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8 Must-Know Tips for Reducing Your Taxes

Published on September 6, 2022

John Hagensen

In this episode, John discusses the latest on student loan forgiveness, provides eight tips for reducing your taxes and details the unprecedented state of the housing market. Plus, John breaks down how to make the most of your 401(k).

Read more on inflation here

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!

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John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. On today’s show we’ll talk student loan forgiveness, gift taxes and as well as the ten steps to maximize your 401K. Now join me, John Hagensen, as I help you Rethink Your Money.

we need to talk about what happened Wednesday regarding student loan forgiveness. And this reminds me a little bit, as a father, when my kids get hurt, regardless of what the ailment is, their need for a Band-Aid and with seven kids and countless amounts of injuries in our home over the years, we run through Band-Aids at an unrivaled pace. As a parent, you know what I’m talking about. They have a headache and they need a Band-Aid.

I can’t tell you how many times I’m searching around our child’s area of injury, looking for blood. I mean, looking for any sign that there was a scrape, but they point to that area of skin. You put the bandaid on and all of a sudden, miraculously, they’re feeling a lot better. There have definitely been times where if you walked into my home and looked at a few of my kids, you would’ve thought they were in a fight with a hundred alley cats. Their bodies covered practically head to toe in Band-Aids, no blood under any of them. But at some point, we grow up and we realize that a Band-Aid over a bullet hole doesn’t do a whole lot. And from my point of view, this is what President Biden did on Wednesday when he announced new steps to address student loan debt, which, if you missed it, includes forgiving up to $20,000 for some borrowers and extending the payment freeze one final time until the end of the year.

Borrowers who hold loans with the Department of Education and make less than $125,000 a year are eligible for up to $20,000 in student loan forgiveness, as I just mentioned, if they obtained Pell Grants. Individuals who make less than that $125,000 a year, but did not receive Pell Grants, are eligible for $10,000 in loan forgiveness. Millions of borrowers will be able to receive relief automatically just based on existing income data. And the Department is proposing a federal rule aimed at making the student loan system more manageable for current and future borrowers. Now, let me be clear. The problem is real, and there are solutions to address this problem, but not putting a Band-Aid on your elbow when your head hurts. This approach to forgiving student loans is really unfair to the majority of Americans and in particular, Americans that never went to college, that chose not to go to college. But just because I disagree with the remedy, doesn’t mean I don’t recognize how much student loans are crippling middle class Americans.

We currently have $1.6 trillion of student loan debt, and that’s rising, for more than 45 million American borrowers. Some have proposed just lowering the interest rate to 1% or even potentially zero and extending out the payment terms longer, so the payments themselves are lower, but they’re not being hampered by a tremendous amount of interest. Personally, I think that’s one of many really good ideas to address this, rather than offering forgiveness. Not only do I think this is unfair for the majority of Americans, but the other aspect of this is that unemployment is near record lows, inflation’s at a 40 year high, and we’re forgiving student loan debt the week following a decision to spend almost $500 billion. All of these things, including forgiving student loan debt, is another action that has inflationary implications.

Our president and CEO, Peter Mallouk, in addition to being named by Barron’s the number one financial advisor in America three times and being a bestselling author and a fantastic leader and visionary for our firm here at Creative Planning, he’s also a great follow on Twitter. His handle is @PeterMallouk and he weighed in Wednesday on his thoughts around the forgiveness of student loans. And in his tweet thread, he lays out why there are better solutions to help those in need. Number one, forgiving a loan doesn’t make it disappear. This is really important. Instead, the liability is transferred to other Americans. This is not hypothetical. It’s really how it works. The money doesn’t disappear. And so because of that, you can’t say, “Well, why do you care? It doesn’t affect you.” Yes, it does. That’s how loan forgiveness works. Number two, about 63% of Americans don’t have a college degree.

Loan forgiveness means that the debt of college grads is going to be partially borne by those that chose not to go to college, some of whom did so because they wanted to avoid debt. Number three, some but not all college debt is predatory. Same with private loans and credit cards. But Peter points out that looking at all college debt the same is not going to result in a fair outcome. Also, by the way, why college debt and not payday loans when payday loans exclusively target the poor? Number four, you and I both know people that chose to go to community college, a lower cost school, or completed their college education faster, all so they could avoid debt. They made decisions assuming everyone would be treated the same. Number five, what about all the students that chose to work several jobs to get through school or parents that worked extra jobs to get their kids through with less debt?

