Wolff:
I know the answer to this question and you probably have a bias, but should people be trying to do this on their own, as far as doing the taxation in reporting?
Josh Cahan, CPA:
They can. I mean, if you have one or two trades. I mean, you just have to know what you’re doing. I mean, it’s like anything else, you have people that are way more computerized and savvy than some other people that say, “Hey, I can do this and import all these information,” but other people don’t and they don’t want to have the time either to deal with it or just don’t want to do it, because it does get tricky and it’s unusual and it’s unclear too. If you feel uncomfortable, there’s many taxation people or softwares that you can go to. It’s just that it’s beneficial if people would have like advisors that would say, “Hey, this is a good person to do it.” Instead of just kind of going off on their own without help. With all the noise and information out there, it’s kind of hard sometimes to just pick up and say, “All right, I’m going to Google.” Then you just have to go through the process of finding out. I’m happy that you’re trying to have people educated on what’s going on because it’s an interesting place.
Steve Wolff:
All right. We’re also trying to educate ourselves because this is so new.
Catherine Magaña, CFP®:
Josh, you mentioned it earlier, but the IRS, the rules are always changing. You might do it this way this year and the next year it could be a little different. Just in general, things change over time. That’s why I think even for us, in our business, and dealing with clients and different rules and regulations that come down our way, it might be one way one year and the next year it’s different. So just having a professional staying on top of it like yourself, I think is extremely important.
Josh Cahan, CPA:
Yes, definitely. I totally agree with you. It will always be changing.
Steve Wolff:
Bottom line, do you have any parting thoughts for us as far as what to do with your taxation of crypto?
Josh Cahan, CPA:
I think one of the things is just try to get as good information as you can. Try to focus on the good part about it and not just the crazy negativity that’s usually in the media. I think that’s one of the big things. Also, I think most people realize that when you make income, it’s going to be taxable. There are people that don’t want to do it, and some people or most people I think, want to do it. They want to not be in trouble with the IRS. It’s a pain and it’s not fun. It’s one of those things that, Hey, just take care of your business and live your life without someone else watching over your back.
Steve Wolff:
I know I said that was kind of the last question, but you just got something going in my brain. In the beginning with crypto, it seemed to me that people said, if you were a criminal, you could do crypto and get away with all this stuff. But it seems like you can’t because everything is tracked. What’s your comment on that?
Josh Cahan, CPA:
Yes. I mean, I’m not into the criminal investigation part of everything, but yes, it’s definitely, I think more and more people are realizing that, Hey, it might have been easy to get that, but now that you have it, they can watch you. So it’s going to be hard to get rid of it. I think it’s like you said, the traceable part is huge and I think more and more people are going to realize that it’s going to be difficult. It’s not going to be easy.
Steve Wolff:
Well, we really appreciate you coming on today. And this is Josh Cahan, who is a CPA in what city in North Carolina?
Josh Cahan, CPA:
Charlotte, North Carolina.
Steve Wolff:
You’re in Charlotte. So you get to see all the good basketball games.
What is the biggest myth that the media has told you? Josh Cahan, Catherine Magaña and Steve Wolff dive in to help you understand some of the myths surrounding cryptocurrencies.
__________________________________
FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
A Conversation About The 2021 Biden Tax Plan and Federal Tax Proposals
In this episode Catherine and Rachel Ivanovich discuss the 2021 Biden Tax Plan proposals including, the child care tax credit, long term capital gains, tax gains at death, 1031 exchanges and more.
Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ and Managing Partner at WWM Financial in Carlsbad California.
Rachel is the founder and Chief Leadership Officer of Easy Life Management, Inc. She is a business coach, an Enrolled Agent and earned an MBA from San Diego State University with an emphasis in Finance and Taxation in 2010.
Learn 5 simple steps to avoid making bad investment decisions.
WWM Financial is an SEC Registered Investment Advisor.
