On our Season Four finale, we’ve saved the best for last. (Well, not necessarily, but that’s a thing people still say, right?) Either way, this episode is a big one.
On this episode, we get into the weeds on how you can keep more of your money—period. That means breaking down and clarifying some of the most confusing and obscure questions around taxes. (Yes, that’s right, we’re finally getting around to taxes.)
With a whole year between now and Tax Day 2023, it’s the perfect time to dive in. This is one of those episodes you’ll probably want to save and listen to a few times—it’s THAT jam-packed with useful (and frugal) insights.
How You Can Steal The Show
- Understand inside and out what kind of taxes you owe, and when, and to who which entities, and why.
- Soak up a ton of useful information about capital gains, estimates, and safe harbors.
- Get insight from a Certified Public Accountant (co-host Matt Rzepka) on strategies to thoughtfully, legally reduce your tax burden.
Listen to more episodes of Steal the Show from this season and previous ones at https://stealtheshow.com/podcast/.
Learn more about Michael’s public speaking training company, Heroic Public Speaking, at https://heroicpublicspeaking.com/.
Learn more about Matt’s specialized financial services firm, Valley Oak, at https://www.valleyoakcpa.com/.
Thanks for listening to Steal the Show: Speakers with Money. Steal the Show will return.
In this episode…
Payroll System Options:
- Gusto (11:57)
- Payroll Relief (12:59)
- Paychex (12:41)
- ADP (12:42)
Other episodes mentioned:
- [Listen Here] S4E2 How to Speak the Secret Language of Business Jargon (referenced at 36:29 and 40:24)
Transcript
Michael Port (00:00:05):
Hello, and welcome to Steal the Show with Michael Port, a podcast from Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money and I’m joined by my very good friend, Matt Rzepka, the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners when it comes to finance. Now to be crystal clear, I’ve got no conflicts of interest here. I don’t stand to make any money at all from you if you take any of the educational information that’s shared on this podcast and do something with it. None. My company is Heroic Public Speaking, which I co-founded with my wife, Amy Port. We’re a public speaking institution based in Lambertville, New Jersey and we provide world-class training to aspiring and working professional speakers around the world. I don’t sell anything related to financial services. Matt, however, does and you are welcome to hire him, but I will not be compensated in any way if you do. I’m doing this purely because I love the topic and most importantly, I think you need it. Everyone in our industry can benefit from learning more about business and personal finance. That’s it.
Michael Port (00:01:31):
Alright today, we’re discussing how to keep more of what you make. So let’s get right to it. Matt Rzepka, I wanna start out today with what might just be the single most exciting, enticing, and invigorating topic we’ve discussed yet. This is a topic that everyone loves to talk about. And now that I think about it, maybe we should have put this right off the bat in episode one, because this is something that really gets people going, gets them leaping outta their seats. Of course, you know what I’m referring to and it’s taxes.
Matt Rzepka (00:02:02):
You know, Michael, uh, you had me going there for a second.
Michael Port (00:02:06):
Really?
Matt Rzepka (00:02:07):
Uh, no.
Michael Port (00:02:09):
Oh, well anyway. Okay. How about this? Today is the day we finally get around to talking about one of the most dreaded, most convoluted, and of course, most important aspects of money. And that’s paying your taxes. Now I know this isn’t something that people love to talk about, but think about it this way. We are finally getting round to talking about taxes, but we saved it for an episode that’s literally called keeping more of what you make. So yes, we’re gonna talk about corporate taxes and capital gains and all that fun stuff. But if you listen all the way through to the end of the episode, we’re gonna talk about how to maximize your savings through tax planning and who doesn’t like savings, especially when it comes to taxes because taxes are your single biggest expense. They are likely the thing you spend the most money on every single year. So, you know, you could save 25 cents if you do price comparison, shopping at the supermarket on a can soup, but maybe you could save $25,000 or $250,000 in taxes by doing appropriate legal, ethical, and even moral tax planning. So Matt, since many of our listeners are entrepreneurs, let’s start with corporate taxes.
Matt Rzepka (00:03:30):
Sounds like a plan to me.
Michael Port (00:03:31):
Okay. So let’s do it. Let’s talk about federal, state, and then of course, local corporate taxes.
Matt Rzepka (00:03:37):
Yeah. So corporate taxes are tax taxes where your business is actually paying taxes directly out of its coffers. It’s not having a direct impact on your personal income taxes. So this is more of an old school approach that has resurfaced with popularity the last several years, because of some recent tax law changes, but corporate taxes, basically your business makes a profit. The corporation has a tax, which right now the C corporation tax is very simple. It’s a flat 21%. So if I have taxable income of a hundred thousand dollars, I have to pay $21,000 in corporate federal tax. Then you go into state and local and it gets a lot more complicated because the rules are different based on those jurisdictions. We won’t go into those details here, but do know you want to learn and understand what your state and what, if any, your local jurisdiction does tax you from a corporate level, but your business pays that tax. You have no personal tax implications on your business profits until you start to take money that you want to earn or spend to live.
Michael Port (00:04:39):
Okay. So let’s briefly just unpack this a little bit more because you know, many folks who start off as speakers or consultants, they often start as a sole proprietor and they may have a limited liability company set up, an LLC, but they’re filing their taxes as a sole proprietor or as an S Corp, which is a pass through entity. So they’re paying all of their business taxes through their personal taxes rather than the business paying separate taxes. Right?
Matt Rzepka (00:05:09):
That is correct.
Michael Port (00:05:11):
And so when the tax laws were changed in, I guess, ’17?
Matt Rzepka (00:05:14):
’18.
Michael Port (00:05:16):
’18. Many small business owners who had pass through tax treatment on their LLC changed and moved over to filing taxes as a C Corp rather than as an S Corp. So they started paying corporate taxes as a result, because if they did good planning, they could end up paying less on their taxes as a result.
Matt Rzepka (00:05:36):
Yes.
Michael Port (00:05:36):
The question here is how do you make sure that you’re not getting tax more than need to be because you run into double taxation where you’re paying it on the corporate level and on the personal level. And so how do you handle this when it comes to working with your clients? And I imagine it’s different for different clients, depending on how much money they’re reporting each year.
Matt Rzepka (00:05:57):
Yeah. It is certainly individualized and different for everyone, but there are some basic factors that will help clarify how it works. The number one thing is just because the corporation is paying taxes, you still can take personal income that’s deductible from that corporation that you would pay personal taxes on. So you need to run some math problems to look at what are my personal tax rates and how much income do I need? What are my corporate tax rates? And the key on the corporate side, if you are spending for personal living, most of the money, your business is making a corporate strategy may become less attractive because you’re not really able to retain those profits and otherwise reinvest them into investments or portfolios or other strategies. You’re just consuming them and it’s gonna force that double taxation to happen now, which wouldn’t be good. So you might wanna stick with an S Corp or sole proprietor or pass through. But as you start to have more and more profits that you can do other investments and other strategies with the C Corp really becomes a dynamic component of your plan to minimize your tax so that you have more money to reinvest and hopefully grow and outpace what some of those initial taxes might be based on your own returns.
Matt Rzepka (00:07:10):
So the strategy right now is to try and balance personal tax and corporate tax to keep you at, or below that 25% level.
Michael Port (00:07:19):
And that’s where the planning comes in. Because if you wait until the end of the year to try to figure out the best way to handle your taxes, then you have fewer options at your disposal. But if you plan in advance, you can make very strategic decisions with respect to how much you’re taking as payroll versus profit versus some other things that will address even in this episode coming up.
Matt Rzepka (00:07:44):
Yeah. Tax planning happens at the end of the year, but what we run into even a lot each and every year is people start thinking about tax planning as we get into the November, December months. Well, if you’re trying to get with a tax planning firm, their plate may already be full and you’re gonna have to wait until next year to get that best advice. So get in and get on their docket so that you’ve got lots of time to plan ahead and start to formulate what those numbers and strategies are gonna look like.
Michael Port (00:08:10):
Yeah. When we meet at the end of the year, we’re doing a full assessment and a wrap up and making strategic decisions with respect to how we file our taxes. But that’s based on the plan that we had made the previous year.
Matt Rzepka (00:08:23):
Yeah.
Michael Port (00:08:23):
And so then at this stage, we also then start doing our planning for next year. Well, what are our estimates gonna be? What our payroll expenses gonna be for us, my wife and I? And that’s all separate from all the business planning that we do with respect to expenses and revenue for the business. We really do keep those pretty separate.
Matt Rzepka (00:08:43):
And when you first start the process, you’re gonna be a lot more active in planning and to-dos and stuff. We have to change and stuff we have to move. But the goal is to get to a 80 to 90% level where it’s then just monitoring what you’ve put into place so that when you do the year end planning, it’s not a long laborious process. It’s just checking the boxes to make sure, Hey, we set this plan. This is what we expected. Have we met those expectations? Do we make any small modifications? And here’s where we’re gonna end up. So that it’s more just continuing to monitor that have to make massive change all at once. So early on, it’s a lot more work, but you want to get it to where that system just runs like clockwork.