This is also really unfair to those that prioritize paying down debt post-graduation. Number six and I think this is a very thoughtful question by Peter on his tweet thread, and again, you can follow him @PeterMallouk, if you’d like to read these in their entirety, are there more equitable ways to support those that need help? I mean, think about this. Targeting the same amount of money at healthcare, education and other benefits that directly go to those most in need, ensures an economic benefit that ends up in the right hands. Number seven, especially when this economic benefit is ending up in the hands of college grads, who upon completion, the data shows on average make 22,000 more per year than high school grads. And that gap dramatically widens over time, ultimately resulting in a lifetime earning gap of about $800,000. So this benefit is disproportionately affecting people who are likely to make 800 grand more than someone who didn’t take on these loans and didn’t go to college. And here’s where Peter lays out three better solutions than this forgiveness option. Number one, all student loan debt should be able to be released in bankruptcy.

Let the lenders, not the taxpayers, bear the risk. This seems pretty obvious we should be doing this. Second, consider taxing endowments, if they aren’t utilized sufficiently. We’ve got institutions with 40 and 50 billion endowments that are just growing in perpetuity while students are paying extraordinarily high tuition costs. And third, what about having a free college available in every state? I mean, think about this. This alone would solve much of the student loan crisis and tackle the cycle of poverty. It would help reduce crime and strengthen households, all which would also save taxpayers money on benefit programs, subsidies, prisons, et cetera. The truth of the matter is there are plenty of inequities in the U.S., and I think it’s great to see them being discussed and we’re making some progress and good things are happening and we should work together to explore new solutions that have a more direct impact on those that are actually in need and at the same time, be a net benefit to taxpayers.

And I understand with this show airing in markets all across the nation, you may disagree with Peter and my point of view on the forgiveness of student loans. That’s okay. But if that’s the case, here’s our tie-in, regarding our personal finances. The government continues to spend money. I talked about this last week. They’re going to continue to spend money. And because of that, it should inform the way that you think about your financial strategies and in particular, about future taxes. Because not only do we spend money, we spend way more money than we bring in, by a lot. Let’s play a little trivia. All right, so since 1961, which single president spent less money in a year than received? Put another way, we’ve had only one president run at a surplus the past 60 years, who is that man?

If you guessed Mr. William Clinton, you are correct. He had a four year period from 1998, ’99, 2000 and 2001, where we had a combined surplus of $558 billion. Interesting tidbit, Republicans controlled the House and Senate with obviously a Democrat president during that four year run of a balanced budget. In case you’re wondering, fiscal year 2021, we ran at a $2.8 trillion deficit. 2020, even worse, much of which due to the pandemic where the deficit was $3.1 trillion. If you lean right and you’re thinking, ah, dang Democrat, President Trump at 2018 and ’19, before the pandemic, the deficit was nearly $1 trillion in each of those years too. So the reality is, big spending is bipartisan and has been for six decades. And here’s what all of this means for you. Taxes are going up. When the Tax Cuts and Jobs Act was passed and it took already low Bush tax cut rates and slashed them even lower and then increased income expansion within brackets, it made the environment that you are sitting in right now, completely unprecedented.

And it’s highly likely you will never see these rates ever again the rest of your life. In light of that, here are eight quick hitter tax tips because I don’t want you losing the opportunity that sunsets at the end of 2025. Number one, make 401k contributions. If you’re making over 340,000 married filing jointly, or over 170,000 single, you may want to defer because you’re in the 32% bracket or higher. If you’re under those income thresholds, consider the Roth side of your 401k because you are in a 24% bracket or lower. Number two, max out HSA contributions. Oh, and a quick tip, you do not need to spend those. In fact, when I’m advising clients, in many cases, let’s take the HSA deduction, let’s let it grow deferred, we’ll eventually spend it tax free so we get triple tax advantage treatment, but when will likely our highest obligations be around medical costs? Later in life.

