On this episode of the Reinvent Rich Podcast, Andrew Randisi, Certified Financial Planner and Senior Financial Advisor, joins Marty Abo and Lesley Buck to talk about why planning ahead is a smart tax move.
Lesley: Welcome to our next podcast here. We’re joined today by Andrew Randisi from Pennsylvania Capital Management and Marty Abo from Abo accounting firm in Mount Laurel, New Jersey.
Andrew: Marty. It’s a pleasure. Thank you for making the time to come on the show today. I guess what we want, we’ll want to delve right into it and tell us a little bit about the different types of tax and accounting services that Abo and company provides its clients.
Marty: That’s, it’s great.
I’ve got a good tax background. I was president of the South Jersey estate and financial planning council.
I’m on the board of a Deborah hospital. I’ve been around in a bank where we focus mostly on high net worth individuals. We’re just low networked individuals, tax oriented. That’s about 50 percent of our practice, a boutique. And the other 50 percent deals in the realm of dispute resolution, which ties [00:01:00] it in because it’s for like shareholder disputes or divorce or estate planning, what’s the value at a company, whatever on I will tell you, which has nothing to do with taxes and I want to get into it. But I learned from big firm accountants.
And one of the things that I learned in my earlier days from a big firm is that I know what I don’t know. I had one tax attorney that says, yeah, but Abel, what makes you really good? Isn’t just that you know what you don’t know, but even better, you know who knows what you don’t do oh, I said, I like that. I’m stealing that. So my point is, it’s three, three pockets on the same pair of pants, tax planning, financial planning, payroll taxes, income tax planning, their business planning, they all in Detroit. And I know what I don’t know. I’m in a frustrating part and by the way, I speak for my colleagues, the CPAs, [00:02:00] accounting profession, is classic Abo.
You’ll ask me a question or somebody, hopefully in my office, a question, you’ll probably get five more questions back. Abo, what’s the answer? It depends. And it’s like with financial services.
Andrew: Exactly.
Marty: So, I spill it. I raise a lot of questions. You’re going to ask me some. I’m rambling now, but it’s this is important, especially this time of year. I’d like to think I look at somebody’s tax return.
And a lot of what we do and we’ll get into it because do your own return, look at it, do it on TurboTax That’s fine with that. You just get somebody to challenge it.
Even if you think you’re doing it on TurboTax or it’s a simple return you’re just doing it It’s not necessarily as, well let’s put it this way. Just as important as the answer to the question you asked [00:03:00] is the answer to the question you didn’t ask.
And I don’t want to be the CPA that comes in Wow, Lesley, you could have done this. You should have done that. I’m like the pain in the neck that says because 2024 is fait accompli for the most part. We might be able to dig out some deductions or credits you weren’t aware of or go back to the drawing board but for the most part, not only can we still do things for 2024 or at least, you know what, even two months in advance, get ready. ’cause you’re gonna owe blankety blank come April 15. But even more important, let’s use it as a springboard right now. I got you under my claws.
Let’s talk about 2025 or let’s put it down to doing it. It’s the concept of planning. Estate planning, tax planning, business planning. We can do a lot even afterwards with seasoned financial advisors or [00:04:00] the attorneys estate planning, even post mortem. What, isn’t it great if you tie in this financial planning, estate planning, tax planning before it’s too late.
I tell people go to the bank when you don’t need the money, don’t wait for when you need the money, it’s just doing it. That’s a long winded response to what we do.
Andrew: Marty. what are some of the dumb mistakes that you see with new clients that come to your firm that they’ve made on their tax returns?
One that we often see a lot and what often gets us wanting to hook our clients up with either if their current CPA is not really giving them the advice part or they’re do it yourselfers. We often see a lot of clients disregard the need for wanting to pay tax estimated payments. I have a quite a few clients this year where it’s going to be a cold slap in the face of not only do I owe interest and penalties because I didn’t pay enough along the way.
Marty: Let me give you give the audience and you some technical [00:05:00] insight. So here’s the scoop. The taxing authorities want their 90 percent of their taxes by year end. And you do that by way of withholding or estimated taxes or a combination of both.
Okay. And that’s fine. And we spend a lot of time in October, November, just actually in February, March, looking at it and roll it forward and update at the end of the year. Let’s see where we are. And here’s some tricks that we may spend the rest of this half hour just on this point on your question. But I wanna, you’re using the tax return as a springboard for the planning.
So full circle now. Very good point. Taxing authorities want their taxes paid in by year end by 90%. If you don’t do it, there’s some playing around or technical things that you can address it It’s a borrowing factor but [00:06:00] it was even cheaper borrowing from the taxing authorities because no matter how low the returns are in the marketplace, as long as they were ready and they could hold off paying until April 15th, the money. Or even if they were borrowing, it was so low and you could do better and it was a cost benefit.