Michael Port (00:09:21):
That’s right. In fact, I remarked on that when you were here just a few weeks ago to do our planning and we finished, and I think it was lunch. We started, you know, 9, 9:30, maybe 10. I don’t even remember. And maybe it took us three, four hours total. And that’s because, you know, we really do have it pretty dialed in. And half of that time was talking about what our plans are for next year and also our investment strategies and some thoughts about retirement and other planning needs that we have going forward. So it’s not even just this year’s, you know, personal tax that we’re managing in that particular meeting.
Michael Port (00:09:56):
Okay. So let’s talk about W2 withholdings, federal state, and local personal income taxes. So what are W2 withholdings and who might owe taxes on them?
Matt Rzepka (00:10:07):
Yes. W2 is actually the tax form where all of your wages from a job or from being an employee of your own company get reported. And then the withholdings come out are your social security, your Medicare, your federal tax, and your state tax. And even sometimes some local tax. So all those numbers happen inside of a payroll software all throughout the year. And then that payroll software reports all of that information to the government on a quarterly basis. And then at the end of the year, the software kicks out the W2 form that then reconciles with the government. So that way they know how much you got paid, how much of your paycheck they received from your employer. Your employer is actually a fiduciary of your taxes. A lot of people don’t realize that. They’re taking money from your check and they’re sending it to the government. And if you’re a business owner, you are a fiduciary on those taxes, and that’s not something you wanna mess around with. They do not take that lightly. And if you ever don’t pay those taxes, they come after you with the full fledged power of the government, because they look at it like you’re stealing other people’s money.
Michael Port (00:11:06):
Oh, you shouldn’t do that. That’s frowned upon.
Matt Rzepka (00:11:08):
Not good at all. And it never goes away if you don’t pay those taxes. And we’ve seen situations where people didn’t realize what was going on and they weren’t making proper payroll deposits. That liability will never leave you until it’s paid. Like they come after you because it was your employee’s money.
Michael Port (00:11:24):
Yeah. And the good news is most of the folks who listen to this show are speakers. And, you know, maybe they work for another company and speak, but many of them are working for themselves and speaking so they may be the only employees in their company, or they may not be taking any W2 income. They’re taking everything as a draw. You know, if that’s how they’ve set it up. So there’s a number of different ways you can do it. And a few of them are gonna be like me who have a team and, you know, pay wages. But the good news is if you, you use a reputable payroll system, it’s incredibly easy. They do all the work for you. We use Gusto.
Matt Rzepka (00:11:58):
Yes.
Michael Port (00:11:59):
Gusto is great. We love it. We started with them when it was Zen payroll, I think it was called. And then they merged or were bought by Gusto a really great platform, not expensive. Uh, does most of the work for us and there’s others out there like that. Any others that you particularly like for a small business?
Matt Rzepka (00:12:15):
Lot of great programs out there, this used to be a major problem. The industry from the CPA perspective was, oh, do your own payroll to save on the fee of the payroll software, but then people don’t understand payroll and they weren’t making deposits right. It is the single greatest investment you can make is to make your payroll and happen without anybody having to worry about it. Gusto is a great option. We have a lot of clients who do that. We use a company called Payroll Relief. There’s great companies like Paychex and ADP. It all depends on the personalization you might want or need with your payroll. If you’re running basic payroll, some of the bigger outsource companies are great. If you want more personalization, someone like us or someone like a Gusto, you’re gonna have a rep and you can do some other good things from that perspective.
Michael Port (00:12:58):
Yeah. It’s really remarkable how much filing there is even just with a team of 10 or 15 people. Frankly, the last thing I would ever want to do or ever want our Director of Finance, Juli, to have to do would be to all of that paperwork. There’s enough to worry about without having to worry about payroll taxes, paperwork, and, you know, just let the system do it for you.
Matt Rzepka (00:13:23):
Yes.
Michael Port (00:13:23):
And, uh, you know, keep an eye on it. Make sure it’s everything is kosher.
Matt Rzepka (00:13:26):
I promise you, you do not want to become a payroll expert. No, I promise you. I’ve been down that road and payroll is just not fun.
Michael Port (00:13:33):
No.
Matt Rzepka (00:13:33):
But it’s necessary. It’s a necessary evil.
Michael Port (00:13:36):
Let’s talk about something more fun. Capital gains.
Matt Rzepka (00:13:38):
Yes.
Michael Port (00:13:38):
From investments. So what are capital gains? We definitely define this in an early episode, but let’s do it again now. And then who might owe taxes on these. And even if they’re not taking capital gains out of their portfolio, give a definition of capital gains and then all the different things that applies to, or at least some of the different things that applies to, and then who might owe taxes on these?
Matt Rzepka (00:14:02):
Absolutely. So the simple breakdown of capital gains is there’s short term capital gains and long term capital gains. Short term are anything that happened under 12 months. So if you owned an asset and you sold it and made a profit, but you didn’t own it for at least 12 months, that is a short term capital gain. Anything that you owned for greater than 12 months becomes a long term capital gain. It’s basically the buying and selling of an asset that it went up in value. So that could be a stock. It could be a bond. It could be real estate. It could be a business. There’s a lot of different things that you can buy, even crypto. Crypto’s a new one that gets treated like capital gain. So as crypto has grown and become more popular, the IRS has had to come out and say, okay, here’s how you report and pay tax on the gains that you make from actively participating in crypto.
Michael Port (00:14:50):
Which really makes all the crypto investors thrilled. They’d love to pay taxes.
Matt Rzepka (00:14:54):
Thrilled.
Michael Port (00:14:55):
They’re not interested in just keeping that private to themselves. They really wanna make sure the government is involved in all of their cryptocurrency activity.
Matt Rzepka (00:15:03):
If you find a way to make money, the IRS will find a way to tax you.
Michael Port (00:15:08):
As well they should look. I mean, we have a lot of necessary…
Matt Rzepka (00:15:11):
Yes.
Michael Port (00:15:11):
…expenditures. I am of the mindset that this idea that one shouldn’t have to pay taxes, especially if they’re making a substantial income, is an absolutely ridiculous concept. Unless you literally live on a different planet.
Matt Rzepka (00:15:26):
Yeah.
Michael Port (00:15:27):
Because you are using the services that you’re taxes are paying for. Of course, there’s lots of waste. Of course, there’s senators carving off, you know, this bit for this pet project and their state and these reps doing it in the House also. I mean, everybody’s got their, you know, hand in the till, but nonetheless, I always find it remarkable when, you know, when people are like, I shouldn’t have to pay any taxes. That’s ridiculous. It all is wasteful. I know what to do better with the money you may, but you still use the services unless you wanna opt out of all those things. Like if there’s a way to say I’m opting out of the police, ambulances, roadways.
Matt Rzepka (00:16:06):
Yeah right.
Michael Port (00:16:06):
Any kind of emergency. Like I’m just completely opting out of all of it. There’s just no way to do it. So anyhow Sorry I got on a soapbox about it, but you know, taxes are something that I feel when I pay my taxes as long as we’re, you know, making choices that put us in the best position that we can be in, as long as they’re within the tax code. I feel fine about paying taxes. I think it’s okay.
Matt Rzepka (00:16:27):
Yeah. It’s a fairness question. And you know, who pays what and how much and what percentage, you know, again, right now we actually historically compared to where we are now, we’re actually in a low tax rate environment.
Michael Port (00:16:38):
Yeah.
Matt Rzepka (00:16:38):
And I’ll tell you too, if you’ve not been to a different country or different place that doesn’t have a good tax system or doesn’t have a good infrastructure system that will give you some appreciation for what your taxes go to build, what systems are in place. You know, there couple stories I heard about Puerto Rico, because you can get some great tax breaks moving down to Puerto Rico. Well then a hurricane came through there and you realized how much resource and infrastructure they didn’t have in those emergency situations. And you’re like, okay, I came here to save taxes, but now I’m stuck here for a year because I can’t even make a cell phone call. And it’s some of those things that money does go to infrastructure. So it’s more of a fairness and not paying more than your fair share, which is what we’re talking about today.
Michael Port (00:17:19):
Yeah. And we operate under a progressive tax system. So if you’re in the highest tax bracket, not all of your money is going to be taxed at that particular percentage. It’s progressive, you know, only over a certain amount. So in any event, that’s probably a conversation that people would argue with us about for hours, you know?
Matt Rzepka (00:17:37):
Oh, we could get a whole…we could get a pretty good banter going on. All that.
Michael Port (00:17:41):
I just want the listeners to know. It doesn’t matter what I think about this, it just, the only thing that matters is what the IRS thinks and you gotta make sure you’re working within the structure that they’ve put forth because…
Matt Rzepka (00:17:53):
Yes.
