Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member of FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink:
Good morning, and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate joined this morning once again by Andy Ferguson with NelsonCorp Tax Solutions, I suppose we’re probably going to talk a little bit of taxes today, but appreciate you joining me again this morning, Andy.
Andy Fergurson:
Glad to be here. Thanks.
Nate Kreinbrink:
So, first Wednesday of every month, usually that’s reserved for David Nelson usually comes in and does the extended program. He had a prior commitment for this morning, so he will be doing that extended program next Wednesday. So I was able to get Andy to join me and to fill in today. And I know Andy, you and I were just talking a bunch of different things yesterday afternoon and this morning, as far as going over today, but there is a date coming up here very, very quickly next week. And that’s the extended tax deadline or the actual, you said the official tax deadline.
Andy Fergurson:
That’s the line in the sand real deadline. Everybody, the tax deadline originally this year was extended to July 15th and normally the extension deadline is six months after that. This year, the extension deadline did not move so the final deadline for your 2019 taxes is October 15th. That’s next week. So there is time- [crosstalk 00:02:03]
Nate Kreinbrink:
Yes, that is next week, so- [crosstalk 00:02:04] wait
Andy Fergurson:
If you’re waiting until the last possible moment that’s now.
Nate Kreinbrink:
So if you’ve been waiting, you have a little bit of time, but you need to get moving, I’m assuming.
Andy Fergurson:
It’s time, yeah.
Nate Kreinbrink:
So, for today’s program, I know Andy and I, we’ve talked some tax planning strategies we’ve talked end of the year tax planning, some of those things coming into it and Roth conversions is as an obstacle or a thing that always seems to come up and we bring it up to people when we sit in meetings with them, they understand the concept of a Roth conversion. So, you’re willingly taking money from a tax deferred account. So a traditional IRA, traditional 401(k), and you’re willingly paying taxes in that current year to get it over to a tax-free environment, a.k.a. a Roth IRA. So people get that concept, but I don’t know if they necessarily understand the magnitude and what that all kind of goes in, entail to it. And as you said, and I thought it was kind of basically straight forward on the way up here is these strategies aren’t eliminating taxes, they’re just choosing when it is that we are paying taxes.
Andy Fergurson:
Yeah, a lot of people for years and years and years strategy has always been pay tax later, pay tax later, pay tax later. What people don’t understand is it’s very difficult to not pay any tax ever. There’s very few tools that exist for that. And so it’s not about avoiding tax, but it’s choosing when to pay tax and which environment is most advantageous for you to pay that expense. It’s just like when you’re shopping, I mean, if you can buy something that you’re going to buy every week, if you can buy it on sale, sometimes you buy double when it’s on sale, because you know you’re going to use it.
Andy Fergurson:
And so taxes work the same way. If you know that you’re in a favorable tax position, you have kids at home, you have a major loss from an investment and so you can also have gains at that same time. If there’s things that are happening in your individual circumstance, that’s the time to choose to pay tax so that you can take advantage of that situation and maybe pay less tax. So it’s not about knocking it down to zero, it’s about making sure that you pay when it’s most advantageous for you.
Nate Kreinbrink:
Right, and I think that goes a lot when we talk about, as far as bracket management and filling up your current bracket that you’re in, if you’re in a 12% bracket and you still have a X amount of dollars to go left in that bracket, let’s willingly pay taxes at that 12%, rather than later on down the road being forced to pay it at the 22% or the 25% when that comes into play. So again, all this stuff comes into it, but I think you and I have also seen when we do these planning sessions together with individuals or with couples is that it’s not necessarily just the straightforward tax reduction that we’re looking at, there’s also a lot of other stuff that comes into play as far as Medicare, as far as being able to Social Security being taxed. And I think when people see what they’re doing to help benefit those two instances, it also helps them as far as with that decision as well.
Andy Fergurson:
Yeah, Social Security is a great example because there’s so many things that happen when you’re calculating your tax return, that’s why you bring it to somebody to calculate it a lot of times and Social Security is an example of where taking money out of your IRA, I’ll give you an example that’s real easy, taking money out of your IRA, a lot of people will take money out of their IRA and they’ll take the withholding that they expect to pay that year also. Well, taking that withholding increases your income because that withholding counts as a distribution to you so your income goes up. Sometimes, that causes you to pay more tax because now more of your Social Security is being taxed and so you end up paying more tax by taking that withholding out and prepaying it than you would have if you had just paid it on the tax deadline or the following year.
