Ep. 15 | Unlocking Tax Planning Strategies for Maximizing Client Value
Download MP3Welcome to the Mr. R Show, presented by the MRR Institute. This podcast is designed specifically for tax professionals industry. Whether you're aiming to grow your business or enhance your client experience, you're in the right place. Now let's get to the show and transform your practice together.
John Tripolsky:Hey, everybody, and welcome back to the mister r show brought to you, presented, edited, produced, conceptualized, whatever we wanna call it, by the MRR Institute. So we're on to episode 15 today. We're gonna look at some advanced tax planning case studies. And I promise you these are not the case studies that you had to, you know, kinda muddle through in in college or, heck, even going back to high school. These are a lot more enjoyable because, heck, you know, you're making money off these things.
John Tripolsky:And these are something that you're providing so much value to your clients for that they are, a, gonna love you, and, b, they're actually gonna pay you for these things. So let's quit wasting time on it. Again, episode 15, that means we have 14 great episodes before this, most of which you actually get a CPE for. So talk about free benefits. There you go.
John Tripolsky:Links are in the shows. Check them out. But more importantly than tax planning, we're here to talk about Chris Pachero's hair today. Chris Pachero, what's happening, man? How are you?
Chris Picciurro:Oh, it's great to be back. Hair is very aerodynamic as usual. I'm passionate about this topic. Great to be back on the Mr. R Show.
Chris Picciurro:Listeners do get a free continuing ad credit. More importantly, this is a topic, that that has been presented this this summer of 2024, at a couple state society at live events and at, the NATP National Association of Tax Professionals Taxposium event live. So if you're listening to this, good news. You saved a lot of money on travel. I I do I'm a firm believer in live events, but congratulations.
Chris Picciurro:And we're gonna we're gonna break down some case studies for you. We're gonna focus from the tax preparer side of things on how we can add value to our clients. We're gonna start by just talking through where the value is as far as tax planning and strategy, then dive into some case studies. We have 4 really cool case studies. We're going to talk through how our firm, my private CPA practice, works on doing tax planning and strategy.
Chris Picciurro:And then most importantly, like you said, John, we wanna add value to clients. However, we need to be compensated for that as tax professionals. So I'm gonna give
John Tripolsky:you some tidbits on how to monetize all this knowledge and experience that you've accumulated over your professional lifetime. Before we jump into it, Chris, really quick too. So if this is something new to a tax pro, maybe somebody who's just getting into this or thinking about getting into this, kudos to you if you're thinking about getting into the industry and you're listening to this podcast. Let's talk very briefly on what exactly tax planning is. I know that, you know, we we talk about this a lot and really just running through it from a from a high level, but we can get into the weeds a little bit here.
John Tripolsky:I mean, give it given the audience. And, again, as I mentioned a little bit before, I had no idea that this even existed. I mean, naturally, I've known you for 2 and a half decades, so I kinda learned through osmosis. But it's super interesting to me how much tax planning really kinda delivers you the control of, you know, that quote, unquote relationship with the IRS.
Chris Picciurro:Absolutely. So what is tax planning? Tax planning and strategy, they are kind of a intangible thing, for us in our private CPA practice for what I do per like, my my work is almost all tax planning and strategy. Either people in our teaching tax flow community, either I'm working with people in our clients of our private CPA firm, or, the third 3rd group I work with are collaborations. Other tax professionals that want to bring tax planning and strategy to their practice.
Chris Picciurro:That could either be working, in a collaborative environment or it could be coaching them 1 on 1 or it could be just inviting them to one of our mastermind groups, peer to peer mastermind groups. So that's what that's tax planning and strategy. Now how to define it? I like the I like what you're saying. Ultimately, it's that forward thinking approach to taxes.
Chris Picciurro:It's you control your tax because if you don't control your tax, the IRS is gonna control your tax, and we believe that tax agencies are your involuntary business partners. So that could be the IRS, that could be a state, that could be a local gov taxing agency. So think about this. You're a tax pro listening to this. If you're not a tax pro and listening to this, well, hey.
Chris Picciurro:You just stumbled upon something pretty cool. You know that operating agreements, when you have a multi member LLC or a partnership or partnership agreement, lays out how the how the taxes or the profit loss deductions credits is allocated to each each member in a multi member LLC. That's done by an operating agreement. So I want you to think about this. If you have a client or yourself that you don't have an operating agreement, you don't have any direction, you don't have any plan, then the government, who's your business partner, is gonna pick the tax you pay.
Chris Picciurro:So that's that's really the thought pattern of being proactive, picking your tax. Technically, according to Investopedia, tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest tax possible. So that we take it a little step further. Our mission in our in my work is legally and ethically reduce the tax you pay in your lifetime. That's the goal.
Chris Picciurro:Doesn't mean wipe out every dollar of tax. Doesn't mean don't file tax returns. It's allow you to pay the lowest tax possible. I want you to think about something. I want you to think about you've got you're jumping in a vehicle and you John, pick a state.