Michael Port (00:17:53):
And look, here’s the other thing, you know, they’ve marketed themselves very well as always, they’re gonna get you no matter what, like they’ve done a great job of marketing as being like the really scary entity that you just cannot cross.
Matt Rzepka (00:18:04):
Yes.
Michael Port (00:18:04):
Which of course I think is clever of them. And to same time, it’s not like there are hundreds of thousands of Jack boot thugs working for the IRS that’re gonna come knocking on your door every single year to give you an audit. They are often woefully underfunded and understaffed. So they’re just doing the best they can too. Like most people, okay, here we go.
Matt Rzepka (00:18:27):
Yep.
Michael Port (00:18:28):
Estimates. We gotta talk about because I’ll tell you when I started my business in 2003, I honestly thought estimates were optional. I thought by meaning you had to pay the taxes, but like you just had to estimate each month how much you were gonna have to pay, but you didn’t actually have to hand it in. I just thought you to estimate them. And then at the end of the year you add them in.
Matt Rzepka (00:18:50):
Lot of people make that mistake the first time. Yeah. A lot of people, all these estimate things and then it’s, then it’s a big slap in the face later when you figure out, whoa, wait a second.
Michael Port (00:18:59):
Yeah. It would’ve been easier if they had called it like required quarterly payments, then it would’ve made more sense. But when they said their estimates, how can you give so many estimates? Because it’s just an estimate. I don’t know if it’s be this.
Matt Rzepka (00:19:11):
Yeah.
Michael Port (00:19:11):
Right. So anyhow, I quickly learned that they are not optional. So talk to us about estimates because some people might be about to go out on their own or just have gone out on their own and still maybe a new concept to them.
Matt Rzepka (00:19:24):
Yeah. Estimates relates to other topics that I talk about on a regular basis, which is something called a Safe Harbor. So first estimates are the quarterly payments you are required to make to the IRS in order to avoid a penalty in addition to your tax. So the government says, Hey, we know you’re making money. We want you to send us our portion of our taxes on this schedule, which is April 15th, June 15th, September 15th and January 15th. And if you don’t send us enough on those dates, we’re not only gonna charge you the tax that you already owe. We’re gonna add penalties and we’re gonna add interest. So that directly ties into then something called a Safe Harbor. So there’s various rules that say, if you pay in a certain amount, you’re gonna be “safe harbored” or covered from penalty or interest. So the most important things when it comes to estimates is knowing the dates and then also understanding what your Safe Harbor is.
Matt Rzepka (00:20:20):
And if the person you’re working with doesn’t know how to answer that question you should find another person because that’s a very basic component of tax and tax planning. And you always want to try and make sure you’re Safe Harbored with the payments you’re making, because you never want to have to pay taxes in a penalty if you can avoid it in additionally, we’ve talked about W2 withholdings already on this show. Those are another form of estimated payment, but it’s automated through payroll. So the IRS likes W2 withholdings way better than estimated payments. So they give you a lot more flexibility when you’re paying your taxes through withholdings compared to estimates. The estimate rules are very specific and you have to follow about one of three different options or they’re gonna charge you penalties and interest.
Michael Port (00:21:03):
Fantastic. So you just mentioned Safe Harbor. Is there anything else that you wanna share about Safe Harbor because Safe Harbor’s used in a number of different ways like the Safe Harbor contribution to our pension plan for the employees. That’s one way that they use that term. The IRS uses it also. Is there anything else we need to understand about it?
Matt Rzepka (00:21:20):
You wanna recognize that terminology and usually you wanna make sure you achieve a afe Harbor, especially when it comes to taxes. So Safe Harbor in some of the retirement spaces are kind of the minimum that an employer has to do to a retirement plan. Here we want to achieve, so the, the simple one that I can easily explain is a hundred percent of last year’s tax. So let’s say my total tax last year was $50,000. If my income’s on under a certain amount, I can pay in a hundred percent of last year’s tax. And if I owe a million dollars the next year they won’t penalize me, they can’t penalize me. And then if I’m over a certain income that Safe Harbor’s 110%. So those are just one of the three options that are pretty basic. But again, every tax preparer should be able to have this conversation with you. The thing I see in the industry that’s frustrating sometimes is people default to the prior year’s Safe Harbor, which could put extra stress on your cashflow if your business is not growing. So that’s why it’s important to understand there’s three different options and ask the question is really what I would recommend.
Michael Port (00:22:24):
Okay. Let’s say you expected a year lower revenues and you expect lower taxes as a result. Can you pay less than what would’ve been considered the Safe Harbor from the previous year, if you do expect lower revenue and profit in the next year?
Matt Rzepka (00:22:43):
Yep. The other two options are actual income or 90% of what you think your income’s gonna be. So if your income is trending down, you can run a calculation to say, okay, my income is down 90% of that expected income is X and that’s the estimate that I need to pay or the actual income method. We use this a lot for real estate developers and even some attorneys who have very variable income, meaning January, February, March, they might just barely get along to pay their bills. And then April, May and June, they have a huge quarter and all of their profits came in in one month. You can calculate how to time that with when your income shows up to meet the actual Safe Harbor method.
Michael Port (00:23:27):
And really, I suppose the government wants these estimates each quarter for cashflow purposes. And because they may be concerned that people will not save throughout the year and have the taxes ready to go at the filing date. Is that why is there any other reason that they would expect estimates?
Matt Rzepka (00:23:47):
Yeah. In general, they don’t trust the taxpayers are gonna be ready to pay their taxes. So they wanna force you to pay those taxes as fast as they can. That’s why the government loves employees because you know, think about all of the employment in the United States. All of those taxes are being administered by businesses and sent to the government often on a weekly or biweekly basis. So those taxpayers, they don’t even have to worry about their taxes. It’s often the refund conversation when someone’s filing their taxes that, Hey, I’m getting a refund. Well, that was your money. They took it from you. And they sent it to the government eight months ago. And you’re just getting it back now.
Michael Port (00:24:23):
Yeah.
Matt Rzepka (00:24:23):
A lot of people don’t necessarily recognize how of that works until it’s broken down for them.
Michael Port (00:24:28):
Which is why many local, state, and certainly the federal government doesn’t love the idea of employees moving to contractor status.
Matt Rzepka (00:24:36):
Yes.
Michael Port (00:24:37):
Because if everybody’s a contractor, they can’t control the payroll taxes in the same way. And they can’t be assured that they’re gonna get it at the same frequency or that they’re gonna get all of it.
Matt Rzepka (00:24:47):
Yeah. They lose a lot of control there. The employee versus contractor discussion is something that they do look at on a regular basis at the IRS level. They want as many people to be employees as possible. So if you’re paying contractors, there’s a 20 point checklist that says, Hey, are you an employee or are you a subcontractor? You want to be for familiar with that checklist and make sure you’re completing that documentation to be a contractor, if that’s how you’re treating somebody.
Michael Port (00:25:12):
So I wanna talk about one more thing before we start to shift gears into keeping more of what you make. We need to do this first to make sure that we’ve outlined the different types of taxes that you will generally have have. And one of the things that often is confusing is multi-state versus state resident taxes. So when you’re a speaker, you may speak in 20 different states or 50 different states or in five states, six times, but different cities each time. And it can get a little bit complex if you have to file in every single state, as well as the state that you reside in. So can you talk a little bit about the difference between paying state taxes in the state that you live versus paying taxes, where you’re actually doing the work and how to manage that and how speaker should approach that?
Matt Rzepka (00:26:09):
Yes, it’s an ever evolving topic right now because again, of really two things, the internet and remote work. And then how expedited remote work became because of COVID. So we have a lot more people that are crossing state lines than ever before. The historical topics around this are like pro athletes. There’s been a lot of tax court cases around pro athletes because they’re making so much money and they’re going and playing sporting events in all these different states. So the states caught onto this and said, Hey, another word for this is multi-state apportionment. How much portions of your income do you have to spread across all of these states? Well, the more money you make, the more aware you need to be of this. Because if you’re making a lot of money and a state gets a hold of your income, they say, Hey, you’re not paying us our share of your, and we want it. And then you’re gonna have to start filing that tax return.
Matt Rzepka (00:27:05):
So initially we tell people, okay, if your resident state is always your home base, start there and then you have to look at how much am I earning in other states, they’re starting to publish different benchmarks to say, okay, if you earn X in this state, but not over, don’t worry about filing with us, like is happening with sales tax right now. Sales tax has led the charge because of Amazon. Amazon has all kinds of people across the world that are buying and selling goods and the states are missing out on their sales tax. So they’ve come out something called the Wayfair Act that says, if you have sales of $10,000 or less in our state, don’t worry about paying us sales tax. But if you have more, more than $10,000, well now you have to register and pay us as well.
