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7 Tax Benefits Missed by Homeowners

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
October 24, 2022

Join John this week as he discusses the seven tax benefits often missed by homeowners, how to avoid the most common mistakes made by prospective clients and the two most important things every American should have for retirement. He’s also joined by Creative Planning Wealth Manager and former Top Gun Aviator Jesse Reed to discuss hardships that come with a lack of financial planning and what you can do now to avoid them.

Read more about the tax benefits to homeownership:
https://creativeplanning.com/insights/are-you-reaping-the-many-tax-benefits-of-owning-a-home/

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

Important Legal Disclosure: 
creativeplanning.com/important-disclosure-information/

Have questions or topic suggestions? 
Email us @ [email protected]

Transcript:

John Hagensen:  Welcome to the Rethink Your Money podcast, present by Creative Planning. Ahead on today’s show, my conversation with a real life Top Gun Aviator, perspective client mistakes so you can avoid repeating them for yourself, as well as seven tax benefits often missed by homeowners. Now join me as I help you Rethink Your Money.

Have you ever noticed that we mistake words or phrases for being synonymous even when they’re not? I recall when we adopted Beck and Shea, our two oldest sons when they were 11 and nine, and they were born in Ethiopia, had lived there their whole lives, didn’t know a word of English whatsoever. And I realized as they were sitting there on Rosetta Stone learning English, that our language is really confusing. As they graduated from understanding it, then you start learning to speak it. And lastly you learn to spell it. And I remember them asking me questions around why something was spelled the way it was, because frankly it didn’t make a lot of sense and I would give them the phenomenal answer of, That’s a great question. Go ask your mom. She probably knows. She’s a better speller than dad, because I had no clue. Here’s a few common mistakes that I see made all the time with the English language.

Confusing evoke for invoke. When we evoke something, we’re bringing or recalling like a feeling memory or image to the conscious mind like we’re eliciting a response. Invoke is calling on a deity or a spirit. They don’t mean the same thing, but they’re similar. Venomous and poisonous is another one that throws people off. Among their differences venomous is related to animals, poisonous to plants. And my last example of this is regardless and irregardless. Regardless, we all know what that means. Regardless, it has that red squiggly line underneath it on a Word document. It auto-corrects in your iPhone, because it’s not a word. In fact, I was sitting in a joint meeting with one of our wealth managers, this was almost a decade ago, and they used the word irregardless about four different times in the meeting.

When we finished the meeting and the client left, I looked at him and said in the same way that Indigo Montoya told Vizzini the crazy Sicilian in the Princess Bride when the man in black didn’t fall on the cliffs of insanity, you keep on using that word. I do not think it means what you think it means. He was convinced, but hey, he’s a really smart guy. It’s just really confusing. And here are the phrases that are assumed to be synonymous with one another when it comes to our money. Investment management and wealth management. They’re used interchangeably often, and it’s by mistake. And I believe the differences are incredibly important to your success with your money. So I want to spend a moment breaking them down. Investment management is a subset of wealth management. Wealth management looks at your finances in its entirety. How can your plan be managed to achieve your long term financial and personal goals?

So wealth management, in addition to handling your investments, means encompassing a wide set of other services, legal planning, insurance, accounting, financial planning, charitable giving, tax advice, tax preparation, whereby contrast investment management is simply organizing and attempting to grow your investment dollars. It generally consists of simply looking at acceptable risk levels and then assembling a portfolio of investments that are appropriate for your wishes. What I believe every single person in America should have is a comprehensive financial plan and be working with a wealth management firm, not an investment manager. Let me share with you an observation I made this week on something unrelated to finance, which is what prompted me to start the program with this topic.

We’re renovating a home right now and we had intended to put a gas fireplace in the main room. So my wife drove 45 minutes down to look at these gas fireplace inserts. She found one that she loved. So as she began talking pricing and delivery timeline, she asked, do you have anyone here that will help frame for the insert? Do you have any gas plumbers? Do you have the electrician? Do you have any masons that can provide the brick once the fireplace is installed? To which the fireplace company said, Oh no, you have to find all of that on your own. We’ll deliver the fireplace and make sure that it’s working, but we don’t do any of those other services.

Now without going too far into the weeds, you understand my parallel here with wealth management and investment management, you can’t have a working fireplace no matter how beautiful the unit is, if it’s framed with plywood because you didn’t have a mason. What value does a fireplace serve on Christmas morning when there’s no gas running to it and it won’t turn on, or it’s not vented properly? So carbon monoxide’s flowing into your home. You see, without the integration of each of these subcontractors and without them coordinating the timeline of who does what when with each of them relying on the other person to complete their project, you don’t end up with a desired result. This is exactly what happens when you try to isolate investment management without looking to the big picture. You have a fireplace unit sitting on the ground in your family room that’s inoperable.

And so if you’re listening to this and you’re paying 1% to have a model portfolio built and to talk with an advisor about your investments a couple times a year, you can do that for far less money because it’s not that valuable in and of itself. I would suggest you find a great wealth manager who can help bring all of those pieces together in a comprehensive and customized way, unique to your situation. Here at Creative Planning, we have been doing just that since 1983 for clients in all 50 states and 65 countries around the world. We believe that your money works harder when it works together. And so to speak with a local advisor who’s not looking to sell you something but rather give you a clear breakdown of exactly where you stand with your money. And when I say money, I mean taxes, estate planning, risk management, financial planning, as well as your investment management. Visit us now at creativeplanning.com for a complimentary, no obligation second opinion. Again, that’s creativeplanning.com to learn more about how comprehensive wealth management may be able to improve your situation.

