- 2 years ago
Kelly Phillips Erb, a Forbes senior writer, joins ‘Forbes Talks’ to discuss end of year tax tips.
0:00 Introduction
0:16 Kelly On Retirement Accounts- How Much Should You Invest?
2:20 Charitable Contributions- Rollovers, Donations Etc.
7:08 How Do Stock Gains Apply To Taxes?
8:36 Reducing Interest Rates- Is It Possible?
12:56 Are EV's A Better Investment Than Regular Vehicles?
16:44 How To Accurately Assess Your Financial Situation
19:44 Approaching Tax Deadlines
0:00 Introduction
0:16 Kelly On Retirement Accounts- How Much Should You Invest?
2:20 Charitable Contributions- Rollovers, Donations Etc.
7:08 How Do Stock Gains Apply To Taxes?
8:36 Reducing Interest Rates- Is It Possible?
12:56 Are EV's A Better Investment Than Regular Vehicles?
16:44 How To Accurately Assess Your Financial Situation
19:44 Approaching Tax Deadlines
Category
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LearningTranscript
00:00 (upbeat music)
00:02 - Hi everyone, I'm Rosemary Miller
00:04 here with Kelly Phillips Erb,
00:06 a senior writer here at Forbes,
00:08 here to give us some end of the year tax tips.
00:12 Thank you so much for joining me today, Kelly.
00:14 - Thank you for having me.
00:16 - Absolutely.
00:17 So Kelly, how can individuals strategically utilize
00:20 retirement and related accounts to defer income
00:23 and contribute to their nest egg
00:24 before the approaching year end?
00:27 - So you have the opportunity to put money away
00:30 all year long, but there are limits
00:32 on how much you can give.
00:34 And we actually have those outlined
00:36 in our year end tax article that's coming out,
00:40 but also you can find it anywhere on Forbes or IRS.
00:42 It depends on the kind of account that you have,
00:45 but typically you're looking at about 22,000
00:49 for a retirement account, that's like a qualified plan,
00:52 like you'd think of as a 401k,
00:54 and about 6,000 for an IRA.
00:57 And at the end of the year, you haven't hit those limits.
01:01 The IRS says, "You're still fine," right?
01:04 So if you're looking and you have a little bit of money,
01:06 maybe you got a bonus, or you have a little bit of money
01:09 you weren't counting on, you can actually put that money
01:12 in one of these tax deferred accounts.
01:15 And what that does is it also defers the tax,
01:18 depending on the kind of account.
01:20 I will say there's roster treated differently
01:22 than traditional accounts, but for the most part,
01:25 I think with traditional accounts,
01:27 it's what a lot of people think of a traditional IRA.
01:30 When you put the money in, it doesn't get taxed
01:33 when you make the contribution.
01:35 It gets taxed later when you take it out.
01:37 And of course, the goal is that you're making more money now
01:41 than you will when you're in retirement,
01:43 so your tax bracket will be a little lower later.
01:45 So you have the benefit of the deferral now,
01:48 and then hopefully the benefit
01:49 of the lower tax bracket later.
01:51 And you can keep making contributions up until the end
01:53 of the year, except when it comes to IRAs,
01:56 you even have an extra wiggle room,
01:58 which is that you can literally make it that kind of.
02:01 With respect to 401ks, your deadline is a hard deadline
02:05 at the end of the year.
02:06 But if you're a super procrastinator and you have an IRA,
02:10 you have a little more wiggle room
02:11 because those contributions can be made all the way up
02:14 to tax day, which is April 15,
02:17 and it will still count for the prior year.
02:19 - Well, Kelly, let's talk about charitable contributions.
02:23 So in what ways can making charitable contributions,
02:26 including rollovers and donations to donor advised funds,
02:29 serve as a means to reduce income
02:32 while simultaneously contributing to a charitable cause?
02:35 - So there's a lot of ways that you can give to charity,
02:39 which is pretty awesome, that have some great tax benefits.
02:44 The one way that most of us think about
02:46 is just writing a check
02:47 or making your credit card donation.
02:50 As long as you make those by year end,
02:52 you are eligible, assuming that you itemize,
02:56 you're eligible to deduct those on your taxes for 2023.