Problem is now markets have changed, get a little bit nervous. This is not my call, but the interest factor, it’s penalty. It’s an underpay, underestimation of tax penalty. There’s all kinds of penalties, but the not paying in enough during the year. Is like an interest factor and currently for the feds, it’s 8 percent per annum, not deductible.
So my point now, by the way, it still may be cheaper borrowing. Lesley’s going to owe. Because she got this big bonus at Pennsylvania Capital or she got this huge [00:07:00] capital gain because you told them not to invest in Enron, but to cut whatever it is got this big gain. We’ll talk about the exceptions, but you may fall when it was like minus 2 percent or an earnestness.
I’d rather even pay the. 1 percent penalty per annum, not 1 percent per quarter, but 1 percent annually. So if you were deficient in the first quarter, you’re down by three, one third, one fourth of 1 percent or whatever, even with the penalty, it was, I can make more in the marketplace or even worse.
I got such credit card debt. No offense, get ready. It’s going to be due for what Abo says by April 15, but paying credit card rates of non deductible of 20, 30%. So your financial planning is an account. Here’s the scoop though. Here’s a couple of tricks. There’s a big exception to that rule, exceptions.
And [00:08:00] one of the rules is generally If you make more than $150,000 in income in the say, 2024. If you make more than 150, if you have to, if you paid in, at least there’s 110 percent of the prior year tax. That’s a safe harbor. It’s 100 percent if you’re less than 150 grand. So my point would be, hey let’s pick on Lesley.
She’s so much fun to pick on. But Lesley comes in first time. I’m looking at 2024. There’s not much we can do. Lesley, here’s the number getting ready cause by April 15 we got to get this in. But now Lesley is an independent contractor or her spouse works and just because I’m making 10 grand and I withheld.
Wait a minute. You combine my 10 grand with my spouse, my partner of $400,000. I’m not in a 10 percent bracket. So I don’t care if you withheld [00:09:00] anything. No, that same income on a joint return might be taxed at 37 percent or whatever. So the point being going fast let’s just say talk to the accountant but if you meet the exception, I might go to Lesley and say, hey, guess what Lesley your prior year tax was pick a number, 40 grand, I’m gonna want you to pay in at least on estimate 2025, put whatever year you want or whatever decimal point you move it over.
If your 2024 tax was $40,000, in your heart of hearts, I’m making $200,000 more this year. I had this whopping capital gain. One of the big exceptions to that penalty is if the prior tax was 40 grand, I’d have Lesley make sure she paid in through withholding or the estimates timeline, $10,000 a quarter.
And my point being is, [00:10:00] even if I owed a million dollars and I want to adhere to that, I’ve, I’m going to have. Somebody is going to tell me or tell Lesley, put the money aside or earn on it, whatever you can earn on it or get ready, be liquid enough because next April 15th of 2026, you’re gonna owe 900,000 in tax and you’ve had it.
It’s not quite a surprise. You’ve earned on it. The problem is You got to adhear to that. One other exceptions to the rule, which we still see when you can do it before the year is withholding is different than an estimated tax payment. So if I’ve got enough time left before December 31st, I can adjust or play around with withholding, legitimately [00:11:00] tell my employer, ’cause he doesn’t, he or she doesn’t know about the extra income or my spouse’s bracket or whatever.
Do a tax projection earlier on or do it yourself on TurboTax. But here’s the scoop. Withholding. And again, I’ve been practicing a long time. I’ve never had this challenge, but theoretically you got to be careful in doing this. But if withholding is counted as all year pro rata, I could look at my buckets of income.
I could say, Hey, you know what? If I’ve got RMD or I’m taking money out of an IRA Um, I can increase my withholding. Okay. I’m getting from social security. I can have them withheld the various buckets. So picture this. If I’ve got enough income left before the end of the year, and Lesley knew.
She knew that she to meet the safe harbor, she would make $40,000 paid in $10,000 a quarter [00:12:00] plus say her withholding, whatever. And she does a projection. Maybe God forbid she listens to me, and we got time to do it. If you remember. I might go and let’s see, I even did this in June and I do a little tax projection and I said, you know what?
It looks like now that in June I do my tax projection now as if I was doing my 2025 tax return and I say, it looks like if all this equals and it’s only as good as the underlying assumptions. But if my assumptions are correct and my accountant or Andrew were doing the proper planning formula, Lesley herself it looks like I’m gonna owe about 50 grand.
And, if I paid it, I already missed the first two quarters. So I’m already deficient for those. But if I go and I say, you know what? I’m at Pennsylvania Capitol. I get bi weekly payroll or bi monthly payroll, whatever. I still got pick a number, 10 more pay periods left or [00:13:00] even better, I could divide it by 10.
Theoretically, by the end of the year, I would have paid in the safe harbor. They don’t look and see that it was late. I’ve been doing it and I’ve seen it successfully for in a closely held business. If I’ve got even a CEO of a public company, but he’s getting a bonus or a year at stuff, I said, Hey, I’m getting a bonus to 500, 000 great dump $400,000 into withholding.