Announcer:  At creativeplanning.com, you’ll learn how your investments, taxes, and estate plan can work harder together. Go to creativeplanning.com. Creative Planning, a richer way to wealth. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.

John:  I have a guest that I have personally been waiting to have on this program ever since I met him at our Creative Planning Connect 22 national event this summer. I’m confident that you are going to find his background fascinating just as I did. His name is Jesse Reed. He is a wealth manager here at Creative Planning and he is unique in that he serves a very specific group of our clientele that he has firsthand experience with. So Jesse, with that being said, I’ve got to start with your background because a lot of us have seen Top Gun Maverick and they’re thinking, that’s crazy. That would be so much fun. I want a cool call sign. I want a nickname like Maverick. Interestingly, that movie has similarities to your actual life. Does it hit pretty close to home for you?

Jesse Reed:  It does. Yeah. And before you wish a call sign on yourself, I would caution you on that because in real life call signs are never cool. There’s no Maverick or Iceman floating around out there in real life. It’s always something that’s embarrassing or makes fun of something dumb that you did once in your career. So yeah, I do have a unique background though. You’re right. I’m not like a lot of wealth managers out there or folks that work in the financial industry, I had a different path to get here, which involved flying in the Navy for a number of years and I was blessed enough once upon a time to get selected as a Top Gun instructor and did that for a couple years. So that was really neat and a different part of my life that I hadn’t thought about in a while until this new movie came out and then suddenly a lot of people were talking about it.

John:  Well, we don’t simulcast this show on YouTube so you can’t actually see Jesse, but let me just tell you that Jesse looks like he could have been one of the stars in Top Gun Maverick. He’s not rocking the mustache, but otherwise he looks like Tom Cruise in the original Top Gun and could be out on the beach playing volleyball.

Jesse:  I need to get on the Tom Cruise workout program because he’s what, 15 years older than me now and he can probably still spike a volleyball and run faster than I can on the beach.

John:  Yeah, well that was pretty impressive, the shape that he got in for that movie, that’s for sure. He put all of us to shame. There’s no question about that, but tell me a little bit about why you are passionate about helping pilots in particular have financial independence?

Jesse:  That’s a great question. So when I initially got out of the Navy, I was interested in service still, which is how I got into the financial industry is I wanted a career that would allow me to still help and essentially service and helping people is a really important aspect of what I do and it’s where I get work satisfaction. So I was looking to do that, but I also had a, because of my aviation background, it was a no-brainer at the time to also get on board with an airline. So I got hired by a major airline and was doing also financial management, financial planning for airline pilots on the side as well. And I learned a lot during that time. I learned that there seemed to be some consistent issues that airline pilots work facing. Typically airline pilots, they’re unique in that they’re high income earners and I’ve heard it almost referred to that their careers from an earning standpoint can mirror something like say a specialist in the medical field as far as what their lifetime earnings can be.

But I found that as I sat in the cockpit on these trips for all the money that airline pilots are making and have made up to this point in their careers, they seem to often be in some form of financial distress or haven’t done as well as they could have. And I started to realize that’s due to essentially a lack of planning and foresight on their part. It’s not through a lack of earnings and it really became my passion to try and help airline pilots figure this puzzle out for themselves so that when they someday hang up the uniform and walk away from flying that they were set up for success in their retirement. Pilots are also a little bit unique in that once you hit mandatory retirement age, your career’s over, you essentially get forced out into retirement. So you really have one shot at making that work. You don’t really necessarily have the option to extend your work years, a few more years like maybe some other people in other careers do.

John:  That’s a good point. And not only do you have one shot and one shot only to get retirement right because of that forced retirement age, but you also have one shot in many cases to get your employer right, because in a unionized profession where everything from your days off to hourly pay the aircraft you fly, whether you’re overnighting in Nova Scotia or Maui is dependent upon your seniority number. So that’s another unique aspect for airline pilots that you and I both understand is that you interview at an airline and basically get married off of a blind date.

Jesse:  That’s exactly the term I would use is you become married to the airline that hires you first essentially, unless you make some decisions pretty quickly. But yeah, once you get some seniority under your belt and you’re finally getting the schedules that you like and you’re starting to get the pay that is starting to actually change your life, you’ve pretty much committed now to that airline. That comes with some pros and some cons. You’re a slave to the contract. A lot of people may or may not know this out there, but airline pilots are essentially hired labor, at least in the US most airlines are unionized, meaning that you’re subject to in a contract between your union group and your employer. And because of that, a lot of your benefits and a lot of things can change in a heartbeat that maybe you once got accustomed to depending on how your negotiations go.

John:  And that uncertainty in swift changes make it critical for airline pilots to plan well financially. Because in addition to what you just outlined, Jesse, if two airplanes hit the Twin Towers or there’s a great financial crisis or the recent COVID pandemic, massive furloughs are coming. And you and I both know that as pilots, contingency planning is incredibly important in having a safe flight. How do you communicate the importance of contingency planning when it comes to financial unexpected events with the pilots that you help?