Matt Rzepka (00:27:46):
We haven’t seen that in the income space yet, but I think it’s coming down the road because you’ve got so many more people that are crossing state lines, they just don’t have the specific regulations. So we always start at home base in the state that you live. And if a state gets on your radar, then you may have to start filing in that state and your home state. But generally we try to keep your home state as the first order of business. And then we look at how much actual business. We have some guidelines that we can use as well for clients who are facing this issue that says, okay, we look at revenue as a percentage of the state that it came from. And now it’s the state that it came from where you were not this necessarily where your client is either. So that starts to get a little bit more complicated. So this is a big, big topic, a big can of worms per se, about, okay, well, how vast of exposure do you have to where your income is coming from? And then you start to divulge a strategy from there. So that’s kind of the quick dive into how complex that can get.
Michael Port (00:28:44):
Is it safe to say that if somebody is in the early stages of their career as a speaker, and maybe they’re doing 15 gigs over the course of the year in a bunch of different places, maybe some of them are virtual, but they’re hitting maybe 10 different states, but their fees are maybe five grand or 10 grand. They’re not making 40 grand or 60 grand or 150 grand a speech. Do you think it’s reasonable for those folks to pay the taxes at their state level? And then if the business builds and they start working in one of those states or a couple of those states on a regular basis, then they might start to think about filing in that particular state.
Matt Rzepka (00:29:24):
I think you don’t even have to twice about this, unless you’re making half a million dollars or more. And even that might be low because you have to then spread across like most state tax rates, I’ll use Michigan as an example Michigan state tax rate is 4.25%. So let’s say I did two gigs for $10,000 each in Michigan. And I’ve got a $20,000 of income that I have to pay 4.25% tax on. It’s gonna cost me more to file the tax return from a professional than it will in tax that I would have to pay.
Michael Port (00:29:55):
Yeah.
Matt Rzepka (00:29:56):
In like I had a client who messed us up once, way, way back, they were referred to a us, they had all these visions of they were gonna be nationwide and serving all 50 states. And the CFO went out and registered in all 50 states and they hadn’t done business there yet.
Matt Rzepka (00:30:09):
And it was a compliance nightmare because now we have to file zero tax returns in states because we’re registered. So once you’re registered, you’ve gotta deal with that state. So we’re, it’s all this compliance cost. So I always say start at the home base. And as your income goes up, ask the question, have the conversation and start to get data about what income’s coming from where. But generally we always push to the home state first. And then we deal with the outside states as they become significant. And significant can be defined differently by person and by state.
Michael Port (00:30:40):
Okay. Let’s say you live in Michigan, but you are speaking very often in California and California catches on and they say, listen, we want you to file here. And so maybe you made a hundred thousand dollars in California or maybe half a million or a million who knows, but let’s say you made some money in California and they want you to pay state taxes in California even though you live Michigan. Are you getting to deduct that tax payment to California on your Michigan state taxes? So you’re not paying two states the same tax on the same income.
Matt Rzepka (00:31:13):
All states are a little bit different, but yes, you don’t have to double tax the income. That’s where that apportionment word comes in. So if I have $500,000 total, let’s just keep the example real easy. $250,000 in Michigan, $250,000 in California, I’m gonna file two state tax returns showing $250,000 in each state.
Michael Port (00:31:29):
Got it.
Matt Rzepka (00:31:30):
Now again, that’s a really, really simplistic example and California’s probably the worst one to use because they’re the most complicated and most difficult, but from a theoretical perspective, that’s how you would do that. Or you would get credit for taxes paid in that state, back against your state, your home state income. That’s another way that it can happen, but you won’t have to double pay.
Michael Port (00:31:49):
Once you’re on the radar in California, you are on the radar in California.
Matt Rzepka (00:31:54):
Yes, sir.
Michael Port (00:31:54):
California is very good at making sure that people are paying their taxes.
Matt Rzepka (00:31:59):
They are number one in terms of aggression in taxation and number 50 in terms of rules.
Michael Port (00:32:06):
Wow.
Matt Rzepka (00:32:07):
So they’re the worst in rules and they’re the most aggressive, so just keep that in mind.
Michael Port (00:32:11):
Oh wow. Alright. Well, it’s also very high cost of living in most of California. So I think I’ll probably stay where I am for now that too. Plus, this is where my children are. So I don’t think they actually, maybe they do want me going to California, who knows. But Matt, we’ve covered all these different categories now. And I think we’re ready to start talking about how folks can keep more of what they make.
AD BREAK (00:32:32):
But before we do, I need to take a quick break to tell you that this episode of Steal the Show with Michael Port is brought to you by HPS PRO. The two most popular programs at Heroic Public Speaking are HPS CORE and HPS GRAD which we’ve talked about in earlier episodes. Not too many people know about this, but we also have a third training program that’s called HPS PRO. Now, the reason why HPS PRO is a little more secretive because it’s our most exclusive offer. Actually, we’ve never talked about it in public the way I am right now. It is the pinnacle of the HPS experience. It is in fact, the highest value that we can produce for any one speaker. In HPS PRO, our faculty, our team, Amy and I, all work as intimately as possible with accomplished Industry Icons who are ready to take their message to the stage and launch their speaking career. It’s a year long training program with Amy and I serving as your personal directors. When you’re an HPS PRO student, you work with our entire team, our script writers, stylists, photographers, filmmakers, and graphic designers, to make sure that you have a transformational script and performance. A custom speaker site, a fashion guide, a slide deck, a high quality speech reel, high res headshots, and more. Every single element of your speaking career will be best in class. This experience transforms you into a speaker who surprises and delights audiences and generates new leads every time you step on stage. I wanna be clear here, HPS PRO is not for everyone. And because it’s such an immersive program, we can only offer it to no more than three people a year. So if you’re an Industry Icon at the top of your field and you’re ready to become a truly transformational, referable speaker, visit HeroicPublicSpeaking.com/Pro to learn more.
Michael Port (00:34:34):
Okay, Matt, you ready to keep going?
Matt Rzepka (00:34:37):
I’m ready.
Michael Port (00:34:38):
Alright. Now let’s get to the good stuff. Talk to me about how I can keep more of what I make.
Matt Rzepka (00:34:46):
Well, there are essentially three main strategies for keeping more of your money when it comes to taxes. There’s tax deferral, eliminating future taxes, and then reducing your current taxes.
Michael Port (00:34:57):
Okay. And I wanna stress this. Everything that we are about to discuss us is completely legal. At least as far as I know, but I’m not a CPA. We would never, ever in a thousand years, for any reason ever suggest that you do something against the law. Matt is a CPA, however, and a brilliant financial mind. And I trust him. It’s essential that you make your own decisions about your money with people you trust too. And like we say at the beginning of every episode, you are welcome to hire Matt’s firm Valley Oak if you don’t have anyone that you trust now, and there are no kickbacks to me, I have no financial incentive. Okay. So Matt, let’s start with tax deferral. What is tax deferral and how can we defer taxes? And when should we defer taxes?
Matt Rzepka (00:35:44):
Yes. Tax deferral is the simple process of saying, I choose not to pay taxes today in respect for paying taxes at some point in the future. So I have a tax event and I’m gonna take those taxes and say, no, I don’t want to pay you now, Uncle Sam or IRS, I wanna pay you later. So that’s the key. Sometimes people miss that tax deferral actually has an implication later in life. So I like to refer to it as tax postponement because the word deferral sometimes gets overlooked as to what it truly means. You’re postponing those taxes until a date in the future. The most common ways we do this right now are retirement plans. Your IRAs, your 401Ks, your defined benefit plans, your SEPs, things like that. And we had, uh, a lot of detail on definitions around those in an earlier episode.
Michael Port (00:36:34):
Now there’s some other ways that you can postpone taxes. And I love that you reframe that because I do think often when people hear deferral, they think, oh, I don’t have to pay taxes.
Matt Rzepka (00:36:45):
I defer not to pay.
Michael Port (00:36:47):
Yes. And of course you’re gonna pay the man.
Matt Rzepka (00:36:49):
Yes.
Michael Port (00:36:50):
You’re gonna pay the man at some point in some way. Hopefully you are making good decisions so you don’t overpay the man. But what are some other strategies for tax deferral that may be less obvious or less common to people that haven’t studied this?
Matt Rzepka (00:37:07):
Another popular one, if you’ve thought about or read up on real estate at all, would be 1031 or like-kind exchanges where you can sell a piece of real estate and take that gain and roll it into the next purchase and not pay tax on it. Now again, that’s a very complex topic and there’s a lot of things to consider there, but that’s another way to defer taxes. You’re basically saying to the government, I have this gain and I’m willing to buy another property. And the key with the 1031 or the like-kind exchange is you can’t touch the, it has to go to a, what’s called a qualified intermediary and they have to handle all the transactions behind the scenes to buy the next property. So that’s one way.
