Episode 60: Take Command Of Your Taxes During COVID
The extended tax deadline is fast approaching. Discover how the COVID crisis has changed tax planning, and what you can do today to improve your economy.
00:55 – How Has COVID Impacted Tax Planning?
01:35 – Is July 15 Really The Tax Deadline?
02:53 – How To Avoid An IRS Lien.
04:43 – Are Quarterly Estimated Taxes Also Due On July 15?
05:25 – How Will PPP Loans Be Taxed?
09:36 – What Tax Strategy Is Best During The COVID Crisis?
15:48 – Why Should You Develop A Financial Plan Of Action Today?
16:54 – Will COVID Delay Tax Refunds?
17:30 – How Are The COVID Unemployment Benefits Taxed?
17:56 – What Financial Hardship Benefits Are Available?
18:42 – How Can Net Operating Losses Be Part Of Your Tax Strategy?
This is The WealthAbility® Show with Tom Wheelwright, way more money, way less taxes.
Welcome to The WealthAbility® Show, where we're always discovering how to make way more money and pay way less tax. Hi, I'm Tom Wheelwright, your host, founder and CEO of WealthAbility®. We have a filing deadline coming up, July 15th, and there's lots of uncertainty in the world right now, lots of questions. Today, you're going to get some certainty over what needs to be done by July 15th, what can be done for the rest of the year, and kind of not just July 15th, but what do you do for the rest of the year when it comes to taxes? We're in a such an unusual time.
For example, we have a net operating loss carryback in 2020, that we're not going to have in 2021. We have a presidential election going on. Who's going to win? Do the Democrats take both Houses? If they do, taxes absolutely, not question, absolutely go up as soon as next year, 2021, so what do we do?
Let's start with what we're going to do between now and July 15th, and by July 15th, and second of all, then let's talk about what to do for the rest of the year. First of all, the July 15th filing deadline is not going to be extended, okay? It is the deadline, which means however, you can affirmatively extend that deadline, okay, so you can actually file an extension and you can extend your personal tax return until October 15th. Now, you must extend, so if you can't pay, still file an extension, and the reason is, is that extensions of time to file prevent a huge penalty, so failure to file is a 5% per month penalty. Failure to pay is a one-half percent per month penalty.
If you can't pay, don't pay. Just file an extension, okay? You're going to need to pay by October 15th, but failure to pay is not the worst thing to do, okay? It's really not, with one exception, and that is that if you owe for prior years, not 2019, but 2018 or before, and you owe money prior, you should really look at, “How do I pay that off before July 15th?” The reason for that is the IRS has suspended all of its liens through July 15th.
I have it on good authority from the IRS directly, that July 16th, all those liens are going to be filed. Now, what does a lien mean? What does an IRS lien mean to you? It means that your credit score immediately plummets, okay? 40, 50 points.
I mean, it's a huge plummet. Second of all, they're really hard to get rid of. I actually had an IRS lien on my account, okay? Not because I hadn't paid taxes, it was a mistake by the IRS. It was absolutely a mistake by the IRS.
It took me eight years to get it off. Now, they're don't always take that long, but I'm just saying, it's not something you want to go through. It's kind of like COVID-19. Is it going to kill you for most of you? No? Okay?
Is it something you'd rather not have to go through? Absolutely, yes. The same is true with an IRS lien, okay? Financially, it can be really hard on you financially, so if you owe money prior to 2019, and take the money you were going to pay for 2019, 2020, pay off your old IRS, okay? Always pay the old, right? 2019 then, fresh start, okay?
You can wait easily until October 15th. You'll have the half percent per month penalty, plus interest, but you can wait until October 15th, as long as you file an extension. Now, don't be afraid of that extension. I've long said I am a big fan of extensions. Now, this year, we got an automatic extension.