Jesse:  One of the first things we look at is disability insurance. So unlike a lot of other careers, you have to be in essentially good shape or have decent health to be able to fly airplanes and it doesn’t take a whole lot of life circumstance to knock that plane off the rails. For some folks it could be getting some chronic condition, technically speaking by FAA rules, if you have to take cold medicine, you’re not necessarily supposed to even be flying. So it doesn’t take a whole lot to consider a pilot “disabled.” So then the question becomes if you have one of those events that is going to result in some sort of long term disability, it keeps you from flying and doing your job for long periods of time. Is your disability insurance that’s provided for you going to cut it?

A lot of airlines do provide long term disability benefits, but in most cases, by the time you have some level of seniority that’s significant at an airline, that’s not going to be enough to make you whole at home. I’ve worked with airline clients in the past who haven’t looked at this and then they find themselves disabled and realize, whoops, I did not plan for this contingency. Now I’m in emergency mode here, the engine’s on fire so to speak, and we got to figure out how to put it out.

John:  What are some other contingencies that you see neglected regularly? Previously it was common that the airlines provided nice pension plans for retirement, but that’s now changed. Can you speak to the current state of pension plans and how that impacts airline pilots today?

Jesse:  Yeah, so it used to be a couple decades ago if you got on with an airline, it was just assumed you’re going to get this nice fat pension someday when you retired and it would just always be there. Well post 9/11, obviously that really rocked the industry and then later on in the late 2000s, a lot of airlines filed for bankruptcy and merged with other airlines. As a result of that, a lot of these pensions went away. Really nowadays it is pretty uncommon for any airlines at all to have any pension benefits. Usually it’s just the folks that have been on board for several decades that maybe still have some benefits left over and then a couple of the cargo carriers still have that. But you’re absolutely right, the difference for an airline pilot who’s a high income earner say versus that doctor I mentioned, or maybe a lawyer, some other specialist or an executive of a company, is that unlike those other employees, airline pilots rely pretty much on their own savings to live off of and that’s it.

There’s no stock option plan that’s going to be waiting for you as an airline pilot. There’s no liquidity event that say may happen for a specialist, a doctor who owns their own practice that they’re going to sell someday. So really it comes down to how much did you save throughout your working years? Because once you hit age 65, that’s all you have to live on at that point. There are a few exceptions. Some folks maybe have some pensions maybe from the military or like we said, some of those legacy pensions from their airlines, but it’s certainly not something that people can count on these days.

John:  It’s worth noting that pilots received a bit of a mulligan when they changed forced retirement age from 60 to 65 a while back. Those pilots got five more years to work and hopefully save in their highest earning years, but that’s obviously not something that can be counted on for pilots now in the future.

Jesse:  Yeah, exactly.

John:  I’m Speaking with Jesse Reed, a former naval aviator, Top Gun instructor, airline pilot, and now wealth manager here at Creative Planning who caters his practice to current and retired airline pilots. If you’d like to connect with Jesse directly, go to creativeplanning.com to request a visit and you’ll have the opportunity to speak with him about your situation. Again, that’s creativeplanning.com to speak with Jesse directly. And by the way, if you’re not an airline pilot, many of the principles that we are discussing likely apply to you as well, so don’t go to sleep at the cockpit as we’ve been discussing topics like contingency planning and navigating retirement without a pension because these topics may speak to your situation as well. Well Jesse, I’d like to transition to a scenario where let’s say a pilot gets into retirement, maybe they’ve done a decent job saving and they put themselves in a fairly good position to replace their income, but there are still some unique challenges that pilots face in retirement even for those that are well prepared. What are some of the most common challenges that you see?

Jesse:  Interestingly enough, it’s often not money issues. It’s a psychological perspective and I tell folks when I’m talking to them and I start bringing up retirement in our meetings, I tell them, Hey, I’m going to take off my number crunching hat for a second, put on my psychologist hat because let’s talk about what your life’s going to look like when you suddenly hang up the captain uniform and you are not the boss of the airplane or running the show anymore, you’re at home. And it’s sometimes it’s a pretty big hit to the psyche to kind of lose that purpose in your life of being in charge essentially of people’s safety. It’s a pretty big responsibility and you go from having that every day of your life or at least 15 days out of the month to now you’re at home and what are you going to do with yourself? So I encourage folks in our meetings outside of the discussion about actual numbers and how much they want to spend to just think about what are you going to do that brings purpose to your life once you hang up the uniform?

Some other challenges that I find is folks aren’t necessarily ready for the difference in income that they may have. Typically, the highest earners captains that are flying international flights towards the end of their career, it’s not uncommon for them to be making 400, $500,000 a year as a salary. And again, even if they’ve been maxing out their qualified accounts that they have through their employer, maybe they’re maxing out an IRA, they have a shock to the system when they realize, whoops, that wasn’t even enough to maintain this lifestyle that I’m used to. So a lot of times depending on at what age that we catch folks at, at this process, we can plan of that ahead of time. A lot of times unfortunately, I’ve talked to pilots that are a little too late in the stage to be able to achieve or maintain that lifestyle and now we have to have a discussion about priorities once they hang up the uniform.