02:59 And a lot of times people wonder,
03:01 does the check have to clear?
03:03 Do you have to have paid off the credit card?
03:04 No, you just have to have made the gift by the year end,
03:07 which is a pretty good idea,
03:10 especially if it's end of the year
03:11 and you're kind of scrambling, right?
03:13 There's other ways that you can give,
03:15 and you mentioned donor advised gifts.
03:19 And so what's really interesting about donor advised gifts
03:21 or donor advised funds is that they are sponsored
03:25 by a charity, but it is usually in a financial institution.
03:29 So for example, Fidelity might have a donor advised fund.
03:34 And so what a donor advised fund does
03:36 is it allows you to make a contribution today,
03:39 even if you're not really sure
03:40 where you want the money to go.
03:41 So let's say, you know, you wanna spend $10,000,
03:44 you wanna make a $10,000 gift to charity,
03:46 but you're not really sure where,
03:48 you can put it in this fund,
03:50 you get the immediate tax deduction now,
03:52 and then later you can tell Fidelity, you know what,
03:54 I really feel strongly about sending this money to Red Cross
03:57 or the charity of your choice.
03:59 You can't make them do it, but your suggestion,
04:02 and it typically, as long as it's a qualified charity,
04:05 they'll then make that contribution.
04:07 And so you get the benefit of having made the donation
04:09 to the fund early by year end,
04:12 but you might can take your time a little bit
04:14 to figure out, you know, how,
04:17 where do I want this money to go?
04:18 How do I wanna benefit charity?
04:20 So that's a really good way.
04:22 Donor advice funds, it's worth noting,
04:24 do tend to be at a little bit of a higher price point,
04:26 right, so you could write a check to charity
04:28 for any amount, $5,
04:30 but donor advice funds are gonna have minimums.
04:32 So they are, you know, a little more strategic,
04:36 high net worth planning, but still a really good option.
04:40 Another thing that you can do is donate appreciated assets.
04:44 I think sometimes people get a little freaked out
04:45 when they hear like appreciated assets,
04:47 'cause it sounds like it has to be like super wealthy,
04:49 but not necessarily.
04:51 I happened to buy Amazon back in the day
04:53 before it became, well, it was Amazon then,
04:57 but now it's Amazon, right?
04:58 So it's appreciated.
05:00 I've never sold it.
05:01 It's sitting in my brokerage account.
05:04 If I were to sell it, I would pay capital gains on it,
05:07 and then I could write a check to charity for the difference,
05:10 which would be a smaller check.
05:11 But if I just transferred that money
05:14 over to the charity directly,
05:16 so if I donated the appreciated asset,
05:19 I don't pay the capital gains,
05:20 and I get the benefit of the entire value of the deduction.
05:23 So it's a win for me, and it's a win for charity.
05:26 So those are two ways that are really good.
05:28 And then the third one that's worth mentioning
05:30 is that if you're a little older,
05:32 you can make what's called a QCD,
05:34 which is a qualified charitable distribution.
05:37 And that is a rollover
05:38 directly from your retirement accounts.
05:40 We mentioned those earlier.
05:41 But when you get older,
05:42 you're required to start taking that money out.
05:45 And at age 73, it's called a required minimum distribution.
05:49 And if you don't take a certain amount of money out,
05:51 the IRS dings you.
05:53 Much like with the appreciated assets,
05:55 if you take the money out, it becomes taxable.
05:58 If you then write a check to charity,
05:59 you're giving them the after-tax value of that gift.
06:03 But you can use this very specific rule
06:06 to donate up to $100,000
06:08 directly from your retirement account to the charity.
06:12 It's treated like a rollover,
06:13 if you've ever done a regular rollover.
06:16 And the benefit is you get the full value of the deduction.
06:19 It can count as your R&D.
06:21 So you check those boxes
06:22 and the charity gets the full value of that gift.
06:26 The best thing about QCDs
06:28 that I don't think it's talked about enough
06:30 is I mentioned earlier that you had to itemize
06:32 to take charitable gifts to get the deduction.
06:36 QCDs are never taken into income.
