2024 - Keep Your Money From the IRS Legally

Can you trust governments and politicians to advise your financial future?

How can you keep from losing your wealth in taxes to the IRS without breaking the law?

Well, be of good cheer. It is possible to strategize your taxes in a way that leverages off inflation and the tax code to legally allow you to keep your hard earned money rather than lose it to the IRS.

In this episode of the Hidden Money Podcast, Mike and Kevin share realistic views of 2024’s scenario, but they have encouragement as well as very practical advice and stories that can help you get your tax plan for 2024 up and running.

In this episode, we discuss

• A quick snapshot of 2024 tax changes and inflationary adjustments.and their impact on tax brackets and standard deductions.
• Considerations for itemized deductions and strategic tax planning.
• Practical tips on charitable giving, property taxes, and financial strategies.
• Strategies for optimizing estate planning and leveraging family limited partnerships.
• How to turn everyday business expenses into strategic advantages for tax deductions.
• Creative approaches to education savings accounts for children and transforming family vacations into legitimate business expenses.
• The significance of the portability election and gifting limits in estate planning for deaths.
• Insights into preserving high net worth estates and securing financial legacies by gifting.
• Actionable insights on being proactive, strategizing, and leveraging the tax code in consultation with financial experts.

TRANSCRIPT:

Kevin Schneider: [00:00:00] So, we have a Mike and Kevin only Hidden Money podcast today. We're just going to briefly go over some 2024 tax changes or ideas that could be coming up the pipeline. So Mike, typically, every year the IRS adjust tax law, not tax law, but I would say they adjust numbers for inflation every year,

and that's all we got as an update for this year. Not much has changed from the 2022 tax year to the 2023 tax year, except for these standard inflationary adjustments.

Mike Pine: Which is actually nice, finally! Inflation has been kicking our butt for the last two years, especially this last year, and now, we finally get a little benefit of that. Because of inflation, they're increasing the tax brackets, so it doesn't help with actual making money, but it reduces our tax burden, thanks to inflation, just a little bit. 

So, I'll take it.

Kevin Schneider: I would too. Even the tax planning lies a lot in the fact that if you have two deductions, you have the itemized deduction and the [00:01:00] standard deduction, they're going to increase the standard deduction each year with inflation. So if you're itemizing, but you're right on the cusp of itemizing versus standard,

these inflation adjustments, although they're good, they may push you out of the using itemized deductions, which makes all your charitable giving, your property tax, mortgage interest... providing zero tax benefit, because now you're taking the standard. 

So now, the question is with these inflation adjustments, where am I sitting at with my tax plan?

And do I need to make some moves before end of year or change my strategy with these increasing inflation numbers?

Mike Pine: Yeah, and that brings up a great point. 

If you're one of those people where you can't itemize anymore, you shouldn't, because your standard deduction is greater than what your itemized were. You should think about bunching in years that it makes the most sense.

So, if I give charitable contributions as an itemized deduction, if I give charitable contributions to my church or a nonprofit in December, and then, turn around and give some more in [00:02:00] January, I've straddled two tax years. If I know I want to itemize this year, but next year I probably want to use a standard, I should give next year's charitable contributions to the charity this year and bunch them together.

You can do the same thing with property taxes, although, with that $10,000 cap, it makes it less likely that'll pay off. But, yeah, you should consider such things like that in light of the new index inflated amounts. I think it's funny though they're increasing and indexing these inflation adjustments based on 5.25% inflation.

The government says we've only experienced 5.25% inflation. 

I've looked at the buckets. I see how the Bureau of Labor Statistics decides that, and it seems fishy to me because I know I'm spending more than 5.25%, more than 5.5%... more this year.

I'm the exact same stuff that I spent last year, but sorry, I digress, Kevin. Back to tax.

Kevin Schneider: No, that, deals with tax because the standard deduction increased 5.5% from last tax year. Inflation... Mike and I are under the opinion- go to the grocery [00:03:00] store, go to the pump, inflation is a lot more than 5%. Now, it's better than nothing, I give them that, but you're still behind.

And so, that's why Mike and I love to do what we do is because we like to take as much opportunity against tax as possible, because although it is fair to pay tax, and it's good for the country, it's not good to pay more. And the government is increasing, in these deductions, just by a 5% inflation, and inflation is really 15%.