Transcript of video below:
Catherine:
Welcome to our podcast on financial planning. I’m Catherine Magana, a Certified Financial Planner™ professional. Today, we’re going to focus on an important topic of financial planning, which is tax planning. Tax planning, we really look at financial situations from a tax perspective. We actually want to find an efficient way of using the tax code and look at financial planning, and they really do go hand in hand together. So we thought it was important for us today to cover the 2021 Biden tax plan and federal tax proposals. Even though there are several items that we’re going to talk about today that aren’t even approved yet, we thought it was important to start the conversation and start thinking ahead.
Catherine:
So we’ve collaborated with an enrolled agent and tax strategist, Rachel Ivanovich, with Easy Life Management, for today’s talk. So thank you for joining us. We’re really happy to have you here with us today. Let’s go ahead and get started, and maybe we can talk a little bit about kind of some of the income taxes that may come up with these changes. Any thoughts on that?
Rachel Ivanovich:
Thanks, Catherine.
Catherine:
You’re welcome.
Rachel Ivanovich:
Thanks for having me today. It’s really great to be here. Honestly, like you said, these are proposals.
Catherine:
Yes.
Rachel Ivanovich:
Tax planning, as you said, is a very important topic, and I believe that a lot of people don’t consider this until it’s too late. So given that these are just proposals, I think it’s really important also to differentiate between what has already been enacted and what is potentially coming down the pipeline at us. As you were saying, it’s really hard for us to know, is it going to be next month? Is it going to be six months from now? Is it actually going to be retroactive, if it actually then does take effect before the end of the year? Let’s just have a conversation kind of about what proposals are on the table.
Catherine:
Sure. No, I would agree. I mean, I think you get a lot of calls. I get a lot of calls, and everybody wants to know what should we be doing now.
Rachel Ivanovich:
Absolutely.
Catherine:
I think it is important to cover some areas that are critical or we think that might be servicing. One in particular, I think, that’s come up is kind of the childcare tax credit. I think that’s definitely something that’s-
Rachel Ivanovich:
Absolutely.
Catherine:
… prevalent.
Rachel Ivanovich:
It’s top of mind because the advance payments are starting to roll out this month. It’s July of 2021. People are excited, a little extra cash in their pocket. We’ve been chatting with clients about does it make sense to take the money right now, or does it make sense… Because these are advance payments, and that’s really important to understand, because if you take and receive the payment now, you won’t be able to use that to offset tax next-
Catherine:
Later.
Rachel Ivanovich:
Yeah, next spring.
Catherine:
Oh, okay.
Rachel Ivanovich:
I think that’s a really important factor for people to consider because you can opt out of receiving the advance payments. Why would you do that? I don’t know. Honestly, I think a lot of people want to have the money, and it’s going to stimulate the economy, they say. But at the same time, tax planning is what we’re here to talk about. If you’re thinking… currently for 2021 only, and this is already law, so we’re going to talk about proposed versus actual.
Catherine:
Okay.
Rachel Ivanovich:
In the past, the child tax credit… there are two credits that were kind of on the table here. One is the child and dependent care tax credit, and the other is the actual child tax credit. In the past, the child tax credit was $2,000 per child, and it expired… Basically, you got the tax credit up until the child turns 17. So that’s to differentiate between this new enhanced child tax credit that’s on the table currently for 2021.
Catherine:
Got it.
Rachel Ivanovich:
So in the past, you’d get the $2,000 credit, a portion of which was considered refundable. The other portion is non-refundable. To explain the difference between those two and why it’s important to understand why this is a great feature for the enhanced child tax credit. The refundable credit functions like a payment, whereas a non-refundable credit just reduces tax liability. Oftentimes, you’ll have a tax situation and you’re doing planning. If you’re looking at what your tax liability is, that non-refundable credit would reduce your tax to zero, but then the remaining portion of the credit, if it’s refundable, you’ll actually get a refund.
Catherine:
Oh, okay. Excellent.