06:38 So there's no offsetting deduction.
06:40 It's like it's would have never happened
06:41 from a tax perspective.
06:42 You're literally moving money, it ticks all the boxes,
06:45 but you don't get taxed on it
06:46 and you don't get a deduction for it.
06:48 It's just considered tax-free.
06:49 That's a really terrific thing to have happen.
06:53 But it also means that you don't have to meet
06:54 any sort of itemization threshold,
06:57 which sometimes can be difficult for folks
06:59 in a post-2017 tax reform world.
07:03 They're sometimes difficult for some taxpayers
07:06 to kind of hit those thresholds.
07:07 - Well, Kelly, could you discuss the benefits
07:10 of harvesting losses and balancing out income,
07:13 particularly in a scenario where there have been
07:16 significant stock gains throughout the year?
07:19 - Right, so it's funny,
07:21 when you talk about harvesting losses,
07:23 it sounds really dramatic.
07:25 But basically what it is is it's just a way
07:27 of balancing out your portfolio.
07:29 So let's say you had a lot of winners over the year,
07:31 and so you're looking at,
07:33 maybe you've actually sold some winners,
07:35 things were going well for you,
07:37 and you went ahead and relapsed those capital gains.
07:40 Those are gonna be taxable.
07:44 But if you have losers in your portfolio,
07:47 they could be too, if you sell them and you have losses,
07:50 those realized losses can offset the realized gains.
07:54 The important part is you actually have to make the sales,
07:57 because what's inside your account,
07:58 sort of like what I was talking about with Amazon before,
08:01 if something is appreciated,
08:03 that in itself isn't a taxable event.
08:05 It's not taxable typically until you sell it
08:07 or give it away.
08:09 In this instance, if you've sold throughout the year
08:12 and you racked up some real gains,
08:14 it's good to offset it with some losses.
08:17 And the flip side is also true.
08:18 If you, as a rough tax year, or sorry,
08:21 a rough accounting, you're looking at your portfolio
08:24 and you had a lot of losses,
08:25 maybe it's time to balance those out
08:28 with selling a few winners.
08:30 While you can carry some losses forward,
08:32 it's always a good idea to try to reach some balance.
08:35 - And so could you explain some of the advantages
08:38 of participating in an intra-family loan,
08:41 referring to the grandma story,
08:43 which we also have a video about that,
08:46 you all should watch it,
08:47 and how it enables individuals to reduce interest rates
08:50 while maintaining associated tax breaks.
08:54 - A lot of folks will tell you
08:55 that you shouldn't borrow money from family,
08:57 but this is essentially one instance
08:59 where you can actually have tax advantages
09:01 as well as economic advantages from borrowing from family.
09:04 Why?
09:06 Interest rates have been up slightly, as many of us know.
09:08 Some folks now have high credit card bills,
09:11 student loan payments have kicked back in,
09:14 and some of those are at higher rates
09:16 than maybe seems affordable for students who just graduate.
09:21 And you might have people who are looking to buy a home
09:24 or to refinance a home,
09:25 and interest rates are just maybe a little too high
09:27 for them to do that right now.
09:29 But if you have a relative who has some liquid assets,
09:33 maybe they have a little nest egg sitting over
09:37 in a bank somewhere,
09:38 then they're willing to give you a loan.
09:41 There's a special kind of inter-family loan
09:43 where the IRS says,
09:44 as long as you hit certain minimums with the interest rates,
09:48 then we're gonna consider this a bona fide loan.
09:51 So you have to hit what's called the AFR,
09:53 it's a very specific number that the IRS puts out,
09:57 well, Treasury puts out every single month.
09:59 But as long as you hit those numbers,
10:01 the IRS says, okay, we're gonna consider this a real loan.
10:04 Now, sometimes the spread between what that number is
10:08 and what you're paying can be significant.
10:10 If you're paying 30% on a credit card and the AFR is 5%,
10:14 you know, big, big difference.
10:16 Same thing with the mortgage.
10:17 If you're looking at a mortgage rate of eight or nine
10:19 and you can pay 5% on the AFR,
10:22 it's a terrific opportunity for you.
10:24 And it feels, because it tends to be more informal, right?