John:  Jesse, I can personally relate, as you were saying, it’s a shot to the psyche to not be in charge. I got home recently from the office and my three year old literally told me how many ice cubes she wanted me to put in her water bottle. So while this financial planning conversation is great, this is what we talk about each and every week here on Rethink Your Money. The reality is what listeners and I want to know more about right now is your time at Top Gun. What is it like Jesse, tell us.

Jesse:  The Top Gun experience, and this may disappoint folks listening, is not beach volleyball and throwing the football on the beach. There’s a lot of study, let’s put it that way. So an average day going through the Top Gun course, which is about three months long, is you get in at 5:30 AM in the morning, you would’ve been studying the previous night for the flight that you’re going to have that day. So you get in the morning, usually about an hour ahead of time to prepare for your brief. You give about an hour long brief, maybe an hour and a half long brief, you’ll go out and fly for maybe one hour flight time and then come back and debrief for three to four hours. So all things being equal, an average day there for one flight is roughly 12 hours and most of that was spent briefing, debriefing, studying, and essentially the execution part of it, the actual flight of where you were actually doing the mission is maybe 15 to 30 minutes of actual simulated combat training.

John:  Are you wearing a bomber jacket on a motorcycle with take my breath away plane? That’s really what I want to know.

Jesse:  You actually are. I used to ride a motorcycle when I was in the Navy and I did wear my bomber jacket, however, Maverick would’ve got his hand slap for not having his helmet on base. That’s usually a requirement, especially in the state of California, I think.

John:  Yeah, I love it. Most of us can’t relate to your Top Gun experience, but you certainly are able to relate with the pilots that you work with as a result of your shared background, which I think is so neat. A lot of your clients fired their current advisor because they felt like you could add more value due to your dual expertise in both finance and aviation. What are some specific strategies that you see where you’re able to leverage your knowledge as a former airline pilot to optimize a pilot’s wealth management?

Jesse:  One of the first things that I help folks do more often than not is help them understand their own contract and their own benefit structure. It’s not uncommon for a pilot to meet with me and other than their 401k, they don’t really understand what happens if they go on disability, they don’t understand their own insurance benefits through the airlines. So the first thing I do is I help people understand that, well, obviously in every discussion we’re talking about retirement. That’s the one thing that everyone’s got to essentially plan for. And in some cases I have pilots that have other short term goals and we cover that as well. But where I find that a lot of times working with pilots who maybe even worked with another advisor somewhere else at some point that they haven’t gone over is those contingencies that we talk about. What happens if you go on disability? What happens, God forbid, if you pass away and maybe you were the only income earner in your house? What do we do about those contingencies?

So one thing that we do that’s really unique here is we run a full blown disability analysis for our pilots using their benefits and that helps us answer that question. Hey, do you need a plan B for income if you were to develop some condition that prevents you from flying? Is your company benefits enough? Do you need to buy a supplemental policy through maybe one of these companies out there that focuses on airline pilots? Same thing on the life insurance. It is again, not uncommon for, in a meeting as we go through discovery, for a family to realize we actually don’t have enough life insurance to cover all these other things we wanted to do. A lot of times people maybe hear some traditional wisdom out there or conventional wisdom of, Hey, I need this much times my annual salary, that’s all I need. But they haven’t accounted for the fact that now you’ve lost that income earner for life who’s not going to have any more 401K contributions, any more IRA contributions, any more 529 contributions for the kids.

So we really go in depth on all these other areas that maybe they haven’t thought about on their own, the things that simple rule of thumbs can’t necessarily solve.

John:  My second book is titled The Retirement Flight Plan, and throughout the book I weave examples of how flight planning and financial planning are similar, and in both instances you’re trying to get from point A to point B and you have these estimates and assumptions within the plan, but you don’t know if you’re going to need to hold due to bad weather, or a bad market, or whether you’re going to need to divert to a different runway because the winds shifted, or interest rates rose. And you need to know you’re not going to run out of fuel or money when visibility isn’t clear for 10 miles with the prevailing winds light and variable as you had hoped. And it’s in those times that the pilot or financial advisor is skilled at proactively navigating unpredictable, unforeseen events that require us to adjust the plan as they occur.

Jesse: Yeah, that’s a great analogy. Just like the flight plan that you get when you go flying. We’re working backwards here, so you never just take off and hope you have enough gas to get to the destination.

John:  Exactly.

Jesse:  I actually had a pilot once on a trip ask me that. He said, as we started talking about money on day three of a trip, he looked over at me and he asked me, so how much do I need for retirement? And I looked back at him and I said, I don’t know, how much fuel does a 737 need to take off? And he looked at me funny and he said, well, it depends. And I said, You just answered the question for yourself. It really depends. It depends on what your goals are. So just like the flight plan, we work backwards here. We start with what do you want your instate to be? And then we start to work backwards to that takeoff origin and see do we have enough to get to that destination? Do we have enough gas to get there? Do we need to deviate for some turbulent weather or some thunderstorms in the area? How many passengers do we have on board? There’s all these different factors that pilots know go into planning a flight. And the same analogy applies for financial planning.

John:  Well, Jesse, this has been a real treat and I promise I’ll be your wing man anytime. So thanks so much for joining me today on Rethink Your Money and for sharing your wisdom with us.

Jesse:  I appreciate you having me on, John. You guys take care.