Matt Rzepka (00:37:47):
Another way, for example, we’ve talked about C corporations and let’s say you have a lot of capital and income from a C corporation and you may temporarily need to use that money for something. You can take a loan and that’s gonna defer taxes on that because loans are not taxable events. So if you needed short term money, you have to treat it like a loan. You have to document it like a loan. You have to have interest. You have to pay the interest, but you don’t have to pay taxes if you take a loan. So it’s another way to defer taxes to a later date and tax deferral is probably one of the most common things in the tax code. Another one would be an installment sale where I’m choosing to take payments over time if I sell an asset in the form of a loan. So you kind of play the bank and you take payments over the next 10 years, let’s say. Well, instead of taking payment all at once, you would pay tax all at once. So if I take payments over 10 years, I’m gonna pay one 10th of that tax over the next 10 years. So it’s a way to defer that tax. And that’s where planning becomes so important. You wanna understand your tax brackets, how much income you’re gonna have how much income you can control. And you want to try and keep those brackets as low as possible.
Michael Port (00:38:59):
Let me ask an important, but what might seem like an obvious question, but I think we should just discuss it a bit. Is why would you want to defer taxes? What’s the value of it? Why would you do it?
Matt Rzepka (00:39:13):
The general rule for deferring taxes is thinking that I’m going to pay less in the future. That’s part one. And part two would be, I think that I can put that money to better use and grow it faster or more than what the tax consequence might be. So for example, on the real estate side, that’s a lot of what the real estate investors are thinking is, Hey, I don’t want to pay this tax now because I can reinvest it in a new, bigger, better property and try and make a bigger return. Now, again, there’s a slippery slope there from a risk perspective that you always want to take into consideration. The tax deferral on retirement accounts, that is more of a tax bracket question typically. Do I think I’m going to be in a larger or smaller tax bracket in the future or the same. And again, there’s no perfect answer to that question because it’s impossible to predict the future. And one thing we know for sure, looking historically, tax laws change and they change frequently. So it’s diversification of tax strategy. So having tax deferred dollars, having tax free dollars, having taxable dollars, having multiple buckets. We’ve referenced a bucket strategy on other episodes. When it comes to taxes, that becomes extremely important as well. So you want to have a strategy around how all this stuff fits together.
Michael Port (00:40:35):
Good. So what about eliminating future taxes? So we pay the tax now, but we eliminate taxes on that money in the future.
Matt Rzepka (00:40:45):
Yes. The analogy here can be paying taxes on the seed or paying taxes on the crop. So this is kind of paying taxes on the seed. I’m gonna pay it today and then I’m gonna try and it as big as possible and, and won’t have to pay it later. So your Roth IRA type accounts, your Roth 401K type of accounts, Roth conversions. A lot of people don’t acknowledge the difference between a Roth 401K and a Roth IRA with a Roth conversion. A Roth conversion is a simple choice by a tax that says, Hey, I have money in this other bucket, the tax deferred bucket. And I want to convert it to the tax free bucket. You can choose at what amount, at least under current law, always the disclosure. You always have to check current law. So whenever you’re listening to this, make sure you just double check the laws haven’t changed. That’s just a good rule of thumb in anything to do with taxes, because things do change frequently. And especially right now, as we’re recording this, they are talking about making changes to Roth-related items. So just double check, if you’re gonna do something with your advisors and your professionals, that the laws haven’t changed and you can and still do that because you don’t want to get caught doing something that’s not allowed because they’re not very friendly in the retirement space when you do something wrong.
Michael Port (00:42:00):
The key concept seems to be here is that you’re paying the taxes now, but then you’re gonna take that money and you’re gonna find a way to make it work for you to invest it, to grow it. This is not paying the taxes now and then buying a jet ski.
Matt Rzepka (00:42:13):
Yes, correct.
Michael Port (00:42:15):
Just paying normal income tax and then you spend the money it’s been consumed and it’s gone. The idea here is okay, let’s pay the tax now and then let’s see if we can grow it so that when I want access to that capital, I’ve received significant gains on it, but I don’t have to pay taxes on those gains because I already paid taxes on when I first made this investment.
Michael Port (00:42:36):
So you mentioned the Roth IRA and you mentioned the Roth 401K, very similar, just different size vehicles. One’s an individual retirement account. The 401K is connected to a business, but it can be a Roth or a traditional.
Matt Rzepka (00:42:51):
Yep.
Michael Port (00:42:51):
Right. Which is a little confusing for people sometimes like, wait, I…so it can be a Roth 401K or a traditional 401K. And a traditional 401K means you are deferring the taxes until later when you access that money.
Matt Rzepka (00:43:03):
Correct.
Michael Port (00:43:04):
At retirement age, but in a Roth 401K, you’re paying the taxes now, money goes in and you don’t have to pay any taxes when you access that money later in life. And you mentioned the Roth conversion, and that’s taking money that was in a 401K or a traditional IRA and then selling it and moving it into a Roth account. Paying the taxes now, but then keeping it invested. So you don’t have to pay in the future. Is that accurate?
Matt Rzepka (00:43:32):
Yes. With one correction, you don’t actually have to sell what’s inside the account always. Sometimes you do. It depends on where you’re moving the account from. But if let’s say you’re at Vanguard and you wanna stay at Vanguard, they’ll let you roll in kind what investments you have inside of that IRA over to the Roth IRA sometimes. So it just depends. But yes, you’re basically moving that money from one tax classification to another.
Michael Port (00:43:57):
And the in kind concept is really important because essentially let’s say you have that money in a total stock market fund at Vanguard. What it sounds like you’re saying is you can move it from the deferred vehicle, which say is a maybe a 401K or an IRA in a traditional sense where you are not paying the taxes upfront. You’re paying it later. You can just take that same exact amount of capital that’s invested in that particular fund. And you’re just moving that in kind, same number of shares of that particular fund to a different type of account, which is a Roth account. You have to pay the taxes on it, but you don’t pay any taxes later on. So you’re not selling it. You’re just moving it in kind into a different type of account. Did I get it?
Matt Rzepka (00:44:41):
Yeah, almost retitling it. You’re just changing the ownership classification from an IRA to a Roth IRA and then on a Roth 401K, one, one thing to remember there, because a lot of people miss this, the Roth IRA you’ll hear a lot. Oh I make too much to contribute to a Roth IRA. So I don’t do a Roth. Well the Roth 401K does not have a income limitation currently, so you can make any amount of income and you can contribute to a Roth 401K. So that’s an important distinction to remember.
Michael Port (00:45:08):
And of course the 401K contribution limits are much higher than an individual retirement account.
Matt Rzepka (00:45:13):
Yes.
Michael Port (00:45:13):
So that’s, you know, obviously something you’d wanna shoot for to try to max out these accounts if possible for most people, not for everybody, but for many people. And so what else, there’s also the Roth backdoor contribution. Is that too complicated to discuss now? Or is that something we should address?
Matt Rzepka (00:45:30):
I can hit it quickly. I mean it is basically if you are not allowed to do a Roth 401K because employer doesn’t offer it and you make too much money to, to do a Roth IRA, there’s a way to do, what’s called a non deductible IRA contribution and convert it to a Roth and get the same treatment. The one thing when you’re doing the backdoor Roth contribution and again, this is something that’s on the chopping block right now. So if you go to do this at some point in the future, just make sure it’s still there. But right now it’s still there. The one thing you have to watch out for you can’t have traditional IRAs. If you’re gonna do a backdoor Roth contribution, because there’s a tax trap there. You’ll end up paying taxes that you didn’t wanna pay. I’m not gonna explain how it works. Just make sure you know, that you don’t have IRAs or ask that question. We’ve had a lot of people that have come to us with, Hey, we did this Roth backdoor thing and was never explained to them how the IRA impact worked. And then they had to pay some tax that they weren’t expecting.
Michael Port (00:46:26):
What if your spouse has IRAs, but you don’t. Can the spouse who doesn’t have them do a Roth backdoor contribution even though their spouse has IRAs?
Matt Rzepka (00:46:38):
Yes. Because the IRAs are individualized. If your spouse does have the IRAs, definitely do not do the backdoor Roth for the spouse, but you yourself with no IRAs could do that with no problem.
Michael Port (00:46:51):
Fantastic. So what about bonds and life insurance? Because those are two additional strategies for eliminating future taxes or reducing future taxes. So can you talk about tax free bonds first
Matt Rzepka (00:47:03):
Tax free bonds. There’s a variety of these available. Municipal bonds is another reference for these. So you can go out and get favorable federal tax treatment by purchasing these specific bonds. So they’re just not subject to tax the interest coupons. So if the interest is paying 3%, 4%, 5%, whatever it is, you do not have to pay tax on that. And it’s just a great way to get some tax free income. The one thing with tax free bonds that is something to keep in the back of your mind is the credit worthiness of the municipality. We have this environment today where we’ve got a lot of debt and money printing going on at the federal level, but state and local governments can’t print their own money so they could get into money problems easier than the federal. So it’s just something to remember if you’re in what I call the muni bonds base. And then life insurance is another way where you have cash values inside of a life insurance contract that grow tax deferred and have access tax free in the form of loans. So that’s another way we talked about loan proceeds before. That loan allows you to have access us to those dollars without having to pay tax on the use or deployment of that capital.