10:28 If you're borrowing from your parents, let's say,
10:30 it feels like it wouldn't be like a bona fide loan
10:33 for purposes of IRS, but it is.
10:36 And the advantage to that on part of the borrower
10:40 is that you can still keep the same tax treatment
10:44 that the loan would have had from a bank,
10:47 even if it's from mom and dad.
10:49 So a good example, again, with a home,
10:51 if I borrow from my parents a proper mortgage,
10:55 like we might write a promissory note,
10:57 they might even record it in the county where I live.
11:01 If I do that, I can still claim a mortgage interest deduction
11:05 for the interest that I'm paying to mom and dad,
11:07 even though I might be getting a more favorable rate
11:10 from that bank than I would say my local bank.
11:13 And it's a really nice way to preserve those tax advantages
11:18 while paying less money.
11:20 On the flip side, the person who's loaned you the money
11:23 does have to bring that money into income as interest,
11:27 but, you know, it's probably more or less the same amount
11:30 that they would have been earning
11:31 had they kept that money in like a CD.
11:33 So there's really no difference to them.
11:36 This works really well, actually,
11:38 for middle-class taxpayers.
11:40 It works even better for high-income years
11:44 because there's a lot of associated estate tax advantages
11:48 that can also come into play
11:50 that really aren't part of the year-end discussion.
11:52 But it is a way, if you have a lot of money
11:55 or parents have a lot of money,
11:56 you know, it might be a discussion you wanna have
11:57 with your advisors.
11:59 But if you're just looking to have a little help
12:01 paying off some student loans
12:03 and you need, you know, just a little cash borrowed
12:06 at a better rate than you would get at a bank,
12:09 family is actually a really good place to start.
12:12 It is worth noting that you wanna make sure
12:14 that you have a really good relationship with your family
12:17 before you either make that ask or say yes,
12:20 because you do wanna still treat it
12:21 like it's a business deal.
12:23 And, you know, if there's a situation
12:24 where you're not really communicating with your parents
12:26 or, you know, maybe you don't trust your uncle,
12:29 probably not the best thing to borrow or lend money.
12:33 - Kelly, I don't know why,
12:35 but I feel like you're letting me in
12:36 on like top secrets or something like,
12:38 "Ooh, everybody does not know this."
12:41 - I love that too,
12:42 'cause I think that's one that people don't talk about
12:44 and we always think of additional lending.
12:46 But, you know, there are, especially now,
12:48 there are people who, retired folks, for example,
12:51 that have money that they might be able to lend
12:53 to their favorite grandchild.
12:56 - Wow.
12:57 So let's talk about electric vehicles.
12:59 How do investments in electric vehicles
13:01 and green home initiatives offer tax benefits
13:04 at both the state and federal levels?
13:07 And what considerations should be made
13:09 regarding the new upfront payment scheme
13:11 for electric vehicles?
13:13 - So EVs are really interesting because,
13:16 electric vehicles, EVs, are really interesting
13:18 because there's a lot of tax incentives
13:21 to get folks to buy them.
13:23 And actually, in some cases,
13:24 there are more opportunities to buy them
13:27 than actual cars to buy.
13:30 But one of the things that the feds have done,
13:32 in particular, and states are now following suit,
13:35 is that they're offering you a tax credit to buy green.
13:38 So you can earn up to $7,500 through credit,
13:42 which is a whole lot, 'cause,
13:43 to make a question,
13:45 a deduction is a deduction in your income.
13:48 So it's like a dollar for dollar deduction in income.
13:51 Credits are a dollar for dollar offset
13:54 on the tax due.
13:56 So that's a much bigger savings, right?
13:58 Because that is, you kind of figure it out
14:00 according to your tax bracket.
14:01 So it can be a pretty significant savings.
14:04 So you can get this credit of up to $7,500
14:07 for buying a new EV.
14:10 There are a lot of rules,
14:12 far too many rules to talk about
14:13 in this short span of time.
14:15 But a couple that you should be aware of is that,
14:18 they keep, well, the one that you should be most aware of
14:21 is that they keep changing the rules.
