Taxes Investments and Retirement Making Sure You’re Getting the Most Out of What You Have

Segment 1 Transcription

00:00 Danny Howes: Well good morning Vero Beach. Welcome to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of the East Coast Tax and Financial Planning. Well, welcome to March 15th. It’s tax day for many companies, S-Corps, and C-Corps and partnerships and the like. So if you own a business and your business is structured and files an 1120 or an 1120S or a 1065, you wanna make sure that you’re at least filing your extension to give you more time so you got until October 15th. So it’s kind of crazy at East Coast Tax and Financial Planning, but we like this time of year ’cause we’re nerds. And I wanted to talk a little about taxes, some of the things I’ve seen so far, this season, and things to watch out for.

00:46 DH: Here at East Coast Tax and Financial Planning, we are a registered investment advisory firm where we manage money in the market for our clients. We also have an independent insurance agency that handle things like annuities, life insurance, long-term care and the like. And then we also have a full service tax and accounting firm where we service small to medium-sized businesses and individuals as far as tax preparation, bookkeeping, and accounting, and so forth. And after sitting down with hundreds of folks already this season, and going through their taxes and reviewing them and looking at strategies, we’ve already adapted our software to account for a lot of the tax reform law changes that are coming down the pike for 2018.

01:27 DH: The IRS is still writing a lot of guidance on that bill but there’s a lot of stuff that they’ve already done for us, particularly as it relates to individual tax returns. And so we’ve been doing a lot of just analysis for people to be able to plan into 2018. And the common theme for married folks, filing jointly, maybe retired, over 65, and maybe got social security, pensions, some investment income, IRA, distributions and so forth, we’re seeing on average that everybody is saving about $1500 to $2500 going into 2018.

02:09 DH: So when you have your taxes prepared next year, if everything’s the same as last year, withholding and all that, that’s what we’re seeing on average. We do this report that basically just says, “Okay, well, how is this, the Tax Reform Act, gonna change your life for the good or for the worst?” And most people are seeing positives. There’s some that are seeing negatives too. But most are seeing a positive savings and a lot of that has to do with the fact that the standard deduction was doubled. And if you think about it, for married filing jointly aged 62 and older, you’re looking at probably 266 I think is what it is as far as, a $26,600 as far as the standard deduction goes, that’s actually over 65, excuse me.

02:58 DH: So that’s a big hurdle to jump for itemized deduction. If your house was paid off, maybe you have real estate taxes, maybe you have some medical expenses, and supplement plan and so forth, if you’re retired. But it really takes a lot. Unless you’re giving a lot of charitable deductions to get over that $26,600 itemized deduction. So I can keep a look out for that, plan for that. And why I’m bringing this up is because that brings new opportunity. So whenever there’s tax savings opportunities and we’re used to paying a certain amount and we always like to see money go back in our pocket, but that could be an opportunity for a number of things.

03:37 DH: And if your savings is significant, which some people’s are, then that might be opportunities to take a look at, and say, “Well, you know what? This isn’t gonna hurt my budget. I can maybe convert more of my regular IRA money to Roth because if I’m saving, two, three, four, $5000 in taxes, I might as well take that two, three, four, $5000 and do an analysis of study to see how much how I can convert in Roth and keep my taxes the same as they were. And that could be a way to transition some money into a tax-free environment for your estate, for your kids, or for yourselves later on down the road. So, something to look out for there.

04:14 DH: If you’re a business owner and you have a corporation, a small business corporation, or maybe you’re a partnership, many many people are gonna be taking advantage of a pass-through credit, meaning that there’s gonna be a 20% discount on your net profit that passes through to your personal income tax return, as a result of the new law. And that could be really significant. And what a lot of folks are missing out on or not thinking about, taking into consideration, is that if you own rental property, especially if you own multiple pieces of rental property and you do profit, and you have to pay tax on that profit, there are ways to structure yourselves to make sure that you can take advantage of that 20% pass-through credit, so that you can save money on your taxes as well.