Chris Picciurro:Any state you want. Feel like we're playing a card
John Tripolsky:in it. Well, I'm not gonna pick California because we pick on California every episode on the Teaching Taxable podcast. So let's let's let's pick Oregon. Oregon. How do
Chris Picciurro:we ever pick on them? Sometimes you're in Oregon, and I tell you, John, I want you to drive from Oregon to Atlanta, Georgia. Now you know you have to go It's a long ride. It's a long ride. You know you have to go south, and you know you have to go east.
Chris Picciurro:Okay? First thing, if you jump on a bus, the bus will take you there. You're gonna have to get on and off the bus several times, and you don't have control of the time frame, and it's gonna take you a significant amount of time. That's the equivalent of the IRS doing picking your tax. That's no tax planning.
Chris Picciurro:Now let's assume you have a vehicle. You're automatically going to cut down on the time it takes to drive from Oregon to Atlanta. But let's say you don't have a GPS and you don't have a triptych for if you know what a triptych is, we like you already. But let's say you don't have a GPS, but you know that you've got to go south and you've got to go east, so you you could probably get there faster than the bus if you know what you're doing, but you can get really, really lost. That's maybe someone preparing their own tax return trying to do their own tax planning.
Chris Picciurro:Well, let's assume you're working with a tax professional or you are a tax professional. This is how an example of how you show your value. The tax professional is your GPS. It's gonna tell you what the speed limit is. It's gonna tell you the best route.
Chris Picciurro:It's gonna allow you to pivot if there's an accident. It's gonna give you multiple routes. It could even tell you where there are gas stations and restaurants to stop at, where there might be some law enforcement around. So think about that. You're going from one place to the other no matter what.
Chris Picciurro:Do you wanna rely on someone else, I. E. The bus? Do you wanna try to take yourself that route, or do you want to work with your GPS? In the GPS as super valuable?
Chris Picciurro:Think about all the gas money you could save. Think about how, you know, how instead of rolling up to a hotel and just saying, do you have a room? Going hotel to hotel before the Internet, before, you know, like our parents used to do. Right? They'd have their little triple a book out trying to figure it out.
Chris Picciurro:So you are Yes. The GPS for your clients, and there's a ton of value in it. And the more complicated the trip, the more complicated the situation, the better value you can show. And I think
John Tripolsky:with that, Chris, too, there's so much power in there. Right? Like, it's almost I think there's so many analogies we can almost, you know, compare to that. Right? So again, me not me not being a tax pro, you know, I'm on the consumer end or client end, if we will, of of the relationship.
John Tripolsky:I mean, obviously, I I like you and hang out with you and work with you too. So it's our relationship's a little different than most people in their tax professional. But you're right. Like, think of it as, like, you know, a lot of stores try to become, you know, the one stop shop. Like, there's a reason why gas stations sell milk and not just gas.
John Tripolsky:Right? Because by them selling milk is a value to somebody going to them versus somewhere else. Like, there's a 1,000,000 different things we can think of. And, you know, I I always think about it too. The first time I heard tax planning, I'm like, okay.
John Tripolsky:Wow. So it seems a little bit complicated. It seems like it's only for somebody who makes $5,000,000 a year, which is not the case. We're gonna obviously get into that. But then also too, it's like, holy crap.
John Tripolsky:You know, for lack of better terms, like, there is there's so much power in that. And by you, the tax pro, presenting that to a client, you becomes basically invaluable to them in that relationship when it comes to taxes because, obviously, everybody most people work pretty hard for a dollar. So if you're telling somebody said, hey. You know, we can save it not just now, but in the future and kinda get the, the alarming, oh, you know, oh, beep moment Right. When when you get a you get a bill, air quotes, bill from the IRS, you know what it's gonna be beforehand, and you're lowering it.
John Tripolsky:It's like going into a store with a bunch of coupons. Like, you know what you're gonna save when you go to the register. So
Chris Picciurro:Or versus coupons. Think about those those coupons now, John. Now you just put your phone number into the machine, and and it automatically deducts I mean, there are some places that do coupons, but gives you the rewards price. So in a nutshell, John, reactive, compliance focused. Annual filing of past activities, that's tax preparation.
Chris Picciurro:Proactive, strategic management of finances to optimal optimize tax outcomes year round, tax planning. You know in my practice, we believe tax planning or your tax return is a verb, not a noun. From a practitioner standpoint, the average per client revenue for tax preparation, this is according to several sources, Fidelity, Intuit accountant, CPA practice advisor, Accounting Today, etcetera, etcetera. $400 per client, average for tax preparation. Average for tax planning, $3,200.
Chris Picciurro:So just the dollars are 8 times more value of tax planning versus tax preparation from a practitioner standpoint. We're seeing higher adoption rates. The bottom line is if you want to be what we call sticky with your client, if you want to show the value that you have with your client, you have to do tax planning and strategy for your clients. That brings us to the next thing we're gonna talk about before we dive into the case studies. How do you do it?
Chris Picciurro:Right? It's like, you know, John, a lot of times when people start going to the gym, the hardest thing for them to do is wake up. I've even heard stories of people putting on their gym clothes before they even go to bed so they're already in their gym clothes when they wake up if you're not not in the habit of going to the gym or exercising. But wake up, put your your athletic clothes on, get in the car, go to the gym. Let's say you're trying to go to the gym.
