February 2023
If you’re a California resident, listen up! Due to the heavy California rain in January, there is tax relief available to those affected by storms, and 41 counties are eligible to extend their tax deadline from April 18 to May 15 without filing an extension.
Chris and Sarah also discuss the taxes that come with alternative investments and limited partnerships. These tax-reporting documents can be delayed past April, causing investors to have to file an extension. Chris says although this can be tedious, these investments may create more diversified and resilient portfolios with better cash flow.
Furthermore, Sarah says CPAs usually think of tax-advantaged strategies in the present lens, aiming to minimize taxes now by investing in things like municipal bonds; however, it is important to consider the possibility that some other investments with “high” taxes may have an even more beneficial net after-tax return.
Finally, Chris reminds listeners that if they fail to max out their contributions to retirement or health savings accounts by the end of the previous year, they still have until the tax filing deadline to make a contribution for the prior year. This is a great way to reduce your income tax.
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Hello, everybody, and thank you for joining us for another episode of The Financial Commute. I'm Chris Galeski, your host. Joined by Sarah Ellis, Wealth Advisor here at Morton Wealth. Sarah, thanks for joining us.
Thanks for having me.
We're here to talk about taxes.
Yes. Hot topic.
Such an exciting topic right now. I know. I feel like any time I talk to people about taxes, it's very heated. But I wanted to bring it up because California endured a lot of rain. Can't normally handle rain when we’re driving. Apparently we can't handle rain when we're doing our taxes either.
I guess not.
So with the rain that came about last month in January, how does that impact our taxes? Tell me a little bit about that.
Yes. So there's actually tax relief for over 41 counties in California and they're able to extend their tax deadline from April 18th until May 15th. Now, without having to file an extension.
Okay. So because it rained in California, not only were we all 30 minutes late to meetings last month, we are now going to be a month late filing our taxes.
We are going to be a month late filing our taxes. You know, when I think about the extension though, because a lot of our clients have to file an extension anyway. And so this news comes as a relief to some people. But I think as you grow as an investor, depending on what you're allocating, this is kind of what happens. You know, filing on extension, I don't think should be as scary as maybe it once was. People always think, oh, if I file on time, I have a less chance of being audited. But it's just not true.
Right. Yeah, I actually I like the fact that things got delayed by a month, mainly because sort of filing for an extension got delayed for a month. But my January quarterly estimates, I didn't have to make those in January. I now have four more months.
That is nice you get to keep it in your pocket. And with interest rates you can invest in a money market and make what, 4% right now probably on those estimated tax payments?
It's a lot nicer to be earning some interest and not having to make those tax payments in the short term. But at the end of the day, California has got some tax reliefs. You'd have to check to see if you who reside in one of those 41 counties to be able to delay filing your taxes until May?
Yeah.
So I've talked to a lot of CPAs. You and I have had conversations about this. What are your thoughts about the people that are just so adamant about wanting to file their taxes on time by April 15th, or then the other side of it, people are like, Oh no, I'm always going to delay. I mean, I know some people that as soon as they get their 1099s and W-2 in February, they're ready to go click the button.
What's your viewpoint on filing for taxes by April 15th or an extension beyond that?
I mean, I think it's situational depending on the person. If you're someone who's just filing a W-2, you could put it into TurboTax or some other online platform, then why not? Especially if you're expecting a refund. People want to jump on that because they want the cash. If you're someone who's thoughtful, planful, maybe you don't want to lend the government money over the year.
And so you know exactly what your withholdings are going to be, maybe you file closer to the tax deadline. If you're an investor, that’s investmented in some partnerships, K-1s, you're going to naturally be delayed because those tax deadlines for those partnerships are beyond the individual tax payer's deadline anyway. So it depends on your situation. I would say my biggest recommendation is not to be fearful of whatever the deadline is, but understand what your situation looks like and the benefits of why you're investing and then filing taxes that way.
For some of our clients that are invested in those partnerships, can you talk to us a little bit about why we do that, Why we don't mind having to file on extension to participate in some of those?
You know, we care about true diversification, right? Not just investing in traditional stocks and bonds, but looking out there in the world and saying, hey, what's interesting? How can we help protect our clients? And then, you know, what vehicles can we use to help grow and generate income? And so that causes us to look outside traditional stocks and bonds at times, maybe real estate or other types of alternative credit or other types of loans.
