Owe Taxes? Do This Before You File and Save...

OWE TAXES? 🏦
See how you can keep more money in your own pocket with valuable insights from Jim Zahansky, AWMA®.

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Transcript

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Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. I'm Jim Zahansky, principle, managing partner and chief goal strategist at Weiss, Hale and Zahansky Strategic Wealth Advisors. Let's dig in to today's topic. So let's jump into a tax season is here. Many Americans wind up owing the IRS money. If you find yourself in the situation, you may be scrambling to figure out how to pay your tax bill before the April 15th filing deadline. So, Jim, what is your advice for listeners who find themselves in that situation? Yeah, well, I mean, obviously, you know, you have taxes withheld from your pay. You try to make sure that you don't have a big IRS bill coming on April 15th. And, a couple of things we always work with our clients on, is to ensure that the retirement contributions are, maximize whatever retirement accounts you're using. And clearly, if you're using a tax filer, they may help you think about this sort of thing. But if you expect to owe taxes, making some sort of pretax contributions to accounts like 401Ks or 403Bs or 457 plans, and even traditional IRAs, it's a smart way to legitimately reduce, you know, your taxable income, which in return, you know, reduces that tax bill. and this way you can pay yourself before you, you pay the government in taxes. All right. How does that work? Well, I mean, when you think about, I'll use the 401 K as an example. You know, when you think about it and you think about someone who earns about $100,000 in gross income, you know, say their effective rate is 24% on the federal level, so they're paying 24% of that income to the government. So, you know, the tax liability would be $24,000 in that case, right, on an annual basis. So that leaves the employee in this case 76,000 for take home pay. However, if the employee contributes 15,000 towards the 401 K plan, that reduces the taxable income, to $85,000 from the 100, and then the tax liability will be 24% of the 85,000. So essentially they'll pay about $4,000 less in taxes by paying themselves through a 401 K, which, you know, obviously people have to look at their own situation, their own budget. But clearly, if you can afford to contribute to a 401 K, it reduces current taxes that you know, and it creates a future income stream, for you to live off of when you're not working. And that's why, you know, this tool is really good, both in that in the now to reduce taxes and in the future to give you an income stream. Well, that makes total sense. Do you have actual clients who have used this strategy and they've wound up saving money come tax time? Oh, absolutely. I mean, and I think it ranges beyond just the traditional, you know, obviously they're saving money. In the example I just used, using a $100,000 example and contributing 15,000 to a 401K, you're reducing your taxable income on an annual basis by about 4000. In addition, if you're a business owner, you know, we'd like to use, if you can, a SEP IRA or simple IRA and these, help reduce your taxable income or if you're if you're a business owner in an LLC or, you know, in an S Corp and your and you're having pass through income, these are great tools to reduce your taxable income and fund your future retirement. And so absolutely, we strategize with our clients in their own financial plan on an individual level to be sure that they're maximizing these retirement tools to, you know, save on taxes now and of course, importantly, build a future income stream. Jim, I imagine the more you owe come tax time, the bigger the benefit is for these pre tax retirement contributions. Yeah I mean of course right I mean people who really should consider this are small business owners, self-employed individuals or anyone expecting a large tax bill, you know, due to bonuses. If you, you know, if you're working for a big company and getting this big bonuses, consider that or income changes because it clearly the higher your tax bracket that the higher your potential tax liability. So if you're at the 37% federal bracket, then your tax liability in true dollars is the highest. So, you know, the more you stand to gain from diverting some of this income into pre-retirement pretax retirement accounts, like 401Ks, 403Bs or 457 plans. Jim, are you working in the word bracket in today because of Selection Sunday yesterday? Well, of course, I mean we have a lot to celebrate locally, right? We've got a number one seed on the men's side. We've got a number three seed on the women's side. And I, I'm trying to figure out how to, you know, reduce my tax bracket. Now do you actually do that I'm talking hoops now. Not, tax money here, but do you, do one of these things where you fill out a bracket, maybe at Weiss, Hale and Zahansky a little office pool going on? Well, you know, we we actually don't do an office pool, but, we there is a, we usually used, ESPN app and try to get in one of their, one of their groups. It's always fun to do. I'm imagining that UConn men probably have the highest percent of people in the brackets that are choosing them to win it all across the country. Gee, I wonder why that is. Maybe it's because of the best team in the country. Do you do it for both men and women? I do, yeah, no, I have and I have for a while, of course. I mean, we have like, you know, we're the basketball capital of the world when it comes to college basketball. You got to be got to be in the game watching both. Right. And I think the women are maybe it could be a surprise team here in the tournament. And they got Aaliyah Edwards back too. All right. Let's go back from basketball brackets to tax brackets here. Are there limitations on who can do the type of retirement contribution strategy that