Intelligent Investing #51 - Commonly Asked Tax Questions with Mike Casey

In this episode I ask Mike Casey a local CPA some of the most commonly asked tax questions.

• How can I reduce me tax bill?
  • Retirement account contributions
  • Health Savings Accounts
  • Flexible Spending Accounts
• What kinds of deductions do I qualify for? (Individuals)
• What are the differences between marginal and effective tax rates?
• Which is better; a tax credit or a tax deduction?
• Should I itemize or claim a standard deduction?
• What are some of the new tax law changes in 2022 and 2023?

 Glenn Leest
 Senior Investment Adviser
 WT Wealth Management
Office (928) 225-2474
Email: INTELLIGENTINVESTING@WTWEALTHMANAGEMENT.COM

Mike Casey
West Christensen & Associates PC
http://flagstaffaccountingservices.com/company/meet-the-team/
https://www.linkedin.com/in/michael-casey-30243514
Address: 705 N Beaver St, Flagstaff, AZ 860
Phone:

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WT Wealth Management
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Transcript

Welcome to Intelligent Investing with Glenn Leest. In today's episode, we have Mike Casey back and we're going to be asking some of the most commonly asked questions when it comes to taxes. So stay tuned. Going to be a great episode.

All right, here in the studio with me, I've got Mike Casey. Mike, how are you today? Doing great, Glen. Happy to be here.  and Mike's with, uh, West Christensen, just right down the road from us on Beaver Street. I asked Mike to come in and, um, want to do a segment. And there's a lot of, you know, CPAs and tax people that I know.

But, uh, I thought I'd do a program today about just the commonly asked questions, uh, that most people have when it comes to taxes. So we are going to answer some of those questions that we know that you guys have. So I guess the first one that most people ask when it comes to taxes is, how, how do I pay less of them?

Right? How do I reduce my tax bill? Um, and there's also obviously very, a lot of different ways to do that, but let's focus on just maybe the individual for right now. So as an individual, what, what are some ways that individuals can maybe lower their tax taxable, uh, taxable liability. Uh, one of the fa, one of the ways folks, uh, typically handle this, you know, uh, generally we like to do tax planning with our clients.

Just to make sure that, you know, they're getting the maximum back bang for that buck as we'd say. Um, you know, some of the common ways to reduce your taxable income is through tax deductions and tax credit. Yep. Yep. And there are various deductions and credits available out there that, um, assist taxpayers in lowering their taxable income.

So like an maybe contributing to a retirement plan, that'll definitely help Lower taxes, definitely, you know, setting up IRAs, 401ks, um, you know, participating in a health savings account, hsa Okay. Uh, flexible spending account. And all of these have, you know, have their limits. So one that maybe we can touch on.

Cause I, I think most people. Have heard this, but maybe let's, let's break it down a little bit more. So say you have a hundred thousand dollars of income and you contribute $5,000 of your income to a retirement plan, whether that be a 401K or traditional ira, it's a pre-tax plan. So the way that would work is now.

You get a, it reduces your taxable income. So instead of making a hundred thousand, now you only pay taxes on $95,000 worth of income. That $5,000 gets to go into your retirement account. You know, us at WT Wealth Management, we're going to grow it. And then one day when you want to retire, you can then, uh, withdraw back out of that account and it just counts as ordinary income at that time.

So that's kind of how the retirement plans work as far as tax goes and, and depending. Which type of plan you have determines how much you can contribute. So traditional IRAs are 6,000 and 7,000, depending on your age. 401ks are, um, 20,005. 20,500. Yep. Then with a catch up provision of 6,550 or over some, I was thinking already thinking 2023.

Yes. So those are a little bit more a simple IRA you can contribute around 13,500 plus a catch up provision. I believe that one's 3000. 3000. Okay. Um, and then you have the step ira, which. More for like the self-employed individuals, but that one is usually around 25% ish of, uh, salary net profit. It's a little bit more complicated than that, but that's kind of a good rule of thumb.

So that's kind of how the IRA deductions work and, um, you get the deduction when you go to your taxes. So a lot of times what happens is if you're contributing directly to an ira, not through your employer. You're already putting money into that account with funds that have already paid taxes on.

So at the end of the year, that's where you get the reconciliation, the, you know, gets to reduce your taxable income. If it's directly through your employer, then it just comes out pre-tax, you know, from the get go. So at the end of the year, it has the same basic effect. But I had that question one time of like, Wait, didn't I already pay taxes on it?

I'm like, Yeah, you did for the ira. But then you get the tax deduction when you go to do your taxes too. So that's my understanding. Any, you know, am I, is my understanding correct on all that? Yes, Glen, That is exactly correct. And you know what's important to understand too with, with tax deferred plans like the 401k or the 4 0 3 B for.

Know or non-profits, uh, you know, colleges, university schools. Mm-hmm. , the 4 5 70 for, um, government employees is that it's tax deferred for federal and state only. Okay. Um, that, you know, it does lower your taxable income. It's still subject to social security and Medicare taxes. Yeah. That's often the misnomer out there.