We basically got an automatic extension from April 15th to July 15th, so a three-month extension. Now, we can file an additional three-month extension if you're not ready to file your tax return, so don't be worried about that. Just make sure that you get your tax paid in. What else is due on July 15th is your estimated taxes for 2020, okay? Now, that means that you have to calculate an estimate of what you think your income is going to be in 2020.
Really hard thing to do right now because a lot of us don't know what's going to happen the rest of the year, so what we can do is we can look at the first half of the year and pay tax based on the first half of the year. Now, one thing I want to talk about with regards to that estimate for July 15th, so that's your April and your June payment, so it's 50% basically of your tax liability. The PPP loans, let's say you have a PPP loan, most small businesses do. If you don't, it looks like they've extended it for a few weeks. You need to get a PPP loan because it's free money.
I do not understand why people turn that down. Even if they do publish your name, I'm okay with it, okay? I'd rather they … I don't think that's appropriate. At the same time, if they're going to publish everybody's name, we've got a PPP loan. Okay, these are people who actually took advantage of a program intended to keep businesses afloat, okay so I'm not understanding the shame here.
Okay? I just don't understand. It was very important to us, okay? It was. I mean, people were holding onto their money, and we really did need the cash, so I'm very grateful, frankly for the PPP loan. We have several clients who are very grateful for their PPP loans, so I've always believed the government is going to offer something.
The reality is we're all going to pay for it, so you really ought to consider that PPP loan. Now, is it going to be taxable? Currently, it's taxable. Currently, it's taxable. The House in their HEROES Act, which is their next stimulus bill makes it non-taxable. Now, the HEROES Act isn't going to pass.
It doesn't matter because if the Democrats want something that the Republicans clearly want in the next stimulus bill, which Mnuchin has said, Treasury Secretary Mnuchin and President Trump have both said there will be another stimulus bill. That provision to make that PPP non-taxable is likely to be included. It's very likely to be included. What that means is that if, for me, I'm not going to include that in my estimated tax payment on July 15th. That's just me.
If you want to be extra careful, make the payment. Now, here's the thing, if you make the payment and it's too high, that's okay. You can reduce your payment in September, so we're just talking about a few months, and since nobody really uses their money well in a few months, unless you just need it to keep your business operating, then it's okay to pre-pay. It's okay to pay a little bit more. I will tell you, I'm not all that precise on my own.
I am very precise with my clients, but I'm not all that precise with mine because I'm okay paying penalties. It doesn't bother me. I'm okay paying a little interest, okay? That doesn't bother me, and somebody's going, “Oh, I can't believe you don't take care of your money better than that.” No, it's not that.
It's that the reality is, is that you have a lot of competing requirements in your life, okay, and so some of it's time, some of it is where you're going to use the money, okay? Do you have a use for that money? Do you really need to use that money somewhere in the next few months? If not, go ahead and pay. Include the PPP loan in it, and make more of a payment, okay?
If you're really worried about the penalties, make more of a payment, and then you'll pay less in September, right? The key here is going to be working with your accountant. Like I said, we're really careful with our calculations for our clients on what they owe, okay, because we want them to have accurate information to make accurate choices, okay? Accurate information to make accurate choices, so we want to make sure they have that available to them. You need to sit down with your accountant and make sure that you know, have a pretty good idea of what's to pay in, and then you can make a choice.
“Do I pay in more? Do I pay in less? Do I risk the penalty? Do I think that I'm going to buy more real estate by the end of the year, and I'm not going to owe that much?” Okay? You have to consider all of these things.
This is why when we do a tax and wealth strategy, we're looking at this at a very big picture. Some of you, hopefully listening, also are on BiggerPockets. I've noticed a stream of questions on BiggerPockets. I'm going to address them actually directly, but there's question. Okay, so how does it really work to do a tax strategy?
Well, what you're looking at is, you're looking at a long-term comprehensive plan of action, okay? We basically invented this, okay? It's a long-term plan of action. It includes all the way to your legacy, okay? When you die, okay?