You're still losing 10% of your money when you're doing your tax return... not 10% of your whole net worth, but 10% when you're filing your tax return, you're paying that. 

So, that's why we like to do what we do. And looking at these rates, bunching is such a terrific idea.

It does take planning, and I walked a client through bunching just yesterday. They were Christians, and so, as a Christian, you tithe on your income, so 10%. You make money, the first 10% goes to your church, and so, there is a spiritual component,

there's an emotional component to giving, and then, there's a tax component. So you don't want tax to [00:04:00] always override your giving. So, I always tell clients there's ways to a donor advised fund. There's ways that you can smartly donate to charity. And let's say, the spiritual component outweighs the tax component, and that's okay.

If you want to give money as you make money throughout the year to charities that you choose or to your church or whatever it is, by all means, do it. 

Then the advice we're giving is just- from a tax standpoint, it totally would make sense to save your tithe fully. As you make money, maybe you take your 10% and put it into a savings account, invest it,

and then in January, you contribute that tax savings account to your church, and then, you tithe as normal throughout the next tax year. So, you are parting with the cash; you're not giving it to the church. You got to work that out yourself. I had an interesting conversation with a client about that specific thing.

Mike Pine: Yeah. I had a really interesting conversation about that last week with a client and I told them about this, and they mentioned, 'I don't think it's right to consider tax while I'm doing my charitable giving. Your right hand shouldn't know what your left hand is in the [00:05:00] pocket.'

And I said, 'No, but we're also called to be good stewards. Now, if you're paying extra tax, you can't use that money to invest in our economy, can't use that to grow a business, to give employees raises, to go out and buy stuff that helps to further the economy.'

One of the nice things that really increased greatly due to the inflation index was the lifetime gift tax or estate tax unitary credit or unitary allowance. It went from $12,920,000 to $13,610,000. What is that? What does that mean, and why should people think about it?

Kevin Schneider: Not many people are going to come across this number because what this is saying is your net worth, coming to this number when you pass away, this $13 million, this new number- $13,610,000, 

when someone dies, if their estate is worth that number or under or less than, which the [00:06:00] majority of Americans are probably going to be under that $13 million, there's no death tax or estate tax.

You just transfer the assets to the heirs. There might be tax implications there, but inheritance is typically tax free on the federal level. There are some states that have inheritance tax, but from a federal standpoint, yes, inheritance is typically tax free. Once you die and you're under that value, there's no additional tax filing.

Now, what happens is let's say you're worth $20 million and you pass away. Let's assume you're married. If you're married and your spouse passes away and he had net worth of $20 million, what you actually want to do is file a estate tax return, and you just want to claim the portability election. That's it. You're not going to report- there's no tax implication, but you're going to basically have that spouse's exclusion, that $13,610,000, if he died in 2024, that exclusion's then going to pass to the wife, and so, [00:07:00] if tax law changes and the exclusion number goes down to back to $5 million,

you've ported that exemption over to the spouse, so you can probably save a lot on estate tax. Because what happens is if you die and you have a net worth over this exclusion amount, you have to file a 706 tax return- it's an estate tax return. The tax rates could be up to 40%, and they get to 40% real quick.

So, the tax implications of this are really heavy, and so estate tax planning if you're high net worth, estate planning is a huge thing. And gifting is a part of this, which they raised the gifting limit from $17,000 to $18,000.

So there's a lot of strategy sharing a high level- kind of, the strategy of gifting over the years to your children, to your grandchildren, to anybody, you can gift any taxpayer up to $18,000 a year and not file a tax return. How does that play into the estate tax?

Mike Pine: That doesn't play into the estate tax. It reduces your estate value as well. You get an annual gift allowance [00:08:00] that anyone can give anyone else. The now $18,000 per year- and let's say you do that for 10 years in a row- $180,000, and then you die, your estate's worth less by $180,000 plus earnings.

So, it's a great plan and there's even cooler ways of doing that. I don't want to get too detailed on this, but like a family limited partnership- let's say I've got this business, or I've got a farm... I'm getting up there in age, but I have this farm and I want to leave it to my three kids if I die right now.