So, Yeah. All right. So it, it definitely helps lower income. Um, another thing that you could do is a health savings account, an hsa. And those ones, from my understanding, work very similar to the, uh, tax deduction component as like an ira. So you put money in, you get the tax deduction tax, it reduces your taxable income.

However, um, as long as it's used for health related expenses, um, it doesn't count as income on the way out. So an HSA is a very great tool to have because you can put money in there. It reduces your taxable income. You can actually invest the funds. You don't have to just put them in a savings account. You can actually invest them like you would a traditional investing account.

And then as long as you use it for health related expenses, you don't pay any taxes on any of the gains. Um, and it gets to roll over year to year to year. So some of the older plans were like, if you didn't use it that year, you lost it or didn't carry over. But the HSA is definitely carry. Now the one provision on that, that I, um, you have to have a high.

To bull, uh, insurance plan. So there are some caveats which Correct. Um, you know, we'll have to look at those another time. But it's, you know, I think the deductibles are probably in that 1500 or $3,000 range for a single person or family. Do you remember what they're Yeah. For, you know, for cell coverage, the, uh, the 20 2022, which is the year that we're dealing with, uh, a cell coverage is 36.

Okay. Uh, family coverage is $7,300 and that's what you can contribute. That's what you just saying you can contribute to. That's a max contribution. Exactly. And then there's what the actual deductible for the healthcare plan has to be. Um, so say you have Blue Cross Blue Shield and they don't kick in any funds until you've paid in say, 2,500 as a deductible.

That, that's the other part is it has to have, meet those criteria as well. Are you familiar with what those ones are? Um, yeah. Correct. I mean, um, Uh, and also, uh, along with those limits, uh, there is a $1,000 catch up for individuals 55 or older. So yeah, Health savings plan is, is, is a great incentive. It's, um, one of those adjustments for adjusted gross income as a deduction that you're allowed in lowering your taxable income and if you're an individual that ordinarily incurs medical expenses anyway.

Yeah, it's a good pay. It's a good idea to. Use that money for your, um, for your, your deductible. Yeah, exactly. And I just confirmed it. So if you're an individual, if you're, uh, deductible to actually instill in. For, So when you look at the healthcare plan, they call them deductibles. We're talking deductions and deductibles are two different things, things.

But your healthcare deductible, if it's 1400 for an individual that's considered high. High deductible. Yeah, high deductible. Or 2,800 for a family. So you have to meet those criteria in order to have it hsa. Exactly. So some people, If they're fairly healthy and they don't need a lot of recurring, you know, medical coverage's, they usually will say, Hey, I got to hire deductible plant and then, then allows me to do the HSA and contribute into that.

So it's a, it's a great plan. We actually manage HSA plans. It's a fairly newer thing that we have the ability to do through Charles Schwab and all the different affiliations we have. So, um, and then I think there's also some criteria, we're going off on a tangent here, but it's great because this is information people need.

Um, with an HSA you have to have a minimum amount in the HSA account sitting as kind of like a cash buffer. And then once you get beyond a certain P point, then you can take those funds and invest. Correct. Most of the time it's right around $2,000 that you have to keep in there as kind of like a cash buffer and then anything above and beyond that you can start investing it.

Right. Um, but yeah, it's a great plan. It's actually one of the most tax advantageous. Things you can do because you get the tax deduction, it gets to grow income tax free, you know, so as long as it's used for healthcare and then, um, you don't have to pay taxes on the way out at all too. So there's all these like, you know, tax benefits.

So definitely it's a great tool for individuals to lower the taxable income is the hsa. Um, and just to reiterate, it does have to be part of a high deductible. Yep, yep. Always. Yeah. High deductible is the, the. Keyword now that what I've seen what happened is maybe someone had a high deductible plan. They got their HSA funded it, got it set up, but then maybe the next year they didn't have a high deductible plan.

So they just can't contribute new money into the plan until they're back in the high deductible. Now I do believe that they can still use funds in that account for health related expenses and, and what qualifies as a health related item, I think has changed a lot. Um, what are some of the things if you have an HSA account that you can actually, you know, spend the money.

Most folks use it, you know, towards their out of pocket expenses for medical, you know, it can be used. And the nice thing about it is you don't lose it. It's, uh, I like a flexible spending account. Mm-hmm. , um, which is, you know, pretax as part of a 1 25 plan, uh, 1 25 under the Internal Revenue Code, which is pretax for everything.

The HSA does carry over indefinitely until you use it, but to make contributions for the following year, Yeah. You still have to be part of a high deductible plan. Yeah. Let's talk about the flexible spending account for a second. You mentioned that Yeah, the fsa. So what's the, between HSA and fsa? Well, the, the hsa, um, has the limits that we just mentioned.

Mm-hmm.  for self only or family, Um, uh, family coverage. With a flexible spending account. That's part of a section 1 25 pretax medical plan. Okay. Offered by the employer. Okay, so it's through your employer. Okay. Correct. It's pretax for everything, including social security and Medicare, that that's the only thing that's a hundred percent pretax for everything, including federal and state unemployment taxes.