14:23 There are actually requirements
14:24 depending on when you buy the car,
14:27 that there must be a certain amount
14:30 of the car produced in North America.
14:32 There are certain kinds of efficiencies
14:34 that you have to prove.
14:35 So you wanna do your homework.
14:37 And you also need to be aware of when you can claim the,
14:42 only claim the credit when the car is delivered.
14:45 So if you go down to your lot today,
14:48 car lot today, and you can pick up the EV of your choice
14:51 and they have it on the lot,
14:53 then you could probably make that a year in tax move.
14:56 However, if they tell you it's backordered
14:58 and you're not gonna be able to get it to 2025,
15:01 then you're not gonna be able to claim the credit
15:02 until 2025.
15:03 So you wanna, when you're out there poking around,
15:05 make sure you check that time.
15:07 So there's an additional incentive
15:09 as of January 1st of next year,
15:12 which allows you to get the credit on site at the dealer.
15:15 So basically it acts like an advance
15:17 or like a discount against the car payment.
15:19 And again, if you start looking at those numbers,
15:21 $7,500 is a pretty hefty credit
15:25 or discount to be able to take at the dealer.
15:28 So if you want the credit now,
15:30 it's a year in move.
15:31 If you wanna wait and try to get it up front at the dealer,
15:35 go on January 1st.
15:37 With respect to homes,
15:39 there's a lot of different kinds of credits
15:41 and many of them have been around for a while.
15:43 It's exactly the kinds of things that you would think,
15:45 things like buying an efficient central air conditioner,
15:49 investing in solar,
15:50 all of those kinds of things
15:52 that we're sort of touting as good for the environment.
15:54 They may also be good for your wallet
15:57 because you can, depending on, again,
15:59 most of them have to be installed
16:02 by the end of the year for you to get the credit.
16:05 But if you're looking at a new heat pump,
16:08 maybe that's your Christmas gift
16:09 because you can offset that with a credit up to 30%
16:13 to the cost of that piece of equipment,
16:16 which can be pretty significant.
16:18 Now, depending on which kind of credit
16:20 you qualify for, so it depends on the thing,
16:23 like which thing you're getting,
16:24 is it roofing tiles versus something else,
16:26 there could be a limit, an annual limit,
16:28 but in either case, there's no maximum credit.
16:31 So most of the time you could keep,
16:34 sorry, there's no maximum lifetime credit.
16:36 So you could do this every year, right?
16:38 So you can start looking now
16:39 and maybe invest in the air conditioner this year
16:42 and the heat pump next year.
16:43 - Well, Kelly, what steps, excuse me,
16:47 should individuals take to assess
16:50 their current financial situation before the year end?
16:53 And how might this evaluation guide decisions
16:56 such as catching up on estimated payments
16:58 or making changes in the upcoming year?
17:01 - Right, so this is the point where I tell you
17:04 that you should have been doing this all along,
17:06 but it's also the point where I tell taxpayers
17:09 that I know that they haven't and that's okay.
17:12 There's no shame in it.
17:13 Like again, ideally, you'd already have a good picture
17:16 of your finances by now and have taken all the right steps.
17:19 But literally, if you're looking at your year end statement,
17:22 you're like, what happened this year?
17:23 It's been a blur, I don't know.
17:25 Maybe take a few hours out of your day.
17:28 Ideally, again, you'd meet with your tax professional,
17:31 but if this is something you'd wanna do on your own,
17:32 there are tools available to help you do that.
17:35 Look at, is my picture the same as it was last year?
17:39 If it is, did I withhold the same amount this year
17:41 as I did last year?
17:42 And that should give you a pretty good indication
17:43 of what your tax bill is gonna be in April.
17:46 If you got a big bump in salary,
17:48 but didn't make any changes,
17:49 maybe consider putting a little more money in
17:52 via either an estimated payment,
17:54 or you can actually just ask your employer
17:56 at the end of the year to increase your withholding
17:59 just a little bit.
18:00 There are a lot of ways where you can measure,
18:02 again, usually against last year's tax returns.
18:05 Just look at your last year and check
18:08 the check that you've received.