John:  If you’re a pilot and what you’ve heard is of interest to you, you’re thinking to yourself, it sure would be nice to have someone helping me with my money who also understands my situation as a pilot. This is why we’ve designed here at Creative Planning, an entire aviation division that serves current and former airline pilots. We appreciate your commitment to keeping us and our families safe as we travel about the country and the world, and we have that same commitment to helping you retire well and with confidence. Go to creativeplanning.com to request a complimentary visit if you’re not an airline pilot but you would like to speak with a local fiduciary advisor who isn’t looking to sell you something, you can also go to creativeplanning.com for a no obligation second opinion.

Announcer:  You just heard John and Jesse talk about the intricacies of retiring. Whatever field you’re in your situation is different from the next persons. Don’t take chances with your retirement. At Creative Planning, our wealth managers work with in-house CPAs and attorneys to ensure your money is working as hard as it can for you every day. To schedule a visit, go to creativeplanning.com/radio. Your retirement should be designed with your unique situation and goals in mind. To get started on a plan or to get a second opinion on your current plan, go to creativeplanning.com/radio to set up a visit. With offices nationwide you can meet with an advisor right away. That’s creativeplanning.com/radio. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.

John:  As the volatility in the housing market and mortgage rates continues to bubble, it had me thinking about this inevitable link between the American Dream and home ownership. There’s obviously a huge sense of security in owning your home, and there are also many tax benefits related to owning your home, which I’ll get to in just a moment because there are seven credits and deductions that I regularly see missed by homeowners. Did you know that there are about 143 million homes currently in America? And if you’ve been hearing the murmurs or reading about the shortage of home supply right now, that is a real issue. We need about four million more homes to satisfy current demand as it sits right now, but probably the biggest challenge has been ever since 2008, home builders are reluctant to get out over their skis and overbuild and they’re very goosey right now with interest rates having jumped all the way up to 7.1% on a 30 year fixed recently.

And so I really feel for first time home buyers because prices shot up the last couple of years and while they’ve leveled and in some markets pulled back slightly, it’s not nearly enough to offset the increased mortgage payment that at not that long ago was sitting at around 3%. The impact of that on a $500,000 loan, your payment used to be $2,100 a month and you’d pay over 30 years about $260,000 of interest. So the total cost of the home would be about 760 grand with interest on that $500,000 loan. Today, as we sit right now, that same $500,000 home at 7%, that monthly payment’s $3,300 a month instead of 2,100. This increase happened in less than a year. You pay nearly $700,000 of interest alone on that house on a 30 year fixed. And so the house would cost in total $1.2 million instead of 760 grand, which would’ve been the 30 year cost just six to 12 months ago.

That average first time home buyer is 34 years old. The average home buyer in general in America is 45 years old. And here’s a crazy stat for you. 15 million homes in America are vacant, of those, a third are unlivable, completely abandoned and in need of major repairs. A third of the homes are for seasonal reasons, so simply put, Americans own more than one home and they don’t want to rent it. So those first two examples are the complete opposite ends of the spectrum in terms of difficult circumstances and people with an abundance. And the final third, those five million homes are simply between owners. So they’re awaiting renters or preparing to sell. As it seems, sellers are anchored to the price someone down their street got for a similar home eight months ago, and buyers are watching rates increase and a housing slow down and saying, I want this house for less money.

And as a result we have an increasing bid ask spread when it comes to residential housing. And it’ll be interesting to see how this plays out and where equilibrium is found in the coming months, but I want to shift my focus regarding home ownership around the seven deductions and credits that I see missed out on, unfortunately on a fairly regular basis. We had an article for our clients written on this, and I’ll post that to the radio page of our website at creativeplanning.com/radio if you would like to reference these. But here is a summary of those seven deductions and credits. Number one is probably the least missed and most well known, which is the mortgage interest deduction.

The mortgage interest deduction allows you to deduct the interest you pay up to $750,000 in mortgage debt as an individual or married couple, or up to 375,000 for married couples filing separately. If you purchased your home before December 15th, 2017, the deduction is limited to $1 million for single filers and married couples and $500,000 for married couples filing separately. Number two, mortgage points deduction. If you paid upfront for points off your mortgage rate when you closed on your loan, you can include this amount with your interest tax deduction. Number three, your salt deduction, state and local taxes. You can deduct up to $10,000 or 5,000 if you’re married, filing separately, of state and local property taxes in the year that you pay them. You can also deduct any state and local income taxes or sales tax paid in that current year.

However, I want you to be aware that you can deduct either state and local income taxes or sales tax, not both. And that $10,000 limit applies either to property taxes plus state and local income taxes or property taxes plus state sales tax. I know I went a little bit in depth there. Again, you can review this by going to the radio page of our website. The fourth often missed deduction or credit around home ownership is the home office deduction. If you use a space in your home exclusively for business, and that’s the key, exclusively, you may be eligible for a home office deduction and there are two methods for calculating that deduction, actual expense or simplified. And if you’re not sure which you should use, contact your CPA or you can go to creativeplanning.com and we will help you sort through that.