But the, the limit on that for TW 2022, the current year is 27 50. Okay. Now, the flexible spending account does. Caveat, it does have a use it all. Lose It plan. So what's not used up by the end of the year, uh, gets f forfeited and the employee uses that money to defray, uh, the administrative expenses of the plan.

Okay? However, Congress has allowed, um, over the last several years, um, employees to carry over $500 up until March 15th of the following. Hmm. Okay. So, uh, fsa flexible spending account is usually off, off offered through your employer. Exactly. And they're fronting money, meaning they're putting it in as a benefit for you.

And if you don't use those funds throughout the year, they, you, you for, for them. Cause it, it's really, it's. The employer funding it on your behalf? Um, actually no. Is that okay if I get it wrong? Case you're putting money in, you're putting the employee defers money because if you're going to have medical expenses anyway Yeah.

Um, you know, why not do it with completely pretax dollars? Sure, sure. The thing about it an an FSA flexible spending account is that you, you have to be selective about the, um, uh, the type of medical, um, um, Options that you, um, that you select. Okay. You know, you have a menu of choices. Um, if you know you're going to need dental or vision or out of pocket medical, I mean, you know, use it for that.

Sure. Okay. Uh, but. It does expire every year and you have to select your new benefits by December the first of each year. Okay, so that one's kind of good for planning if, from what I'm hearing, because you're putting money in. But if you don't use it at the end of the year, you forfeit that so it's, you know, you got dental work that you need to done or you have these.

You know, you see the chiropractor, you know, every week or for, you know, whatever. So you have these known expenses. Mm-hmm. . And so that's where the FSA comes into play. Because quite frankly, I, I've never had an fsa, never really seen a whole lot of them be used. Um, but they can be a good thing. It's just using them the right way.

Okay. So that's one way to reduce your taxable income. Yeah. And you can carry over $500. Okay. Into March 15th. Another nice thing about the flexible spending account or um, um, or the 1 25 plan is having. Dependent care, you know? So if you know you have incur childcare expense, For merit filing joint is $5,000.

Mm-hmm. , uh, for other types of filers, single or merit filing separate, had a household, it's $2,500, so why not use that money with pre-tax dollars if you know you're going to incur childcare. Okay, so that's actually a great thing to talk about. So if you have childcare, daycare expenses, you can route those through the fsa, right?

So, you know, hey, it costs me 400, $500 a month to, you know, take the kiddo to the daycare. I can, you know, fund say $2,500 in the beginning of the year into. FSA and then use all those, use that to pay for those expenses and that lowers my taxable income. Okay. Yeah. Okay. So I mean, every little bit helps though.

So you do a little bit here, a little bit there, a little bit with this, and all of a sudden, you know, all those little things for reducing your taxable income where deductions really add up. Um, and this is on top of, okay, so maybe the next question is, so we have a thing called itemize. Standard deduction.

Mm-hmm. , this is for individuals. What's the difference between the two and kind of how does that all, how does all that work? Okay. Um, , you may be aware that, you know, in 2018 with the, the reform of the Trump bill, uh, that took effect January 19, uh, January 1st, 2019, they did away with, uh, with exemptions.

Okay? So, um, to answer the question, the difference between a standard deduction, itemized deductions, Individuals will take either the greater of the standard deduction, which for 2022 is 25,900 for merit filing joint. Um, it's half of that for a single or merit filing separate, which is 12,009 50. If you qualify for head of household status, uh, that's going to be nine 19,400 for 2022.

So in order to benefit by itemizing, you have to have. More than the standard deduction to either mind worth of, uh, uh, worth of expenses that would count as deductions. Correct. So, so your, your, your, your medical, your taxes and taxes are capped off of $10,000. Okay. Um, mortgage interest, um, charitable contributions, um, um, are pretty much it.

There's some, there's some other subject to 2% of your a agi, but, um, so you have to have more in itemized deductions than the standard deduction in order to, in order to benefit by itemized. So most of the people do the standard deduction, so. Let's do easy math here. Say you have a married couple making a hundred thousand bucks and they're married, filing jointly.

So they would have a 20,000, 25,900 right off the top. Is that what you said? 25 9? Uh, that would be the standard, the introduction. Okay. Right off the top, they're down to, you know, $74,900 of income. Right. They do it right. $74,100 of income. Um, and that's what they, that's their, their base right From there.

Correct. So then you would add in, okay, did they put any money into a traditional ira? Did they put any money into the hsa, the fsa, And those will continue to add on top of the standard deduction. Um, so from what I'm hearing, most people just do the standard deduction. Requires very little work, and it's usually the greater amount anyways, which isn't that why they, they upped it so that way it creates less work on the IRS part.

Um, to have to go through all those itemized deductions. They said, Hey, let's just make that threshold larger, and then most people are going to choose that anyways. Right. To some extent. Yeah. But you know, it really depends because if you, if you're an individual that you know, uh, very few people benefit by medical nowadays.

