EP. 139 More Knowledge, More Wealth: AM 590 Radio Show

Transcript:

Announcer:

This is More Knowledge, More Wealth, with your host, Gabriel Shahin. Gabriel is a certified financial planner and a registered investment advisor at Falcon Wealth Planning. This show is not intended to provide personalized investment advice through this broadcast and does not represent that the services or securities discussed, are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast, in the process of making a full informed investment decision. More Knowledge, More Wealth, on AM 590 The Answer. Now here's your host, Gabriel Shahin.

Gabriel Shahin:

Good afternoon, this is Gabriel Shahin, Certified Financial Planner and your host of More Knowledge, More Wealth here on every weekend talking about all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth. Now, feel free to reach out to any one of our colleagues, myself included. Give us a call if you want to help to relate this show to your specific situation. Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird, or visit our website at falconwealthplanning.com.

That's falconwp.com for short. Call us. We'll have a private, confidential conversation about you to help answer your questions. Now, I'm a Principal of Faculty Wealth Planning, a registered investment advisory firm. We are a fee-only financial planning firm that also manages money as well, but folks, we go over all important topics, personal finance.

That goes over where you are today, how retirement looks, going over investments, insurance, estate planning, investments. Folk, you name it, anything that involves a Dollar sign, we go over, and our biggest niche is tax planning, folks, and because I always feel like we're in tax planning in the tax world, a lot of you could have just finished your taxes as well, even though a large population of us do an extension. I do want to discuss with you some strategies, so I like to share with you things that come up every week at our firm at Falcon Wealth Planning. I wanted to talk to you about self-employed individuals. I want to talk about QBI, which is this new deduction our government gave starting in 2018.

I want to compare it to this Medicare tax. I want to explain to you all that stuff, self-employed people and their salaries they pay themselves, taking money out of their corporation. Folks, these are the things I want to discuss with you. If these are already topics you have in your mind, if already things that you wanted to talk to your current tax advisor with, give us a call because most tax advisors are tax prepares, which makes sense. There's very few actual tax planners that are out there, so I wanted to discuss with you kind of what a planning looks like, and if this already sounds like you and something you want to help with, give us a call, folks.

We help people all across the country, offices all across the West Coast. Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird. We'll help relate this show to your specific situation. Just give us a call.

First, I want to start off talking about business owners, and we know there's different types of entities people can have. Some people have a sole proprietorship, some people have an LLC, and it's just them or their spouse. It actually is the same from an IRS point of view. It also goes on your Schedule C as a sole proprietor. I wanted to also discuss with you the corporations. There's S-corps and C-corps, and most people out there are one of those entities.

There's really nothing much that you can do outside of that, but what happened with the sole proprietor in LLC and an S-corporation is that our government incorporated, for most of us are eligible for this, is something called QBI, qualified business income. What means? The net income from your business is tax-free 20%? What does that mean? If you have 100,000 of net profits, you could have grossed 200,000.

You could have grossed a million, but your net profits is $100,000. You will get 20% of that off tax-free, which means you won't get tax on 100, even though that's what you netted. You'll only get tax on 80,000, so there has to be certain things you have to look at, income, limitations as well, industry limitations, and even paying yourself a salary depending on the entity. That is important to know because you're able, you could be potentially able to get 20% of your net profits tax-free. Folks, depending on your tax bracket, that is massive, okay?

That is a really big deal, so I want to discuss what we typically see at this time of the year as we go over some tax planning techniques, and where people were always complaining about paying too much in taxes. First is that qualified business income. You also get that on rental income. Yes, that is also something that you get, is on rental properties. Even though they're passive, you get those that are eligible to you.

The thing though, that I see sometimes is self-rental. That's where it seems to be some type of a gray area, but I've seen people that get it wrong both because on passive income, you are subject to 3.8% Medicare surtax. That's if your adjusted gross income, your AGI is over 250,000 if you're married, 200,000 if you're single. What I've seen happen is that self-rental, people doing self-rental, which means they own the building that they're in, like Falcon Wealth Planning, they own their building that they're in, the company I work for, my company, and you are not allowed to get this QBI deduction from that, okay, because it's self-rental, but with that being said, it's no longer passive, which means you should not be subject to a 3.8% Medicare tax if that's the case, so it's one or the other, all right? If, in fact, you take the 20% off your rental income, then you're not supposed to pay the 3.8% surtax on the income from the rental.

If you, in fact, claim it where you get 20% off, well then, you will have to pay the 3.8% Medicare income surtax on top of that. Well, what I've seen people is not take it, the QBI deduction and still pay the 3.8% surtax. That's insanity. I've seen that so many times this year, folks, and it's unfortunate, because who the end loser in this is you. You don't know any different.