you've talked about today. Yeah I mean you have to earn some income. So essentially you know, and you have to have a job to access a 401 K, 403B or 457 plan. So, you know, that's a limitation if you're not working, outside the home. Yeah. You're not going to have access to these type of employer retirement plans. and you know, if you, if, if you basically do have a job and you do earn income, though, you need to mine the deadlines, to save at the tax time. So, you know, we're still talking 2023 taxes at this point, even though we're in 2024. So, individual retirement accounts, traditional IRAs, they can be funded by individuals up until the April tax deadline. Right, so all the way to April 15th, but 401K contributions or 457 or 403Bs, if you're in those plans from your employer, your, your contributions for 2023 were cut off at the December 31st calendar year date. So it's something to remember as you're sort of considering filing your taxes this year. All right, Jim, here's how my brain works here. Our topic for this program, You and Your Money today is owed taxes. Do this before you file and save. Well, there's a few people out there. Oh, look, I'm raising my hand, who haven't filed yet. Haven't started yet. Don't know if we'll be owing money or getting money back. What's your message for the people who do not know if they'll be owing money? Yeah, it's it's time to take some action, right? I mean, if you've planned it right, and we always say sort of think about the tax planning related to your taxes. So, you know, did you earn more money this year? If you did, you probably owe a bit more. Right. Did you say did you have more taken out from your paycheck? Or if you're doing estimated taxes, did you pay more because you earned more? Right. You sort of know that, right when you're thinking about your tax planning. So if you don't know that, well, you should get started today. Because to your point, there are some deadlines, right? So if you get to April 15th and you're just getting your taxes back and you owe money, but could have made an IRA contribution to reduce your tax base, well you just lost out on probably, on that opportunity by filing late. So get started, get your stuff together, work with a tax professional if you need to. If you're filing on your own, using TurboTax or something like that, you know that that also would be able to tell you, if you made an IRA contribution, you know, could you save on taxes and if you could, you know, then obviously make that contribution if you can, if you can pull it off from your cash flow. Well, does this strategy primarily work for people who are going to owe money? If the strategy works that well, why wouldn't it work for people who are going to get money back to get the more money back? How's that for a question? Yeah, no, it's a good one. it certainly can, because, you know, it just depends if you're meeting the contribution limits. Right. So so, you know, if you're contributing, to an IRA, traditional IRA for 2023, you have a limitation of $6,500 if you're below the age of 50. So if you're if you're contributing to that level already, you cannot over contribute to that. So if you're not contributing to that level, then to your point, contribute to that level and you're likely, you know, if you're within the income limits, get get some more money back. and that's, that's one way to think about it. And also beyond just sort of getting the money back, have to remember that these, these tax deferred accounts, these IRAs. And 401Ks, they grow tax deferred. So if you have them invested in the investment strategy, you're essentially, you know, gaining tax free growth from those over time. And so there's sort of a win win situation of, as I was saying at the outset of this, reduce taxes, you know, that you owe now and pay yourself through it in future income stream like a 401 K by tax deferred growth. And so it's really a a tax efficient strategy now and in the future. And then take a trip to Tahiti. All right. So the type of account and deadlines matter for successfully pulling this type of tax planning off. What's the right way for listeners to think about how much to contribute, if they want to go down this path? Yeah. I mean, so as I was saying, you know, if you're not working with a financial advisor, a tax professional, you may want to because these are important things, right? You want to calculate the approximate money of how much you owe, and, and contribute just enough pretax to offset that amount. Over contributing, as I was saying, it can cause issues like penalties on excess contributions. And I think the key in this case is we advise our clients on is always diverting just what you need to erase the expected tax bill. Of course, you're able to, you know, if you can, if you can, maximize all the way to the limits, as I was saying, for 2023 6500 in an IRA 2024, that's 7000. And, you know, in in 401Ks in 2024 all the way up to 23,000. So if you can hit those limits, it's really going to reduce your tax bill and, you know, set you up for a nice future retirement income stream. All right makes sense. Target the amount to what you actually expect to owe. And are there any other accounts beyond IRAs and 401Ks that allow these large pretax contributions? Yeah one that that we're in, it's really starting to evolve and we always advise our client on, are health savings accounts. So if you're in a high deductible health plan, you likely can be eligible for health savings accounts or HSA, as you might have heard them. These are a great tool for, you know, if you're eligible for an HSA plan, they basically allow you to save for future medical costs, you know, tax free all the way to age 65 and start using that, for medical costs at that point. So that's a really good one. And then SEP IRAs, they can be really powerful. for self-employed listeners, you know, they they may even allow a larger pretax contribution than regular IRAs, particularly