IRS could always collapse. I’ve never had this thing. Same thing for state. But not only do I get it in before December 31st, the W2 says this. I didn’t have a chance to pay estimates. I’m not late because even if I start, even if you did it late. You missed the April 15th 1st quarter and then the June 15th quarter.
You’ve cleaned it up for this thing. That’s a long winded response, but to not do it the other. I think I’ve addressed it in your problem [00:14:00] that we see this all the time at this point. I just look at it and says, Hey, guess what? This is what you’re gonna. Oh, there’s nothing we can do. We’ve lowered the tax as much as possible.
And by the way, we’ll make the computation that you haven’t paid in enough during the year. Some people tax individual taxpayers may not even notice they’ve been hit with the penalty because we, as the tax practitioner, it goes in. So even if I’m telling you that hey, Les you owe $20,000 for 2024 yet.
You won’t see except it’s a line on there that I’m telling you to pay 20, 300 because you didn’t pay in enough during the course of the year and you should have done it. Long winded response. Talk to your planner and doing that. That is thank you for bringing up. It’s a classic thing.
Andrew: What are some of the other ones We’ve also seen clients that have come that we had one client. That’s been audited quite a few times because not giving, getting all the 1099 to the [00:15:00] prepare.
That’s been one mistake. We’ve seen quite a bit. We’ve had seen other clients miss 1099 hours for IRA distributions. Another one that I often see is clients that are on we do have some clients that are, I would say, fortunate enough to retire early, are on the Affordable Care Act.
They did not tell the exchange along the way as their income might have increased. And then we see all of their Affordable Care Act credit get recaptured at the end and a huge tax bill happened.
Marty: Let me address a couple, let me parse that out.
Just had it yesterday. Got a new client.
Andrew: Okay.
Marty: He prepared his own as a patent guy. So very anal did his own. But now we moved out in New York, New Jersey, Massachusetts, blah, blah, blah, you got it.
It’s complexing gave it to us on the first thing that we do is very carefully looked at the last year return.
Didn’t [00:16:00] matter that he prepared it himself. He could have had it elsewhere. By the way, mistakes happen here. We have a review process, but it could have happened here and I missed it. But the first thing we look at 2023 because it’s a new client for us. And we got all these 1099. You know what? I don’t like letters from the I. R. S. And you don’t either forget about the audit. And now they’re doing so much by, by letter or emails or letters. So I can, the audit is a different issue and we try to stay away from those. That’s why you disclose on a return. If I got an incorrect 1099 and I know it’s going to be a headache for my employer or whatever to change it.
I’ll still tie into the 1099 as and then disclose on the return. Incorrect, you want to try to prevent the notices escalating to, and it costs you more to respond and the account.
So my point in this example was the [00:17:00] last year, yeah, you did a good job or frankly, even if you did something incorrect, we’ll evaluate. It’s not worth opening up a Pandora’s box to file it. There’s the cost of the accounting. There’s one more return floating around out there. Maybe it opens it up for other things.
But the real reality is I didn’t have any changes and it was okay. One of the things my associate missed, not going to mention a name, but I personally, that’s why we have a review, is, oh, I looked at 2023 just to see if there’s missing. Notice last year, he was in a without getting too technical into a health savings account.
Andrew: Okay.
Marty: He did it pre tax. So it’s not the deduction. I’ve seen a lot of people, including accountants, including us miss it. But I saw last year that he had. He picked it up properly some distributions properly that shouldn’t be made for tax, that were done [00:18:00] and you can check, but you got to see the return.
He never sent us with all this new 1099 stuff. He was sending us by e filing. I’d never met him. And I just happened to see that last year. It’s just one more thing. By the way, we didn’t miss it. And it’s not but he didn’t give us the 1099. We had to go back into it. Oh, yeah, he said now he sent it to us.
And I just had to ask him, did you the $5,000 that you took out of HSA? It’s not the contributions to HSA because you had what’s called it was pre tax. So your employer paid but the issue is You got a 1099 floating around out there So all we had to do is pick up the form and check off that it was used to pay qualified medical expenses.
That’s it.
Andrew: Yeah, pretty much nothing. Nothing happens.
Marty: The other thing that I see that It’s not an error you gotta know that tax law if there’s a position to [00:19:00] take. Even the IRS is wrong or it’s interpretive. So the more you think an auditor would challenge it. The more you want to document it.
But there’s nothing wrong with taking an aggressive, albeit supportable presumption, have it documented, going for a deduction and a classic thing on that. I wouldn’t want it a mile on amended return, but we’ll talk about that in certain things, whether or not itemized or bunch and take the standard deduction.
But one of the things that I just see all the time and you gotta know the technical part and the first thing is that it’s got to be principle place of business exclusively used for business.