Yeah. Because you have to have. It's the amount in excess of 7.5% of your adjusted gross income. Yeah. So unless you have, you know, a lot. Uncovered medical expenses, um, that you're trying to deduct, um, taxes, which cap to $10,000. Um, you may have high mortgage interest. You may be an individual that, you know, that's very generous with your contributions, donations.

Um, so you, you know, you may have more than 25,009. Yeah. So it, it really. It really depends. Sure. But, but to go back on what your, what you just mentioned, um, from my experience over the last couple of years, most individuals seem to have benefited more by the standard deduction. Okay. So, um, we talk about the different ways you can reduce your taxes.

Um, you know, we talked about the IRA hsa. Fsa. Um, if you do, how you do your deductions, most of the time the standard deduction is where most people do. But say you have a lot of expenses and you can do the itemized deduction, that works out. Right. That may be helpful. Um, the next thing we can look at is, um, you know, is there any.

Um, and this is for individuals that maybe have a side business. They're not, you know, full time having their own business, their own small business, but maybe they do a side hustle. Um, so maybe during the weekend they, uh, you know, they manufacture or they create, um, you know, shelving units or tables in their garage.

And so, you know, are there things that it costs to, uh, run that business? Um, you know, my. Sometimes she does the essential oils, the, you know, the stuff you put in the diffuser. So you know, what are all the costs associated with that? Well, obviously they have to have a cell phone, obviously they need to have an internet connection and you know, costs of marketing.

So all these little things, like if you have a side hustle, those things can be categorized like a normal business would, and you don't necessarily have to go through the same process of incorporating all that. From what I understand, you can, but a lot of times if it's just a smaller amount of income, you can classify it.

I think we were talking about that if, uh, the Schedule C is one of those areas that if you have Schedule C income, um, that the IRS looks at that quite a bit more often. So, um, so let's talk a little bit about the side hustles. I am I thinking about that correctly with those additional deductions and expenses?

I mean, Correct. Yeah. I mean, you know, any person in business for themselves, self-employed, um, self-employed income, Schedule C income, as you mentioned, is subject to self-employment tank. Yeah. Yeah. So whatever deductions you can offset against your income, Is obviously a benefit. One of the nice things about, um, Schedule Cs, um, flow through LLCs, partnerships, ORs, corporations, um, something Congress came up with a few years ago is the qualified business income deduction.

Hmm. Which is 20% of the, um, uh, deduction of 20% of the profits. Which, uh, which, which is a nice incentive. You know, that's an above the line deduction. Okay. So wait, go back to that. So the name of it was Qualified? Qualified Business. Income Qualified. Okay. So in what situation would that apply? Um, there are limits for, you know, it's, um, it's based on your income.

And, you know, married filing joint versus single. There are, there are some limits for that. Um, um, I haven't looked at the 2022 limits yet, but, um, but most individuals, you know, if you're talking about a small, you know, somebody that's just operating a business as a sideline mm-hmm. , um, I'm sure their taxable income's probably going to be under 300,000, I would think.

Yeah. Uh, but maybe. It depends on the line of business. Okay, so let's paint a scenario. So you have a husband and wife that make a hundred thousand dollars a year. You know, work their normal jobs, um mm-hmm.  and then, but one of them, you know, on the weekends, like I said, maybe the husband and wife, they create, uh, furniture out of the garage.

Right. And that brings in an extra $50,000 a year. Mm-hmm.  of net profit. So that qualified business, uh, income deduction. Um, so 50,000, let's say they're net profit on the, the furniture, maybe they made. A hundred thousand dollars, but they only profited 50,000 after everything was said and done. Um, so how does that work?

Because that 50,000 would flow through to them on the personal side, but you're saying that that qualified business income deduction may reduce that $50,000 number when it comes over on the personal side. Is that how that works? Exactly. By 20%. You know, I have to After the deduction. Yeah. With the self-employment tax then the net of that, um, is subject to a 20%.

Deduction, which is, um, you know, it's a 20% of profit is a nice deduction. Yeah. So in that scenario, only taxable income back. Yeah. Yeah. $50,000 of, of net profit. They may get a, you know, on the income that flows through the personal side, that 50,000, they may be able to, you know, deduct 10,000 off. So maybe it's only 40,000 ish.

Ish. And I'll say, Cause there's other characters in play there. Right. But that qualified business deduction income, when did that start? Was that, It's a fairly newer thing, Right? Um, yeah. That came into play. Uh, again, I think it was with the reform of the Trump Act. Okay. Um, or it may have been soon. It's been a while.

It's been around for a while. And this is specifically for individuals that have income from a small business. Right. It has to be, you know, business income driven. Correct. Okay. Well, that's good to know. I mean, that's just one thing that, you know, people are listening that make sure that they, I mean, I'm sure the, the software, the CPA or whoever you're working with knows about that, but you, the more you know about taxes and that's always been my, my, I come back to the more I can help.

My clients and myself. The more I understand about taxes and, and everything there is to know about finances, the more we can be successful. Doesn't mean that it doesn't, I don't still hire a cpa, but at least now we're start, we're talking the same language. I'm understanding, you know, the whole process.