You just are told what the taxes that are owed at the end of the year, and then you get upset about it because nobody wants to pay taxes. By the way, folks, if you're just joining us, you're listening to Gabriel Shahin, Certified Financial Planner and your host of More Knowledge, More Wealth here on every weekend, talking about all important topics of personal finance. Today, I wanted to discuss with you qualified business income and a couple of other strategies out there, and I've seen a lot of people mess this up. Folks, if you need help with this, if you own real estate, if you are a business owner, you have to be aware of this qualified business income. People are leaving thousands, tens of thousands, some people hundreds of thousands of dollar on the table by not doing it right, not even aware of what they should be doing, and heck, their accounts aren't even aware because you're meeting with your accountant what, once or twice a year?

Folks, that's a tax prepare, not a tax planner. We can help with that. It's sad people with multiple real estates, they work very hard to accumulate the amount of wealth that they've accumulated and they're giving it away frivolously, not because they don't respect money, but the simple fact is them and the professional they've hired are not doing it right. It's sad, frankly, so to make sure that you're doing the right thing with rental income, let alone, when you self-rent it, when you own the building you're renting from, make sure you code it properly. Not you, but your accountant, and sadly, you have to dot your Is across that T, okay?

Give us a call. Get a second opinion if that's you. That's issue number one. There's two other issues that I see. Issue number two is business owners.

Now, this doesn't work for sole proprietor or a single-member LLC because it really doesn't matter, because they're paying already the self-employment tax, but you and I, for W-2, we pay into FICA, Medicare, OSHA, right? We pay into social security and Medicare roughly seven and a half percent of our pay, so if you make $100,000, seven and a half percent goes to that, okay, so yeah, that's on top of the federal and state as well. Well, your boss, your employer pays the other seven and a half, kind of the benefit of working for somebody, but if you're self-employed, you pay both, the employee and the employer side. You're paying both sides of it, folks, okay? That's important to know.

Why? Because people with a sole proprietor and an LLC are paying an unlimited amount based on the net profits. If they net profit $500,000, they're paying that payroll tax on all $500,000. That could be just excessive. I've seen somebody this week that had 600,000 net profit that is paying $50,000.

That's a lot, okay? Where am I going with this? This is why it's important to look at an S-corporation. S-corporation limits you from paying the payroll tax because the entity pays it on the state level. Now, State of California is very weak.

It's one and a half percent of your net income, but one and a half percent net income is sure better than 15%. I know what you're thinking here. Let's do an S-corporation. Pay myself no salary. I don't care about social security, won't even be ready for me when I need it then anyway.

That was a mouthful. That is not allowed. The IRS feels that you should pay yourself what's called a reasonable compensation. The issue is, I've had two situations this past week where somebody was paying themselves because it was sole proprietor, all $600,000, and another person paid himself $275,000 for net profits, okay, and the other person was a S-corporation. The issue I have with that is on the 275,000, let alone the 600, they were paying all their payroll tax and Medicare, and not leading any leftover profits in the corporation.

Why is that a big deal? Two reasons. Reason number one is you're paying payroll tax on all that money. You don't need to be paying payroll tax on all that money. That's an excessive amount.

It's unnecessary. You are paying 15% on salary for a majority of that income up to $150,000, and after that, you're still paying the Medicare tax. You have to be strategic on how you pay yourself. The second part is the more net profits you leave in the company, that's 20% off on income tax through the qualified business income credit that we discuss, or write-off, excuse me, that we discussed. It's crazy that people are not doing proper tax planning on this, folks, so you need to be aware of that what you should be doing.

It's crazy. Now, I know what you're thinking. People are saying to themselves, "Well, what about having your money stuck in the corporation now? How do I take it out?" Well, if it's a C-corporation, yes, that poses an issue, and there are other strategies you could do that, especially if you're self-rent and a few others, but the other one with an S-corporation, folks, you're already paying taxes on the net profits anyway, so if you're already paying taxes on it, just take the money out.

It's called a distribution, and no, a distribution is not a write-off. That's just you taking money out and paying taxes on that. It's crazy. I've seen people think that they're taking a distribution, which is a write-off, but that's not the case. They're taking money out that's already been taxed.

You get taxed on the K-1, whether you take the money out or not. It's the net profits. I see this far too often, so knowing how to strategically pay yourself, how much to pay yourself, and to make sure you have the proper amount as a qualified business income, which is the net profits, is crucial. Absolutely crucial. You need to be aware of the strategies that are available to you and the things that you should be doing.

On this next half of the show, I'm going to talk to you about standard write-offs that I don't see people taking, and if they do, they're taking it wrong. Remember, folks, we practice tax avoidance, not tax evasion, okay? I know what you're maybe thinking, and you have to be aware that you don't want to mess with the IRS. When we come back, we're going to talk more about this, and if you need help with this, if this sounds like your situation, give us a call. We can help.

Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird. Folks, we're going to come back after a few words. Welcome back, folks. This is Gabriel Shahin, Certified Financial Planner and your host of More Knowledge, More Wealth here on every weekend, talking about all important topics of personal finance.

Today, our job and our goal is to help you, especially with these tax, people with taxes, or a lot of the issues that we're seeing right now, especially the major money savers come from business owners. Even if you're not a business owner, this could help maybe motivate you to start a business. It can help maybe your kids. It can help you sound really smart at a cocktail party. Anyway you slice it, these are things that you have to be aware of, and some of the recommendations I gave at the first half of the show was looking at what's called qualified business income, which is a 20% write-off on your net profits, doing that with rental property even if you own the building that you're renting yourself from, there are strategies there, and paying yourself unnecessarily high salary, which affects your taxes, so these are the main points that I wanted to make sure we discuss in the first half, but the second half, I really wanted to discuss if you have maybe a really high year maybe because it was due to COVID, maybe you had a company that sold hand sanitizer for 10 years in the past couple years you made a crushing, so there are certain write-offs that you could do, some that are instant and some that are just often forgotten.

The first thing I wanted to focus on is what's called a Section 179. A Section 179 is when somebody is able to write off something that's fairly large initially. Let me give you an example. This could be something like a car. Now, the car has to be over 6,000 pounds, so mostly they're trucks.

That's what it's designed for, but if you use it for over 50% business, you can write it off, so it's hard for maybe like a dentist to do that because they go to their office every day. They're not doing house calls, they're doing dentistry, so it's hard for that, but for construction worker and maybe some engineers, some really, people that are road warriors or travel a lot for business or log things back and forth, those could be perfect write-offs, and you get the whole write-off. You spend $100,000 on a vehicle, you could write off that whole vehicle in one tax year. That's important to note, guys. I don't want to discount what I'm just saying to you right now.

You're able to write that off, and so these are things you have to be aware of. The addition to that, which I don't see people do a lot of is mining off meals that are business related. If you want to write down the clients or the associates that you went with, that's important. Travel is also being able to written off. This is nice because historically, you're only able to write off 50% of food and so on, but now, past couple years, this year included, you're able to write off meals, okay?

100% of it, not just 50%, which is really nice to do. Also, I see people writing off vehicles, whether it's a lease payment, which historically is very popular, but if you write off everything work related in your vehicle, okay, the car you even drive back and forth to work, so almost like you're also daily driver. You can't write off the miles and the car expenses, the oil change, so on and so forth, so you want to do the analysis to see what makes the most sense, depending on how many miles that you've driven. You might want to take out your actual car expense or you might want to do the mileage, so one or the other. These are important analysts that has to be done, and we just don't see people doing that, folks.

That's just what it really comes down to, and this is something that you have to plan for. You need to have a strategy in place, and your accountant doesn't expect to help you with these customized write-offs. That's not their job. Their job is to prepare your taxes, and I'm not saying even that's something we do, but what we do is educate you on what you should do. We educate you on what you should pay yourself.

We educate you on what structure of the entity that you should do. These are the things that a tax planner helps with, and that's what we would want to help you with, so give us a call if you want to take advantage of our assessment. Yet again, we help people nationwide, folks. Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird.

We can help put a confidential, personal assessment for you to help relate this show to your specific situation. We just often see people leaving money on the table all the time. One thing I want to bring up to you is on charitable deductions. A lot of people do that out of their corporation, which makes sense, but just know, not including C-Corp, what I'm about to say, you write that off on your personal taxes, on your Schedule A. People think they're getting a write-off from their business, but in reality, it's just being written off on the personal.

Well, if you have no mortgage and you're not writing off enough items because the SALT limitation's at 10, then you might be doing a standard deduction, so is that really helping you? The answer is it is not really helping you, so whether it's business owners or personal, this next advice makes sense for both of you. The advice is using a donor-advised fund if you are charitably inclined. That could make a lot of sense for you. Let me give you a couple examples.

If you have a SALT limitation of 10,000, that's if you pay a lot to the State of California, property tax, car registration, you can only write off 10,000. Let's say you have another 10,000 of mortgage interest. That's $20,000 you're allowed to write off. Assuming your married filing joint, they give you a standard deduction of 26,000 roughly, depending on your age, it could be more or less, so $26,000, so you only have 20,000 write-off, so the government will give you a $26,000 write-off, which is 6,000 more than what you have available to write off, which is kind of cool. You got a pre-6,000 write-off.

That sounds great. IRS, thank you so much. You guys are the best. Well, let's not get carried away there. By the way, if you're just joining us, you're listening to Gabriel Shahin, Certified Financial Planner, your host of More Knowledge, More Wealth here on every weekend, talking about all important talks of personal finances.