Get that tax deferred in eventual tax free growth, if it’s used for qualified expenses, to better protect yourself against healthcare costs later in life. Number three, convert money from a traditional IRA to a Roth IRA. I’ve gone over this before, but if you have room and low brackets, take advantage of those today. If you’ve got questions, go to your CPA. Don’t do it alone, as it’s irreversible, once executed. Number four, contribute to a 529 plan. You do not receive a federal deduction, but you do receive a state deduction. So 529s are more valuable in places like California than certainly Texas or Florida or another state that has either no state tax or very low state tax, like in North Dakota, for example. The fifth quick hitter tax tip, stop buying traditional, retail, antiquated, mutual funds.

Turnover is often high. You’re sharing in your neighbor’s taxes. Get more efficient inside of your portfolio. Number six, harvest capital losses. A 60/40 stock bond portfolio has gotten whacked. Commodities have fallen off. Crypto tanked. If you have positions inside of your portfolio with losses, harvest those by a similar investment that’s not exactly the same to avoid wash sale rules, assuming that you want to stay invested in that strategy. Book the $3,000 of losses and even if you have to carry forward the rest of those losses, they can make a big difference in future years where you have gains that are now offset by those losses. Number seven, sort of the opposite of what I just said, pick up capital gains. If you’re in a low tax bracket, long term capital gains rates are zero, if they fall within the 15% bracket or lower. You don’t want those wasted. And my eighth and final tax tip, donate highly appreciated securities to a charity.

If you want to gift money, cash is often not the most tax efficient holding to gift. And here’s my ninth extra bonus tax tip, it’s the most important by far, meet with your CPA for tax planning. This time of year, unrelated to filing your taxes, meet with your CPA, look at projections, build a mock return, if that’s what’s needed, do some planning as we’re moving into this back third of the year and coordinate all of that with your financial planner. Financial planning means tax planning because financial planning is not investment management. That’s one part of financial planning.

Announcer: At Creative Planning.com you’ll learn how your investments, taxes and estate plan can work harder together. Go to Creative Planning.com. Creative Planning, a richer way to wealth.

Now, back to Rethink Your Money, Presented by Creative Planning with your host, John Hagensen 

John: we have big news here at Creative Planning, and it’s really exciting. Wipfli Financial Advisors, which is the wealth management and investment advisory affiliate of top 20 CPA and advisory firm, Wipfli, LLP, has agreed to join us here at Creative Planning. Wipfli Financial Advisors manages $5 billion. And the really fantastic part is they’re bringing 95 new employees onto the team here at Creative Planning, including the firm’s CEO, Jeff Pierce. And what I personally am thrilled about is that Wipfli, LLP, as I mentioned, is a top 20 CPA firm. And in 1999, they started this financial advisor arm of their business with a mission to make objective fiduciary focused financial advice available to the everyday investor.

And so it’s exciting to have these synergies on mission and philosophy, as well as the addition to this great talent. So if you’re listening and you are on the Wipfli team, welcome to the Creative Planning family. But while it’s exciting times, I think it’s worth addressing a question that I’ve answered for some of our clients and prospective clients regarding the size that we are here at Creative Planning, $225 billion under management or advisement. And as a result, sometimes people think, “John, am I just going to be a number?” I mean, because originally when I was a financial advisor and it was me and a part-time assistant, I mean, I didn’t have any CPAs on my team or tax attorneys or 401k specialists or a trust company that could administer estates if something were to happen to my clients.

I mean, I had none of that. I mean, it was just me sitting in an executive suite’s office wanting to help people as a financial advisor and I’m sure many of my clients would’ve benefited and really liked if I had those resources. And now we have those resources, but the desire is still that people want that personal relationship. And so if you’ve thought to yourself, listening to the show, are they just too big? The answer is absolutely not. I mean, while you get all the expertise, all the advice you need, all in house from us here at Creative Planning, you have a specific wealth manager and financial planner that know and understand and care about you. And so we know your wants and your dreams and your concerns. We understand you. We know your kids’ names. And I understand how important that is. So when you’re sitting down with your wealth manager, in your town, don’t you want them to have all the resources necessary to do an incredible job for you?