Chris Picciurro:That's the hardest part. Then the next step is, like, oh, crap. I'm at the gym. How do now what do I do? So we're gonna get dive into that next.
Chris Picciurro:Awesome. Awesome. And, again, I look forward to
John Tripolsky:it because this you know, this holds so much power, and and it it I think, obviously and you could speak to this more than I too, you know, and we're gonna talk about monetizing it here as we wrap up. But, know, as we get get towards that, we have a we have a little ways to go down our path until we get to that point. But, again, there's so much power in it, but yet it's not something that, you know, you're gonna bill a client $250 for for for 1 hour of work. Like, there's a lot that goes into it, but also the output is alarming in a great way. You know?
John Tripolsky:So I I look forward to going through these.
Chris Picciurro:Right. I mean, I could just say in our prime in our practice, I'm looking for a minimum of 4 to 5 x of value for for so if I'm gonna do a personalized tax plan, I you know, let's I'm just making numbers up. Let's say it's $3,000 through that personalized tax plan. I need to make sure that my ideas could be easily implemented and reduce their tax legally and ethically by at least $15,000 per year minimum. I'm really shooting for a minimum of 25.
Chris Picciurro:But that's you know? So it doesn't have to be big dollars, but it's just you're gonna get the value for helping your clients out. So here's what we do. We have a 4 step process. Okay?
Chris Picciurro:The first thing is just understanding what your what the laws of tax planning are. We've developed our own laws of tax planning, which I'm gonna share in a couple minutes. You could develop your own, or you could just use ours. But figure out what the pillars or what the laws are of tax planning. 2, understand what marginal tax rate is.
Chris Picciurro:We know I love talking to tax professionals because we when we talk to tax taxpayers, they don't really understand these concepts. But we know marginal tax rate is much different than a tax bracket. That's our number one KPI when it comes to tax planning. Diagnose your client's situation. We always talk about in our practice.
Chris Picciurro:Ideas are cheap. You can find ideas on TikTok, Instagram. Implementation is valuable. So figure out how to implement for your clients based on their situation. How many times do we see that client, you know, that might be in a low marginal tax rate continuing to dump money in their 4 zero one k when they probably should be putting it in your Roth?
Chris Picciurro:Then the 4th step, complete an implementation process. None of this matters unless you implement. For, like, like, base for basketball, you could steal the ball, you can go in for a nice layup, and if you can't put the layup in, none of what you did to get that layup matters because you can't finish. You've gotta finish. And that's a lot a lot you know, if you're an athlete, you know you finish strong.
Chris Picciurro:That's a part and so finish these plans. Don't leave clients lingering. So complete an implementation process. What that is for you is different than what it is for me. I'm just gonna be, as I always am, raw and tell you how we do our implementations, but you might have something different.
Chris Picciurro:So And, Chris, to your point too, you know, you're gonna talk about these examples, and this is not something that
John Tripolsky:I and I know this as I'm saying it. Not something that you guys just kinda pull out of a hat, you know, a couple months ago and say, hey. We're gonna try this to see how it goes. You guys have been doing this for a while, and, again, I think you mentioned a little bit earlier on too. Like, this has become really the the cornerstone the current core cornerstone of y'all's private practice.
John Tripolsky:It's not even really kind of an add on anymore. Like, you guys do this, and you you stick to it a lot.
Chris Picciurro:Right? Absolutely. This is a differentiating factor. What makes you different? Why are you better than the person down the street for a certain client?
Chris Picciurro:So you've gotta figure that out. Now for us, what are our laws of tax planning? We have we've developed something called teaching tax flow, but you don't we don't have to invent a tax planning community to to have some laws. But what what do I mean by the laws is talk to your clients about what your goals are and how what you're trying to achieve. So for us, we talk to clients that cash flow does not equal tax flow.
Chris Picciurro:That means that just because you net x amount of money when you sell a property, doesn't mean, for instance, real estate. That's the taxable portion. We know that there's cost basis involved, same with stocks, etcetera, etcetera. So understand that there's a cash flow component and there's a tax flow component. Tax flow means your after tax amount.
Chris Picciurro:One more example. Great example. Rental property. Right? Someone might say, hey, I'm netting, you know, $400 a month on this rental property, so I must be paying tax on 48100.
Chris Picciurro:No. That's not correct. You get the depreciation deduction and then you only deduct the interest portion of your mortgage payment, not principal. So that's 1. Number 2, tax agencies are your involuntary business partner.
Chris Picciurro:I think I already mentioned that. Number 3, which I already mentioned, your tax return is a verb, not a noun. So those are our 3 laws of tax planning. The second step, understand a client's marginal tax rate. You should be using software, in my opinion, to help figure this out.
Chris Picciurro:Ultimately, the margin as you know if you're listening to this, your marginal tax rate is the amount you pay in tax for each additional dollar of income you have to report on your return, and it's the amount you keep in your pocket for each additional dollar of tax deduction. So your marginal tax rate, if you're thinking about an operating agreement, is that's the percentage that you're paying your business partners of your taxable income. You have to pick that. The marginal tax rate should tell you what strategies to implement. 3rd step, diagnose your client situation.