And because those entities are limited partnerships, they tend to have a different tax reporting document that comes with it's not a 1099, it's a K-1. There's always rules and regulation changes, whether it's federal or even state. And sometimes those tax reporting document documents can be delayed past April. Yeah, And so, you know, some of it's out of our control in terms of when clients get that document so that way they can file their taxes.
But the net result is for most of our clients, they end up getting more diversification, sometimes better cash flow. Yeah, when I think about some of those partnerships, I've got some clients that just hate paying taxes. And you know what? I don't enjoy paying taxes either. Partially because sometimes I'm not a fan of how they use those tax dollars, but they're so adamant about about not paying taxes.
I can only imagine what happens when they go talk to their CPA, like, Hey, I just want to pay as few taxes as possible and the pitfalls that can come with that, only looking at it from that lens.
Yeah, I mean, CPAs are in the world of, you know, numbers. They're crunching numbers, they're filling out forms. And so when they're thinking of tax advantaged strategies, they're going to default to municipal bonds. So you can have tax savings on state level and even a federal level, they're going to think about other ways to shelter your taxes now, maybe, you know, in the past there was a lot of recommendations towards annuities and things like that.
So they're going to see what impacts me now in kind of a finite lens. And I think that's where our industry comes into play. Speaking to a financial advisor that does financial planning because yeah, maybe you're making 3% or 4%, you're not paying taxes on it, but you can get into another type of investment vehicle that has higher returns and the net after taxes is still more beneficial than sticking it to a muni bond.
Yeah, I'm glad that you said that. I mean, net after tax return, what is the result that you get after you paid taxes and is it better or worse than not paying taxes at all? Someone once told me, you know what's worse than having a tax problem? Not having a tax problem, right? Nobody wants to wants to not have a tax problem.
So we talked a little bit about the deadline getting pushed, why it may be beneficial for people to file on time or even delay. And then we talked a little bit about the impact or the viewpoint on certain investments when it comes to taxes. What are some other ways that that people can take a look at taxes and help make decisions today that that could benefit them next year?
Maybe it has to do with like their employee benefits or something like that. What are some other things?
Yeah, I mean, that's where you kind of then start layering on. So not just what you're invested in, but if there's other strategies that can come into play, whether you're charitably inclined, a lot of people will write a check to an organization that they want to support. But there's vehicles called a donor advised fund. And yes, you can donate cash to a donor advised fund.
It's essentially an account that you have control over in the sense that you can decide what charities you donate to, but it allows you to invest in that account and accumulate funds for future charitable endeavors. So if you don't necessarily have an organization you want to donate to now, but say you have a highly appreciated stock, you could donate that stock to your donor advised fund, capitalize on the tax savings from not realizing those gains personally.
Have a write off on your tax return for donating a large piece of your stock portfolio and then have a bucket that you can essentially write future checks off of. So there's things that you can plan for the future, even if you're not ready to make a charitable contribution now, that allow you to take advantage of some of those savings and layer on to reduce that tax bill.
And you mentioned employer benefits. I know that's kind of your background. Do you mind sharing some specifics around that with us?
You know, some things that I think people often miss are contributions to certain retirement or health savings accounts and more specifically, the health savings account or HSA. What's nice about that is if you failed to max that out before the end of last year, you still have until that tax filing deadline to make a contribution for the prior year.
And that's a real benefit. I mean, that's dollar for dollar reducing your income, saving your taxes. So if you're in the highest federal tax bracket, that's almost every dollar you put in, it's 50 cents savings. So being able to to to be prepared enough to when you're going to talk to your accountant saying, hey, am I eligible for an HSA, did I max it out, how much can I contribute still, will that help you know result in less taxes?
Depending on your income limit, you may qualify for a deductible IRA contribution. There are a number of things, but I just notice that a lot of people forget about that HSA.
Yeah, definitely. And I see with spouses too, especially when one’s working, has access to a 401k, they forget to look at the spouse, maybe the spouse is at home, you know, there's income limits and things like that where you can get pretty strategic with how you can support your spouse through retirement too, right?
Yeah, definitely. Well, Sarah, thanks. I know taxes aren't always fun. There's only two things that are certain in life, right? Death and taxes. Sarah, thank you so much.
Thanks, Chris.
Disclosures:
Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and do not represent the views and opinions held by Morton Wealth. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