And, uh, kudos to you, Mike. Your line of work is, uh, a lot of numbers and the numbers and people, which is a lot of what I do too. Um, but just different, different sides of the coin. Right, Right. Um, very different. So, okay, so we talked about, um, some of the deductions as a. Individual. Um, the, if you have a small business or side hustle that you're working on, um, you know, making sure that that's dialed and properly.

In fact, I actually had an individual that, um, was doing exactly that. They were, they were making tables. It's funny I keep mentioning the table. They actually did that as a side business and they actually made us a table and it was like the best table. It's this thing is rock solid. Uh, this guy was amazing.

He worked a normal nine to five job, and then on the weekend he just loved making stuff and there's a lot of things in his situation that he just wasn't classifying as a business expense. So all the tools that he was using to build the furniture were all his tools anyways. But now they're business equipment.

There's space in the house for business operations. There's. It has to have a, a desk and a laptop and a, you know, internet connection and a cell phone, you know, those sorts of things. And so all these things, like I, they, they already have, but now they're flowing through as business, uh, expenses and business, uh, equipment.

Um, so, so it just helped, you know, his overall situation. So, uh, at the end of the day, you know, it's always your, your business can't just keep losing money over and over and over again, because then the IRS says, Hey, This is more of a hobby than anything else. But, um, there are certain deductions and expenses that you, you can flow through your company and that makes sense, that are needed to operate the company.

So, um, okay. So, uh, pivoting again. Um, let's talk about the difference between marginal and effective tax rates. I, I've heard that a couple times and I think if you're asked the everyday Joe, what that means, Their head would probably start span like, what, what is, what is marginal tax rate? What's effective tax rate?

What does all this mean? Don't I just pay the same rate across the board? And the answer is not necessarily, necessarily, Yeah, exactly. Yeah, that's a good question, Glen. Um, you know, the US has a progressive tax rate system. Yep. So what does progressive mean? Um, it, it's, it's income driven. The, you know, the more you earn, the more, uh, the higher will be your tax rate.

The higher percentage will your tax rate, and that's something I've talked about before. Progressive tax system means as you make more money, you bump up into higher percentage, different tax brackets. Tax brackets. We have. We have seven different marginal tax rates, so it's seven different marginal tax brackets.

Cause I always hear people say, Oh, that those that make a lot of money don't pay their fair share. And you're like, Well, if they're earning income is clearly, the more you make, the more you have to pay out of as a percentage, not just dollar amount, but percentage wise. You start getting, like you get into those higher tiers and you're going to be forfeiting.

Or more of your income. And it's depending on the state too. If you're in a state like California, not only do you pay federal, but you also have to pay all the state taxes and local and all that. So, um, you know, currently our lowest tax rate is 10%. With the reform of the Trump bill, um, the tax rate's got.

Got changed. The lowest tax rate we have is now currently 10%. Okay. The highest rate is 37%. Is it the federal level? Okay. At the federal level where it used to be 39.5%, you know, these are in effect through, you know, through the end of 2025. So, but to answer that question, you know, we have seven different marginal text.

Tax rates. Okay. Tax brackets. And the difference between that and effect and an effective tax rate is your effective tax rate is based on your, your tax liability and your taxable income. Okay? So it's basically your, you know, your tax liability divided by your taxable income will give you an effective rate, whereas you could be within, for an ex, for example, your marginal, your effective rate may be like 21.1%.

Whereas your marginal rate is within, you're within the 22% tax bracket because Okay. You know, the bracket has a range. Okay, So you may be in the marginal tax range or 22%. Okay? But your effective rate within that range may end up being like 21.1 or whatever.  because of your tax liability divided by your taxable income.

Okay, so let's see if I got this correctly. So I'm looking at the tax rates right now online. Mm-hmm.  or in front of the computer. Um, if you're single, um, the lowest tax bracket is 10%. So if you're anywhere, if you, the first $10,275, you make your tax at 10% right now, the next amount of money that goes from $10,275 all the way up to 40 1007 75, your tax at 12%.

And then the next bracket starts right after that and goes all the way up to 89,000, uh, $75, and that's a 22%. And so basically, you know, what ends up happening is that first bracket you, you pay, you know, as much of that amount is correct, and then the next bracket you pay whatever that amount is, and then the next bracket.

So it's like, it's kind of tiered if you think of it that way. So, um, what I'm trying to say here is if you're in the highest tax bracket of 37% in this scenario, and you're making over 540,000, well. Not the entire bucket is taxed at that 37,000. It's tiered. It's our 37%. It, it's, it's, it moves up as you go through the tax bracket.

Exactly. So what you're saying, The marginal rate is where the highest rate that you're at, the highest, you know, tier that you end up. But then the effective is when you combined all of them together, an average amount. You blend them to get an idea, like what are you really paying over as an overall percentage.

So that's your effective rate. Did I, am I understanding that correctly? Yeah, yeah, Correct. So, you know, whatever your tax of income may be, you know, um, after all allowable deductions and whatever your tax liability ends up being. You take a percentage of your tax liability over your ink taxable income.