Chris Picciurro:We use color coded diagnosis in our private tax practice. I'm happy to share that with anyone listening today, as long as you reach out to us, because last time I checked, we don't have all of ESP. This might be different for you. For us, it works well. Red, green, purple, gold.
Chris Picciurro:So red diagnosis is someone in a high marginal tax rate. In my opinion, that's 25% or higher, typically. Green so red means I'm looking for immediate one time deductions. Green, lower marginal tax rate, 20% or less. I'm willing to, I'm willing to accelerate or keep taxable income on that tax return at a green diagnosis, most commonly that 12% marginal tax rate.
Chris Picciurro:We're gonna really focus on, you know, mostly on the federal side of things here. Purple, tax deferral. So purple is gonna be your 401 k plan. Right? And different strategies could have more than one diagnosis and you could be more than one diagnosis as a taxpayer, but typically you want purple.
Chris Picciurro:Purple is gonna be your diagnosis when your marginal your current marginal tax rate is expected to be higher than your future marginal tax rate. Now we kinda expect tax rates are gonna go up in the future, but you might have someone that, you know, is in their peak earning years and they're gonna retire in, like, 5 to 7 years and they're not gonna they're willing to to kinda kick the can down the road on taxable income for that those assets. And then gold. I believe everyone is a gold diagnosis. Gold means tax free income and growth.
Chris Picciurro:And even high marginal tax rate clients, I believe, should be focusing on growing tax after tax assets or tax free assets. Why? Because if they're in a high marginal tax rate, if they could find in you know, John, let's say someone has a income of 10% on an investment, but it's tax free, and they're in the 40% marginal tax rate, or marginal tax bracket, or marginal their marginal tax rate is 40%, then they've gotta earn, like, almost 14, $15, 14, 15% to get to that equivalent of 10% tax free. So and then finally, have a have a process. For us, it's the teaching tax flow process.
Chris Picciurro:For you, again, it could be anything that you want. But for us, it's diagnose. I already explained that. Prescribe. Make sure the tax strategy that you're prescribing fits the diagnosis?
Chris Picciurro:Does a traditional IRA contribution fit a diagnosis of someone that is working that is making $20,000 per year right now? No. It doesn't. If you have if you're making $20 a year and you could put money into a retirement plan, I would recommend a Roth. Step 3 for us, IQ test.
Chris Picciurro:That stands for identify strategy, quantify result. Make sure, you know, I won't dive into this too much on this podcast, but here's what you have to think about as a tax pro. Our IQ test is the equivalent of a dressing room, a financial dressing room. Does it fit? I'll give you a weird example, John.
Chris Picciurro:I'm not kidding. I was doing I I like to do my own laundry because my kids steal my socks. I was doing my laundry, and I'm I'm one of these guys, like, if once I find, like, a pair of shorts that I like, which I have, these certain brand with a Swoosh shorts with zippers so my cell phone doesn't fall out if I'm running, I you know, all my other my keys are there. I found these shorts. I love these shorts.
Chris Picciurro:I asked my wife to buy any every Father's Day and Christmas, Please give me as many shorts as you can in the same size but different colors. I have 4 black shorts that are all the same. What was why am I talking about my stupid shorts? Right? Because as I was doing laundry, I'm, like, talking to my wife.
Chris Picciurro:I'm, like, you know what's really weird about this? None of these some of these shorts, even though they're the same size, the same brand, the same style, fit differently. Some of them are, like, a little tighter, some of them are looser, some of them even so my point is just be there's not a one size fits all. Just because you're a high marginal tax rate doesn't mean that you should do a strategy. Take it in the dressing room and make sure it fits.
Chris Picciurro:And then 4th and most importantly, implement. Implementation is extremely important. That's where the value is. And based on the strategy, you might have to bring in other people to help implement. And we're gonna kinda we're gonna talk through some of those people coming up here.
Chris Picciurro:So now that we've walked through the 4 steps of how we do tax planning in my practice, again, your 4 steps might look differently, I wanna talk through how to monetize this before we jump into the case studies to wrap things up in the second half of the show. You've got a variety options. Our practice is a subscription based model. So, we any type of touristized tax planning is already underwritten in part of the monthly membership fee that they pay, but you can certainly charge some type of transactional fee for a tax projection or strategy. But there's so on the transactional side, meaning the actual tax projection strategy, you've got a variety of ways you can monetize that.
Chris Picciurro:There are multiple ways to monetize the implementation as well. The implementation, as I said before, is really, really where the value's at. So that's where that's where I feel like there is a, there's a ton of opportunity for tax professionals. So you could either, 1 I'll give you an example. If a client implements a tax strategy that's advanced or causes their tax preparation needs to increase, then you could obviously monetize that by increasing the fee you pay charge them.
Chris Picciurro:Example. Really basic example. Capital loss harvesting. Maybe they sold some stocks, mutual funds, bonds. Now that you have the you have a longer schedule d, you have more reporting, that might be something you might charge that client for.