Rachel Ivanovich:
Okay? Yeah. There are two different kinds. This new enhanced child tax credit makes it completely refundable, so it’s money in your pocket.
Catherine:
Nice. Definitely good to think about and know. Especially, like you said, down the line, if you’re planning to do your taxes and if you’ve already taken the credit, then you don’t want to do it twice.
Rachel Ivanovich:
Yes, absolutely. You’re looking at the credit, and previously the credit was $2,000 per child. Now the credit is, if your child’s under age six, you’re getting $3,600, which is a great benefit. Then also, the enhanced child tax credit is $3,000, but it’s up until age 17, including age 17. So I think this is a great benefit for families.
Catherine:
Another one that I’ve heard a lot about and it really affects some of the clients that are investing or have properties and investments are there’s a long-term capital gains and dividends being taxed at ordinary income with taxable income over a million dollars. That’s kind of a big deal.
Rachel Ivanovich:
It’s huge. Yeah, it’s huge. Okay, so just to differentiate, this is proposed.
Catherine:
Correct, yes.
Rachel Ivanovich:
Who knows what’s actually going to happen? What I’ve heard is for individuals whose taxable income or income is under $400,000, there will be no changes. That’s a sigh of relief for a lot of people, a lot of families. But if your income is over $400,000 and if you are approaching that million dollar mark, you definitely want to start thinking, “Should I start planning ahead?” Clearly, a lot of clients have called the office who have… they work for a corporation, they receive a large amount of their compensation as stock options. It may be time to diversify. Meet with a financial advisor and really look at your portfolio, and should I sell now?
Catherine:
Well, and some other things I was thinking about is perhaps between now and the end of the year, if it does come into play, then there’s some tax loss harvesting. Are there things that maybe… Are there some losses that you can take?
Rachel Ivanovich:
Absolutely. It’s definitely a really good time to meet with your financial advisor to look at your portfolio. Because, as you were saying, this proposed rate, they’re looking to tax long-term capital gains and qualified dividends as ordinary income. What that translates into is currently there are three long-term capital gain rates or preferential rates. If you hold assets more than a year and a day, then the gains on those assets are taxed at lower rates. Therefore, currently, if you make less than $40,000, which you don’t pay anything. There’s a 0%. If you are up to, I want to say from 40-ish thousand to 446,000, if you’re single, you’re going to be paying 15% on those long-term capital gains and your qualified dividends.
Catherine:
Yikes.
Rachel Ivanovich:
Over that, it’s 20%.
Catherine:
Correct. It’s really those that make over a million that are really going to get dinged on this.
Rachel Ivanovich:
Yes, and really need to start planning and/or thinking about planning. Because the other thing that they’re talking about, they’ve proposed, is bumping the highest tax bracket from 37% up to 39.6%.
Catherine:
Yeah, that’s a big deal.
Rachel Ivanovich:
Yes. It is a big deal. Definitely want to look ahead and… It isn’t law yet, but it’s hard to say what’s going to happen.
Catherine:
Yeah. Another one that comes up a lot is the tax gains at death for unrealized gains. Being above a million dollars, that you’re now going to be taxed.
Rachel Ivanovich:
Yes.
Catherine:
Kind of taking a step back and know that, once again, this is being proposed, so it’s not in effect yet.
Rachel Ivanovich:
Absolutely.
Catherine:
Currently, if somebody gets an inheritance, then there’s a step up in basis, and they can use that step up or the six-month date of death valuation.
Rachel Ivanovich:
It is really important to look at this because they have put this on the table. It’s hard to say if it’s actually going to happen. But currently, as you were saying, the step-up in basis, they are talking about taking that off the table. The step-up in basis is if you hold assets and you bought it for, I don’t know, $5 a stock, and now it’s worth $100 when you pass away, whoever inherits it, their basis or what their investment in it is that date-of-death value. They’re thinking of taking that off the table.
Catherine:
Which is a big deal.
Rachel Ivanovich:
It’s a big deal.