18:09 Usually it'll tell you how much you've had taken out
18:12 year to date, but since it's the end of the year,
18:14 it's gonna be pretty close to what happened last year,
18:16 right, hopefully.
18:18 So you can look at those numbers, see if they match,
18:20 see if there's anything else you need to do.
18:22 If you find that you're gonna owe a little more tax,
18:25 you can either, as I mentioned, make an extra payment now,
18:29 or you can do some of the things we've talked about,
18:31 like make a charitable contribution,
18:33 consider deferring extra income through a charitable,
18:37 sorry, through a retirement contribution.
18:39 There's lots of ways that you can reduce
18:42 your taxable income, again, ideally,
18:45 you'd be doing it all during the year,
18:47 but if you are sort of feeling the scramble at the end,
18:50 there's lots of resources to help you.
18:52 One of them I think I wanna mention for sure
18:54 is that there is a withholding calculator
18:57 on the IRS website, it's irs.gov,
19:01 and it can actually, it sort of walks you through
19:03 and asks you some questions, you can figure out
19:05 if you've been making the right withholdings.
19:08 I think most people are pretty confused
19:10 by their form W-4, what you could fill out
19:13 when you start your job, so this is a way for you
19:16 to check against what the IRS thinks you're gonna owe,
19:20 so that you are kind of keeping in mind.
19:23 Another way, I know Bill Baldwin's a fan of,
19:25 you can use tax software, just run a demo,
19:29 see what you think's gonna happen.
19:31 You don't have to have perfect numbers, right?
19:33 You can say, I think I made this amount this year,
19:35 just run the numbers and see what it looks like,
19:37 and if it's in keeping with what happened last year again,
19:40 you're probably okay, if it's significantly different,
19:42 you won't make a change.
19:44 - So are there any specific deadlines or extensions
19:47 for retirement and related accounts
19:48 that individuals should be aware of
19:51 as they approach tax day,
19:52 allowing for last minute contributions?
19:56 - Right, so earlier I discussed retirement contributions
19:59 for retirement accounts like a 401k,
20:02 those are definitely year end, but again,
20:05 if you are making a contribution
20:07 to something like an IRA, you have until tax day,
20:10 which is April 15th, so a little more wiggle room,
20:12 but if you are looking to make
20:15 that retirement contribution this year,
20:17 you wanna make sure that it's in by December 31st.
20:21 - Okay, and considering all the strategies you've mentioned,
20:24 what key factors should individuals consider
20:27 when deciding whether to catch up on estimated payments
20:30 or implement changes in their financial plan
20:33 for the new year?
20:35 - Again, I think when you start thinking about next year,
20:37 you wanna do exactly the same thing
20:38 that I just said to do for the year end, right?
20:41 Look at what you have, what you're expecting to come in
20:45 and what happened last year
20:47 and see if you think those things are gonna be the same.
20:49 If you know that there's something
20:51 that's gonna be significantly different in your life,
20:53 you're gonna wanna plan accordingly.
20:54 And while we always don't know what's gonna happen,
20:56 there's some things you can be pretty sure about, right?
20:59 Like if you're getting married next year,
21:02 hopefully you know that, hopefully you know that now,
21:05 having a baby, buying a house, moving,
21:08 all of these things that can have an impact on your taxes,
21:11 you probably know now
21:12 if you're gonna be doing that next year
21:14 or that you're thinking seriously about doing those things
21:17 and you can make some changes.
21:19 Same thing with jobs, if you are getting a raise,
21:21 if you are changing jobs,
21:23 especially if you're shifting into maybe more than one job,
21:26 you're thinking about picking up a side hustle,
21:28 those are things that would impact
21:30 your next year's planning.
21:31 And you wanna start thinking about it now
21:33 so that next year we don't have the same conversation
21:35 about how to scramble at the end.
21:37 Not that I'm downplaying scrambling at the end,
21:40 it can be advantageous and I'm a procrastinator too,
21:42 I get it.
21:44 But the more that you can plan ahead,
21:45 the more likely it is that you can save.
21:48 - Kelly, this has been so helpful.
21:50 Thank you so much for joining me today.
21:52 - Thank you.
21:53 - Absolutely.
21:55 (upbeat music)
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