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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 indeces mentioned are unmanaged and cannot be invested into directly. Registered representatives security is 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. 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. This is Nate joined by Andy Ferguson with the NelsonCorp Tax Solutions again this morning. I know Andy and I were kind of discussing a few different topics and I think we’ve got some great things to go over with you today. Another beautiful time of the year. I know talking with you last night, right before you were getting ready to leave, also a busy time of the year. With schedules and whether it’s soccer, whether it’s baseball, whether it’s choir, whether it’s all these end of the year concerts and festivities. Definitely a busy, busy time of the year but glad to see that the sunshine is out to enjoy some of that.
Andy Fergurson: It’s a different kind of busy.
Nate Kreinbrink: Yes.
Andy Fergurson: It’s an opportunity to get back into that work life balance. We have a lot of work over the last few months. Now I gotta balance it with a lot of life. It’s fun. Yeah. Kids are in everything. Seems like they’ve got more stuff going on than there are hours in the day.
Nate Kreinbrink: Absolutely.
Andy Fergurson: It’s a fun problem to have.
Nate Kreinbrink: If you’re like mine, you have that calendar on the fridge and you have that calendar filled up and say okay, I’ll take here, I’ll take here, I’ll take this one, you cover this one, you cover this one and we’ll see you back tonight and hopefully we don’t forget anybody anywhere.
Andy Fergurson: Yeah. Good news for me is I think I’ve got another driver coming pretty soon. Getting another driver ought to lessen the load. I might get to watch a baseball game or something.
Nate Kreinbrink: Sit down and enjoy it.
Andy Fergurson: Yeah.
Nate Kreinbrink: Today’s show, I know, like you said, there are a lot of topics we want to get into. I know from the financial world, the trade tariffs with US and China has been dominating the news and controlling to some extent these little market swings that we’ve seen over the last couple days. Wanted to, while we have Andy here, to continue that discussion on taxes. We had workshops last week as far as you and David going over a lot of different of these tax changes with the new tax laws, how they impacted people, what it looked like on their tax return, why it looked that way on their tax return.
There was a couple of key points that stood out to me that I wanted to continue on today. The first one is how people view taxes. I know a lot of people, when they look at their taxes, they view it as a success if they get a big return back. If they have to pay in, they view it as a bad tax year. That’s not necessarily always the best way to do that. Especially last year, when we seen tax rates drop, people got a little bit more on their paychecks so subsequently their tax return may have went down but it still was a win/win for a lot of people because of one important aspect that you pointed out.
Andy Fergurson: Yeah, one of the things that happens all the time is people want to judge their tax situation based on their refund and that is a trap in your mind. If you get stuck thinking about your refund, you can control your refund.
Nate Kreinbrink: Right.
Andy Fergurson: You can put $10000 through withholding into your account and get a huge refund back but that doesn’t mean you’re making better sense tax-wise. We have this conversation every year. We talk to people every year and we tell them you can’t look at your refund this year compared to your refund last year. What we need to look at is your total tax or the amount of tax you paid this year compared to the amount of tax you paid last year. What we saw across the board this year is that generally people’s taxes went down. However, also their refunds went down and the reason is, last year, back in the first quarter, the withholding amounts changed. We talked about that a lot last year on the radio, I know and we encouraged people to look at that but because those withholdings dropped more than their taxes actually dropped, we saw a lot of refunds shrink because of that. We had a lot of conversations about how, now wait a minute, I want to make sure you understand, this is not a bad thing that happened to you. You paid less tax.
Nate Kreinbrink: Right.
Andy Fergurson: That’s what we want people to focus on. We want them to focus on the parts of their tax return that they can control with regard to tax. Not with regard to refund. We don’t spend as much time saying, let’s just put more money in so that you get a bigger refund. But we do say, hey, you know if you put this money in a 401K, if you put it in an IRA, if you take advantage of this or if you take advantage of that, you can decrease your tax liability. By decreasing your tax liability, everybody’s happier when they pay less tax.