Chris Picciurro:You might get a strategic revenue partner referral fee. So if you work closely with implementation partners, they might pay you a referral fee, based on what you what you bring up to the client or potentially recommend. Now, obviously, we know that that has to be communicated with clients. This isn't the ethics show. If you are sharing or receiving referral fees, you you have certain certain disclosures to, to keep up with.
Chris Picciurro:Finally, many accountants, tax pros, have moved over to getting licensed as a financial adviser and wear dual hats. So you could also potentially earn financial advisory commissions or or help a partner or you can even manage it on your own assets under management. So those are the ways you can in the implementation side, increase tax prep fee, strategic revenue partner fee, or potentially financial advisory revenue on top of the more transactional side of things of, hey. Come on in. Let's do a personalized tax plan.
Chris Picciurro:Let's do a tax strategy session, etcetera, etcetera. So And, Chris, before we before we jump into something else
John Tripolsky:too, I do wanna bring back up the really good point. Right? Like, so now we're talking about the monetization of this a little bit. And, again, there's so much value in this that they're real And, again, I could be wrong, but I think from a tax pro perspective and a client relations side. Right?
John Tripolsky:Like, it's more or less just you really explaining to the client, you know, what it is, what's the potential here. And and I absolutely love the way that that you and and your team approach this on on your private practice side because you guys it sounds like you still do this more or less during the early discussions of talking with a client on it. You're you're in a sense kind of laying out, alright. Well, this is my my multiplier goal. You said there's, like, 3 or 5 x.
John Tripolsky:So it's pretty straightforward. Right? Like, it's not like you're telling the mayor, you know what? I'm gonna charge you $3,000 for this, and we're gonna hopefully save you $2. Like, you you know what you're getting into beforehand, so it's a lot easier, I think, for what it's worth, to say, alright, client.
John Tripolsky:Yeah. It's not the cheapest thing in the world, but look at what we're doing here, and we're bringing so much to the table that it's almost a no brainer. Right. Exactly. You you're trying to
Chris Picciurro:make sure before you jump into a tax plan that doing a plan would be beneficial to the client. So let's talk about case studies. Alright? First one, we got Joe and Jill Youngster, very young, I know, couple. They're in the 12% marginal tax rate.
Chris Picciurro:Joe is a tax nerd. He makes $55,000 per year on a w two. Jill is a teacher making $50, they're in their mid twenties. They have no dependents. They live in a no tax state.
Chris Picciurro:They're currently running a house for $3,000 a month. They don't have any employer response employer sponsored retirement plans. They have saved up money in their brokerage account, $40,000. Thinking about putting that down on a home. They have unrealized capital gains and losses of $5,000.
Chris Picciurro:They pay student loan interest of 5,000. She has $500 worth of education educator expenses, and they take the standard deduction. They have a small amount of charitable deductions, but they take the standard deduction. So this is gonna be, hey, 85 or a 105,000 of of of income total. You would think a lot of people think that there's no way, we could really help someone like this with tax planning and strategy.
Chris Picciurro:Right? Young couple, what can you do? Well, I think there's a lot you could do for them. And I would argue that low to middle income households could benefit from tax planning just as much or if not more than high net worth and high income households because it's relative to their financial situation. So for Joe and Jill, here are a couple ideas.
Chris Picciurro:Right? One, they could harvest their capital losses. Remember their brokerage account had $5,000 of capital gains or losses. They're long term. That would really only reduce their tax by $360.
Chris Picciurro:Now did that cost them any money out of pocket? No. Because they're just selling investments in their brokerage account. So the their cash flow, nothing went out cash flow wise. They still have the same brokerage account with the same value.
Chris Picciurro:They just reallocated their portfolio and they reduced their tax by $360. Now $360 isn't a big amount, but for them it is. You know, that that's that's a decent reduction of tax. What if they recognize $5,000 worth of capital gain? Because they know down the road, they might have that capital gain as income and they're young, so their income is probably gonna go up.
Chris Picciurro:Based on their fact pattern, they would actually pay no tax on recognizing $5,000 worth of capital gain. Right? Because they're in the 0 because due to their marginal tax rate, they're paying 0% capital gains tax. And this is on the remember, they're fed this is only on the federal side. They're they're they live in a no tax state.
Chris Picciurro:We thought, okay. What if they put $10 into a traditional IRA? Remember I talked about diagnose, prescribe? Well, that $10 that goes into an I traditional IRA, it would reduce their tax by $1200. To me, that doesn't move the needle a lot.
Chris Picciurro:Right? That's not a that's a misdiagnosis. That's that's a traditional IRAs for a red diagnosis and they're a green diagnosis, meaning they're a lower marginal tax rate. So I would argue with that now, hopefully, I'm not arguing with these poor people. Yeah.
Chris Picciurro:You know, we'll know Sometimes you need
John Tripolsky:to argue with them though, to talk some
Chris Picciurro:sense into them. Right. I'd say, why don't you toss some money into a Roth? So put the money into a Roth. They don't get a tax deduction today.