Andy Fergurson:
And so a lot of people don’t realize that. They don’t realize how those components work together and how moving a number on one line affects a number on another line. And that’s what we try to do as we’re talking to them is saying, hey, you know if you do this just a little bit differently it may change things for you. I had a phone call the other day where I was talking to a person who needed to take some more money out of their IRA because they had some expenditures coming up over the next several months and I said, if you can take some of that in January, as opposed to taking it all in October, it’s going to change things, you know? Because January is next tax year. So, if you can move that a little bit and push some of that income into the following year, you may not pay as much tax and Social Security.
Nate Kreinbrink:
So, we talk about these planning situations and I know you and I hit it oftentimes throughout the course of the year, but for someone listening out there today, whether it’s an individual or a couple, this is the best time to really sit down and kind of start having these conversations and implementing it for one we’re into October, we still got a little bit of time yet by the end of the year, we’re getting closer to a point where individuals also know or they have a good idea as far as what their income’s going to be for this year as well.
Andy Fergurson:
Yeah. And their tax preparer has time, right? So it’s a lot different talking to your tax preparer in January, February, March, April than it is talking to them in October, November and December. They’ve got time to sit down. They’ve got time to look at your situation, run a scenario and see what advantages exist there for you. So now is a good time to make that phone call to your preparer and say, hey, let’s do some planning because again it’s the idea of looking at it a little bit differently. And we talked about this yesterday, when we were talking about a Roth conversion, the idea of looking at it, not necessarily just what happens to you this year, what’s it going to cost?
Andy Fergurson:
That’s the thing that clients ask me all the time, what’s it going to cost me in taxes this year? And I can give them that answer, but it’s more advantageous for them to understand what it’s going to do over the longterm, right? Because if you can move money this year into your 12% bracket and avoid putting it in the 24% bracket down the road you’ve won, because 12 is way better than 24 when it comes to that tax rate.
Nate Kreinbrink:
Right. And I think, I mean, you and I have done just quite a few of them just recently where we sat down and we’ve done it and we coordinated the tax planning portion of it from your side of it, the financial planning aspect of it from my side of it and I think those numbers, like you just alluded to as far as not just paying the taxes today, but what is that going to really save me down the road as far as with taxes? I think when people start seeing those numbers, it just floors them as far as, okay, so you’re saying I can pay taxes and it’s actually going to save me this much in taxes versus me paying more and I’m going to have more leftover? And I think one other concept that I think people, again, oftentimes overlooked this simple thing is when you are this for married couples, if you’re married, you’re more than likely, probably married, filing jointly when you file those taxes.
Nate Kreinbrink:
We obviously don’t know how long we’re going to live on this earth. We don’t know how long our spouse is going to live, but the likelihood of one of you probably passing away before the other one is probably pretty high. So that surviving spouse, when they’re still alive, all the assets more than likely are probably going to come to their name, their income that the couple really had throughout their lifetime is going to be pretty close to what that surviving spouse is going to have. Now, though, they’re not married, filing jointly they’re a single tax filer. And I think when people see that concept and what now they’re going to be paying on taxes that really seals the deal a lot of times- [crosstalk 00:10:06].
Andy Fergurson:
Yeah, it goes back to what we said earlier, we talked about, you mentioned, we don’t always know when something’s going to happen. We don’t know when somebody is going to pass away. What we do know is that their tax rate today, when they’re married, filing joint is going to be better than it is when they’re single, right? And so, again, that goes back to what we talked about earlier, we’re talking about choosing when to pay taxes and the choice to pay taxes when you’re in a more favorable tax bracket or a more favorable tax position that’s what we’re talking about, right? So if you know you’re better today than when one of you is single the choice then becomes, can you stomach paying a little bit of tax right now so that you can avoid paying it when it’s a less advantageous tax bracket?
Nate Kreinbrink:
Andy, I told you that we get gone on this stuff and time just flies right on by. [crosstalk 00:10:53] But I would throw this out there again, if you have questions on any of this, any of these situations feel like they could kind of fit in with you and not wondering if they do or not give us a call, Andy and I will be happy to sit down with you and just kind of start that conversation and just seeing what it may lead to, and then what it may benefit you, hopefully, down the road, as far as from a tax standpoint. So I did want to mention real quick that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of October will be donated to the Med Tree, which is sponsored by Mercy one here in Clinton. Andy, as always, I appreciate you joining me today. Again, this is Nate Kreinbrink with NelsonCorp Wealth Management, Andy Ferguson with NelsonCorp Tax Solutions, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker-dealer member FINRA, SIPC, investment advisor representative Cambridge Investment Research Advisors Incorporated a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information visit our website at www.nelsoncorp.com.