I know you’re working from home, but I also know you got an office. Offense, but your home office, even if you use it in 200 percent is not the kids and dogs barking, but [00:20:00] you’re not going to qualify for the home office deduction.
But then all of a sudden, you got your 1099 employee, person, you’ve got other income, you’ve got a legitimate LLC, that which is just could be a Schedule C. You got other income. Or this is your only place. I got so many people working out of the house now. And they’ve got it on a return, documented.
Okay, but and you even have the optional, the lazy man or woman’s outlet that says, oh, they’ll let up the 1500 go when you’re missing a missed deduction, but they’re afraid of it. An accountant says you can’t take a home office deduction. And let me tell you this thing. And I’ve been yelling at clients.
But for years, well before COVID and now the virtual office I’m telling you, this is my principal place of business. So I’m not doing what conjures up in your mind the home office deduction. But there are [00:21:00] expenses that I can submit to my employer, which is me for my home office expenses that I incurred that can be reimbursed.
Okay? And it’s like the same thing some of your internet but an allocation of the Comcast bill. Oh, that’s right.
Or you look in the back. That’s just as much as deductible as this stapler, as you see all these pictures around, and this is the office here, but just as much as that staple or what I paid for the wallpaper. And let’s assume I was home. It’s expressly I’ll submit it to my employer for reimbursement or deduct it on my Schedule C or my partnership tax return.
Get reimbursed for it because it’s a legitimate expense. And when you see that. That tree in the back at Michael’s for $90 if that was live [00:22:00] Trust me. I’d kill it if that’s at home. What’s the difference on there those picture frames the laptop on that and so I see so many incorrect not taking advantage of a home office or taking it when they can’t.
Andrew: We have just to stop you real quick. We have one client who very reluctant.
She’s works from home. I said, why don’t you not deduct the business percentage of your internet home office deduction? Too afraid to want to do that. The other thing we often see a lot with our self employed clients is I often haven’t have to bring it up to the accountant after the fact.
A lot of them don’t deduct the self employment health insurance premiums, or if the client is we have a couple of clients that are self employed that are on Medicare. I said, where’s the medic? Where’s the Medicare premium being deducted against the business income?
Marty: Excuse me, tax preparer in me got this all the time.
And I get on my associates. I said, if just realize that [00:23:00] most people fortunately probably don’t qualify for the medical deduction because it’s not over seven and a half.
Andrew: Seven and a half percent.
Marty: And then not only does it have to be over seven, I just had this guy, not only does it have to be over seven and a half percent of your just gross income, but that, let’s assume, oh yeah, this is great.
It’s deductible. It’s over that. Then you start to get, but it’s not even going to help you anyway, because we’re going to end up taking, as you’re probably aware, most of the people know, going to take the standard deduction instead of the itemized.
I’ve had people that have some self employment income, even if it’s not fully on that, that can qualify.
And my point is, visualize this. If they’re on Medicare, they get a 1099 assault, whatever it is, SSA. And it shows the taxable amount of the gross amount, which if you’re over 35,000 85 percent of it is going to be taxable or whatever.If you looked at the form. It shows [00:24:00] that Medicare or prescription plan through Medicare, whatever it is.
Andrew: The B, the part B and the part D premiums.
Marty: But there’s two things I want to get across. Number one, even in our office, but I catch it on our review.
I said they had some Schedule C income. They’re also self employed from the partnership, but they also got to know you too and doing on this thing. So I’m saying, don’t just put it on the input because if, on most of tax programs, if you put it on the input on the social security page, it’s going to go over to the medical and lose it.
What we’ll do and most of the software will do this even a TurboTax. You got to be careful. You do it right. Don’t enter it there for the social security. Enter it for the self employment insurance because what will happen and this is for I don’t think you got to it, but you’re about to the people that don’t do it on TurboTax or don’t follow it to this thing.
Just give the [00:25:00] forms to the accountant and do it. And the accountant is going to input like that. And I said no. And what happens is. to the extent that you have self employment income, not your W2, but self employment income. You can deduct the health insurance above the line in addition, number one, we’re number one.
If you’re getting a standard deduction, you wouldn’t have got any benefit. Even if you’re getting the medical doesn’t help you as much. But the fact of the matter is we put it and put it over there. Then ask the question, which they never give us on the organizers we sent out. But I, hello, you’re looking at Medicare here.
I know that if you put it in and he only had, I had this for a client. $400 in the net income on a schedule C, the self employment income, but he gets a $200,000 W2.
If I put it there and I know he paid in a [00:26:00] Medicare supplement or on the thing $1,000, it’ll at least deduct above the line 400,000 and then the rest goes into medical.
Computers do that. So you raise a very good point. The other thing that I’ve seen missing a lot that once I know that they’re getting Medicare, I don’t care if you’ve got it or not, just in case I move it over. But then you’re going to ask if you, if I see you doing Medicare, what about the supplement?