Well, of course you do. You also want them to care about you and know you. That’s a key ingredient of what’s probably contributed of us going from $0 under management back in 1983, with an idea, to one of the largest registered investment advisory firms in the country. And I can assure you, if you have questions about your situation, take us up on a complimentary second opinion. Go to CreativePlanning.com. One of our fiduciaries, who is not looking to sell you something but actually, as I just mentioned, wants to take the time to get to know you and understand how we can make a difference in your life, that’s the goal. So again, go to CreativePlanning.com, if you have questions that you’d like us to help answer. And this leads me to my rule for money today. Oftentimes, you don’t need to find the next best thing. You need to utilize the current best thing.

The other day, one of my friends was telling me about this new, all natural supplement. It’s a pre-workout/post-workout energy enhancer. So I’m explaining this to my wife and Brittany says, “Why don’t you just get more sleep? You might not be so tired and need this supplement and an entire pot of coffee every morning if you just went to bed a little earlier.” Oh, and by the way, here’s my defense. I tell my wife that with seven kids, if I go to bed right after the kids go to bed, I don’t get any me time. Feels like the day just ends and then I get back up and it’s work and it’s kids and all that stuff’s great and I love it, but staying up gives me a little bit of time for me. But there’s a lot of wisdom in my wife’s observation.

And I see this so often in two different financial scenarios where there are things right in front of us, but we’re overlooking them. And so the first, next best thing people are constantly looking for, better investment returns, the next best investment, the next Bitcoin, or Google or Amazon or Apple. I just need to find that great investment and get phenomenal returns. Meanwhile, they’re sitting on way too much cash. They aren’t saving in the most efficient places. They’re emotionally trading and they’re just not saving enough money. They’ve got a low savings rate relative to their income, because they’re spending too much money, living too high of a lifestyle. And meanwhile, they’re out saying, “Man, I just need to find the next best thing. I got to get better investment returns.” How about the second, next best thing. We need to find some tax loopholes. I want to find the next great exotic tax strategy.

How can I reduce my taxes? Where can I be crazy aggressive with deductions? You mean I can’t write off the entire house that I live in for a home office deduction? I mean, are you sure? I mean, I do kind of take my laptop into different bedrooms. I mean, could we maybe… No. So they’re out there buying oil and gas limited partnerships trying to get deductions and meanwhile, they’re not maxing out 401k opportunities. They’ve got inefficient mutual funds from a tax standpoint, not maximizing low brackets and in some cases, failing to gift money properly. But before we take a break, I want to walk through a topic that I’ve been receiving a lot of questions around from clients over the last couple of weeks. And that is regarding target-date funds. And if you’re not familiar, target-date funds are some of the most popular choices for retirement savers inside of these employer sponsored plans.

But in some cases, I see them potentially holding back your retirement. And to be clear, the genesis of target-date funds, they started to solve a huge problem, which is that a lot of money inside of long-term retirement based plans, even for a 25 year old employee, was sitting in cash or a stable value fund, even though it would be penalized if used over the next 30 or 40 years. And so the idea of a target-date fund was a good one. Select the date around that you plan to retire, for example, a target-date 2045 fund, for say a 40 year old, will start out with more stocks and less bonds and progressively become more conservative as that target-date or that retirement date approaches. And while they’re better than someone just sitting in cash, they have major drawbacks. Unfortunately, that decision isn’t mutually exclusive. I either need to sit in cash or I can have a target-date fund.

There are other alternatives and here are the five primary drawbacks to target-date funds. The first is pretty obvious. It’s a one size fits all. The only metric the fund company is using to determine how it manages that fund is the target-date. It doesn’t account for your own individual risk tolerance and oftentimes as a result, there’s far too much or too little equity exposure for your specific situation. And by the way, this is evidenced by the fact that it’s really hard to find two target-date funds, even that have the exact same retirement date that have the same allocation. Number two, you’re stuck with one mutual fund company. Every target-date fund is made up of individual funds representing each asset class. And if you plan to invest in those individual funds themselves on your own, you might buy an ETF from one fund company and an index fund from another company and piece your portfolio together.