Yeah. And that effectively is your effective rate. Okay. So that, Cause I've heard that sometimes say, um, where you have people that are maybe business owners, like a Warren Buffet. He says, My effective tax rate is lower percentage wise than. Some of my employee is a secretary, and I'm like, Wait, what is he saying there?

And so what he's saying is she may be in a 12, 15, 20%, uh, effective tax rate, but he's at a 5% or 10%, whatever it may be. Um, so that's what they're talking about, is that the actual percentage they end up paying. You know, as far as their, their tax, tax tax bill. Um, so, uh, there's still, you know, you know, taxes are taxes, right?

They're, you're not going to escape them. You're going to pay them, right? And this is where you, it's important to have someone like Mike to help, you know, making sure you're playing within the lines, you're doing things correctly, and all this information is done. Um, and in your, you know, making the best use of what's available to you.

Um, there's no thing in the tax code that says that you can't, um, you. Do everything within your, within reason to try and lower your taxable income. Now there's things I've heard of people doing that are completely just fraudulent. Like I've heard people say, Oh, well, um, I have church services in my garage.

You know, so my whole home is a, you know, business deduction, and yet there's no people, you know, That's just completely not the case. So stuff like that is, is obvious. Sleeve fraudulent. But you know, say that individual who's creating furniture out of his house, Well, yeah, his cell phone. Mm-hmm. , um, part of that's going to be a business deduction.

Maybe not all of it, but a certain percentage is probably business. Use the internet, you know, part of the garage. He's going to need to, uh, you know, categorize that as a business expense. So say he is got a $5,000, a 5,000 square foot home and a thousand of it is being used for creating the furniture, well, that would be 20% of the home would count as a.

Deduction sort of thing. So all these things, you know, add up. Um, but definitely the marginal and effective rate are two different things. And so you want your effective rates. That's the number you really care about is getting that one correct. That's your effective Exactly. Your, your, your effective rate is based on, on your tax and your taxable income.

Yeah. Whereas the, you know, the tax bra you. And that's within your tax bracket? Yeah. So to say that, you know, um, your secretary may be in a higher tax bracket than you is based on her taxable income versus your taxable income. And not all, not all money that you get is counted as income and treated the same.

There's a difference between I went to a job and got W two income versus I have rental income, or I, my investments paid me. You know, some long term capital gains or some interest, they're, they're all taxed at little bit different rates and so not, they're not all treated the same. And it's based on your filing status as well.

Yep. Because the rates are different based on your filing status. So, so, so, okay. So I have heard, uh, the term tax credit and tax deduction mm-hmm. , um, when we talk about individuals, what's the difference between the two and which one do you think is better? We, we both know the answer to this question, but Yeah.

Um, well, which one is better? Um, the tax credit is always better. Yeah. Uh, a tax deduction lowers your taxable income, Okay. Uh, whereas a tax credit is a dollar for dollar deduction, lowering your tax liability. So let's paint a picture then so I can understand. Okay. Say, say you make a hundred thousand dollars, and for this scenario you're in a 10% tax bracket, that would mean you'd owe $10,000 of taxes.

Now, if you got a tax deduction, you know, let's say $5,000, instead of making a hundred thousand dollars, now you're making 95,000. 5,000, and at 10%, you're now paying $9,500 of taxes versus the 10,000. Now let's give that same person. Makes a hundred thousand dollars a $5,000 tax credit. Mm-hmm. , instead of owing a 10,000 or 9,500, that tax, the actual tax due is going to be 5,000.

Because it goes against the total amounts that you owe on taxes. So credit is far better deduction. Great. You know, those are obviously very good, but the differences between the two are monumental and some of, Yes. Some, some, uh, credits, they have limitations on them, so they say, Some of them, they'll go, they'll take your tax liability all the way down to zero, but not more than that.

And then some of them, like their earned income tax credit will actually give you money back. That's that you maybe didn't even pay any taxes into the system that you got all your original money back. Plus you got more money out of the system as well. And so some they call those refundable credits.

Yeah, the refundable tax credits and the non-refundable tax credits. The non-refundable tax credits. Bring your tax liability down to zero. Yep. Yep. Below zero. Where about you're getting a refund. Exactly. Uh, correct. And what's funny is when they say the word refund, um, at the end of the day, okay, so let's, let's, let's take a step back.

So I work, say you work at a regular job, you earn your money, and then you take a look at your paycheck and you see all these deductions, right? Ica, Social Security, Medicare, all these things, those, and then your federal income. Federal and state taxes, those are all withheld from your paycheck and sent directly to the treasury or you know, whatever local agency they're supposed to go to, whether it's Social Security or Medicare or whatever.

Um, and so say during the year, um, you've paid just to make math easy. Say you make a hundred thousand dollars and you've withheld. Know, $10,000 throughout the year, you know, throughout your paychecks. And so when you go to do your taxes, um, sometimes people will say, Oh, I'm getting money back. But it's like, well, you've already withheld 10,000 of your own dollars already.