It’s important to note though that if you work remotely for a company as a W2 employee, you’re not eligible for a home office deduction. This became a common question during the pandemic when everyone was working from home and wanting to write off a home office deduction. You cannot do that if you are a W2 employee. Number five residential energy credit. This credit allows you to deduct up to 30% of the cost of new energy savings systems that use solar, wind, geothermal, biomass or fuel cell power to heat water, generate electricity or heat your home. Number six, electric vehicle charging station credit. If you own an electric vehicle, you may be eligible for a tax credit of up to 30% of the cost of your charging equipment up to a maximum of $1,000. And the seventh and final deduction or credit around home ownership that I often see missed is the deduction for medically necessary home improvements. So if you are someone who experiences a medical condition that requires you to modify your home or install special equipment, you may qualify for this deduction.

Examples of qualifying modifications include but are not exclusive to adding ramps, installing handrails, lowering cabinets, installing an elevator, widening doorways, and that deduction is limited to seven and a half percent of your adjusted gross income and is reduced by any increase in the value of property due to the home improvement. So if you pay 60 grand to install an elevator and the estimated impact of you being a baller with an elevator in your home is a $50,000 increase to the home’s value, you’re only deducting $10,000. And if you’re interested in learning more ways to save on your taxes, that is what we do each and every day for our clients here at Creative Planning. Our 300 plus certified financial planners are working in coordination with our 85 CPAs to help our clients navigate a wide range of these financial and tax planning challenges. If you’d like a no cost, no obligation, second opinion with a local advisor, simply go to creativeplanning.com right now to get your questions answered.

As promised, I’d like to transition us over to five client examples that have recently come up so that you can make better money moves. The first was a client out in Chicago, they’re pretty wealthy and had a child going to college. They didn’t fill out the FAFSA form because they just assumed they wouldn’t qualify for any student aid. So what’s the point? Well, I want to encourage you, even if you are rich, filthy rich, do it because you’ll often get merit based offers. Well, maybe you’re not filthy rich, but you make too much to receive any needs-based support when it comes to paying for college. Again, still fill out the FAFSA form. And remember to always negotiate between schools. For instance, if your child wants to go to one school in particular, but they’re not offering as much merit-based compensation, it is completely acceptable and normal to say, this is the amount this other school is offering us for grades or their extracurricular and we’d love if you could do a little better because our kid really wants to go to your school.

You may be very surprised at how much you receive off the cost of that tuition. Remember, the sticker price for college right now is what almost no one in fact actually ends up paying. Second mistake that we saw from a client out in Boise is that they were locked up in CDs for another three years, didn’t really want to stay in them because obviously they’re getting crushed by inflation at extraordinarily low interest rates, but they didn’t want to pay the penalty. Remember, the penalty on CDs is based upon the remaining interest that has yet to be paid. So if you are in a one or a 2%, or even a 3% CD, in this case, these clients were under two, the remaining interest/ penalty was extremely low and the opportunity cost with inflation at 40 year highs of staying in that CD for another three years was significantly more detrimental in their situation than just getting out of the CDs and paying a small penalty to redeploy the assets in something that would hopefully have a better shot at keeping up with 8% inflation.

Another example was a client in Nashville that went to cash in 2020, got back into late, then just went back to cash again about a month ago and came into our office wondering what they should do now. I’ve spoken at length about this. Market timing is darn near impossible. And remember, the risk of being out of the market is greater often than the risk of being in the market. I spoke last week about the upcoming Tax Cuts and Jobs Act expiring at the end of 2025 as well as the expected forward returns coming out of a drop in the market of 20% or more, so coming out of a bear market. And historically, the expected three year returns are over 50%. Remember, no one is shooting flares up in the air signaling that the coast is clear and the market is bottomed. Before sentiment improves, the market will already be recovering.

Your strategy, no matter who you work with, cannot consist of trying to figure out tops and bottoms and attempting to get in and out of the market. If you’d like to listen to that show or any previous episodes in their entirety, they’re available wherever you listen to podcasts by searching Rethink Your Money or by visiting the radio page of our website at createplanning.com/radio. Another example was a client out in Tampa who had all insurance. Their whole portfolio was sitting in fixed indexed annuities and they were claiming that they pay no fees. Like, man, I really like to have your offering and 45 attorneys and 85 CPAs and all this fantastic in depth planning and wealth management. But gosh, right now I just don’t pay anything for this. Remember, if you’re not paying anything, you are the product. Facebook costs us nothing to have an account. There’s a reason Facebook’s one of the largest companies in the world, even with its enormous recent drop in value. How can that be if no one has to pay to sign up for accounts?

So just remember who’s paying for that insurance agent’s really big house and nice vacations and fancy cars. Ultimately it is you. And my fifth mistake, it’s around social security scamming. CNBC did a great piece on this and I’ll pull a few of the highlights. Fortunately, our client in New Orleans didn’t fall for this but brought it to our attention and it seems to be quite common right now. Here’s the key. If you get a call, text, or email from someone claiming to be from the Social Security Administration, it’s likely a scam. So let me share with you what you can watch out for and how you can help stop these perpetrators of these schemes.