I would advise you may look at those based upon expense ratios to try to build a low cost portfolio, which brings me to my third issue with target-date funds and that’s the fees. The average target-date fund expense ratio, in 2020, was 52 basis points or a little over one half of a percent. And while that’s obviously an improvement from five or 10 years ago where the average fund charged nearly three quarters of 1%, it’s a whole lot higher than you can find in other index funds and ETFs where you’re likely to settle well below a quarter of a percent. Number four, and this is a big one as a certified financial planner that bothers me is that there is no accounting for outside assets. So you pick a target-date fund in my example of 2045, because that’s when I’m going to retire.

But most people’s 401k doesn’t account for every bit of their savings. They have outside accounts and how those are invested should inform the way that you’re going to invest your 401k. So for example, if you’re very conservative with another part of the portfolio, you might want your target-date fund to tilt very equity heavy because in aggregate, you’re still at an appropriate risk level. And you might want to do that because you know you’re going to need to take withdrawals from a different account first, due to your tax strategy. And you’re going to be tapping your 401k account, even if you retire next year, not for about 15 or 20 years. Well, you wouldn’t want that account sitting almost entirely in bonds, especially in this high inflationary environment, just because that’s the target-date that you retired at. And the fifth and final issue that I have with target-date funds is the poor asset allocation in retirement.

Even if you want to argue that they do an adequate job during your working years, while you’re accumulating and saving, most of these funds have huge fundamental flaws that make them poor investment choices, once you’re in retirement and potentially looking for income. Some funds, in fact, stop changing the asset allocation once you reach the target-date. There are just far more factors to consider regarding your asset allocation than your age. And a target-date fund just simply can’t take that into account because inherently, that target-date fund knows nothing about your individual financial needs in retirement.

Announcer: At Creative Planning we provide custom tailored solutions to all your money management needs. Why not give your wealth a second look and learn how the team at Creative Planning covers all areas of your financial life. Visit Creative Planning.com

Now, back to Rethink Your Money presented by Creative Planning with your host, John Hagensen.

John:  Lets’s make sense of this wild housing market that you’ve been experiencing in the last couple of years. We sold a house in 2020 and we had four offers, two were cash, all four were over asking price. It was over an asking price that we initially thought, “Is this too high? I mean, can we even really list it at this? I mean, what if it’s crickets? ” We felt amazing about what we made on that house.

Of course, then we watched the Zillow Zestimate just climb and go through the roof, pun intended, I know bad dad joke, for the next two years. We also purchased a home that we felt, ooh, we really paid at the top of the market. And of course, that looks like a phenomenal value just a year and a half later. The reason I bring this up is because from my vantage point as a wealth manager, I’m able to hear what clients are asking each week as we meet. And by the way, I try to have that inform the content for the show, because my assumption is that there’s a good chance you’re wondering a lot of the same things that keep coming up in meetings with my clients and prospective clients.

And if you’re wondering, people are most confused on average around taxes. Generally, that’s the number one reason people hire me and hire us here at Creative Planning, because we’re also a tax practice with 85 CPAs. And oftentimes even if someone feels a bit more confident on the investment side, they realize there’s no integration. It’s either something they have no desire to figure out, or just feel like it’s too complicated. Taxes confuse people the most. For many months now, inflation has been where the most curiosity has been driven, sort of the most practical impact on our lives. That was being discussed a lot. I feel like we’ve become a bit fatigued.

Not that inflation isn’t still important, we’re sitting at 40 year highs, but a lot of that’s been discussed. And now it seems most of the conversations around the broad economy have been focused on real estate and, in particular, the state of the residential housing market. Even if you don’t have the data, housing is such an integral part of our lives that you probably sense that things are cooling off. I’ve had a couple of friends in the last week in fact tell me that they were going to delay or at least be extremely patient with their home purchase because they’re expecting a big correction with real estate.

Now, while they might be right, I want to be clear, timing the housing market is very difficult as I just outlined above with our situation, where you think you’re selling to the top and buying at the top, all of a sudden, a year or two later, you’re looking around going, “Wait, I was way wrong on that. Glad I didn’t act upon my hunch.” Let’s take a look at this, average time on the market is expanding dramatically with the historic levels we saw early in 2022. What’s contributing in part to this is that many sellers are seeking prices that they saw comps down the street selling for in February. But buyers are feeling like they might not need to pay that price anymore. They’ve got more options. There’s more inventory.