We're looking at everything, every aspect of your life, because taxes impact every aspect of our life, so if taxes are impacting everything, we got to be looking at everything, and it takes us several months to do that, but you're not done with the strategy. You have to report it on your tax return, so who you have prepare your tax return is important. Working with your advisor on a regular basis, your tax advisor on a regular basis is critical to your success in reducing your taxes. Now, why do you want you to reduce your taxes? I did a little YouTube video on, is it patriotic to pay lots of taxes?
The answer is it's patriotic to do your duty and obey the law, and everybody should do that. What's not patriotic is to pay more taxes because you don't understand how the law works. That's just ignorance. That's not patriotism, that's ignorance, so what we want to do is we want to understand the law, okay? That's WealthAbility®'s job, is we've created this system, educational system to help you understand the law and to help actually advisors understand the law so that you can put the pieces together so that you can, doing what the government wants you to do, you can pay less tax, right?
We're partners with the government, and as long as we do it, the government wants us to do, we'll pay less tax. For example, the government wants us to buy a house, instead of rent. You buy a house, you get a tax deduction, you rent, you don't, okay? You go, “That's the government saying they want you to buy a house.” Okay?
Now, they don't any longer want you to buy a luxury house because if it's over 750,000, guess what? No deduction. The government's saying, “Guess what? If you live in a high tax state, we're not going to subsidize that,” so that is a political statement saying the government is saying, “Look, we're going to benefit the lower tax state. We're not going to subsidize the high tax state,” but here's some others.
The government wants us to produce energy, both clean energy and fossil fuels, so you choose, so you can choose. You can choose clean energy, and you can put on solar paneling. You can use clean energy and buy an electric car. You can choose instead, you can choose fossil fuels, okay? The not as clean energy, okay, if you will. I love oil and gas.
I think it's done an amazing work for our economy and our world, so I don't discount the benefit of the fossil fuels, so you want to invest in fossil fuels, there are tax benefits for that because the U.S. government wants the U.S. to be energy independent. It's been very important for them. Real estate, if you buy a house for yourself, you get a little bit deduction, but if you buy apartments for other people, you get a much bigger deduction called appreciation, which you don't get on your own house. I'm just talking about what the governor wants you to do. Now, you choose.
You choose to pay the higher tax, okay, or to pay the lower tax, doing what the government wants you to do, but it's your choice. The key to working with an advisor and understanding the system for reducing taxes is understanding what the government wants you to do and how to make this work within what you want to do, okay? We're trying to match up what you want to do and what the government wants you to do, okay, and we're going to make sure that you get all the benefits that the government wants to give you, like a PPP loan, okay? I've been a big advocate of PPP loans from the day one. I'm a big advocate of getting, if you need a Main Street loan, get a Main Street loan.
If you need an EIDL loan, I was a big advocate of that. I just think use the resources that are available to you. Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine.
He's a former board certified surgeon, and he's turned into a real estate professional, so he has this podcast that is geared towards high-paid professionals. That's who he's geared towards, so if you're a high-paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes. I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey.
I hope you join Buck on this adventure of a lifetime. Now, back to what we were discussing. This is, this whole crisis is as much a personal crisis as it is a government or a societal crisis, and it's a crisis of, how are we going to behave, and how are we going to react, and how are we going to adapt to difficult situations? Well, we can start by getting things done by July 15th, okay, but make sure that all taxes are paid in. Make sure that you filed an extension, and make sure you sat down with your tax advisor, and so you understand what choices you have to make.
Then, remember, it is the first of the rest of the year, right? We're in the very first week of the rest of the year. Well, when you're the first week of the rest of the year, it's like happy new half year, right? The first half of the year was tough. It was really rocky.
Well, let's make some changes. Let's make some decisions, and one of those decisions should be, let's develop a plan of action to reduce our taxes, okay? Let's do it now, because what you'll find is, when we look at your tax returns, and we always look at our potential client's tax returns from prior years, there's not a whole lot we can do, typically for prior years. There's an enormous amount we can do for the future. Just an enormous amount, we can do for the future, so we want to start this strategy as soon as possible because we want to start implementing it before the end of the year, with some things you really want to do right now, so do not hesitate on that, okay?