05:02 DH: So there’s a whole slew of benefits available but there’s… Just like with anything, when the government gets involved, there’s caveats with everything. And so it seems simple enough but if you’re a business owner, it’s a little bit more complicated than that. If you’re a doctor, if you’re an attorney, an accountant, a chiropractor, a dentist, some of these professional service companies are gonna have to do some creative things as far as the structure goes in order to take advantage of those credits. So it’s not like you just automatically gonna get it just because you’re a business. There are caveats in the code that you wanna make sure that you’re structured properly.

05:42 DH: The C-Corps, which means it files his own tax returns, pays his own taxes, and if an owner wants to take money out, they have to take it out in the way of dividends, those are gonna be taxed at a maximum of 20%. So if you’re a C-Corp, you’re gonna save a lot of money there. Lots of things coming down… I wanna remind everybody that even if you have a little job and you’re retired, you still have opportunity to put money into an IRA or your spouse’s IRA. If you’re working and you have earned wages, you just have to make sure you make those deposits by April 17th this year, before you file your tax return is the best way to go. You can still file but you just gotta make sure that you do that before April 17th even if you’re on extension.

06:31 DH: There was a big race at the end of the year last year for a lot of folks that own property up north that wanted to make sure that, because you have such a large property tax bill, you wanted to make sure that you could take advantage of it. Because one of the things about this law that’s happened is that they’ve capped state and local taxes, both income and real estate taxes, on your itemized deduction, they capped that at $10,000, 2018 and beyond. So that has a big impact on somebody that maybe pays $20,000 to $30,000 worth of real estate taxes between a couple homes that you might have. So there was this big race last year to go for that. But there’s other things that have kinda balanced out that, you know, that doubling of the standard deduction. I would say probably half of our retired clients won’t even have to itemize anymore and they’ll actually still benefit and come out ahead. So, it’s really going to simplify filing. It’s gonna be less filing costs and that’s a positive thing too.

07:37 DH: So lots of cool things happening as a result of this Tax Reform Act. I’m excited about it because I am watching these tax returns come through. We’re doing these analyses and we’re like, “Wow, this is how much you’re gonna save next year.” And it’s finally nice to have some money be put back in our pocket. But it’s like my father always said, “When they’re putting money in your front pocket, they’re taking it out of your back pocket.” It’s coming from somewhere, there’s no doubt about it. When we get back from the break, I really want to talk about the stock market and the volatility that’s going on. And that’s the buzz right now. Are we in a correction? Are we in a bear market? Or are we rebounding now? We’ve just seen it all around and when you see these indices really mixed, it’s really kind of interesting. When you see the DOW close really negative and the NASDAQ close really high, that’s just really… Money is just flowing all around and traders are chasing, bettors are chasing returns, and that’s just causing a lot of volatility. And with volatility comes a lot of danger.

08:37 DH: But it also comes a lot of opportunity. And when we get back from the break, I really wanna kinda dive a little bit deeper into that to just talk about how you could protect yourself, keep your eye on the ball, and make sure that you don’t wake up really disappointed one day. Because that’s the big thing. We’ve all been through 2008. We’ve all been through 2001. And we just don’t wanna go through that again. However, we don’t want to lose out on the opportunity that’s available out there because there are really bright spots of the economy and there is prudent ways to invest to be able to take advantage of positive returns in the market without taking tremendous amounts of risk. And when we get back, I’m gonna talk about a couple little strategies that aren’t the fix-all or end-all. They’re not the silver bullet of investing, but they can help you mitigate against some of the risks that’s inherent with the market.

09:34 DH: Well, we’ll be back in just a bit. I’m Danny Howes, Financial Pulse, CEO of East Coast Tax and Financial Planning. If you need to have your taxes prepared, whether you’re a business owner or individual, give us a call, 772-774-7970. Or you can go to our website, eastcoasttaxandfinancial.com. We’ll be back in just a bit.