Things are sitting longer. The biggest factor by far for this is that mortgage rates are at the highest they’ve been since December of 2008. They’re between five and 6% on a 30 year fixed rate mortgage. The average mortgage payment is around $1,613 a month, which is 60%, not 16, 60% higher than just over one year ago. And if you’re wondering how can that be, home prices have gone through the roof, while simultaneously interest rates have gone up. 73% of mortgages are locked in at sub 4%. The reality is that person doesn’t want to move unless they really need to. They don’t want to give up their 3% mortgage. Here’s some more data.

29% of real estate sales, according to the National Association of Realtors, are first time home buyers, which does seem really high. Average first time home buyer, 33 years old, which is at an all-time high, $87,000 is their median income, and the purchase price for first time home buyers, $250,000. Depending upon where you live, that may seem really low, or maybe it sounds high. But to me, $250,000 seems like a pretty reasonable, affordable price. That surprised me. Also, according to the National Association of Realtors, previously owned home sales are down over 15% from a year ago and new home sales fell by 12.6% in the month of July.

But here’s what’s contributing to that $1,600 a month average payment right now, the average existing home sales price is at a record $440,300, which is up nearly 11% year over year. I’ll end with this astounding stat that I had to read twice to make sure it was correct. We are currently in the midst of 125 consecutive months of year over year increases. Of course, that will likely end early in 2023 if things continue on their current trajectory. But here’s the key with real estate when it comes to our personal finances, buy something you can afford and expect to live there for seven years to historically come out okay. The counter to that is, if you know you’re likely to move in three years, you should probably rent.

I mean, you can buy. But if you purchase, you’re basically gambling and hoping the sequence of returns doesn’t blow up in your face. You’re really just hoping that you don’t buy in a 2005, 2006, 2007 type scenario. One of the ways I like to envision and think about investments, or in this case assets, I don’t personally think that your primary home is an investment. You need shelter. You need somewhere to live. I mean, you hope you make a little money on it, but purchasing a place to build your life and raise a family should not be driven primarily using the same matrix as how you’re going to invest in your 401(k).

But think of your investments in your assets like a crop that you’re farming. As a farmer, you plant your crop and then they have a growing season. If you’re mid growing season and you’re looking out at your field and judging the fruit or the corn or whatever it is that you’re growing and it’s prior to the time that it needs to be harvested, it’s kind of unfair or irrelevant to be evaluating it because it’s not time. It’s not ready. Real estate’s similar to the broad stock market. Growing season is seven years or so minimum. If you need to harvest it in three years, you might not like how it tastes. You likely won’t maximize your sale and should have probably planted something with a shorter growing season.

Keep that in mind. The last 125 months have really distorted a lot of our perspective around real estate and what we can expect. It’s a long-term hold that generally has some volatility along the way. Want to transition over to my technical topic where my goal is to help you gain in your understanding and knowledge of personal finance one show at a time. Today, I want to talk a little bit about the gift tax. I know you’re thinking, “Boring! Pick something different, John.” I promise I’ll try to keep this interesting. I can assure you, it’s something you want to understand and handle correctly. Let me start when talking about the gift tax by separating it from estate tax.

When you pass away, estate taxes, and I didn’t say state, by the way, I said estate taxes are applied at 40%. Right now that’s if your estate is above $12 million. That’s been as low as 600,000 within the last 20 years. By the way, many states have their own income thresholds as well. But while estate taxes are paid after death, gift taxes are paid during your lifetime. But it’s important to note that with the exemption so high currently, the vast majority of Americans could gift a lot of money while alive and die with a lot of money and still not need to pay gift or estate taxes. The first thing is that as it sits today, you’re able to give away $12 million during your lifetime or through your estate.

But in addition, you’re also able to give up to $16,000 annually, and that 16,000 can be to any one person. You’re actually able to join that with your spouse as well and give 32,000 of tax-free gifts annually to any one person. I mean, it could be a completely random person. Probably wouldn’t, right? I mean, if you like giving money to random people, I’ll send you my Venmo QR code. But oftentimes it’s family members. If that family member happens to be a child and that child happens to be married, you can then gift $64,000 between 16,000 from you to your kid, 16,000 from your spouse to your kid, 16,000 from you to your child’s spouse, and 16,000 from your spouse to your child’s spouse.