So when we say refund, it's like, Okay, am I getting my own money back that I've just overpaid or am I getting. Money back that I didn't even pay into the system, you know, for refundable tax payment. That's the difference. Um, so like a lot of times you see that with the earned income tax credit, um, where people not only get all the original money back that they paid in plus, you know, say in that same scenario, that person withheld $10,000 and their tax bills 10,000.

Um, you know, so they get all, or they say, Okay, so let's say they owe, um, well should have pay $10,000. Um, but they're, they have enough deductions to bring their income down to zero, uh, for, for their. For their tax liability. So they have a $0, um, tax bill, plus maybe they do a refundable credit, um, and they get additional two or $3,000 back.

So in that scenario, they got the original 10,000 that they had withheld plus two or $3,000 that they didn't even pay into the system. This was someone else, another taxpayer or the government that's, you know, given the refundable. So there is a difference between the refundable and non refund. Uh, Correct.

And, you know, you mentioned the earned income tax credit specifically, which is a refundable credit. And again, it's based on, you know, your, your filing status, um, your earned, it's based on your earned income. Yep, yep. Uh, because it is an earned income tax credit and once your income is below a certain threshold amount based on your filing status, then the earned income tax credit will, will kick in.

So, , but just to reiterate what you said, that Yeah, I mean, you could perceivably, get back what you've paid in. A portion of that plus the earned income credit will increase your refund. Mm-hmm.  based for being a low income earner based on your filing status. And I've even heard that sometimes said too, where you have a certain percentage of the US population that pays nothing into the system, not only.

Um, you know, the, the taxes that they did have withheld, they get all those back. And so I think it's something like 50,000 or uh, 50% of our population, um, doesn't even actually pay into it. At the end of the day. At the end of the year, it's, it's, there's, the net amount is no money that they actually pay into the system, which is crazy to think you've got almost half the, the US population of working age that just is not paying into our, our, the system.

So it is something kind of interesting to think about. You're like, how, how? I mean, is there possible, It's always advantageous to file. You know, we have several individuals who said, Well, I, I didn't make enough money in order to file. Um, in order to qualify for filing, your income has to be below your standard deduction amount effectively.

But some people, May qualify for earned income credit based on their earned income. Gotcha. Okay. Earned income and the filing status was always advantageous to file.

And that's a, that's a great point too, is just because someone's like, Hey, I don't, I'm not going to owe any money, you know, for taxes this year. Cause I just didn't make a lot. Yeah, they may not, whatever the case may be, but they may be eligible for some of these refundable credits, you know, where they can get money back, which is aimed to help.

You know, get better in life, help them to succeed. You know, hopefully that's the whole idea with these, some of these refundable tax credits is to give people a leg up, if you will. Right. That's the incentive. Yeah, the incentive. Um, okay. So most people should take the standard deduction for most of the cases.

That makes sense, because that's usually the higher amount. Now if you have It depends. Yeah, it depends. Yeah. If you have a lot of medical expenses or other things that you can't item. You can do that, but most, most, most of the time, you know, that standard deduction fits the case from most people. Um, what about some of the new tax changes that have happened uh, recently?

This. And taxes that will tax changes that will happen next year. So actually, you know, one question I have real quick. So they, they have this, uh, the student loan debt forgiveness in a program that's they're working on. They said that website's up and running, but yet they're not doing it quite yet. So it's still kind of up in the air.

But say, say you have an individual who has $10,000 of student loan debt and they get it forgiven, now that counts as actually debt forgiveness and can count. Taxable income, correct? Correct. It'll count as other income. Okay. As part of the taxpayer's ordinary income, so $10,000, you're like, Okay, great. I'm relieved of that debt, but your tax bill, because now it is as if you earn that $10,000 at a normal job.

If you're at a 10 or 12% tax rate, you may have to owe a thousand or $1,200 to get your debt relieved, which is obviously better than paying the $10,000. But still that's, I think, that's, uh, something that people may not be realizing. That's good to know that now, so that way.  if that comes to pass and you get that debt forgiveness, especially if it's $20,000, um, and it puts you in a higher tax bracket, you're just not expecting it.

Whatever the case may be, but yeah, it does, It does, can count as income. What are some of the other changes that are going on, um, this, uh, this year and next year that I think that, that people should know about? Oh, well, some of the changes that I think we've heard about on the news, um, and you know, through the media is.

Um, uh, clean energy tax credits for homeowners. You know, um, uh, Congress has extended some of these credits through, uh, 2032, uh, whereby eligible homeowners could qualify for up to a 30% tax credit and that gets reduced to 26%, uh, after 2032. Um, you know, for qualifying homeowner energy credits, you know, you fish in water heaters, heat pumps, and.

HVAC systems, for example. I mean, there are rebates on top of that, that, you know, the, uh, manufacturer, um, you know, office, you could get a rebate also up to like $14,000. Oh, wow. Okay. Um, also, um, uh, rebates for electric vehicle purchases. Okay. Um, you know, were. They're trying to push, you know, energy efficiency, um, going green.