Chris Picciurro:But, John, if that money was in a Roth at an 8% annual return for 36 years, meaning it doubles 4 times, which is completely please plausible based on their age when they retire, that $10,000 would be worth a $160,000 tax free. Then finally, purchase a primary residence. Let's assume that the residence, the budget for the residence is $300,000, and they're putting 10% down. We know that there's a lot of, you know, maybe he's a veteran, may you you can get into a primary for 10% down. That's $30,000 out of their pocket.
Chris Picciurro:Does it help them on their tax return? Actually, it doesn't because their mortgage interest property taxes, they're they're not gonna make create a situation where they exceed the standard deduction. However, there are other tax benefits down the road to owning a primary residence. They could rent it out for up to 14 days a year tax free under the Guster rule. They can hold it for 2 years or more as a primary and sell it and take care and take advantage of the section 121 exclusion.
Chris Picciurro:But my point is when you're looking at this young couple, an uneducated tax planner would say, go buy a house. That helps you on your taxes. Actually, it doesn't at all. The other things would help them more down the road. And we're gonna talk when we're done with all of our case studies, we'll we'll touch on all the monetization opportunities with each each strategy.
Chris Picciurro:But so that's that's gonna be our first case study of, the youngster fam, The young Joe and Jill youngster. But, again, lot of opportunities no matter what. Now probably my favorite couple, if you could imagine, John, are Joe and Jill pickleball. Joe and Jill pickleball love
John Tripolsky:to come. Was coming, and I knew you'd find a way to sneak in pickleball. I know you had. See would do it this way.
Chris Picciurro:Just like the youngsters, 12% marginal tax rate. Let's remember, people, your marginal tax rate has nothing to do with your amount of assets that you have. Your marginal tax rate's based on the taxable income you have this year. So we have Joe and Jill pickleball with the exact same marginal tax rate with a ton more assets. They both recently retired.
Chris Picciurro:They're in their early sixties, so they don't have to take money out of their IRA. They don't have any dependents anymore. They have 2 grandkids they love and adore. They wanna help out with college. They live in a no tax state.
Chris Picciurro:Actually, these people are like my neighbors. I just changed their names. Being here in Tennessee, they have dividend and interest, a qualified dividend income of $8,000 a year. He gets a pension of $75,000 a year. They have a $1,000,000 in their brokerage account with capital gains and losses of $75,000.
Chris Picciurro:They're not drawing Social Security yet, but they will in 5 years. He's got an IRA with a $1,500,000 but no Roth IRAs. Oh, what's that mean, guys? You know what that means is that he's gonna have to take required minimum distributions out of his IRA. And if in 10 years, that's gonna be about $130,000 a year in RMDs, assuming the IRA doubles in 10 years.
Chris Picciurro:So and they own a large home with a fair market value of 1 and a half $1,000,000. They paid 1.1, and they don't have a mortgage, and they take the standard deduction. So right now, they're in a super low marginal tax bracket or marginal tax rate. That's a goal diagnosis. What are we thinking for them?
Chris Picciurro:Well, I'm thinking I see a train coming down the tracks far away with that required minimum distribution, and I wanna start getting money out of that IRA at a low marginal tax rate. So first thing they could do, and we say don't let the tax tail wag the dog, but they could sell their house and downsize. They don't have a mortgage on it. They have less than a half $1,000,000 gain, and they could walk away with a $1,500,000 of cash in their pocket and pay zero tax. They could harvest $3,000 worth of capital losses.
Chris Picciurro:Now, not a big needle mover just like the youngsters. $360 tax benefit. This is the one I like. They're a green diagnosis, not not red. Accelerate income.
Chris Picciurro:They can recognize $30,000 of capital gains and pay a whopping $158 worth of tax. Now let's talk about that IRA that train down the tracks. Let's start looking at getting money out of the IRA, but you but they're very comfortable financially. They don't need the money. So let's convert that to Roths.
Chris Picciurro:So we ran the numbers on this case and said, what if they convert 25,000, 50,000, a $100,000? So Roth conversion, they're taking money out of their traditional IRA. They're converting it to a Roth IRA. They're gonna let it sit there for at least 5 years, and then it's gonna grow tax free, and they're gonna lock in the tax on that conversion this year while they're out playing pickleball. So a $25,000 conversion is gonna cost them a whopping $3,000 of tax, 50,000 is 80 about 8500, and a 100,000's about $19,500.
Chris Picciurro:So the the nice thing is getting that money out of the IRA reduces their their their future required minimum distributions, which we believe are going to be taxed at a higher rate and trigger 85% of their Social Security to be taxed. The way the law is written now, we know Social Security is underfunded, and I would not be shocked if that percentage goes up. Finally, for these good folks, they like their grandkids. They wanna help them with education. What if they put a $100,000 into the college funds for the grandkids?
Chris Picciurro:5 29 plans. 5/29 assets have a lot more flexibility now. They could be used for private k to 12 school. That $100,000 that they put into the 5/29, it does not provide them with a tax benefit because they're in a no tax state. Okay.
Chris Picciurro:But guess what? That $100,000 is gonna grow tax free for the grandkids and could double 2 times if it gains 8%, could double 2 times by the time they're 18, which would be $400,000. Now we know there are some gift tax considerations when you contribute to the 5.29. There's a special rule that you can average that out over 5 years that goes beyond this podcast. If you have questions, reach out to me.