Oh yeah, that’s right, because they’re paying that personally to Ed Aitner or whatever you’re doing. So you raise a very good point on the self employment. I’ve talked about be careful using the lingo. of, home office deduction. Two things. I don’t think it’s a red flag if you’re deducted to it, you just legitimately document it well and fill out the forms correctly.
But then consider the I’m deducting above the line, even if it’s not a home office, because guess what? [00:27:00] If I bought, I’m looking at yours. If I bought that plant at Michael’s and it was my home just because I do see clients there, but I’m not deducting 10 percent of my utilities or whatever. That wallpaper, the pictures of all these kids.
It’s just as much as decorating. You’re just thinking outside of the box. It’s not going to trigger an audit.
The other problem that I’m seeing more and more of.
It’s just so complex out there and nobody even sees it. But I’ve seen people that give a bonus or I’ve seen a law firm wrong that their W2’s. But if they got they brought in a case and they got a 30 percent bonus, they get like I said, 1099. I want to tell you, I don’t care. The real risk is not just on the employer because saying they’re doing the same things.
You can’t pull it out. It’s not like he was coming in cleaning the office. We also pay him as an attorney. It was in the same thing. It all should have [00:28:00] been on the. W2 and what they try to do is maybe to escape benefits. Maybe they’ll save a little social security. I, it depends on where your numbers lie.
But the point being what I’ve seen people try to do and I says I won’t do it is that they got And again, you put the decimal point where you think it belongs. It could be 10 grand, it could be 100 grand, could be a million dollars. Okay, I’ve seen it all ways. And even if it’s only say, 10 grand. Not that’s not a lot of money, but it’s not for me as the accountant to be material.
I’m only concerned, I don’t want you to pay a thousand dollars in accounting just to get you to see to do it right on that. I’ll alert you to it, but I don’t want to be the biggest line on your personal P& L, but I will tell them. All of a sudden they got that $10,000 and some hotshot CFP suggests, Hey, why don’t you put it into a SEP or a solo 401k.
And you [00:29:00] can do that, get the deduction. The problem that I have with that. Even though the real exposure is on the employer for not really, it really should have been on a W2 or Christmas bonus. Wink. And I got something, they pay it out and they don’t even issue a 1099. The problem is not only is it a problem for the employer that could screw up their whole retirement plan, all kinds of penalties, excise taxes a disaster.
But even on the individual who deducted on say, he got a 10,000 bonus. He had no expenses, but he thinks because it’s self employment income that he could put, I want to put in $2,500 away. And I’m already in a 401k at the office. I can’t put in an IRA. They’re very special rules. The point is that it’s incumbent upon us to advise says undo that because it’s too much of a risk that [00:30:00] you know, they see it, they see your W2, your luck, you get audited or somebody else.
And now it’s not just you got to pay it back. They could disallow your whole plan. So you could have put him putting in $2,500 for the last five years. And now it’s like about 70, it’s worth about 10 grand. Not only are you going to have a 50 percent penalty and all these things are doing on this thing.
So there’s a lot of traps for the unwary. But the other side of that, the beauty of it is that you still got another bite at the apple because if there’s legitimate earned income or we never really did it. We didn’t open up a plan. Calling your friends at Pennsylvania Capital and say that you’ve got, we want to put some money away.
I don’t care if it’s this or not. IRA is a separate issue is due April 15. But if I have some other income, even if I’m already in a 401K or, by the way, even if my spouse [00:31:00] makes over the limit that I can’t even if I’m not in a plan, I couldn’t put an IRA. I’m going real fast on this and dropping the bomb.
But let’s assume I got my dermatologist doctor husband that makes a lot of money. So it kicks out me being in the IRA I’m working for somebody as a dental hygienist making my money. But I also did some consulting on the side or I did for another dentist or I’m doing some or I’m doing something to make some extra money.
And I got $10,000, you’ve got until the due date of the return to open up and deduct a SEP simplified employee manually, deduction for you plan. And if you don’t have the cash, but it’s a good idea, we plop it on extension. You then have another six months to fund that thing, even though it’s going back and saving your tax for 2024, even though you don’t do it till October 15th.
So [00:32:00] there’s a post. After planning of his legitimate getting an extension in today’s environment is nothing. I probably even finish the return. Maybe get an extension out, pay whatever you owe in or except for the set contribution. You don’t have the money for that until May, June, July, even as late as October when we finally file the return.
But at least you got, you can still open it up on that. What else you want to know?
Andrew: Marty, that actually leads me to my next question.
Marty: Oh, are we good or what?
Andrew: You mentioned just one of the strategies retirement plan, retirement planning that we work with clients on being able to go back in time and reduce the prior year tax liability.
What are some other strategies that, we’ll call it self, the self employed small business owners can do to further reduce the prior year’s tax liability. One that I often see a lot is with our clients that have set up S corps determining what is the W2 [00:33:00] and then what goes as the partnership distribution, to save oneself 15 percent plus self employment tax.