Segment 2 Transcription

00:01 Danny Howes: Well, good morning and welcome back to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. If you’re just joining us, last segment, we talked about the Tax Reform Act and how it’s affected people, many people in a positive way. We do hundreds and hundreds of tax returns every year here at our firm, ’cause we are a full service tax and accounting firm, as well as an investment advisory firm and insurance agency, all kinda wrapped up into one bow. And we’ve just seen a tremendous amount of people saving a lot of money in taxes. And we have this special report that we can do for you. Even if you’ve already had your tax prepared, we could do an analysis for you, show you what 2018 will actually look like for you. There’s still a lot of little IRS guidelines and guidance that they’re still putting out there, but we’ve done our best to put together a little tax map for 2018, so you can do some planning to be proactive in saving money in taxes, or some of the opportunities with Roth Conversions, and so forth.

00:53 DH: If you wanna take advantage of that, you could just go to our website, eastcoasttaxandfinancial.com, and you could actually register for a complimentary first appointment to sit down, see how we might be able to help you, or you could just call our phone line at 772-774-7970. Just say, “I listened to the radio and interested in doing some tax planning with Danny,” and we’ll get you on the calendar. But we ended the segment talking about market volatility and how we could possibly save ourselves from a disappointing situation if the market were to be extremely disrupted, a big crash or something like that. Because when markets are volatile like they are, when you see indices really far off, where the Dow may be down real far and the NASDAQ up and so forth, that’s when you’re seeing massive shifts of assets of people chasing returns. And these large asset managers for these large firms, they have these algorithms and they have these machines that trade on nanoseconds, and they do these things, and we have no control over that.

01:58 DH: As retail investors, as professional investors even, it’s very difficult to bet against these machines. And so we have to kinda look at the longer term view and see where the value is and not jump on the momentum train, because jumping on the momentum train and chasing returns can really, really mess a lot of people up. There’s a lot of valuations that are extremely high in stocks right now, but there’s a lot of good opportunities too. And when you see what’s going on in the news with tariffs and trade wars and so on and so forth, the market reacts to those things. And traders, day traders and so forth, they trade based off of news, and that’s how markets move so quickly on a day in and day out basis. But having an investment policy statement, a longer term view of what you’re invested in, what you feel like is value and where you think things are headed, that’s a more prudent way to look at things.

02:54 DH: But there’s another strategy I wanted to talk about today that a lot of folks don’t consider or don’t know much about. Most people say it’s either all my money’s in cash or all my money’s in stocks, because when you look at bonds, bonds don’t really pay very much. So really, balancing your risk out can be very challenging in this type of market. You have stocks that are doing double digit returns potentially, right? 20%, 30%. We hope, right? And then you got interest rates down 1%, 2%, 3% max on real safe AAA corporate bonds or 10-year treasuries, and so forth. So there’s really not a whole lot of income that you can make with your money. You can’t rent your money and make a lot of money like you used to be able to, like back in the ’80s, where you could earn 16%, 17%, 18% in CDs.

03:38 DH: So what do you do? And a common strategy that a lot of folks don’t really know about, but it’s been around for a while, is indexing. Using indexed linked products to be able to get good moderate rates of return without risk, and be able to have the potential to beat things like CDs and beat things like high-grade bonds. And they come in the form of a couple different products. There are structured CDs that work this way, where you can buy a CD that’s FDIC insured, and it basically is a bet on an index.

04:12 DH: And what you do is… For example, let’s say you’re doing a five-year CD, and let’s say it’s linked to the S&P 500. You buy the CD today, March 15, 2018, and the CD matures March 15, 2023. And the only two dates that really matter in between there are what is the S&P 500 today? Let’s just say, for simple numbers sake, it’s 2000 points. I know it’s higher than that, but let’s just say it’s 2000 points. And let’s say that five years from now it’s 2200 points. There’s a 10% gain. You may not get that whole 10%. The bank has to go out and buy options and so forth to protect themselves, so they may only give you 7% or 6% of that gain. So instead of earning 10%, you may earn 6% or 5% or 10%.