Chris Picciurro:I'm happy to help you. But my point is with these folks, same marginal tax rate as the youngsters, completely different balance sheet. Right? Completely different asset, completely different season of life. Completely different diagnosis.
Chris Picciurro:Rather, same diagnosis, different prescriptions.
John Tripolsky:And that's I love how you refer to that too. Right? The diagnosis. So as we talked on a little bit earlier on, it's like everybody is so different. Right, that there is no cookie cutter, which then goes back to what we were really talking about at the beginning with tax planning.
John Tripolsky:Right? It's not like I can take a tax plan that I wrote for John Smith over here, copy it, and just resell it off to somebody else. They're so customizable, and and I think people would realize it. Right? I I don't think it's a very I don't think it would have really be assumed by any clients, you know, in talking with their tax pro yourself or our listeners included.
John Tripolsky:They're like, oh, I'd be the exact same as so and so over here, and, you know, oh, they're just they're overcharging for this service. And, I mean, I I think these case studies that you pulled out here and use an example, I know we got more of them, I think really lay out the value of it. So the approach is still the same, but the diagnosis and the prescription are completely different. Well, mostly different between all of them, which is probably like the makeup of most people's clients. Even if and I'm gonna make this assumption too, Chris.
John Tripolsky:I I don't know if you can attest to this or, again, our our audience probably can. Actually, I know they can because I've heard them say this. Even if you only serve clients in one industry, you likely see a lot of the similarities between them, but it's still very rare that they are all the exact same. Almost slim to none that they are the exact same. Right?
Chris Picciurro:Right. Exactly. They're so yeah. It's it's it's it's just like John. It's kinda like this.
Chris Picciurro:So we all can order pizza. It's still pizza, but we're gonna all order with different ingredients. We're gonna order different toppings. Alright. Case study 3 of 4.
Chris Picciurro:Susie Swanky. She lives in Cali.
John Tripolsky:Gotta love the names.
Chris Picciurro:Very high marginal tax rate. Her marginal tax rate's 49.8%. 49.8, red diagnosis. K? Why?
Chris Picciurro:She makes half a $1,000,000 a year. She's self employed. Guys, she's single. She has no employees. She's in her late thirties, no dependents.
Chris Picciurro:She is a pet therapist. So you bring your little dog, your little cat into her. Of course, she's in Southern California. Gotta throw California under the bus, pretty much every podcast. And, she talks to your dog for and and she, like, you know, if the dog goes on the couch, she talks to the dog and that's about it.
Chris Picciurro:She charges a lot of money. So she's making a half a 1,000,000 a year. She works from home. I'm sitting over at
John Tripolsky:chocolate because I like that you said in with, gosh, she is single. You know, she is, she is available.
Chris Picciurro:Yes. She is. She's looking to mingle. So she's home employee, works from home. She has her health insurance is a 1,000 a month, and she's got 5,000 a year of out of pocket expenses.
Chris Picciurro:She bought a condo down in Beverly Hills a long time ago for 1,200,000. It's now worth 2.4. And she's got mortgage interest and property taxes, so she itemizes her deductions. So what are we thinking for her? Right?
Chris Picciurro:She's making a half a $1,000,000 a year with no employees. Well, the first two things that come to mind would be, 1, should she maybe be an s corporation? I think s corps are often overused, but for Susie, this could be a really good option. 2, maybe she doesn't want these dogs and cats foxtrotting all over her home, and she wants a more professional office condo to operate out of and maybe expand her her her her business. So assuming that we've an s corp's in play, with that assumption, she'd be making about her her reasonable compensation would be $60,000.
Chris Picciurro:Her payroll taxes would be about $10,000 per year. It's gonna cost her about 4 grand a year for payroll processing, additional tax prep, section 105 paperwork, PTET, pass through entity tax election, which would help her because she's now gonna be able to deduct 9.3%, the 9.3% California tax. Remember, SALT tax deduction, ma'am, taxes at $10,000, so now she could deduct that. So should she be an s corp and then basically give herself all these employee benefits to shift these personal expenses, like medical deduction medical expenses, and and the California state tax. Bottom line is we're making things that are personal deductions, not business deductions.
Chris Picciurro:That's the way you wanna think about it. And then if she bought an office condo, she could buy it for 9 950 grand. She could utilize 80% bonus appreciation. Let's say there's a 2023 tax return, and she could do a cost segregation study on it. If you are wondering what a cost segregation study is, that's okay.
Chris Picciurro:A lot of people are. Check out our podcast episode. We had an amazing guest on cost segregation studies. So what's the low hanging fruit for Susie? 1, put money into a SOP IRA.
Chris Picciurro:If she does nothing, that $66,000 is her max. She definitely has the money. She could put it in the SOP. She's a red diagnosis, so tax deferral makes sense. Tax she wants to take it off her tax return.
Chris Picciurro:That would reduce her tax by about $30,500. 2, I said she worked out of the home. Just claim the home office deduction. It's legit. $64100 tax reduction.
