If you missed this great session, your lifetime's tax strategizing efforts could be helped by tuning in for this recap.
When more than a couple hundred of you show up to talk about taxes, I think to myself, it's wonderful this Club is serving the financial literacy needs of so many. I love this community. And how cool to have a former Intel employee, now financial planner, join us to cover the topic. He packed his presentation chuck full of little nuggets in under an hour.
Thank you, Nathan Brown, from My Personal CFO, for lending us your time and your expertise to help us survey our own tax gold mines and landmines more effectively so we can tap potential opportunities and avoid perilous pitfalls.
The written recap...
On Tuesday, March 19, 2023, Nathan Brown, CFP, (nathan@mypcfo.com; and www.MyPCFO.com) joined The Club and talked about the importance of tax planning and how there are going to be years where you maybe need to focus immediately on paying less tax or maybe you need to forward-look at tax upcoming and reduce future years’ tax bills now/soon/opportunistically.
He helped us look through a myriad of advanced tax planning techniques and explained his company, My Personal CFO, and their offerings, including tax compliance, investments, and retirement planning.
Nathan mentioned his career path through Intel and onto becoming a financial planner. While he mentioned Intel compensation and benefits related implications often, most concepts are likely to be applicable to any employee of any similar large-scale, publicly traded, employer in the U.S. with similar benefits (like stock and retirement plans).
Nathan talked about the U.S. Tax Code’s complexity for the majority of the hour and covered those things you may want to avoid (tax landmines) and things that you may want to use to your advantage (gold mines). The scope of the discussion was geared toward an audience of corporate employees vs. sole proprietors or business owners.
Over your lifetime, taxes are likely to amount to your greatest/number one expense, says Nathan. So, thinking through your lifetime reduction of taxes is a great opportunity to ultimately spend less on them.
Taxes can depend on your income level each year, maybe that includes stock vests, bonuses, spousal income, and other income sources that can create surprise tax bills.
The U.S. has a progressive tax system...
The more you make, the greater percentage of your income gets paid to federal and state tax agencies depending on where you live. As you increase through ordinary income brackets the tax rate increases. Making under $23k a year means you are paying 10% on taxable income. However, making over $731k will put you in the 37% income bracket. Nathan explained how it is accumulative throughout each bracket. He showed that there are biggest jumps at 12 to 22% and 24 to 32%. You just want to be aware of where the jumps are for each bracket.
Then Nathan explained how then there are interactions between ordinary income taxes and capital gains taxes too on stock transactions you may have in a given tax year. The deductions we each may be able to weigh/take compared to the standard deduction everyone gets can vary and include mortgage interest, charitable gifts and state and local property taxes, for example.
The tax code isn't all bad...
He explained that tax credits are government designed to incentivize folks to adopt certain positive behaviors, such as health care, earned income tax credit, education, savers credits, and child credits. These may not serve everyone, typically they help lower income to lower-middle-income taxpayers. But they're good to tap into if you can lower your tax bill.
He mentioned additional ways you can adjust your taxable income yourself by moving your tax bracket out to the right (lowering your taxable income), such as these potential gold mines:
Retirement contributions
Dental, vision, healthcare expenses and FSA/HSA (flexible spending account and health savings accounts) deductions (dependent care assistance program or DCAP is another)
Deferred compensation
Nathan also covered some positive changes, recent and upcoming, with thanks due to the SECURE Act (1.0 and 2.0):
Required Minimal Distributions (RMDs) from tax advantaged retirement accounts were revised so that the rules help folks avoid these requirements longer, and penalties were reduced too.
Inherited IRA withdrawal / distribution rules were changed so that the funds must be taken over ten years.
Catch-up provisions were improved for over age 50 and now new provisions were established for over age 60 too (additional savings to Roth accounts based on income coming in 2025).
529 plans for college savings were made more flexible where up to $35k can roll over to the beneficiary if account is open for 15 years.
First responder benefits were improved.
Make sense of it on a personal level...
Nathan said you can [and should] simulate tax returns ahead of time to comprehend changes in your own life that may impact you with additional new tax obligations or new tax credits. Your goal is to understand your own tax situation and how your tax rate may be moving left and right over the years depending on the various life events and variable income and expenses ahead of you. It’s important to do, so you can project your payments and aim to not overpay or grossly underpay in a tax year but also over your lifetime.
At minute 20:00 of the recording, Nathan showed a future-looking projection sheet to help you think about how to make adjustments along the way as part of your income and tax planning strategy. Such as maybe adjusting your 401k contribution between pre-tax and after-tax.
Nathan also talked about the numbers that you can play with when you save at work vs. in an IRA. With a 401k, the most you can save will depend on your employer, your age, your company match if applicable, along with if your employer offers an additional after-tax contribution source, such as a Roth In Plan Conversion feature.