Michael Port (00:48:14):
Alright, fantastic. I love this because this is just so right in your wheelhouse, you could talk about actually you do talk about this all day long. That is actually what you do.
Matt Rzepka (00:48:23):
All day, every day.
Michael Port (00:48:24):
Every day. So let’s talk about reducing current taxes.
Matt Rzepka (00:48:29):
Yes.
Michael Port (00:48:29):
Where should we start? How does this work? What should people do
Matt Rzepka (00:48:34):
Right now with the way the tax law is set up? One of the most common calculations and discussions we look at is does a corporate structure complement to your current business operation make sense? So let’s say I’m running an S corporation for my speaking company, what income level am I at? How many tax brackets have I filled up? And let’s say, I’ve gotten into the 32%, the 35% or the 37% tax bracket. There are ways to set up corporate structures to help compliment and spread out. You could either take your whole company to a corporate structure or you could do a combination structure of an S Corp and a C Corp together to help control that income so that your personal income ,hopefully, is staying at or below the current 24% bracket. And then the remainder income in your C corporation would be at 21%. So we go from being a 30 high, 30% tax bracket range to keeping all of our income taxed in the twenties. That’s a pretty significant improvement. So that’s one of the more popular strategies right now. And then another one is really payroll taxes with the S Corp world and looking at what salaries you have, what salaries are required, what level of payroll taxes you’re paying, and is there some strategies there to reduce some of that exposure?
Michael Port (00:49:52):
So I’m gonna just jump in and highlight the corporate structures strategy because this was a game changer when we started working together. And in fact, I think I mentioned this in an earlier episode, but one of the things that we had been discussing as we were getting to know each other before I contracted with you and we started you actually and working on all of our taxes was this concept of adjusting the entities to take better advantage of the tax code. And I took that idea over to my accountant and presented it to him and he’s like, oh yeah, you could do that. And I said, well, why haven’t you suggested that we do this? He’s like, well, I don’t know. You know, it takes time and it’s, you know, it a little complicated and I was like, okay, that’ll be it for us.
Michael Port (00:50:38):
It’s definitely not me. It’s you? And I’m breaking up with you. And uh, then I called you and I was like, Matt, let’s go. Let’s do it. But it really is important to understand that there are many ways to approach your tax planning and a really good CPA is going to consider your situation specifically. But if you are going to somebody who’s kind of just working through everybody’s taxes, like a factory, or a mill, just sort of trying to run the processes and do everything the same way. Now, then you may not get the kind of individual treatment that you need. And the kind of business owner you are often requires more individual treatment.
Matt Rzepka (00:51:20):
Yeah.
Michael Port (00:51:21):
We are unusual business owners. We’re not like every other business owner. I mean, we’re the same problems that every business owner has and the wins, you know, like there’s a lot of similarities of course, but we are less traditional most of us. And I think that’s why you need somebody who really understands this stuff.
Matt Rzepka (00:51:37):
Yeah. And the expectations are just so backwards from the accountants and CPAs and the client. The client has the expectation that if you have a good idea for me, you’re gonna come tell me about it. And the CPAs and accountants, I always use the 80/20 rule, but 80% of the accountants out there are expecting you to come to them and say, Hey, I wanna do something different. They’re not really bringing you strategies. And if you say, Hey, I heard about this or I can do that. Oh yeah. We can do that or no, no, you can’t do that, but they’re not really proactively. Now this is starting to change in the industry more. But when I first started doing this, you know, I said 80/20 rule. It was like 98% 2%. There was only 2% of the people doing tax planning
Michael Port (00:52:17):
And only the super or the uber wealthy were getting them. I think that’s one of the things that’s really nice.
Matt Rzepka (00:52:24):
Yeah. Super top clients or super wealthy. And now the one thing to be careful of is you have a lot of people getting into the tax planning space that aren’t CPAs.
Michael Port (00:52:32):
Yeah.
Matt Rzepka (00:52:33):
So just be careful and cautious. Not that they’re doing a bad job, but you just wanna make sure that you’re confident in what somebody’s bringing to you because you start hearing about strategies and then everybody wants to try and make it something that it’s not or start doing something that you shouldn’t be. So you have to have a level of, of conservatism around just general questioning. Alright. Does this work for us? And, and does this fit?
Michael Port (00:52:55):
Yeah. It’s one thing to get tax planning advice from an experienced and sophisticated tax attorney. It’s another thing to get advice from a financial advisor around your taxes. They may have some good ideas, but they need to be run through your CPA to make sure that, you know, you’re not doing something that seems kind of sexy, but may actually not be legal or it may be legal but if you don’t cross every T and dot every I you’re gonna be in for a world of pain. And I can speak for myself here. I remember being pitched pretty aggressively a number of years ago, some investments slash tax savings strategies using what’s called a captive insurance company.
Matt Rzepka (00:53:41):
Yep.
Michael Port (00:53:41):
And absolutely a captive insurance company is incredibly useful for companies that need to self-insure in some way. That’s the point of the captive, but they also can be used to shelter a fair amount of income, but only for very certain people only at certain incomes and definitely not the first line of defense. They’re very expensive and they’re very complicated and they can be a red flag to the IRS. Matt, before we go on to some additional strategies for reducing current taxes, I just want you to address some of the things that people may hear, or they may get pitched like a captive when in fact they may not be ready for it. It may not be appropriate for them. And it may even in fact be just a little bit questionable from an IRS standpoint, whether or not they should even be in that in the first place.
Matt Rzepka (00:54:31):
Yes. This is a great item to talk about compliance and what fits and what doesn’t and who’s pitching and who’s managing. Because captives can be completely DIY, do it yourself. If you’re a DIY captive, you better be ready for a world of trouble because there are lots and lots of compliance components to a captive. They are fantastic vehicles. They work great in the right situation. But see what a lot of people do again, especially non CPAs will come out and they’ll sell you on the tax benefits only. It’s a risk tool as well. It has costs, it needs audits. It needs actuaries. It needs all of these different things to happen. And if you’re in a captive and you’re not doing those things, then you wanna reassess. We actually helped someone exit a captive that just scared the Dickens outta me here just this past year, they said, oh, we can put between $50,000 and $2.2 million in our captive. And I said, well, what was your actuarial study? What’s an actuarial study? And, and this isn’t the client. This is the person who was running the captive. Those things make my skin curl, especially in the world of captive, which the IRS watches and administers audits on those on a fairly regular basis. Now an audit isn’t something thing to be scared of if you’re doing it right, but if you’re doing it wrong, it can be pretty ugly.
Michael Port (00:55:52):
So we hit corporate structures for reducing current taxes. Payroll tax reductions. What are some of the other strategies for reducing current taxes that we can employ?
Matt Rzepka (00:56:03):
Yes. I kind of have a trifecta of three here that I like to talk about that I lump together because I really feel like they can apply to a lot of people. So this would be three strategies to think about for yourself. So one would be, you know, family or children strategies and putting family members to work inside your business and making sure you’re maximizing different tax brackets and different ages. Something called the Augusta Rule or the 14 Day Rental Rule is another great one. And I’ll explain these as I get through ’em. And then the third of the trifecta is HSAs or health savings accounts.
Matt Rzepka (00:56:36):
So the family strategies is really hiring your kids, hiring a spouse, hiring a parent. You know, you all have different tax brackets. You all have the ability to fill up tax rates and tax brackets differently. So it can help you disperse work and help the family at the same time. The more common way would probably be hiring your kids. There is a lot of tax legislation around what age you can start doing that, which is usually around age seven. And again, in the tax world, there’s exceptions to every rule. So there are ways you can hire children before age seven, just think about child actors. Child actors get paid before they’re age seven. There’s just a lot of extra hoops to jump through if you’re putting your kids to work in your business before age seven. So just be aware of that. One of the things is the social security administration is gonna pepper your mailbox with mail to make sure nobody’s stolen your child’s identity. That’s the one thing they’re concerned about is that somebody’s trying to take your kid’s social security number and do something with it that isn’t appropriate.
Matt Rzepka (00:57:36):
The Augusta Rule. This is a pretty fun one where you can rent your personal residence or other real estate for up to 14 days and receive rental income and not have to pay tax on that income. So this was actually generated from some congressional leaders back in the seventies who were fans of golf and fans of Green Bay Packer football. So back when the NFL was 14 games and then the, Augusta Golf Tournament is every year in the spring, typically. They said, Hey, all these wealthy professional people are coming to our cities to either watch football or watch golf. How about we be able to rent our house and not have to pay tax on the money? So they put this bill through it got passed and, and here we go. So now those rules exist. And it’s kind of weird how some of that stuff ends up happening.