for those that are self-employed. What's the maximum contribution that can be made to a health savings account or the aforementioned SEP IRA? Yeah, I mean, since we're in the 2023 tax year at this point let's think about that. So for 2023, the health savings account limit for an individual is 3850 so $3850 for a family though, it's 7750. So pretty, pretty nice. And, there's a lot of these health savings accounts that, you know, you start at various banks and other places that can be invested in, in the markets as well, which allow for, for growth. And then if you're over the age of 55, you can also add another thousand in, so, you know, for if you're a family and over 50, the maximum amount for 2023 is 8750 in a health savings account. If you're self-employed, these are the SEP IRAs, the maximum contribution is the lesser of 25% of your compensation or 66,000. So pretty big numbers for these self-employed listeners and it's a great way to reduce tax bills and set yourself up with future income. With all due respect, how do you keep track of all this stuff? I'm hearing all these numbers tossed around. I go, man, how does this guy know all this stuff? But, you know, I'm just curious, are these things new or these been going on for 10, 20, 30 years? No, they've been going on, I would say there's been a really conscious effort in recent policy changes, you know, from the Tax Cut and Jobs Act of 17 to Secure Act, to, to Secure 2.0 Act over the past, you know, 5 or 6 years that have really started to look at these limits, in, in pretax savings because people are, you know, living on a if you're living on or planning on a retirement, just your Social Security income, it becomes really challenging. So policy has been supportive of increasing these pre tax limits on on a lot of these accounts which allow people, you know, future income streams to supplement things like Social Security or pension. So really really positive policy changes there. That's good info. So let's wrap things up with your main pieces of advice for listeners, because this is an important thing, especially for the folks who are going to be owing taxes this year. Explain the best ways to do that. Yeah, I mean, I've thrown a lot of numbers around, actually, you know, and obviously this is planning we're doing with our clients. But if you're sitting there today, you have to file taxes or you're about to or you owe money, you know, think about diverting some income, you know, to, to, traditional IRA and, talk to your tax professional about what that does for your taxes. It may reduce them. Number two is, you know, for self-employed individuals who are listening and small business owners. You have some unique savings opportunities available to you, like a SEP IRA or a simple IRA. You should really think about diverting some of that income into those plans for future income. Number three, you know, working with a financial advisor or a tax advisor to determine the right type of plan, you know, from an investment point of view and contribution amounts to these plans based on your situation is important. Not one size does not fit all here. You need to have a unique plan designed for you. And then obviously be conscious, you know, from the fourth takeaway here of deadlines. You know, IRAs can be funded up until April 15th for the previous tax year, but 401 K cut off was December 31st. So if you weren't contributing to your 401 K in 2023 and you got a big tax bill and you're still with the same employer, start deferring some money into your 401 K so you can reduce your taxes. And and I think, you know, while this all can be really confusing, we have a resource for you to check out. We have a tax resource center for listeners. If you go to our website at whzwealth.com, you can look at the Tax Resource Center, there's a tax savings calculator there and other tools to help you think through, you know, how much you can divert and be and be helpful to you as you, as you plan for your taxes in 2023. And as you look forward to 2024. Outstanding. That Tax Resource Center sounds like an amazing tool for the listeners, As we talk about owing taxes, do this before you file and save. Do you think maybe you've actually had clients who take advantage of these tips you've given today? They would have owed money to our pals at the IRS, but because they took these tips, they actually got money back instead. Yeah, it's likely that's the case. I mean, depending on your income level and how much you've deferred, you know, it's a, it's a it because remember, you're essentially have the opportunity to reduce your back to this bracket where it again, reduce your effective tax bracket rate. You know, how much you're paying. So as in the example I used, you know, if you're if you're making 100,000 and you're deferring all the way to the max of 23,000 to your 401K in 2024, I mean, your taxable income is significantly reduced, hence saving taxes. And so that's that's a huge takeaway for any of your listeners is, you know, these tax deferred plans allow you to reduce tax bill now and, and save tax deferred for the future. Really good information today. Hope we've saved our listeners some money today. Jim, thanks for joining me today with You and Your Money. Yeah, thanks for having me. Wayne is awesome to be with you. He is the Z of Weiss, Hale and Zahansky. And to our listeners, if you see guidance or wish to discuss your financial strategy this upcoming tax season, don't hesitate to reach out to Weiss, Hale and Zahansky Strategic Financial Advisors. This is their website, whzwealth.com. Or call them (860) 928-2341 to schedule a complimentary consultation. That's it for today. for listening to You and Your Money. Find even more episodes, videos and other resources at our whzwealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259, and can be reached at (860) 928-2341. Weis, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit www.whzwealth.com.