He talked about the rules of IRAs too, including backdoor Roth, spousal IRAs, and other rules/limitations to determine how much you can max IRA contributions and potentially grow these dollars tax-free for the future. The dollars saved in an IRA (traditional, deductible, or Roth) are not going to impact what you can save in an employer plan like a 401(k). There are no income limitations to saving in a 401(k) or Roth IRA or non-deductible IRA--only annual contribution limitations that will depend on type of account, the employer's design/features (for 401(k)s), and your own age (starting at age 50 you can save even more in your workplace retirement plan and IRAs, starting at age 55 you can save even more in an HSA, and soon at 60 you'll have another opportunity to save $10K more in a Roth IRA).
Long Term Care
Nathan also talked about additional tax rules that may be coming up. A new Long Term Care tax may be coming to all Californians but may be avoided if you have your own LTC coverage, time will tell. Nathan thinks most LTC coverage is capped out very minimally compared to what average LTC patients will need (which averages three years of coverage). This may indicate we need to save for an average of three years of LTC costs ourselves and self-insure if our LTC coverage lacks or is non-existent, or there is no state benefit. But be aware of these taxes, new laws, and changes coming in your state to plan for these expenses.
Gifting
Nathan also talked about gifting. You can give $18k per year per person as an opportunity. So, a couple has a threshold of $36k in gifting before they have to deduct it from their lifetime allocation limit of tax-free gifting.
You can give children gifts into their 529s too such that up to $180k per child in a single year could be gifted. Because a couple can gift five years’ worth of 529 contributions in one year.
Income with RSUs
Nathan talked about future restricted stock unity (RSU) vests and understanding when they impact your income, especially if you have a big vest coming up, for example when RSUs may accelerate at retirement. These can increase earnings and push you to a new bracket.
Advanced tax planning opportunities
A few advanced opportunities were named. Such as deferred comp, capital gains tax planning, retirement income planning, estate planning with life insurance trusts, lifetime access trusts, and charitable contribution planning.
Nathan reminded us that tax rates are set now to be going up in two years unless Congress acts ahead of 2026. Depending on what your situation is, you may want to pay taxes you can get out of the way now vs. later (i.e., on traditional IRA contributions that you might convert, or stock sales you want to make eventually, or income you’re not deferring…).
Federal Estate Tax exemption may also significantly be dropped in future, so be aware that taxes may go up on estate assets in future too, watch for it, and plan so you’re not caught by surprise.
There’s a special 0% long-term capital gains tax bracket that applies to unique situations. If you don’t have any other ordinary income, you may be able to get some tax-free treatment on long-term cap gains.
When you build a tax plan for the future, all types of income will interact and knowing how they do is key to building a solid tax strategy to minimize avoidable taxes in the future.
Nathan talked about creative ways to avoid or defer capital gains:
First, investing in Economic Opportunity Zones may help you get some appreciation on your existing holdings tax-free or to defer taxes until later too.
Second, you may look at deferred compensation of income (deferred comp plans or 401k plan) and then not pay the tax on that income until later on when the money comes out—then if during that period you were to move to a lower-tax environment you could reduce your state tax obligation and over time reach a lower federal tax bill when you enter lower tax brackets.
Third, is doing an exchange of company stock shares you may be heavily concentrated in (meaning you are holding a ton of the same stock still and want to diversify out of it without generating a ton of transactions/income, bumping tax brackets, and generating capital gains taxes as you go). In this case you can consider how to leverage an exchange fund, such as the NASDAQ 100 or S&P500 which are more diversified collections of multiples of stocks, not just one, and then you achieve diversification but owe no taxes until the exchange position is actually sold later, enjoying the cost basis from your original shares’ position(s). You can learn more about this by searching the web for “exchange funds to reduce concentrated stock positions.”
Nathan talked about how natural it is for all of us to want to lower our tax bills. We all want to optimize our situations. It’s important to consider all the steps we might take and properly plan for them. He gave us all a to-do list, or in Intel-speak an AR list (Action Required) but also said if you don't want to go it alone, Nathan is available to help. Again, he invited anyone within five years of retirement to tap him for help, via: https://calendly.com/nwbrown/strategysession
Thank you everyone who came to the session. If you didn’t get your question answered, or you have more tax gold mines or landmines to share, please type your thoughts in the comment field below. Thanks! We want to help this community build its financial muscles. To comment/participate with us, becoming a Club Member is a required step first, just create a log-in when prompted or in the upper right corner of the site, and join The Club!
Because money matters,
el
E.M.Powers ("el") is a regular person with no particular financial credentials or expertise who happens to be a money enthusiast and the founder of The Money Matters Club, a virtual watercooler for like-minded individuals with a thirst for building their own financial health. Since 2006, she's helped thousands of co-workers build their financial literacy and wealth by participating in The Money Matters Club, a community she built on her employer's internal network. Since 2023, she's been attempting to scale The Club's reach through its second home on the World Wide Web. Her opinions--as well as the opinions of all participants--are just that: opinions, which are subject to flawed logic, math, typos and correction. She keeps a growth mindset and is also always learning something new or bolstering her own understanding after discussions at The Club. All information shared is done so with the best intent to inspire and empower others to learn more about money considerations toward building their own financial muscles. Nothing shared is meant as individualized advice that anyone should act on without doing their own curious research and personal decision making. There are no dumb questions at The Money Matters Club. Your financial health and literacy are what this Club cares about. All investing involves risk. All results can and will vary.
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