Marty: Unfortunately that’s well beyond the scope of this. That’s not my cop out. It’s just, it’ll take us down a rabbit hole. There’ll be really technical and applies to some or not.
Andrew: Got it.
Marty: But it’s still not a tuning. And it’s up there. They don’t know how to deal with it. And by the way, that’s some errors we see last year.
Wow. Somebody gave me advice or I read somewhere. What a great way to do it. Okay. Is I’m a self employed business, not an LS and I haven’t elected S corp or C corp, and I don’t want to get into that. Should you be a sole member LLC, you convert it to an S corp. By the way, that is me. That’s what I do.
I’ll review your tax return for you.
If you’re doing it yourself, that’s wonderful, especially in this environment. There’s not much you can do if you’re a [00:34:00] W2, your business, if you’re self employed, but you’re an S corp, your game should be get, and that’s a different ball game. Submit to your business as much as possible and adjust your compensation.
And if you use your car 90 percent business because you live a mile away and whatever on that -and I got another car I can use for my personal business, okay, and your partner is really commuting for, or he’s got an old clunker that he’s not, doesn’t have the same lease environment you, but with 50, 50 partners, you can even up on your own by what we take or whatever.
But I want to submit to my business because I’m only a W you’re a W2 employee. The worst tragedy, according to Abo, is not getting the benefit of it. You come and say, Oh, I don’t want to do that. It screws it up. We don’t have the cash flow to do it. Or I don’t want to, my partner’s going to think I’m a pig.
I says, no, you have the business you [00:35:00] legitimately submitted to there. He’s you’ve got effectively I’m picking a number 10 grand extra benefit out of my S corp.
Maybe my salary is going to be a little bit less. Wait a minute. I don’t want you just paying for it. Maybe we’ll have to take more of a $10,000 salary or evens up because he did.
He went to a conference. You went to Atlantic City. And that’s great at the road, and stayed at the Borgata. We had the firm pay for that. He went to Hawaii, still legitimate, went to all the things. But wait a minute, you’re taking out an extra quote unquote benefit. So my point, long winded response is that, You can’t do it too much. Have it it’s also sheltered a little bit more in the business. Maybe I’m picking a number, a million dollar Pennsylvania Capital income, and then it gets down with all kinds of expenses versus sticking out, which you can’t even deduct it anymore. But we don’t know what’s going to happen with [00:36:00] tax changes and that’s beyond the scope of this too.
That’s coming around the block that they may reinstitute. They may get rid of the salt cap and doing it. So my point to you with that thought about salary, one of the errors that we see, and I say, you know what, we looked at it this year. That’s great. Somebody saved it. Because If Andrew took out of his business 100,000 and he owned it 100 percent and he let it flow through to, it took out $100,000 salary.
Hey, he’s going to have that some credit, but this is great. I saved not only on the 15 percent because I got two pockets on the same pair of pants, right? I’m the employee. I’m the employer. So you save about 12, 13%. So isn’t that great? That’s what IRS is looking for. What’s the magic number? If I knew that I would say take it out $10 less.
But I will tell you when I looked at your S Corp [00:37:00] and they put, they didn’t put on a line or, you got this accounting firm or a law firm or a medical practice and he takes out a $20,000 salary and he lets 400,000 fall through.
Andrew: It looks very fishy. It looks very fishy. Yeah.
Marty: Fishy. That’s what they’re looking for.
So the buzzword is reasonable.
Andrew: And then also, correct me if I’m wrong, you’re also shooting yourself in the foot for a social security check, because you’re paying less into the system.
Marty: That’s a discussion.
That’s the thing I will suggest to you that we just went through that yesterday. I’m older, so I’m, I get Medicare. I waited the extra set, all of that stuff. first of and I’ve got people that are older than me that took it because I have good genes. I waited till the extra you’ll get into that.
Andrew: Yep.
Marty: Whatever I do, it’s not impacting what you’re going to do. But if you’re really young, then you got the issue. And by the [00:38:00] way, not only my financial advisors at Pennsylvania Capital, but the Social Security website is extremely helpful. And by the way, even calling them, they’ll explain it to you. What’s the pros and cons of that.
But I would suggest to you that I just had this yesterday that some people don’t even don’t take it at 62, but they’ll look at, because that you really lose out on in terms of taking social security, but a lot of people take it as soon as they can. God forbid, if you have to take it at 62, because you’re not going to live long enough.
God forbid you really need the money.
Andrew: Yep.
Marty: When you don’t have the investable assets that I can really use at Pennsylvania Capital I’m almost at pro bono. Oh the fact of the matter is some people don’t think social security is going to be around Some people don’t know if I don’t know what Mr Trump is going to do with getting rid of interest taxable or this or getting rid of social security on this thing I’ve had very [00:39:00] seasoned people that it’s a numbers game.