It could be worth $20 million because it's a generational farm. We don't make any money, but our land is worth a ton, and if we just follow the tax law, and that's it and we don't do any kind of tax planning, when I die, the family doesn't keep to get the farm. They have to sell it off to pay the taxes.

So, what you could do is you put your farm in a family unlimited partnership and you still stay the general partner. You stay in control of it but you start gifting the interest using the annual gift tax exclusion $18,000 to each kid each year, and [00:09:00] start gifting it away. You stay in control of it until you die, but anything that was gifted, whatever that value is, isn't included in your estate when you die.

So, if you do this right, and the family live in a partnership with a farm, hopefully, your family gets to keep the farm after you die, and you don't have to sell it off to pay taxes. You get some really cool things in FLPs- like minority interest discount, marketability discount. So, I mean, you could actually give, maybe, land where $28,000 - $30,000... applying those discounts, and get it down to the $18,000 limit, but you got to work with a good estate planner.

You got to work with a good tax person, and if it's big estates like that, you got to get a valuation expert to come and prove that you're staying under the legal tax limit each year.

I see this article's come out in the Wall Street Journal, usually once or twice a year- What should I be doing for tax planning? Just depends if there's not a lot of tax law change, it's almost the exact same article year after year. A lot of people did a lot of different publishers published the same advice, [00:10:00] but for someone coming on and wondering, 'What should I be doing for tax planning this year in 2024?'

--The number one thing I would say, and I say every single year and it's still very applicable, be proactive. Don't be a victim of the tax code. Leverage the tax code for your own benefit. Be proactive, strategize, know what your taxes are going to look like at the beginning of the year. If nothing changes, if

everything comes out like you're planning. You get your W2 job all year long, business performs according to your projections, whatever... know what your tax is going to be at the end of the year- which you're going to next April 15th- and work backwards from that. Okay. So nothing changes. I owe this $50,000 in tax.

Then start thinking about things that you want to do. What makes sense for your own personal financial planning? What makes sense for your lifestyle and your goals? Work with a financial advisor, if you have one help figure those kinds of things out, and continue to work backwards. If you need to [00:11:00] invest, but you know you're going to pay too much in tax, maybe you can get a tax advantaged investment where you get a much higher ROI, or the government actually helps you get into that investment and subsidizes your initial purchase of that investment.

Just be proactive. You want to know what to do for tax planning this year or any other year? Start being proactive. Strategize. Don't put your head in the sand. Be aware and start thinking about it. You don't have to become a tax expert. You just have to know where you're going and work with some experts if you don't want to become your own.

Kevin Schneider: Yeah. And we do this all the time. To give a specific example, I had a consultation with a client just yesterday. It's a family owned resale shop, and they have four children. One's going to college and the three others are in private school because they said that the school district of where they live is just so poor that they have to float private school.

So, they live, honestly, paycheck to paycheck, because of their education expense. They have a child going to college and they have three in private school. So, ideas that we think of is just- [00:12:00] 'Hey, are your children of working age?' --All four of them were, and all four of them worked for the resale shop. So, we're paying each child out of the business,

getting a tax deduction for it. We're putting it into a education savings account and ESA. ESAs grow tax free so long as you use it for education expenses, and you're now allowed to use ESAs for private school tuition. So now, instead of paying the schools out of the parents' checking account, we're getting a tax deduction out of the business, putting that into a tax advantageous checking account.

They're going to pay the tuition every month out of this ESA that's growing tax free. And so, nothing changed in their financial footprint. They didn't have to go get borrow money. They didn't have to go do anything. We just found ways to move money from the business to fit their personal life.

And there's many other ways- they're going to have monthly meetings at their house now because they have lawn care. They have a maid service. They have all these services at home. [00:13:00] They're like, 'Can we do anything with tax deductions?' --I'm like, 'Do you ever have clients or any employee meetings at the house?'

--And they said, 'Yeah, we do once a month.' --And I was like, 'How often do the cleaners come? --'Once a month.' --I'm like, 'How convenient! Your cleaners come once a month, your lawn care company comes once a month, and you have a monthly meeting at your house. Let's run that through the business because you have employees coming to your house for meetings.