This is, you want to reduce your taxes, you got to take action. Remember, the way to reduce your tax, so you want to change your tax, you have to change your facts. How many times have I said that? You want to change your tax, you've got to change your facts. Well, you need to understand what facts to change, so that's what you want to do right now.
Okay, so I'm going to check my notes here and let's look at some of the issues that might arise. Will tax refunds be delayed due to COVID? The IRS says they're catching up. They're catching up on paper filed returns. They're going to be catching up.
I think they will be delayed, unless you are willing to give them your bank account number, okay? I'm not willing to give the, mine, but if you're willing to give them yours, then that will make your tax refund faster, okay? Now, if you have a tax refund and you have a estimated payment due, don't take the refund, okay? Apply that to your estimated payments, and then just make less of an estimated payment. That way, you get the money immediately, right?
That's the way you get the money immediately. Unemployment benefits, so if you've been getting unemployment check, it's taxable. Just know it's taxable and include that in your computation when you're calculating, “How much money do I owe for 2020?” You need to include your unemployment benefits, and I know for a lot of you, that's been a pretty significant number, so don't forget and especially if you chose not to withhold any, don't forget that you want to make sure that that gets withheld. Financial hardships, okay, due to COVID.
There are some benefits. I mean, the biggest one is the $100,000 of IRA, 401(k) or pension plan money that you're allowed to take out if you had a true, certain hardships, financial hardships due to COVID, like you reduced your hours, or your business reduced its hours, or your business had to shut down because of COVID, then you can take up to $100,000 and it's combined 100,000, right? It's not 100,000 per plan. It's 100,000 per taxpayer. You can take up to $100,000, which you don't have to pay back for three years, so you can get an interest free loan for three years, or you can spread the tax over three years.
Here's one other thing I want to talk about. Remember, 2020, we have this net operating loss carryback for 2020, and we may not know if we're going to have a loss, but the issue is we may be able to do some things to reduce our taxes in 2020, that may actually take us into a net operating loss position so that we can carry that back or carry it forward, so you have a choice. You have a choice, back or forward, so there's some interesting planning that's going on right now, and you need to consider that planning and those planning opportunities, all right? Anything else that I'm missing here? You know, I would just …
Let me just reemphasize one thing, and then we'll call it a day. Please, please, please either file your taxes by July 15th or file an extension. You do not want a late filing penalty. If you can't pay the tax, file the extension, get your money together so you can pay the tax by October, okay? It's a half percent a month, it's some money so you are paying, right?
You are paying interest on top of that, so average about a 1% per month. Consider it's close to 1% per month, so it's not something you want to do, but if you have to do it and you can't get the money anywhere else, then it's not the end of the world to wait until October 15th, okay? Last thing is, don't forget to start planning for the rest of the year. This is the first of the rest of the year, and it's … My stepdaughter reminded me of that.
It's the first of the rest of the year, and we have an opportunity to reboot. We can reboot our own finances, we can reboot our own economy, and we can reboot our own tax planning, so let's do it now. Sit down with your advisor, work through, go through a … If you haven't yet done a wealth and tax strategy, make sure you go through that. Just anytime, give us a call at WealthAbility®, or go to WealthAbility.com/schedulecall, and we'll get you lined up, okay?
We have over 40 members across the country that are just dying to help you. I mean, they really are. These are such good people and they care so much about their clients, and they're so excited. They get so excited to get WealthAbility® clients because you guys are the best in the world. Remember, take care of your taxes, pay attention.
You want to reduce your taxes, you got to change your facts, and you need to work with a good advisor, and when you do that, you're always going to make way more money and pay way less tax. See you next time.
You've been listening to The WealthAbility® Show with Tom Wheelwright, way more money, way less taxes. To learn more, go to WealthAbility.com.