And in doing that, as long as you don’t go above the 16,000, you won’t need to file a gift tax return, as well as it not counting against the $12 million exemption. For example, the moment you gift someone let’s say $20,000 instead of 16,000, now you do need to file a gift tax return, which by the way is Form 709 for the three of you listening that care about that level of detail. And that amount is now going to reduce that exemption upon your passing. It’s important to note that the IRS deems any transfer of property or something of equal value that’s not returned a gift. This isn’t just cash. It’s not that easy. This could be shares of a closely held business.

This could be adding someone to a real estate deed or a bank account or providing interest free loans. Those may all be considered gifts by the IRS. I just spent a lot of time talking about the real estate market. A lot of parents, especially as prices have run away from first time home buyers the last couple of years, are trying to help out kids by giving them a cash gift that they call a loan, but they’re not charging them interest. The interest portion of that loan is going to be considered a gift. Or if they end up forgiving the loan, that’s all considered a gift. Depending upon the size, a gift tax return is going to need to be considered. Maybe you’re listening and saying, “Dang, that kind of stinks. I want to charge my kid interest.”

Well, I’ve got some good news. Here are items that the IRS will not tax, even though they’re considered gifts, and that is a gift to a spouse. You can give unlimited amounts of gifts to your spouse that’ll never be taxed and you’ll never have to file a gift tax return. Obviously that $16,000 annual exclusion that I just mentioned, even though it’s a gift, it’s not considered a taxable gift in the IRS’s eyes. Any support to a dependent or gifts made to any kind of charitable organization, you won’t need a gift tax return, as well as some unique rules with tuition.

If you pay directly to the institution on behalf of someone else, or any kind of medical payment made directly to the medical provider on behalf of someone else, those are also not subject to gift tax and you will not need to file a gift tax return. I recently spoke with Zach Cox. He is a tax director here at Creative Planning and asked him if he had any tips for efficient gifting. He brought up a really good point, but I’ll let you hear it. In his words from our interview.

Zach Cox: A big one is gifting assets that you know are going to appreciate in value, so that could be closely held business, could be stocks, anything like that. The reason being is the gift goes in at fair market value and the beneficiary receives your basis in that. If you know it’s going to appreciate, give it to the beneficiary now. It won’t appreciate in your estate, so it won’t inflate your estate, which may subject to taxability later. And then the beneficiary can not only enjoy it earlier, but they can have that appreciation in their estate, which more than likely is less than yours.

John: Zach is right on with that. Really all of this to say, it can be complicated. It’s why even if you’re not working with us here at Creative Planning, I just encourage you have a team around you that includes a CPA and ideally even a tax attorney or two to help with these sorts of discussions. If you have any questions around gifting or tax strategies in general, you can visit us at creativeplanning.com for a second opinion from a fiduciary who thankfully isn’t looking to sell you something. We have been helping people just like you with these sorts of circumstances since 1983. Again, go to creativeplanning.com if you’d like to speak with one of our experienced wealth managers.

Before I head to the break, I want to share with you one of the biggest mistakes that I see investors making so that you can hopefully avoid this for yourself. The mistake is using these two words: always and never. I mean, oil prices went negative. We’ve had AMC, GameStop, Bed Bath and Beyond shooting up in price like a rocket ship off of a Reddit message board. We’ve had an entire country shut down and quarantined due to a global pandemic. Crazy stuff happens that haven’t actually happened before. The challenge with these things is having the wisdom to differentiate between staying disciplined while not burying your head in the sand. I recently had a client who was 50% stocks, 50% bonds.

They were just dead set on this 50/50 allocation because it’s how they’ve always done it, and they’ll never have more than 50% of their portfolio in stocks. While I respect that rules based approach, a 50/50 portfolio might be really appropriate for someone with certain short-term goals and income needs and when interest rates are at certain levels. But at one point, we had high inflation and historically low interest rates with 50% of the portfolio losing a lot of money to inflation. Now, I wasn’t advocating this person went to 90/10 and maybe 50/50 was okay, but that discussion can’t even take place when we’re using words like always and never.