Today, I am talking taxes, and we are now talking about putting money into charity, saving, and where you're not able to fully write it off. Let's just say you gave 10,000 a charity in that example, where you have 10,000 in mortgage interest and 10,000 everything else, so you have 20,000. The government gives you 26,000, so which means if you donate 10, well, the government already gives you 26, who cares if now you have 30,000 write-offs? You only got to write off 4,000 of the 10,000 you gave. 40% of it you get to write off.

That's annoying. That's not fair. That's not right. With that being said, what to do? What you could do, depending on your high-income year, this could make a lot of sense, or if you're consistently high income, if you normally give 10,000 a year to charity, how about you give 50?

How about you give $50,000 to charity in one year, but you don't want to give it all in one year. You put it into a donor-advised funds, and from that account, you can pay out of that account to the charity 10,000 a year, but why would you do this? Well, because that 50,000 you get a write-off in one year. That can make a lot of sense if you're in a high-income year, folks. Hello. That can make a lot of sense.

In addition to that, remember earlier, I said that if you give 10,000, you get a $30,000 write-off, but the government gives you 26, which means you only got to write off that additional four that you gave of the 10 as a write-off, but if you give 50,000, yes, you still lose that 6,000, but you get to write off the remaining 44,000. Guys, you're getting almost a 90% write-off on that donation because you lumped it all in one year. Then, in future years, we're only write off 20, you still get the $6,000 free write-off that the government gives you because the standard deduction is 26,000 instead of 20. This could make a lot of sense for you, especially if you're charitably inclined, and God bless you if you are. We just got done with Easter, we got done with the Passover, we got done with the Ramadan.

Well, some of those are happening still, but you get what I'm saying, so there are still people who are charitably inclined and you want to be strategic, and I know you give from the goodness of your heart, and God bless you, whatever your God may be. My point is, is that you should be financially benefited from that. Don't give it to the government unnecessarily. This is why you hire a professional to make sure you strategically are getting the write-offs that you need. Folks, if you need help with this, if this sounds like you and you want to make sure you're squeezing out every legal dollar you're allowed, give us a call.

This is what we do on a daily basis. Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird. We can help put together an assessment to make sure that you're saving money on taxes, whether you're a business owner or not, whether you're charitably inclined or not. Folks, we know the rules.

We know the laws, and when you know the laws, you can dig deep to make sure you are taking advantage of every legal strategic move that are there. There are things you don't even have to do different. You just have to maybe plan it differently for strategic reasons, and I've seen this happen often, just by knowing the tax code. You might have a million dollars in a brokerage account, a million dollars in an IRA and a million dollars in a Roth. Well, which one do you want to take out first?

It depends on your tax bracket. You could take out potentially $120,000 a year in that scenario and keep yourself at the 12% bracket, even though you technically should be in the 22, 24. There are strategic ways where you can limit the amount of taxes that you're doing. You can legally avoid them as well, but we, yet again, don't see that often, so you have to be smart about this, folks. I see this all far too often where people mess this up, so give us a chance where we can help you.

We grow ridiculously off referrals, even if it's something we just tell you to go ahead and do ABC or XYZ. That's great. We're one of the good guys in the industry. Hey, we just gave you some free advice. Please share that with other people.

That's our number one form of growth, is through our client referrals, so all we ask is spread the good word. Folks, I want to mention to you too, that taxes are at times could be subjective, and with us, we spend a lot of time on the education piece of how taxes work, where other people don't. They just say, "Hey, trust us. This is how it works. You'll thank us later."

We like to spend that extra time of the education of the why behind it. We sometimes see that's missing a lot in the tax industry. People have never even had their taxes reviewed with them. Walk them through their tax return, line by line to have them see what's in there. A lot of the time when we do that for our clients, they are shocked, number one, how little they know, and now, number two, how much they now know from something that only took 10 minutes, so give us a call.

Our phone number is 855-963-2526. That's 855-96-Falcon, like the bird, or visit our website at falconwealthplanning.com. That's falconwp.com for short. We'll help put together a personal, confidential, customized assessment for you. By the way, folks, that was a fast, fast show.

I can't believe it's already been 30 minutes, and our time is up. I want to thank you for joining us this weekend. Feel free to reach out to myself or any one of our colleagues at 855-963-2526. That's 855-96-Falcon, like the bird. Call us.

We'll help relate this show to your specific situation. I want to thank you for tuning in with us. Feel free to find us on Spotify or podcasts, let alone the radio. Our goal is to give you the knowledge you need to increase your wealth. Thank you for listening.

Enjoy your weekend, oh, got caught up, and have a great week. God bless, everybody.