Chris Picciurro:Doesn't cost her anything. Now we start getting fat and sassy. What if she purchases her office condo with a cost segregation study? With the amount she's gonna have to put down, and remember, she owns an asset then, she's gonna have to put 20% down plus pay for the cost segregation study, it's gonna be a $193,000 out of pocket. She has the cash.
Chris Picciurro:That would reduce her tax this year by $87,000. So Anne should have an office building that she owns. The low hanging fruit to me, the s corp election with her reasonable compensation, employee benefits, and the California PTET, her total cost for compliance for bringing in s corp's $14,000 that does include, like I said, employee benefits and payroll taxes. Her net tax reduction, $65,000, actually, 64993. My point is the s corp is a net $45,000 tax reduction.
Chris Picciurro:Right? It works for her. It doesn't work for everyone, but that's what we need to be thinking about. Can we monetize that? Oh, absolutely.
Chris Picciurro:Rather easily. And then the final case study is Joe and Jill Scoops. They're another red diagnosis. 38.1 percent marginal tax rate because it's self employment tax. They own an ice cream par shop in a non tax state, Florida.
Chris Picciurro:They're in their late forties. They have twins that actually work, 15 year old twins that work in the business. They have $800,000 of sales per year or of of net income per year. They've got health insurance of $1,000 and out of pocket expenses of 15,000. They just bought a new home, so they don't have tons and tons of cash, but they have some money.
Chris Picciurro:Their mortgage interest is, $18,000 in deductible. Property tax is 5,000, and they don't donate $5,000 to charity each year. Bottom line is the low hanging fruit on these good folks, their kids are helping in the business. Pay pay your bill. No.
Chris Picciurro:Pay your children for fair compensation. If they pay their kids as $12,000 per year, they will not pay any payroll taxes because the kids are 15 years old. One, purchase a building. We talked about that a little bit with Susie. They wanna they're renting space right now.
Chris Picciurro:They they have a great business. Maybe they should purchase a building, with that building. They could do the cost segregation study. Let's assume that building is about $650,000 with a 20% down payment using 80% bonus depreciation. Again, check out that cost seg study, episode if you need to.
Chris Picciurro:The the 3rd big thing they could do is income shift to a related business entity. This is a very advanced tax strategy called a private reinsurance strategy or 831 b. It allows them to shift up to about 12 and a half percent of their total income into a separate entity. This is a listed transaction for the IRS. There are administrative costs of $15,000 but they're able to take $200,000 off of their tax return.
Chris Picciurro:Okay? So let's look at the numbers. Again, 831b, as a compliance tip, understand that this is a listed transaction as a micro captive insurance company would be. There's some bad actors out there. If you have a client that you think this would be a good fit for, please reach out to us here at MRR Institute, and we'll guide you in the right direction.
Chris Picciurro:So paying their kids really doesn't cost them any more in cash. Right? They're gonna pay for their kids' stuff anyway. That would reduce their tax by about $13,300. They could contribute to IRAs with the kids so I would say pay the kids and have the kids contribute to IRAs.
Chris Picciurro:That's that each child could do 7,000 into an IRA, so they could take their tax savings of about 13.3 and contribute that to an IRA so they're net neutral. And the money is in an IRA for those kids that are 15 years old, if that money grew at 8% and doubled 5 times, which is plausible, it'd be worth $440,000 tax free. The building with the cost seg study, it would cost them about a $133, reduce their tax by 47, but they own the building, and then the private reinsurance strategy, it would cost them about $15,000 of of administrative costs, but reduce their tax by $75,900. So, obviously, red diagnosis and a little gold for the kids. To wrap it up, we went through a ton of tax strategies.
Chris Picciurro:Many of them, you can like, you can monetize all of them. So it's important to remember for each strategy, all of them you could monetize on a transactional phone way. Almost all of them if you're working with if you're a licensed financial advisor, you can you can monetize. And then many of them, like the cost segregation studies, in the s corp election, in the paying the children, in the private reinsurance, you could potentially monetize using a strategic revenue partner referral fee. And pretty much all of these, you're gonna increase your tax preparation fee, at with the implementation.
Chris Picciurro:Final thing I'm gonna say, timing is important. Some of these strategies all these strategies you could do before the end of the year, I'm gonna point out some of them you could do post year end, which was the traditional IRA, the Roth IRA, the SEP, and the cost segregation study, in the home office deduction could be done after the end of
John Tripolsky:the year. Awesome, Chris. We appreciate the information as always. And for anybody that's listening to this, I mean, really take into account, right, that you are bringing so much value. I know we mentioned that keyword value multiple signs in this podcast specifically, but really think on that, right?
John Tripolsky:Taking pricing out of the equation where you're bringing an offering to your clients is astronomical. Potentially it's something that they've never heard about before. If they have, maybe they've been looking for the right person to implement that for them. So exactly. That may be you as their tax pro.
John Tripolsky:So think about that as you may venture into tax planning a little bit further. And as always, we'll see everybody back here next time on the Mr. R Show.
Disclaimer:The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney.
Disclaimer:Investment advisory services are offered through Cabin Advisors, a registered investment adviser.