Catherine:
Once again, so the new proposal then is if it’s over a million dollars, then at that point, they’re going to be taxed.
Rachel Ivanovich:
Correct. Then there are a couple of different proposals that I’ve heard, and therefore, that’s why it’s really hard to do the planning and to dig into it. I guess at the end of the day, the question is, well, what should I do now?
Catherine:
Yeah.
Rachel Ivanovich:
As you mentioned previously, tax loss harvesting and really taking a hard look at your portfolio and looking at what is in there. Is it diversified? What can I do based on the current law? Because even though they’re proposing certain things, it doesn’t necessarily mean it’s going to come to fruition. I mean, also they’ve thrown out 1031 exchanges may go away.
Catherine:
Yeah, I saw that or over $500,000.
Rachel Ivanovich:
Correct.
Catherine:
Which is another big deal-
Rachel Ivanovich:
It’s huge.
Catherine:
Because a lot of people have real estate, and they’re doing 1031 exchanges. So once again, here we are.
Rachel Ivanovich:
The question is should I sell? Should I do a 1031? So a 1031, for those of you who aren’t familiar, is if you hold rental real estate and you have appreciated a property and you sell at a gain, you can buy another rental property, which is like-kind… They’re sometimes called like-kind exchanges.
Catherine:
Correct.
Rachel Ivanovich:
It’s been a great tax planning tool for those who own real estate.
Catherine:
A lot of people own real estate-
Rachel Ivanovich:
Yes.
Catherine:
Especially real estate’s gone up so much in value.
Rachel Ivanovich:
Absolutely.
Catherine:
So that’s a really, really big deal.
Rachel Ivanovich:
Yes.
Catherine:
The other thing that kind of comes to mind with some of these potential proposals are revisiting maybe life insurance or your estate plans.
Rachel Ivanovich:
Yes, absolutely.
Catherine:
Those are some areas I think that can be looked at. Perhaps we can talk a little bit about kind of the estate planning aspect of some of the proposals.
Rachel Ivanovich:
Estate planning is definitely a topic that people should be considering right now, even if the proposals that are currently on the table don’t go through the current lifetime exemption. Every individual has what’s called a lifetime exemption, which is $11.7 million. Current law is it will go down at the end, or what they’re saying, the language is it’s going to sunset back to pre Tax Cuts and Jobs Act, which was the end of 2017. It’s supposed to go from $11.7 back down to $5 million. What’s on the table currently is that it’ll even go down further to $3.5 million. Definitely looking at different planning tools and charitable remainder trusts.
Catherine:
I think one of the things that… Yeah, grantor remainder trust.
Rachel Ivanovich:
Exactly.
Catherine:
One of the things that we often see is the annual gifting. So the $15,000 per donee per year, and if you’re married, then you can give-
Rachel Ivanovich:
30.
Catherine:
… up to 30. I think those are some things that may be revisiting.
Rachel Ivanovich:
Those are absolutely huge to consider right now, is to really look at that $15,000 annual exclusion. There’s zero reporting requirements for that. As you mentioned, you can give $15,000 to any one individual. A lot of people should be thinking about 529 accounts, which are a great, great investment tool. They’re governed by gift tax rules, meaning you can put up to $15,000 per individual per year. You don’t have to file a gift tax return for that. So definitely something-
Catherine:
Yeah, 529 plans, especially of those that have grandkids or even kids or want to gift money-
Rachel Ivanovich:
Yes, nieces and nephews.
Catherine:
Yes, and it grows tax deferred-
Rachel Ivanovich:
Tax free.
Catherine:
And it comes out tax free if they use it for education.
Rachel Ivanovich:
Exactly, yeah.
Catherine:
There’s definitely some amazing benefits there.