I’ve got four steps for you. Number one, hang up and do not respond if you receive a suspicious text, call or email. Number two, don’t disclose any personal information such as your social security number and, of course, your bank account information. Number three, never make payments with gift cards, wire transfers, cryptocurrencies, or ever by mailing cash for any reason. In fact, the CNBC story talked about someone who called the government agency and they were able to intercept a bag that they had shipped with $20,000 of cash to these fraudsters. And thankfully they realized it in time and were able to get it. But don’t go Jim Carey in Dumb and Dumber and have a giant bag filled with cash or IOUs for that matter. Number four, you can report these scams to the oig.ssa.gov. So the next time someone calls and says there’s a problem with your social security number or account, hang up, it’s not legit. I hope that those examples provide you more perspective.

Announcer:  Social Security is a part of nearly everyone’s retirement income. Creative Planning’s team of advisors can help you determine how to get the most from your social security benefits. To set up a visit today, go to creativeplanning.com. That’s creativeplanning.com. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.

John:  Here at Creative Planning, we provide three paths to help you achieve that richer way to wealth. It’s not just an empty slogan for us. And that first path is through a richer knowledge. One of our passions is to provide clear education that’s timely and relevant so that you can understand truly the why behind the guidance that we provide, and then be able to use that knowledge to better your situation. And we do that a variety of ways, one of which is through webinars where you can learn from the comfort of your own home. And I’d like to invite you for our upcoming webinar where you can learn how to identify the most important aspects of reducing your taxes in retirement. It will be held this Tuesday, October 25th. We have one in the afternoon and one in the evening. And this will be covering how to lessen the sting of taxes in retirement.

You can sign up right now by going to creativeplanning.com/radio. Well, as promised a couple of weeks ago on the program, I have an update on the Social Security Cost of Living Adjustment. We knew it would be the highest in decades and wow it did not disappoint. The Social Security Administration announced that there will be an 8.7% cost of living adjustment starting in 2023. Another cost of living adjustment massively increased by record levels of inflation is the lifetime exemption for estate planning purposes. It’s up from just over 12 million this year to nearly 13 million. In 2023, it’ll be 12,920,000 to be exact. And remember, even if you’re presently under the limit, you’re saying, John, that’s for people with high net worth. No, not necessarily. There are strategies to be utilizing today, even if you’re underneath those limits, be proactive in maximizing the opportunities that exist right now.

If you’re unsure where to start, for many of these things, you have until December 31st to take action. Go to creativeplanning.com right now to request a visit with a local fiduciary. Let’s transition over to the weather. I plan on spending the remainder of the show discussing climate change. No, I’m just joking. I’m messing with you. We won’t be talking about that topic on this program, but I do actually want to discuss the weather as it relates to our money. When we lived in Hawaii, the saying was, If you don’t like the weather, wait 10 minutes or drive 10 miles, because it’ll change. Have you ever seen a 60 day weather forecast? Why not? Well, the reason is that a meteorologist can predict the weather over the next couple of days and forecast that with pretty high level of accuracy. Oftentimes, they’ll go out to a seven day forecast, maybe even two weeks, but that’s about the furthest they can go. And even in that second week, it’s getting pretty dicey on the accuracy. There’s just far too many variables.

This show airs and markets all over the country and while places like Arizona are pretty predictable, good luck forecasting Minneapolis or Tampa. So we can all agree that the weather two months from now on a specific day is unknowable, but we’re not comfortable in many cases accepting that things are in fact unknowable. And when it comes to our money, this leads us to what behavioral scientists refer to as false patterning, where essentially we want so badly to discover an explanation that will lower our anxiety around the uncertainty that we find patterns that don’t even exist. Something like the past six times it rained in Boise, it also rained in Auckland. So I guess it’s a reliable way to determine the future weather in New Zealand by simply cross testing Boise’s weather with Auckland’s. And I’m sure I’ll get really accurate results.

No, no you won’t. Random correlation and causation are two very different things. And, of course, if someone actually believed that and was trying to forecast the weather that way, you’d probably assume they were dropped on their head as a child. And by the way, I actually was dropped on my head as a child and that’s a common joke, but I’m a little offended when it comes up because I was in a Kmart with my mom and fell out of a shopping cart directly onto my head. I turned blue, the paramedics came. By the way, I feel like it’s a little bit ironic that I turned blue because I’m pretty sure Kmart was the place that had the blue light special. But anyways, I’m way off the rails here. But point being, if you ever question my line of thinking or you’re wondering where I’m going with something, just cut me a little slack, I do have an excuse. I was dropped on my head as a child. It really happened to me.

But just like meteorologists, you have analysts, economists, traders, who are all really smart, they’re all educated. They also all have absolutely no idea how to forecast the stock market any more than a meteorologist can correctly and accurately provide a 60 day forecast. And if you don’t believe me, just look at the Fed, how many PhDs do you think that they have over there? I’ll let you guess between 25, 50 or 400 PhDs. How many do you think are employed by the Federal Reserve? If you guessed 400, you are correct. Think about this. We were buying $80 billion of treasury securities and 40 billion in mortgage backed bonds every single month into late 2021. These are some of the most intellectually capable people in the world of finance. And their entire job is to get the monetary policy side of things correct. They couldn’t do it, 400 of them because it’s really unpredictable. It’s really hard.