Should I buy term and invest the rest?. You need to, you need somebody like you guys to really work the magic. That is a factor, but that is not as big because to put in, I need the money now to reduce my salary now and to pay in for the next 30 years or whatever. It’s a numbers game.
Does that make sense?
Andrew: Got it.
The next topic that I also goes with self employed business owners. Can you elaborate a little bit more on the, and you mentioned it in your materials that you send to your clients, the pass through entity tax, the PTET and how that works? Because it’s, it seems to be a workaround that a lot of the states have developed to get around the salt cap of of $10,000 dollars.
Marty: Yes. Here’s the scoop. I apologize, but I’m going to take this. I’m picking the baton for me and going. [00:40:00] This is really complex. And it could be screwy. And I assume your audience understand.
So let me just briefly go into and anything that anybody listens to that, the buzzwords will be look, Google it, call Andrew, call me, but Google it or suddenly ask their accountant without getting into it, after 2017, good, bad, or indifferent, whether they agree or not, the Trump tax provision lowered the tax rates.
They increased substantially the standard deduction. Don’t let it fool you that old days where he forgets about the postcard. It’s just moved around. It’s not the one page, but he’s got 15 other schedules that say schedule one, two. So there, there ain’t no shortened version. But [00:41:00] in 2017, after that, they lowered the income tax.
They increased the standard deduction. So more and more people should be on their own. They got rid of miscellaneous itemized deductions, which, to be…
Andrew: The one that a lot of our clients really who is the investment being able to deduct investment advice, says the miscellaneous itemized deduction or
Marty: The accounting thing.
Unless I can allocate it reasonably to the business or whatever. You’re absolutely right. That financial planning, the good news is that it’s deductible as tax plan, tax rate. The bad news is it’s not deductible. But those miscellaneous itemized deductions that go on around, I get these questions all the time.
Client just had a dropped off a retired therapist. I said, I should be talking to you. You should be talking to me. But he asked me a thing. He says, I won’t know until I go through the numbers, but taking a standard or itemized, we’ll talk about that. But here’s one of the things that came in [00:42:00] that could go away that they’re talking about, but we don’t know.
And it’s current law is that. They limited state and local tax. That’s what Andrew referred to people out there as the salt tax. Cause you’re using your own buzzword too. People are like, I don’t have salt, I’m trying to be on a salt free diet. I got my A1C so high. The SALT tax is state and local tax.
Andrew: Precisely.
Marty: And here’s the history of and how you get around it or how you don’t. I’m shocked that New Jersey was one of the first states and the IRS approved it on what’s called debate tax or a workaround or whatever you want to call it to get the deduction. I was shocked on it. But Jersey was one of the first.
Pennsylvania got a little bit of an issue, but you got Connecticut, California. But what are we talking about? Especially [00:43:00] if your state tax, which is your state income tax, as well as local, which is like your real estate tax. I don’t care what you pay don’t bother me.
but it doesn’t matter because of the income taxes, and let’s say you pay 50 grand in income taxes and another $10,000 in real estate taxes in Pennsylvania the max that you can deduct is 10 grand.
And you can appreciate why the Californias of the world and the New Jersey are in uproar. You don’t hear much from Florida, doesn’t have an income tax. Seattle doesn’t have a state income tax. Texas doesn’t have a state income tax. So they’re not but we get kind of screwed. What part of the worker and then, by the way, they tried.
Love it. Even governor Christie when he was governor saying, how about this? We have the state of New Jersey because it’s not fair. We’re going to say. [00:44:00] It’s a contribution to the state and you can deduct it as a contribution deduction and we’ll credit it to your income tax. That was great. Didn’t fly in IRS, but I love that kind of thinking.
But IRS came down and I, it’s not gonna do it. Or even the treasury said, no way. It’s the… it’s not a quid pro quo it’s the substance over form that’s going to work. But now what they have, and that’s in place, I want to say 2020-21 now we’re well into a 2024. If you’ve got income that flows from a S corp or a a partnership or multi member LLC.
Andrew: Yeah,
Marty: A tax flow through entity to the extent that flows through and you make a state election that you got to do every year. And I don’t think Pennsylvania has [00:45:00] joined the party so good in some of the states, but you can look this up.
What will happen is you make this election, the business is paying the computation At different rates and you got it. This gets tricky, but it’s the accountant let them do it on this thing makes the computation. So if I had a hundred thousand dollar flow through on my S corp to me okay.
And roughly for New Jersey, they, you may pay the PTE I paid in New Jersey what did I say? A hundred thousand?
Andrew: Yeah,
Marty: About $5,500. Okay, that’s great. I’m gonna pay the state of New Jersey, $5,500. I’m well over with my real estate taxes and everything. So I’m not getting Zippo in a personal benefit.
