Episode 70: Year-End Tax Moves


Year-end tax planning takes on added implications due to the elections and COVID. Discover what options are available to safeguard your wealth.


01:33 – Will Your Taxes Rise Next Year?

02:25 – What Are The Goals Of Year-End Tax Planning?

03:04 – Are PPP Loans Taxable?

06:06 – How Will Estate Planning Change?

06:55 – What Is The $100k Opportunity?

10:14 – How Will Biden Shift Tax Incentives?

13:23 – What Investments Should You Consider Before 2021?



This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.


Tom Wheelwright:

Welcome to the WealthAbility® Show, where we're always discovering how to make way more money, and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility®.

            So, end of year, 2020, taxes are on everybody's mind. What can you do between now and the end of 2020 to reduce your taxes and maximize your tax benefits? That's the question on everybody's mind. We've got presumably a new President-Elect, Biden, presumably. We have a January 5th runoff election in Georgia for the control of the Senate between Republicans and Democrats. And everybody is wondering what's going to happen next year, but in the meantime, what do we do this year? Because in the meantime, we have COVID pandemic, we have PPP loans, we have all of these opportunities in the CARES Act. So what do we do between now and the end of the year? That's what we're going to talk about for the next few minutes.

            So let's start with the first question. Are taxes going to be higher next year or lower next year? Well, we don't know how much higher they're going to be. What we do know is that they won't be lower. That's the only thing we know about next year. We know that taxes will not be going down, okay? For anybody who makes over $400,000 a year. Joe Biden's been very, very clear about that. So if that's the case, what do you do in your year-end planning in 2020?

            Well, what's the very first thing you need to do? You need to know where you stand. So, please sit down with your CPA, sit down with your tax advisor and do a computation of what your projected income and tax liability is for 2020. Once you know that, then you can start making decisions, right? Once you know that you can start making decisions.

            Now, year-end planning is really, should have two goals. The first is, what can we do for the current year of 2020? But the second is, what do we have to do in 2020 to be ready for 2021, okay?

            Let's first, let's start with 2020. Now, the first thing we have to recognize is as of today, PPP loans are, technically, are in effect, taxable, because while the loan isn't taxable, the expenses that created that, the payroll and the rent, et cetera, are non-deductible. According to the IRS, and this is in very recently released news, the IRS has been very clear that they believe that they are going to treat that as non-deductible expenses, which has the same effect as including your PPP loan and taxable income. So that's really the way to look at it. I would suggest everybody who has a PPP loan include that number in your taxable income when you're making your computations.

            Second of all, realizing that taxes aren't going down next year, you may actually want to add income to this year. So if there is income that you might receive next year, you might consider receiving it this year. You might be in a lower tax bracket this year. Let's consider that.

            Let's say that you're in a 30% tax bracket this year, and next year, your tax bracket could easily be 40%, okay? Well, that means that if you earn $100,000, that's $30,000 of tax, versus $40,000 of tax. And the first question you have to answer is, am I willing to pay an extra $10,000 on that $100,000 of income by postponing that to next year? Because typically what most CPAs do is, their idea of year-end tax planning is, “Let's just postpone money to next year.”

            Well, I'm telling you right now, that could be exactly the wrong thing. You may in fact want to accelerate income into 2020. Remember, we have all sorts of tax benefits in 2020, okay? You may have had challenges in your business in 2020, you may have had challenges with your investments. Your real estate may not have produced the income you thought it was going to do, and so you thought you were going to have positive taxable income from your real estate, and you have a loss from your real estate, okay?

            That's why the number one thing you have to do is meet with your CPA, meet with your tax advisor, and get them to do a computation of your estimated tax liability, your estimated income tax this year, but also estimate next year, 2021. Also estimate next year, 2021, because if 2021 is going to be a lot higher, you're probably going to be in a higher tax bracket anyway. So make sure that you're not just following the crowd, and just automatically postponing income to next year. That may not be the right answer for you. So make sure you take a look at this year.