But fortunately, that doesn’t mean that we just throw our hands up in the air and give up. Indeed, there is a path for you to have confidence in your financial future in the midst of a world of unknowns. And that is through focusing on long term trends and by you controlling what you can control. Back to our weather example, we don’t know exactly what New Orleans weather will be 58 days from now, but it’s fairly reasonable for us to assume it’ll be pretty hot in July, and Chicago, it’ll be pretty cold in January. Here are some long term trends that should inform your financial planning. Let me just rattle these off. 64% of the time the S&P 500 is within 10% of its all time highs, and 11% of the time it’s in the range of being down 20 to 30% from its highs. We are sitting right now in one of those 11% times.

One year swings of the broad markets range from up 50% to down 40. So if you invest your money in the stock market in a diversified fashion, and you’re wondering what can I expect 12 months from now? Well, it would be historically relevant for you to be anywhere in that 90% delta up 50 to all the way down 40, which is why it’s widely accepted that if you invest money you need one year from now entirely in stocks, you’re taking a huge gamble. And the reason for that is my next long term trend, which is that 70% of calendar years, the market’s higher on December 31st than it was on January 1st. So even if you took that gamble, you’d be okay about 70% of the time. But in my opinion, it’s far too risky to have a short time horizon on your stock investments.

But if you’ve got a longer time horizon, consider this. The market’s made 11.1% per year the past 50 years. And there is no 20 year period in the stock market’s history where you had an average yearly loss. In fact, only 3% of all rolling 10 year periods have had an average yearly loss, which is why most financial planners advise, and we do here at Creative Planning, that you should plan on holding your stocks for about seven years or longer to give yourself a high probability of coming out ahead in most scenarios. And my final long-term trend that should inform your financial decisions, taxes are the lowest they’ve been in decades and our national debt is at a higher ratio than ever in our nation’s history. The long-term trend is that taxes are going up. And so make sure that tax planning is a part of your wealth management strategy.

And so in addition to acknowledging some of these long-term trends, the second key to success in an unknowable world is to control what you can control. Taxes, estate planning, having a great long term focused financial plan, risk management, investment management. These are must have components to a well built financial plan. And of course, the biggest and most important decision that you’ll make with regard to your finances, and by the way you can control this, is who you hire to oversee your wealth management. As a reform broker myself, I can speak to the three things that in my opinion are non-negotiables when it comes to optimizing the team that you put in place. Number one, you should look for an independent firm that has no proprietary products of any kind, that isn’t dually registered as a broker and a fiduciary, but is a fiduciary 100% of the time.

Number two, a firm that can customize for your specific and unique needs rather than shoehorning you into a model portfolio that looks exactly like thousands of others as well as a team that’s comprehensive, that can help you with your taxes, your legal needs, your institutional needs, your trustee needs, as well as your investments. So again, that’s an independent firm that can customize and provide comprehensive guidance. And this leads me to our second path here at Creative Planning to helping you find a richer way to wealth. And that’s through a richer team. We have all the expertise, all the advice you need, all in-house. In fact, I’d be remiss if I didn’t acknowledge seven of my colleagues and wealth managers here at Creative Planning, Brenna Saunders, Ryan Schwartz, Molly Rothoff, Ken Steves, Jessica Cole Pepper, Tim Sutton, and Jay BB. As those seven wealth managers were named to the Barons top 100 independent advisors in America list for 2022. You’ve worked hard for your money. And here at Creative Planning, we believe your money works harder when it works together.

Contact us today by visiting creativeplanning.com if you’d like to hear a fresh perspective from one of our local advisors. Again, that’s creativeplanning.com. Speaking in perspective, our third path to finding a richer way to wealth is through a richer journey, because money isn’t all about money. And as I thought about this, I found myself pondering the profound distinction between inherent versus instrumental value. Examples for things that have inherent value would be relationships with friends, family, your spiritual life. You see those are valuable in and of themselves, but money’s an example of something that is instrumentally valuable, meaning a big number in your IRA has zero inherent value, but certainly has instrumental value because of what you can do with that money. And so with that idea and focus, I want to remind you, we see what we look at.

If our focus is on the size of our net worth, the bottom line balance of our bank account, we’re focusing on the wrong thing when it comes to our money, because money’s not inherently valuable. Let’s instead turn our gaze and our focus to the instrumental value that money can provide. I want to end with a great example of this. A client who has since passed away, she was estranged from her children. She decided to reach out proactively after many years and invite the entire family on an all expense paid vacation. And so while there had been basically no communication and not much of a relationship for many years, she had all of her children and her grandchildren come on this vacation and they were able to bury the hatchet as a family, even move past their differences and make incredible memories. And there was absolutely no better instrumental value for that money than using it to mend those family relationships. She clearly wasn’t focused on maximizing the rate of return, but instead maximizing her rate on life, which is what it’s all about.

It reminds me of a quote from Jim Elliott that I have in my home office on the wall, and it says, He is no fool who gives what he cannot gain, to gain that which he cannot lose. My colleagues and I here at Creative Planning are truly committed to helping you find a richer way to wealth. It’s not just a slogan, it means something to us. And when your financial plan is built in alignment with your values, it’s a huge blessing to not just you, but more importantly to those for whom you care deeply. And my prayer is that you and I learn from the example of others who have gone before us and courageously demonstrated what it looks like to live with a focus on the inherently valuable. Because remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoy the podcast, please subscribe, share and leave us a rating.

Disclaimer:  The preceding program is furnished by Creative Planning, an SEC registered Investment advisory firm that manages or advises on $225 billion in assets. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance objectives and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

 

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