Nate Kreinbrink: Right. I think that’s the question we always ask people. Do you want to pay more in tax or do you want to pay less in tax. Obviously 100% of everyone I’ve asked has said yes, less tax is great.
Andy Fergurson: You don’t get a lot of volunteers for more tax?
Nate Kreinbrink: No, no we don’t usually. But essentially, when people get a big refund, they’re essentially getting their own money back anyway. It’s not necessarily a win for them. They borrowed the money, technically, to the IRS and the IRS is paying that back to them. Another key point that was brought up was two key terms and that’s deductions and credit. People all of the sudden, a lot of times, associate those two together. Although they both can have some benefit to you, as far as on your tax return, to what extent that benefit is drastically different.
Andy Fergurson: Sure. We noticed it this year a lot with the change to the standard deduction.
Nate Kreinbrink: Mm-hmm (affirmative).
Andy Fergurson: People were concerned that they weren’t getting as many deductions. Well the difference between a deduction and a credit is your tax rate. A deduction allows you to reduce taxable income, which means it’s value is directly proportional to your individual tax rate. If you pay 10% in tax to the fed, then $1000 deduction only changes your tax bill by about $100.
Nate Kreinbrink: Right.
Andy Fergurson: Whereas a credit is a dollar for dollar change. If you get $100 credit, that’s $100 regardless of what your tax bracket is. It’s $100 less in tax because of the credit. We always try and push people towards credits, looking for those opportunities to take credits because credits are better than deductions. If you can’t get the credits then we go to the deductions and talk about what you can do to increase deductions. But just have to help people understand that a deduction doesn’t materialize dollar for dollar like a credit does.
Nate Kreinbrink: Right and I think that’s extremely important, like you mentioned with that standard deduction rate being increased so much last year, the people that were able to itemize deductions and make sure that every one of those things actually helped them or benefited them on their tax return pretty much drastically reduced because of a lot of people weren’t able to go above and beyond that standard deduction that was raised for last year.
Andy Fergurson: Yeah, a great example is the loss of the exemption for people that live in your house. If you have kids in 2017, a kid was worth about $4000 worth of deduction and in 2018, that same kid had $1000 increase in credit. What happened is for most people, anybody who was below a 25% tax bracket saw a benefit from having a child because their credit increased more than their deduction would have reduced their tax return.
Nate Kreinbrink: I think that’s extremely important for people to realize and understand how that technically impacts your tax return, again, for your overall taxes. Another key point, and I think this will basically push us up to the end and probably then some, is that simple concept of understanding the impact of what a Roth account, Roth conversion, things along those lines have. Going back to that question that I mentioned a little while ago, as far as you do you want to pay more in taxes or do you want to pay less in taxes, obviously with everyone saying paying less in taxes, but yet, when you look a their accounts, their assets that they have, what they’re holding into, they’re kind of doing the complete opposite of that answer that they gave us. Because if we look at tax brackets now, simply put, 15% went down to 12%, 25 went down to 22%, so on and so on. So if we know that there is a lower tax bracket right now, right off the bat we have a tax savings as far as the amount of taxes we’re paying, not knowing what taxes are going to be like in the future. But I think best case scenario, they stay the same, more than likely they will probably go back up.
Andy Fergurson: Right.
Nate Kreinbrink: Yet, when they’re saving money, they’re saving money in a tax deferred account.
Andy Fergurson: Right.
Nate Kreinbrink: Meaning they’re getting that tax deduction now. They’re basically kicking their tax liability down the road and then whatever tax rate is in the future, that’s what they’re gonna pay taxes on, with their thinking of, well I’m gonna retire, I’m gonna be in the lower tax bracket. But as David mentioned and as we always say, we don’t work with a lot of people that made 75, 80, $100000 a year and are living off of 15.
Andy Fergurson: Right.