            Second of all, remember that there's a lot you can do this year to prevent any adverse effects of whatever a Biden presidency does next year, okay? So right now is the time to sit down with it, a competent tax advisor, and do a tax strategy, a long-term plan of action, because there are things that you need to be looking at such as estate planning, even if you're not… Even if you don't have a high net worth, the estate tax proposals of the Biden campaign are very serious and should not be ignored. The lowering of the exclusion, the elimination of the step-up in basis.

            Do we know whether any of those are going to get passed? No, we don't. We don't. What we do know is, it's not going to get better than it is right now. So let's take advantage of what we have right now, both from the 2017 Tax Act, as well as the CARES Act. Now, the CARES Act, there's a couple of things that you really have to pay attention to. First of all, we talked about the PPP loans. Second of all, okay, now, there's a $100,000 opportunity. And the $100,000 opportunity works like this, if you have an IRA, a pension plan, a profit-sharing plan, a 401(k) plan, you can take a distribution and not be taxable in 2020 on that distribution, and not be taxable in 2021 on that distribution, as long as in three years, you actually give that money back to your IRA, or 401(k), or pension plan, okay? If you pay it back, so you're not taxable at all.

            Or, you can take a third of it in taxable income this year, a third next year, and a third in 2022. Now, who's eligible for this $100,000 deal? Anybody who had an impact from COVID, okay? Now, you have to prove it. You have to show it, and who you have to show it to is your plan administrator. So that's your IRA administrator, or your 401(k) administrator, your profit-sharing pension plan administrator. And what you have to show them is, “Look, either my hours dropped as an employee, or my business hours dropped, or myself or somebody in my family got COVID,” okay?

            Well, there's millions, and millions of cases of COVID, so we know that there's a lot of people out there who've been affected directly. This is a direct impact of COVID. Now, if your business did well this year, and you didn't have to reduce your hours at all, because you were in [inaudible 00:08:24] business, for example, and nobody in your family got COVID because you were like ultra careful, and sequestered yourself, or quarantined yourself for nine months of the year, okay? Well, then you don't get it, but there's no income limitation, nothing like that. Now, why would you want to do that?

            Well, let's say that you wanted to invest in real estate, or let's say that you think that Joe Biden will put in great tax benefits for solar energy, or other renewable energy resources, which he likely will if he gets the chance, okay? If he can do that, right? Then maybe you want that money set aside so that you can invest in that and get the tax benefits from it. Because remember, you don't get any tax benefits in an IRA, or 401(k), except for the not being taxed until a later year, right? You get to postpone that, but you could actually end up with a tax benefit, not having to pay much tax on it when you pull it out, and get the tax benefits of the investment you make without money.

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            All that can happen, realistically, under a Joe Biden presidency, even with a democratic controlled Senate, and House, is that the tax incentives shift, that they shift from, say, real estate to solar energy, natural resources, such as oil and gas, coal mining to renewable energy, okay? So they're going to shift. They're not going to go away. That's a key, they're going to shift, they're not going to go away. So that's another part of the planning that you're going to want to do right now is, “Okay, I need to be nimble. I need to set myself up so that no matter what the tax law changes are, I'm better off in 2021, taxwise than I was in 2020,” right? Because I think the key right now is, 2020, our taxes have literally never been lower than in 2020. Our taxes have never been lower than in 2020.

            On top of that, we have net operating loss carrybacks in 2020 that we need to take advantage of, we have charitable contributions, we can make up to 100% of cash contributions that are deductible. So there's all sorts of things you can actually do. For example, I mean, those charitable contributions, any cash contributions, I mean, 100% of your cash contributions, well, it can be deductible this year, so there's no limitations on cash contributions. So that's something you can do at the end of the year. You say, “Look, I've got extra money. I want to do… I want to be charitable. I can do some cash contributions,” okay?

            Now, not all your contributions need be cash. I mean, you can contribute appreciated stock, right? Where you don't pay tax on the gain and you get a deduction for the fair market value. That's a double-dip, okay? That's an allowed double-dip. Well, you could do that. Now, that's not unlimited, okay? That does have limitations, but it's still a major tax benefit. So that's why you have to sit down with your CPA, your tax advisor, between now and the end of the year, because you absolutely need to know where you are. And, what are you going to do?