Rachel Ivanovich:
What I’ve also heard, and I don’t know if this is… Well, clearly proposed. I mean, I’ve heard so many things, but I have heard that large gifts… It may be a good time to be considering larger gifts at this point, because if you look at gift and estate tax planning over the years, you’ll have that lifetime exclusion amount and the gift… Or if you make a large gift, if it is over the $15,000 annual exclusion where there is no reporting requirement, it’ll just carve away from your exclusion. I have heard that those large gifts, that if you give them pre American Family Plan actually being enacted, you may be grandfathered in under the old rules. I do think that’s something to consider if, if you’re thinking about making a large gift to a family member or a child.
Catherine:
I know we talked a lot about the unknowns, and we’re getting a lot of questions, and we do think, yes, we want to plan ahead. I know I’m a planner. You’re a planner.
Rachel Ivanovich:
Yes.
Catherine:
It is hard when we don’t have the actual information or know for sure.
Rachel Ivanovich:
Absolutely.
Catherine:
A lot of things might get retro or grandfathered and we don’t know. In the past, we’ve also seen things get approved last minute, and so I think it’s just being mindful of what’s to come. Are there some things that perhaps you may want to do, maybe along the way as you know things might come down the line? But part of this is also maybe planning, but then waiting to see what comes up.
Rachel Ivanovich:
Absolutely. As we all know, there are certain tools that are already in place that you can use. You can plan for Roth conversions. I think it’s a case-by-case situation. Every individual really wants to look at if you have money in an IRA account, is this a good year to do a conversion?
Catherine:
I absolutely love Roth conversions as well. Once again, it is case by case, but for those that are potentially in some gap years for retirement or collecting Social Security or Medicare and just different things that perhaps you factor that in. I think it is… there is potential ways to reduce your… taxes now than later.
Rachel Ivanovich:
Absolutely. Yeah, and maybe if your businesses is having a down year, it might be a good year to consider that as well, to do that conversion in a year when your income’s a little bit lower.
Catherine:
Is there anything else that we didn’t touch on that maybe-
Rachel Ivanovich:
We didn’t mention the net investment income tax, because that is something that you can plan for. I do think that working with a tax advisor, a tax strategist, working with your financial advisors, because as we were saying, the long-term capital gains rates currently do have that preferential treatment of the lower rates. If that does go up to be taxed as ordinary income, you’re not only looking at the 39.6%, but you’ve also got the additional 3.8 net investment income tax to consider. And if you’re in a high income state, such as California, New York, New Jersey, you may be paying 51% in taxes on long-term capital gains and qualified-
Catherine:
That’s a big change from what we’re used to.
Rachel Ivanovich:
It’s a huge change. If you actually look, that would put the United States as the highest, yes, country in the world for-
Catherine:
For gains?
Rachel Ivanovich:
… for long-term capital gains.
Catherine:
Oh, interesting.
Rachel Ivanovich:
Yeah, it was very interesting for me to see. It’s hard to say what’s going to happen.
Catherine:
Yeah. Well, I thought today we wanted to talk a little bit about tax planning. Once again, doing financial plans, it all goes hand in hand. Rachel, thank you for your time today.
Rachel Ivanovich:
Absolutely. It’s my pleasure.
Catherine:
Is there a way that people can contact you if needed? Do you have a phone number, email or anything?
Rachel Ivanovich:
Absolutely. They can reach out to me at Rachel@elmtax.com or they can call me at my office 760-730-1817.
Catherine:
Great. Well, thank you so much for joining us today. We hope you learned something and it was worthwhile for you. Thank you, and you’ll hear from us again. Thanks.
Click on the image above to view this Proactive Wealth Process video.
Tax Planning for Investors
In this Proactive Wealth Process discussion we focus on Tax Planning for Investors with IRS Enrolled Agent, Rachel Ivanovich, MBA and Chief Leadership Officer of Easy Life Management.
Rachel Ivanovich of Easy Life Management can be reached at 760-730-1817 or rachel@elmtax.com. You can learn more about Easy Life Management at https://www.elmtax.com
Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER TM and Managing Partner at Savvy Women Wealth Management in Carlsbad California.