Take good minutes, show good details of why it's a business expense, and then, let's start getting more tax deductions for stuff you're already expensing.' --Then on top of that, they're husband and wife owning this resale shop. They're both 50-50 owners and they take vacations every year. As a husband and wife, as shareholders of this company, I think it's very reasonable that two of the owners get away from the four children and hustle bustle of private school and school events and activities to get out of town and focus on the business.

So if y'all are going to Florida for a week, I think it's very reasonable that a few days of that, if not five days or seven days, depending on how much meeting is going on, [00:14:00] could be a business expense. Just document the purpose of the travel, the airfare, the hotel, the meals even. I mean, if you're doing this event as a shareholder meeting- and in their bylaws of their LLC, it even says that the owners are going to, once a year, have an annual review of the business plan-

let's just do it out of state, and go do it poolside. Be creative with it, but also be legit about it. Maybe not all of that is going to be tax deductible. We have to be reasonable. If you're there seven days, but three of the days, you're really hammering the business plan for the next year, whatever it is, then three-sevenths of your vacation could be run through the business. So, it's just finding small stuff like this that we do every single day, and you're not changing anything from a functional standpoint of your business. We're just harvesting tax deductions that are already there.

You just need to know about them.

Mike Pine: Those tax deductions exist because everyone agrees and understands. I would say most, majority of [00:15:00] people agree and understand, in order for a business to make money, in order for a business to be able to pay its employees, in order for a business to be able to pay taxes, it has to invest in the business.

There are ordinary and necessary and reasonable expenses asked to pay. IRS recognizes that, Congress recognizes that, and they give you the ability to deduct these ordinary, necessary, customary, reasonable expenses, but a lot of people don't think about it. They're like- 'If I didn't have a business, I'd have to pay for this stuff out of pocket after tax.'

--But if you do have a business, and whatever you're spending money on is helping that business, it may very well be it's probably deductible within reason. 

So, just use the tax law to your advantage, work with someone like Kevin, or your CPA- work with someone to figure out what am I already doing that could be helpful on my taxes and talk about it. 

So many people don't actually ever talk to their CPAs, Kevin. I find this fantastic! People, they don't know their CPAs or CPAs [00:16:00] don't know them. They send their documents once a year. They answer some questionnaires. They don't talk with their CPAs.

So, the CPA doesn't know my kids work for me and I'm sending them to school- is there anything you can help me with that? They have no idea. So, it's important to communicate and actively, proactively work with a planner, work with an expert to mitigate your taxes. You shouldn't pay what you don't legally have to pay.

That's what I'm saying.

Kevin Schneider: Great. Agreed. And so many times we see it when prepping a tax return for a new client. Because earlier in the video, we were talking about 2024 updates. That's for income earned in 2024 on the 2025 tax return.

So, for 2023, we already know the rates. We already know the standard deduction and all this stuff.

So, what pains us is we get a new client for the 2023 tax year, and they come to us in March or April saying, 'Hey, I heard you guys. I want you to prep my return.' --And they think we have this magic wand. 

We don't. We don't have a magic wand when 12:31 hits, when that ball drops, our magic wand expires for that [00:17:00] tax year.

On very few occasions, you could do a SAP or you could do some deferred cash tax planning after the calendar year ends, and to have it account for that prior tax year. Very few occasions. So, majority of the tax planning needs to be done in the tax year that we're doing it, and so, I 100% agree, Mike, that nothing hurts more than seeing a new client come in, in the tax year

we're already preparing them for, and seeing, 'Oh, if only they came to me four, five, six months earlier, we could have saved them thousands.' -- But it's better late than never, so don't be discouraged by it, but try to be as proactive as you can with the CPA you have now. And if you don't have one, then please reach out to us because we can definitely help you out.

Mike Pine: Agreed.

To Learn More

You can reach out to Mike or Kevin on their website Pine and Company CPAs - Investment Tax Strategy | Ongoing Tax Monitoring | Tax Filing (pinecocpas.com)

They would love to help you find the financial freedom you’re working hard for and deserve. 

To access the bonus tax content mentioned in the episode, go to https://www.hiddenmoney.com/bonus 

To start using the tax code as a tool to grow your wealth, schedule a call with Pine & Co. CPAs: https://www.pinecocpas.com/consultation

Disclaimer: The content of this podcast is not legal advice and is meant for educational purposes only.