            Now, you may want to save those donations for next year, thinking that taxes are going to go up. But whatever you do, planning now for this year and for next year is a no lose proposition. It's a huge win for both years, and for future years. Remember, you can actually structure your tax life, okay? Judge Learned Hand of the Second Circuit said this, okay? This is Court of Appeals, so this is… This guy's a big deal. He said, “There's nothing wrong with structuring your life so that you pay the least amount of taxes legally possible.”

            On top of that, the tax has a series of incentives, so we're just doing what the government wants us to do. Now, we don't want to do monkey business, and shenanigans. Like, the papers talking about all the rich people do all these shenanigans, and I'm sure some do, okay? But there are also very legitimate opportunities. Let me give you another example. If you invest in investment real estate between now and the end of the year, as long as you close by December 31st, you get a huge bonus depreciation, typically, equal to 20 to 30% of the purchase price of the property this year. So that's something you can do.

            If you invest in an oil and gas drilling, if you like oil and gas, okay? That's something anybody can do and get a deduction this year, even if they don't drill until next year, okay? Another thing you can do this year, even though it doesn't happen till next year. Now, can you do what most tax advisors will tell you, and say, “Postpone your income to another year?” Yeah, you can. There are legitimate ways to do that. Can you accelerate expenses into this year? Yeah, there are legitimate ways to do that. The question is, do you want to? And I know this is contrary to everything you've ever heard about taxes, but I'm not a fan of deferral, postponing taxes to a later year, if there's something I can do to permanently benefit this year, and lower taxes next year. That's why we sit down with our CPA and tax advisor.

            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, and 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.

            So, number one, sit down with your CPA and tax advisor. Get a good estimate of where you are this year. Number two, create a… Well, number two is, I would say, go through all of the recent tax law changes, okay? All of the CARES Act changes. Is there anything you can do based on those changes, based on 2017 to affect this year, such as new investments you can make before the end of the year, charitable contributions you can make before the end of the year, that these are permanent tax savings, okay?

            Number three is, absolutely take the time to prepare a tax strategy, a plan of action that will last for the next, at least, the next three, four or five years, okay? Something that where you can actually reduce your taxes on a daily basis. Remember, all you have to do to change your tax is change your facts. So that's why we sit down with our CPA, our tax advisor, and we figure out, what facts do we need to change? But a lot of those, we need to do before the end of the year.

            If you're going to set up different entities, such as limited liability companies or corporations or limited partnerships, you need to do that before the end of the year. If you're going to do gifting to your children, you need to do that before the end of the year, okay? All of this takes time. It takes help from your entire team, not only your tax advisor, but also your attorney. You may need help from whoever your investment advisors are, okay? People on your investment team, people to help you find that piece of real estate that you can invest in, all right? So, that's the third thing.

            Fourth thing, don't ever let the tax tail wag the dog, please. Don't ever do anything just for tax purposes, do it because there's sound business reasons to do it, sound investment reasons to do it, there's sound principles behind it. Don't do it because it's… Don't go out and buy an $80,000 SUV because you want the tax deduction this year, although that is a nice tax deduction this year if you need a new SUV, and you're a business owner, and you have a home office, okay? But don't do it just for the tax benefit, okay? Because the tax benefit at most is like 40 or 50%, right? You still have to pay the other 50 or 60% out of your own pocket. So don't do it for tax reasons only.

            But remember that when you follow what the tax law says, you're likely to make more money, okay? So if you have business expenses that will produce income, that will make you more money and get you a tax deduction. If you make good solid investments, the way the government wants you to, they'll produce good solid tax benefits. So when you do that, when you take advantage of everything that the tax law has to offer you, you are being a good partner with the government, a good steward of your resources, and you're always going to be making way more money, and paying way less tax. [inaudible 00:18:28] 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.