Michael Port (00:58:22):
I don’t think it’s weird. I just think it’s the world in which we live.
Matt Rzepka (00:58:25):
Yeah.
Michael Port (00:58:26):
One dude is like, Hey, I think I can do something special for my friends around the neighborhood.
Matt Rzepka (00:58:31):
Yes.
Michael Port (00:58:32):
‘Cause I’m important. And then, you know, they get this slipped in there. Nobody else is really paying attention. Nobody cares. They’re like great. And I think the people that are probably benefiting from this are probably very wealthy folks with very big homes on large pieces of property.
Matt Rzepka (00:58:45):
Yeah.
Michael Port (00:58:45):
In that particular area. And uh, most people wouldn’t even know that this was an option.
Matt Rzepka (00:58:51):
Yeah. And with that situation, like, especially in Augusta, Georgia, you know, if you’re using this inside your business and with your personal residence or some other piece of property that you own, you have to be conscious of fair value rental. But if you’re renting to a third party, which what they’re doing, a professional golfer, well, heck I can charge $25,000 for the 14 days. And you know, not $5,000 because $5,000 might be a true fair rental, but a professional might be willing to pay a premium. So again, if you ever were to encounter a situation where you could do that again, there’s a way to make tax free income if that ever becomes something in your wheelhouse.
Michael Port (00:59:27):
Yeah. But the rest of us, you know, we can rent it at a fair market value.
Matt Rzepka (00:59:31):
Yes.
Michael Port (00:59:31):
For those number of days, you could rent it to your own business.
Matt Rzepka (00:59:34):
Correct.
Michael Port (00:59:35):
Then you don’t have to pay taxes on that personal income for the rental of the property.
Michael Port (00:59:39):
Let’s just jump in back to the family and child strategies for a quick sec, because I just wanna give an example of how powerful this can be. This is something that you taught me how to do. We’ve got three kids, two of them work for the business and we’ll do a whole myriad of different things from working at events to labor type activities. You know, using the, our muscles move furniture around. Like this weekend, I’ll take Jake over to HPS HQ because the stage is a foot off the ground and we need to go under it to tighten up some of the legs and some of the screws and things, and Amy can get under there, but she’s not strong enough to actually torque the things enough.
Matt Rzepka (01:00:21):
Ah.
Michael Port (01:00:21):
I’m strong enough to torque the things, but I can’t get under there. But Jake is both. So Jake will come and do that. But Jake gets paid and Ruby gets paid through payroll. And you know, because the individual exemption is up to $12,000, they don’t have to pay taxes on the first $12,000 that they make correct?
Matt Rzepka (01:00:38):
Correct. Yep. That standard deduction.
Michael Port (01:00:40):
Yeah. So what that allows us to do is invest a portion of that money into a Roth IRA.
Matt Rzepka (01:00:48):
Yep.
Michael Port (01:00:48):
Because they are now eligible to invest in a Roth IRA because they have earned income. If you don’t have earned income, you can’t invest in a Roth IRA. Or if you have too much income, then you’re prohibited from investing in a Roth IRA. But for them, this is incredible because they’re in high school. And then because that money’s not taxed on the front end for them because they get the exemption, then they put it into the Roth, the money won’t be taxed on the back end when they take the money out either.
Matt Rzepka (01:01:15):
Correct.
Michael Port (01:01:16):
So it’s a really very effective strategy. And even better is that you can use Roth money for qualified education. If you want to without paying penalties. Now, because if you take money out early of an account, often that’s a retirement account. You gotta pay penalties and taxes. If it’s tax deferred and you don’t pay taxes if it’s in a Roth, but you gotta pay penalties for taking out earlier, unless it’s for qualified education. And I think there are some other strategies that people use to get access to that money earlier. And I think they’re a little bit more complex so we won’t go into that now. You know, if they wanted to retire earlier, there are some ways to get some access to that.
Matt Rzepka (01:01:52):
Yep.
Michael Port (01:01:52):
But this particular strategy is so effective and what it does is it teaches them how to invest.
Matt Rzepka (01:01:59):
Yes.
Michael Port (01:01:59):
So when we sit down and do the budgets with the kids, we also go over their investments, both in their Roth accounts and also their own brokerage accounts because they each have brokerage accounts that they put money into on a regular basis and they love seeing it go…I mean the great thing is, is that the market’s been so helpful for our education process because they’re still young. They’ve been doing this for a number of years, but the years they’ve been doing it, the market has been really on a tear. So it’s not like the, for the last couple years they just see their money going down. They see it going up so that, that’s just lucky that they’re at that age when the market has been really productive. But that strategy is really effective. If you’ve got your own business, and you’ve got kids that are of working age, this is a no brainer.
Matt Rzepka (01:02:42):
Yeah. So much good education. So many good things from using that strategy. Not only financially, but just from life lessons and things they want to know. And they live through the COVID dip too. So they start to get used to what it feels like when the market’s going down, but then they’ve seen how the market comes back up and they start to learn about those cycles. And there’s just, there’s so much good education in putting that strategy to work that I highly recommended if you’re able.
Michael Port (01:03:07):
So let’s talk about the HSA, the health savings account. ‘Cause you mentioned that. What is the health savings account and who is it right for?
Matt Rzepka (01:03:15):
Yes. The health savings account is a component of your medical insurance that if you have a high deductible health plan, you’re allowed to contribute additional dollars to this special account and you get a tax deduction for making a contribution. Then if you spend the dollars in that account on qualified medical expenses, you do not have to pay taxes on those distributions. So I got a tax deduction, I put it in an account and then I spend the money and I don’t have to pay taxes on it. So it’s never taxed money. It’s a really good way to help defray some of your medical costs because most of the other medical deductions that exist in the tax code, most people don’t get to take advantage of because there’s income restrictions that are just kinda silly. So if you’re looking for a way to make your medical cost more efficient, this is a great way to do it.
Matt Rzepka (01:04:05):
And you can take a long term, play with an HSA, make contributions over time and not spend the money. Even though you may have medical expenses happening, you could choose to pay the medical expenses out of pocket. And at any point in the future, you can always reimburse yourself for having paid those medical expenses personally, still on a tax free basis. But if you build that account and can grow and invest it, you can start to get this really big pot of medical funds to help hopefully balance out what medical needs you might have in the future. And then worst case scenario. If you get to a certain age, I believe it’s at least age 65, you can turn it into an IRA and have it be taxed if you don’t end up using it for medical. So there’s a lot of good flexibility built into the HSA right now.
Michael Port (01:04:53):
It’s important to recognize that the health savings account is an account in which you usually invest the money that you put in. But if you’re investing that in either stocks or funds, index funds, mutual funds that are very risky, you might lose some of the money you put in there. But if you’re taking a long term play on it, you should see gains over time. And it’s generally considered typical to have more medical expenses when you are older than you do now. I mean, you may have a life, you know, real serious illness at this point. But for most people when they’re older, eighties, nineties, that’s when all of a sudden you’re starting to see some really big medical bills that might fall outside the scope of Medicare or even if you have a second insurance to back up Medicare. And then that’s a great time to use that money and not have to pay any taxes on it, but you’re just saving it all through these years.
Michael Port (01:05:51):
That means in the meantime, you’d have to pay out of pocket for any additional medical costs that you have, and that might be a substantial amount of money because to use an HSA, you need a high deductible plan. And not even all high deductible plans from my understanding actually allow you to use an HSA. There are some that may not. So you gotta make sure that you’re choosing a plan that is a high deductible plan. It has the HSA option available and that you are willing to pay out of pocket because you’re gonna have to reach that deductible before you start getting coverage and the deductible could be substantial.
Matt Rzepka (01:06:31):
Yeah. You always wanna do, I always say the math problem or the cash flow analysis. Hey, if I have a non HSA type plan and I paying premiums and paying outta pocket X amount, what would it look like if I flipped the switch to an HSA, I saved some taxes, but I’m gonna have some more expenditures? You wanna try and get a net gain there. If you’re gonna switch to an HSA, you always want to have the least out pocket exposure as possible. But if your tax savings can help reduce your exposure, that’s where it might make sense to make that change.
Michael Port (01:07:00):
You also need to be diligent because you’ve gotta keep records of all of your medical expenses. Because if you don’t have records, if you don’t have receipts…
Matt Rzepka (01:07:08):
Yep.
Michael Port (01:07:09):
Then you might go, you know, 10 years from now, you may wanna say, okay, I’m gonna use this money to pay for all of the expenses I’ve had over the last 10 years. Because I think you can do that. You can reimburse yourself for past medical expenses. That’s correct, Matt?
Matt Rzepka (01:07:21):
That is correct. Yep.