Nate Kreinbrink: Or 20.
Andy Fergurson: Right.
Nate Kreinbrink: They have a standard way, a normal lifestyle that they’re living. They haven’t worked 35, 40 years to retire and just sit at home and do absolutely nothing.
Andy Fergurson: Sure.
Nate Kreinbrink: They’re gonna go out and live. So their tax rate, with any pension, with social security, with the money that’s coming out of those tax deferred accounts being taxable income to us in those years, they’re right back up to darn near where they were when they were still working. That argument, I guess, to say that I’m gonna be in a much lower tax bracket, isn’t necessarily true.
Andy Fergurson: It’s a model that was built when tax rates were much different.
Nate Kreinbrink: Mm-hmm (affirmative).
Andy Fergurson: Okay. It’s a model that comes from the 70s and 80s when the top tax rates were 70% or 50%. Well that’s not the case anymore.
Nate Kreinbrink: Right.
Andy Fergurson: What you said is important. We know where taxes are now and where they’re gonna be. We’ve got a pretty good idea of which way they’re trending. What that means is you may get some counsel that’s not traditional accountant counsel which is, it may be smart to pay tax today.
Nate Kreinbrink: Right.
Andy Fergurson: Accountants, generally, are gonna say, kick the can down the road. Don’t pay tax until you have to. Right now that’s not necessarily a good model. It may be smart based on your situation to look and say, let’s see what we can pay today. Your tax rates are lower today, let’s pay some tax and get some of these things out of the tax deferred accounts and see if we can’t protect ourselves against future taxation. It’s a switch. It’s a switch in the conversation and it’s something that people haven’t heard a lot of because they’re used to this model that’s been pushed on them. Honestly, two years ago, it was the right model.
Nate Kreinbrink: Mm-hmm (affirmative).
Andy Fergurson: Two years ago it was right to say, let’s not pay tax until we have to. But now, maybe we should. Maybe we should pay tax. I know, our family is looking at it. We’ve decided that we’re gonna pay some tax. We want to pay tax now and get some of that money into tax deferred options so that we can protect ourselves against the tax rollercoaster. Because we know it’s coming.
Nate Kreinbrink: Right.
Andy Fergurson: We know it’s coming. There’s gonna be a change. Somethings gonna happen. At the very least, we have a sunset on this tax, this current tax law. We’ve got a window of time where the law is gonna be the way it is and maybe there’s an opportunity to capitalize. Like you said, even the bracket’s moving two or three percent. Two or three percent can be a lot of money.
Nate Kreinbrink: Mm-hmm (affirmative).
Andy Fergurson: Nobody ever pays an extra three percent for fun. They only pay it when they get surprised. It’s important to sit down with a financial advisor, sit down with your tax advisor and bring up these questions and say, well what should we do. What should we look at, how should we approach this, is there anything I can do now to hedge my bed a little bit and to protect myself going forward. If those opportunities exist in your particular tax situation, I’m sure your advisors will point it out to you and give you an opportunity to get in front of this tax law change.
Nate Kreinbrink: Right. All important points. Again, as I said, this did take us right up to the very last minute. But again, all very important topics and it all goes right back into that overall retirement planning process. People again, always focus strictly on, what are my investments, what are my returns, whatever. Well, taxes and all these other things have so much more, if not more of an impact on your overall retirement than any of those other things. But before we do run out of time here, did want to mention that every Friday, Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of May will be donated to the Miss Clinton County Scholarship Program. Andy, appreciate always talking taxes. Again, this is Nate with Nelson Corp Wealth Management, Andy with Nelson Corp Tax Solutions, bringing you this weeks financial focus. Thanks for tuning in and have a great rest of your week.
Announcer: Financial Focus is a production of NelsonCorp Wealth Management in Clinton in Davenport. 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 indeces mentioned are unmanaged and cannot be invested into directly. Registered representatives, security 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.NelsonCore.com.
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