What the abate election it’s called bait because it’s business alternative, something it doesn’t matter. It’s the passive income to the extent that you did it. I could have a [00:46:00] whatever tax, but allocated to that the incremental tax I have the business pay for. And what happens is this is like the city of Philadelphia tax or New York City for state purposes.
It’s deducted by the business for federal purposes, which means instead of getting my K1 that shows a hundred grand.
Andrew: It shows ninety four, ninety four, five.
Marty: See, that’s what happens when you go to Drexel. I went to Syracuse. I just conceptual, but you did that math like that. Okay, so effectively, and it’s, I have people that are brighter than me a lot brighter and make more money than I’ll ever see not grasping it.
But you got it that effectively same thing happens. I’m not getting the itemized deduction. By the way, I don’t even take itemized deduction. So it wouldn’t have worked anyway. But now I’ve effectively got instead of being taxed federally.
Okay. on 100 grand, I’m only taxed on 94,000. And by the way, [00:47:00] I’m getting that $5,500 credit that the business paid for me. It’s like withholding against my New Jersey tax win you’re with me as a result. , it mitigates that. And by the way, if the return is done correctly, you don’t get the deduction for New Jersey, but that’s okay.
You wouldn’t have gotten it before. Okay. So my, and because Jersey is a gross income tax, Pennsylvania is a gross income tax. So my point being is my K1 from the S corp, your S corp isn’t just, it says 94,000. My K1 for for New Jersey purposes is a hundred grand. I’ve saved pick the number, 37%, 25% of the 5,500 for doing nothing, just manipulating around.
That I see a lot of times. I saw that. I don’t do this automobile dealership, but he had [00:48:00] me look at his tax return. It’s done by a very seasoned. That’s a whole specialty, and I know enough to be dangerous. I just reviewed his return, but for whatever reason, they were out in the Midwest. They didn’t do this.
You know what? On a big number. That’s why I was saying before I’m talking about 100 grand. That’s a lot of money. 5,500. Okay maybe it’s 10,000. That’s $550. That’s a nice day. It depends on personal bracket, but for his money with a little bit of planning beforehand, and they missed it. We’re talking about a lot of money.
Andrew: Yeah.
Marty: And it’s by the way. It’s I don’t know I guess maybe it might have been, I just looked it up. A lot of states there’s, what, there’s 50 states,
Andrew: I think about 37 participate. , yeah.
Marty: States. Maybe after Mr. Trump gets through, maybe they’ll, I don’t know about the guys of stripping and another state and qualifying or somewhere in Mexico.
Maybe we add a new state, but for the most part it’s almost [00:49:00] a shame if you don’t do something. I don’t want to say a malpractice. I got one more thing. I had a client, lovely people on Long Island. You can tell by my Amish country accents why my kids that I come from New York and they were lovely.
They weren’t spending their money. Their estate was growing. Why? Because they were simple. They were living off Social Security. He had his pension. So they were nothing tax bracket. And without saying it, they would get all these tax free bonds. And they called up their, advisor and it says, give me some more Mac bonds.
This one came due and he did it. In my mind, this is not Pennsylvania Capital folks. This was another firm up in New York. And I said to the clients, I said, you know what? It’s not for me to say, and maybe those are the greatest bonds going, but you really need a good financial advisor because that to me, [00:50:00] it’s not malpractice, but it’s a Jewish mother would say is Shonda, because if you guys went to that, you could get talk to Andrew, you get does many of your bonds, maybe God forbid you even pay tax, but I’m talking about. I could have in that client got an extra $15,000 in taxable income without paying zero tax and getting that much more money.
And, so he told them and then move around. So I guess my point is, you watch the tax freeze, the kind of planning. It’s not a malpractice. I’m not trying to stout that. This PTE and the Bait tax and the computations has added levels of complications. Your accounting bill might get more.
Maybe it doesn’t pay. I looked at somebody and says, don’t worry, we didn’t, we missed it last year, but it wouldn’t have helped you that much, blah, blah, blah. But it’s not, I don’t want to say malpractice, but to me, that’s time to get the old [00:51:00] corners, quintessential second opinion, and by the way, even if you think you’re doing it, your accountant did it.
You only ask them because we can’t be responsible for remembering everything about every client. So you bring it up to us. You know what? You might be right. We may want to increase your salary. We may want to decrease it. It’s got to be legitimate. You got to be able to enforce it. You got to do it. But that’s a great question.
I think that says straightforward as I want to see, say the only tip is whoever’s going to be watching this, look into it. Ask the accountant if you got again for self employment, for an S Corp or flow through, but not for a sole member LLC unless you elected S Corp.
Anything else?
Andrew: Got it. Okay. Marty, I think that really answers all of our, all the questions we had today for you.
Marty: We’ll end it with a very much hearty thank you.
Lesley: Thank you very [00:52:00] much, Marty and Andrew, for talking with us today about tax planning, all kinds of useful information that the two of you discussed here.
And I really appreciate both of you spending the time with us today.