I think we hear a lot about that, um, in terms some of these, these, uh, Rebates or, or tax credits for, you know, some of these, uh, especially with the electric vehicles, they're, they're quite substantial. Uh, now there's been a lot of discussion of, you know, which manufacturer qualifies for and which don't. Um, cause I think we all think of Tesla.

But I don't know if Tesla meets all the right, you know, criteria because it's all decided by politicians. So just double check to see whatever car you're looking at for the EV that if you're wanting to get the tax credit, that it actually meets the criteria for it. And, and some of these, I mean, if you get an extra four or.

$7,500 in a tax credit to buy the electronic, the electric vehicle. Right. It can make a big, pretty big difference. Yeah. And then even like you were saying before, uh, putting stuff on your home, like when solar, you know, upgraded high efficiency utilities in there, um, can be credits on that. So double check, you know, as well.

But those, those are incentives. If you have an old system and you're looking to upgrade it, You know, a 25 or 30% reduction or or credit certainly helps the equation for sure. Absolutely. And you know, with these electric vehicles also, these have been extended, um, also through 2032, you know, and, um, this credit does apply to green vehicles, you know, which also includes you hydrogen fuel cell cars, you know, within certain price limits.

And there are. There are limits, um, for these, you know, it's, um, uh, vehicles under 80,000, $80,000 for trucks and in SUVs and under 55,000 for all other types of cars. Okay? So, like you say, you could, you know, get up to, um, for a new vehicle, you could get up to a $7,500 credit applied. Um, the point of sale and a new 400,000 tax credit, um, on the purchase of a qualifying, you know, used, used electric.

That's a nice incentive. So, Okay. And you know, this is based on your, um, your income level as well, you know, merit falling joint. Yeah. Your income has to be under 300,000 to qualify, or it gets phased out dollar for dollar within a certain threshold amount. And, um, single another tax filers. Um, it's under 150,000.

Okay. Yeah. Okay. And it's $4,000 tax credit for the married, uh, couple to buy the electric vehicle. Cause I thought for a used vehicle or, Yeah. Used, sorry. Yeah. For some reason I thought I heard 400,000. I was like, dang, that's a pretty good credit for 4,000. Yeah. Okay. Um, what about some of the changes to the 15% corporate minimum tax?

What, how is that going to impact corporations and. Just overall taxes. Uh, and why did they, you know, what's some background on why they even put this in place? Um, you may remember before the reform of the tax, the Trump bill, um, we had a progressive corporate tax rate structure. Okay. Uh, you know, 15% being, being the lowest rates.

Um, it was progressive 1525. 31, 34, you know, 30, 35, 39. So saying like the, on the, on the individual side. The individual, and then with the reform of the Trump bill, um, that took effect January 1st, 2019. We have a flat corporate tax rate currently at 25 20 1%. Okay? So whether you're a company, a corporation like Motorola or Microsoft making billions of dollars, you'll, or you're a small mum and P corporation, 21 is 21% regardless.

And so Congress is, uh, has introduced this new, uh, 15%, um, Corporate, uh, tax rate, um, for most corporations that, uh, earn more than $1 billion in profits. Um, and we're going to be hearing more about this. Um, Yeah. Cause it takes effect, uh, January, January 1, 23 erect. Yeah. Um, so, um, if I'm understanding that change, they're just making sure that, because I think maybe what happened is you had a company like Amazon.

Who, um, you hear the headlines and Amazon made, you know, X amount of billions of dollars in this year and they didn't pay any taxes because they had a bunch of lost carry forwards and deductions that they were able to, uh, really capture all in that year. So I wonder if, uh, if part of this is to minimize that, but I'm not quite sure.

I guess we'll have to just see how this all plays out because it, it does seem, um, Yet to be foreseen, the impact of all this. And, uh, it's certainly coming up. So, um, yeah, I mean that they are developing, you know, the, um, uh, the regs for this, uh, as, as we speak. And there'll be more information coming on this year in, in the next three weeks.

So, but yeah, cause it does take effect January 1st, 2023, so, Yeah. Yeah. So. All right. Well I had a lot of fun today, Mike, talking about just. Taxes and, and the different, uh, facets of it. Um, we'll have to have you back on. I want to do a show talking a little bit more in depth about some of these, um, tax incentives.

Some of these businesses get to move into different municipalities and, and, uh, areas. Cause we see that a lot in Phoenix right now, where they're doing those big, um, chip manufacturing companies. And so it's, it's causing a lot of, uh, economic growth. And so I want to kind of play out the pros and cons of all that.

So, uh, Mike, uh, how do people get ahold of you if they want to call? Yeah, feel free to call me any time. Uh, my work number is 9 2 8 7 7 4 3 6 3 6 and my email is m casey, m c a s e y n az cpa.com. I also have all of Mike's contact information in the description below. With that, I appreciate you, Mike.

Thanks for coming in today. This has been another episode of Intelligent Investing. We'll talk soon. Thanks again. My pleasure.