05:07 DH: And that’s a way to kinda set it and forget it. If your money’s just sitting around doing nothing anyway, at least you have the opportunity for growth. So that’s one way to be able to take advantage of indexing without risk, where you basically are making a bet, and you could do all kinds of things. They have CDs that are based off of a basket of stocks or ETFs and so forth, and we can get as complicated as we wanna be. But, at the end of the day, it’s a CD that’s called a structured CD that links the rate of return, the interest that’s earned, based off the performance of an underlying investment that you’re not directly actually invested in. In other words, you can’t lose money in many of these. Some of them are structured where you can have a down, where you can lose a certain amount, but there’s usually always a floor. So that’s one way that you can kinda make bets with the market without taking a lot of risk.

06:00 DH: Other ways are indexed insurance products. So fixed index annuities are a big buzz. They’re the second most sold annuity in this country. And the first, of course, is a variable annuity that can go up and down in value. But a fixed index annuity actually links the interest to a common index like the S&P 500, the NASDAQ, or the Dow. And it looks at two points, and there’s multiple different ways to structure these. But the simplicity of it is, is that you buy an annuity, and every year you get to change the index or change the strategy that you want to link your interest to. But the good news is, is that you can never lose money. In a fixed index annuity, it has 100% safety on the downside. Your principal is never at risk due to market volatility. And it works much like I just talked about with that CD, but it’s on an annualized basis most commonly, and sometimes two-year or five-year. But let’s just use an annualized basis for example. And let’s say we’re gonna use the S&P 500 and we’re gonna say just for simplicity numbers’ sake, it’s 2000 points, hypothetically today.

07:08 DH: And you put your money in. Let’s say you put $100,000 in, and one year from today, it doesn’t matter what happens in between, it could bounce all over the place, go up and down, up and down, up and down, but one year from today, your anniversary date. Let’s say that the S&P 500 is at 2500 points. That’s a pretty big gain, right? So, if we’re at 2500 points, then you’re gonna get a portion of that gain. So, you’re not… Let’s say there’s a 10% gain or 15% gain or whatnot. They’re not gonna give you 100% of that gain. Because they’re gonna protect you on the downside.

07:45 DH: So, you may only get 6% out of a 10% return or 7% out of a 10% return. Some are even uncapped in some strategies, where you can earn a higher rate of return than maybe money that’s lying around in CDs and bonds. Oftentime in our firm, we’ll use that as part of an asset allocation, where if we have money invested in stocks and so forth, rather than just having it, the safe money sitting in bonds, we’ll get even safer, ’cause bonds are still at risk with interest rates. We could be even safer and carve out a portion of that bond portfolio and put it in a fixed index annuity and have the opportunity to make a moderate rate of return.

08:21 DH: Some come with attractive bonuses and so forth. And it really helps mitigate against risk. If you’re younger… That’s for retired folks… If you’re younger, and you’re still working, there are index universal life insurance policies that work exactly the same way. But actually have even more potential for growth because they have higher caps. I know this is really convoluted and it’s kinda complicated. On our website, eastcoasttaxandfinancial.com, there’s more information on how these things work and some of these strategies. If you missed last segment, we talked about the Tax Reform Act. We put our radio shows. We tried to get them up there as fast as possible on our website so you can go back and listen to them. We transcribe them so you can read them if you’d rather. But it’s a great resource. Again, that’s eastcoasttaxandfinancial.com.

09:08 DH: Again, we’re running out of time today, but if you’re concerned about volatility and risk in the market, we have an analysis we could do on your investments to show you how much risk you’re taking, and whether or not you should still be comfortable with that and so forth. You can call our office, 774-7970, that’s 774-7970. You can register for an appointment right online. First appointment is complimentary, and go to eastcoasttaxandfinancial.com. Also, we could do a 2018 tax map and show you how much money you might save, or how much your taxes might increase as a result of the Tax Reform Act. We’ve already built a lot of the guidance that the IRS has put out for that tax law into our software, to be able to do projections for folks.

09:51 DH: Well, each and every Thursday, 10:30 AM, right here on your WAXE Radio. Make sure you protect that money, folks. But most importantly, make sure you know who and what you’re protecting it from. We’ll talk to you next week.