Michael Port (01:07:23):
I just don’t wanna say anything that’s you know that’s wrong, but.
Matt Rzepka (01:07:25):
No.
Michael Port (01:07:25):
But if you don’t have the receipts, you’re outta luck.
Matt Rzepka (01:07:29):
Yeah. You really just need to make sure you’ve got proper documentation. If you’re not a good documentation person, then that kind of a strategy might not be best for you, but there’s a lot of great automated tools to get some of that in your files and kept track of so that you can take advantage of this, especially if it’s gonna make financial sense.
Michael Port (01:07:46):
There’s one more thing that I want you to speak to because we did this a couple years ago and it was a really effective strategy. It was when I bought our truck and I called you up, I’ll call you for almost anything. I was like, listen, I’m working on this deal for the car. You think it’s a good deal? Should I do this? Or I should do this. What’s the deal. I’ll be in the parking lot of the dealer and I’ll call Matt, what do you think? You’re like, no, no, that’s not good. Go for this. I’m like, okay. So anyhow, I called you and I was just, we were talking about this particular purchase because we needed a truck and you said, oh, here’s what you do.
Matt Rzepka (01:08:19):
Yeah, it’s this fantastic little loophole that has existed now for quite some time, what we call the SUV loophole. And it is a way to purchase a vehicle that weighs 6,000 pounds or more gross vehicle weight for your business and take an accelerated depreciation deduction on the purchase of that vehicle. So accelerated depreciation. So depreciation is how you take an expense for an asset. So the government says, Hey, this car, it’s not gonna be completely used and worthless after the first year we have wanna make you take that a expense over time. But from a tax perspective, we’re gonna give you special treatment if you elect to take that deduction or that expense all in the first year. So this is, this is pretty popular now. It’s been around for, I think going on about 15 years, it used to be limited to only $25,000 of the purchase price. And then as the depreciation laws have continued to be expanded, this law was also part of that expansion to where then there’s no limit. And then there’s, you can do it on new or used. Now you can do it with bonus depreciation. So there’s all these great things in there. If you’re interested in taking kind of a one time deduction for a business vehicle purchase that’s an SUV. Now with this, there’s always a catch when it comes to depreciation…
Michael Port (01:09:40):
And it needs to be a business purchase, correct?
Matt Rzepka (01:09:42):
Yes. So you want to have a business use percentage of some sort. You always want to have a mileage log if you can, but you have to factor in what the business use versus personal use is. And that’s always part of that equation. And also it depends on how many vehicles you have. If you have a vehicle that could be used for personal, you might be able to have a vehicle that’s just for business. Like I’m personally actually living this right now. I just bought a new vehicle for myself that is 100% business. It’s a vehicle I added to our vehicles for home. So I’m gonna have new drivers in the near future. So I just decided to use a vehicle that I wanted to drive as a way to help increase our fleet for when my daughter starts driving. But I’m driving this vehicle strictly for business. So I’m keeping every mile logged. I’m not doing any trips that aren’t for business and I’m gonna take a hundred percent of the purchase as a write off using this loophole.
Michael Port (01:10:37):
Nice. So Matt, as we start to close up this episode, because we’ve been talking for far too long about taxes, what would you say is fundamental to your philosophy on your approach to taxes?
Matt Rzepka (01:10:51):
Know your numbers and make sure that somebody is looking for opportunity. I’m not sitting here saying you’re gonna pay zero taxes. And again, I don’t know that you should, there are people out there who pay zero taxes, but you have to live a completely different life with risk and loans and stress to do some of that stuff. That, to me, it doesn’t seem worth it. It’s more about systematizing your approach, making sure you understand the tax code and what of it you can take advantage of and then save that money and try to put it to work for you or grow your business or help save for your retirement. Other things of that nature.
Michael Port (01:11:28):
Nice. And the thing I’d like to add is that this is just a bunch of information that you can learn. It’s like anything else you’ve learned over the course of your life, but we generally don’t learn and hold onto things that we don’t need at the moment. That’s why sometimes it can be challenging teaching kids about things like this. Like if you sit down and wanna teach kid about a mortgage, unless it just happened to be somebody who’s fascinated by mortgages, it doesn’t seem relevant to them. So it’s very hard for them to learn it because it’s not important and it’s just not gonna stick. But as things become more important to you, it gets easier to learn about them because you now have real world applications that you can apply the learning to. So you do just in time learning. We only need to learn what we need for the moment and probably the next few days or weeks.
Michael Port (01:12:25):
And that’s wonderful because we can apply the learning quite quickly. It’s really just, I think comes down to how important it is to you. I’m not a math person. I’m comfortable saying that because I’ve really studied math a lot over the years and it just doesn’t come to me particularly easily. But I’ve figured out what I need to know in order to set up the family for what we wanna do now and into the future. If I need help with the math, I ask Amy, and if we both need help with the math, we ask Matt. If I need to spell something, I’ll call my mother, how do I spell this mom? Before the internet. That is exactly what I did. I was in college. I’d call my mom up, say, how do you spell this? I’ve got a paper. I can’t figure out how to spell this word.
Michael Port (01:13:04):
She’s like, have you heard of a dictionary? I was like, yes, but you know you like when I call you to ask for help. She’s like, I know I’d rather you call me. So if you have some people in your life who have experience with this and can help guide you, it really does make a big difference. But what I would recommend avoiding is thinking, oh, I’m gonna find somebody that I can just dump this on because look, I’ve got Matt who I think’s the greatest in the world, but he doesn’t sit down and do my personal budget every weekend. That’s not his job. If I wanted him to manage all the money he would, but I’d still have to understand it and work with him on it on a regular basis. But I do that myself. And so I have to learn about that.
Michael Port (01:13:47):
But when I have questions, I ask Matt. So you gotta have those people in your life, but they’re not gonna do it all for you because they have other things to do. And I just think abdicating this responsibility doesn’t feel good.
Matt Rzepka (01:14:02):
Yeah.
Michael Port (01:14:03):
You can certainly delegate certain aspects of it. Like obviously I delegate all the tax planning to Matt, but we meet on it. We discuss it, do it together. But I’m not gonna learn how to actually file my complicated taxes. There’s no need to do that. The amount of time it would take to learn versus the amount of money it costs to have Matt do it is way outta line.
Matt Rzepka (01:14:24):
Yeah.
Michael Port (01:14:24):
Right? So it’s much cheaper to have that.
Matt Rzepka (01:14:25):
Well, and the Internet’s a great thing. You know, you mentioned internet about spelling words, but when it comes to finance, one of the main roles from whoever you’re talking to or working with, Hey, I found this on the internet and it seems like a great idea. Where’s my third party verification? Like, is this a good idea? Can I do this? Is there any pitfalls? Because again, the writer of that article might be steering you one way for one reason and having a confidant of some sort to bounce stuff like that off of, because again, there is a lot of great information on the internet, but there is also some information that’s maybe not so good.
Michael Port (01:14:57):
Yeah.
Matt Rzepka (01:14:57):
So you wanna just have a way to balance that and say, how does it work or fit for me?
Michael Port (01:15:01):
Yeah. They might be just wrong, not even just, they’re trying to steer you in one way. They might have no conflict of interest, but just maybe dead wrong. Or it really applies to their situation because of this specific thing. And they don’t articulate that. And as a result, it doesn’t actually apply to your situation. So I do think having somebody who you can trust that’s a fiduciary, even if you are paying just for the time you spend with them, it can be incredibly valuable. Because it just makes sure that you stay on your path, but it does start with goals. Where are we going? What do we want to do? How are we gonna get there?
Matt Rzepka (01:15:38):
Yep.
Michael Port (01:15:38):
And then you can start looking at what steps you’re gonna take. So it’s a big topic and we covered a lot. I hope it was helpful for our listeners. Matt. I just thank you so much for spending all of this time. I mean, this is, this is a lot of time. Did you enjoy your time here on the podcast?
Matt Rzepka (01:15:53):
I loved it. It’s truly my honor. And my pleasure to be here. Love always talking these topics with you and getting in the weeds and having a little fun, but also helping people at the same time. So I hope it was helpful for those who are listening. I truly enjoyed my time and happy to help anyway I can.
Michael Port (01:16:08):
Good. And for folks who have questions, uh, don’t send them to me because I’m not gonna give you advice because I’m not accredited. It’s not my job. I’m not a professional in any way, shape or form, but Matt is. So if you need help, go to Matt. And Matt may charge you for it, but you’ll know you get the right advice and it’ll make a big difference for you long term.
Michael Port (01:16:34):
So that’s it. Thank you so much for spending this season with us on Steal the Show with Michael Port brought to you by Heroic Public Speaking. Give us a rating. A high rating would be lovely. Put in the comments, what you found helpful. What did you learn? What did you discover? And in the meantime, keep thinking big about who you are and about what you offer the world. Bye for now.