It’s also not a great communication strategy when in a disagreement. Shouldn’t be using always and never. I want to encourage you, yes, you want to stay true to your guiding principles of investing. Take a long-term outlook. Don’t time the market. Stay well diversified. But within that framework, looking for opportunities to adapt and improve that plan that you have in place as new information arises.

Announcer: At Creative Planning.com we provide custom tailored solution for all your money management needs. If you have any questions about what you have been hearing visit CreativePlanning.com and connect with a local adviser. Why not give your wealth a second look?

Now, back to Rethink Your Money, Presented by Creative Planning with your host, John Hagensen

John: The other night, my wife and I were chatting in the family room, enjoying our nice glass of San Pellegrino, little lime squeezed in there. Quite delicious. I know mineral water is an acquired taste. It takes some time getting used to, but I highly recommend it. Down in the basement, we are listening to our 11, eight, and six year old trying to sell each other these different items from their rooms. It was like they were running a trade depot down there. They each had their quasi piggy banks, which are actually these three sided storage containers where they put their money between a spending, giving, and saving category.

And while it was really cute, I had to have a conversation privately with our 11 year old. Because when I went in our six year old Jude’s room, he had no money left. None. He was completely wiped out. You know what he had to show for it? It was basically a pack of gum and a couple baseball cards. I was waiting for him to tell me that Lloyd Christmas from Dumb and Dumber sold him a dead bird with a head taped on. I mean, he was taken to the cleaners. Meanwhile, Cruz, our 11 year old, can’t even get the top on his piggy bank because he’s transferred all of Jude’s money over to him, but it turned into a good lesson for both of them.

I told Cruz, “Don’t do that. Give your brother fair value,” and I told Jude, “Be careful to not buy a bunch of stuff you don’t need that isn’t worth anything.” But I really love and welcome the opportunity to share with my kids money principles. Of course, I’m a certified financial planner. I host this radio show. I mean, it’s a big part of my life, so it makes sense that it’s top of mind and something that I prioritize with them. But it’s not because I think money’s going to make my kids happy, or that it’s the most important thing, but it is an important thing, because it’s a tool in the world that we live in that’s needed to accomplish things that we care about.

I’m of the belief that learning basic money principles as a child is a heck of a lot more important than trigonometry that you’ll likely never use again, or how to dissect a frog. Not that those things aren’t at all important, but I think practically understanding how to handle money is going to either positively or negatively impact your life a whole lot more than those things. But while my parents did a lot of things really well in raising me, we didn’t talk a lot about money. It was a pretty private subject in my house. That may have been how your house was as well. I think some of that was generational.

If you learned how to handle money late in life, I want to encourage you, don’t miss the opportunity to teach your children early. One of the most important topics around money that you can share with them centers around their 401(k). I have loved over the years working with my clients’ children who are getting their first job and helping them understand their employee benefit package and how to enroll in the 401(k) and how it works. If you have any questions about that, go to creativeplanning.com, contact us, because myself and our other wealth managers are more than happy to offer advice for your adult children, even if they’re just getting started.

We posted an article here at Creative Planning for our clients titled The 10 steps to make the most of your 401(k). I’m also going to load this on the radio page of our website. You can go to creativeplanning.com/radio to find this document if you’d like to go through it after the fact, or if you’d just like to share it with one of your children. Again, you can go to createplanning.com/radio to read these 10 steps for yourself. But in the meantime, I’d like to go through them with you. Number one, sign up for your 401(k) today. Don’t put it off. Get started now. Number two, some companies offer a match. Always contribute up to the full match when possible. It’s an instant 100% rate of return.

Even if your company matches less than 100%, let’s say it’s 25% up to a ceiling, always contribute enough to receive the full match. It’s really hard to beat from a return perspective. The third step to making the most out of your 401(k), beyond the match, save as much as you can. This assumes you don’t have high interest rate debt like credit cards, in which case, you should pay that off first. The fourth step to make the most out of your 401(k), spend 20 minutes with a financial planner or CPA to determine if you’re better off using a Roth 401(k) instead of a traditional 401(k). Number five, focus on your asset allocation and start with a bias towards stocks.

Too many 401(k) investors hold far too much of their account in bonds, and bonds should be kept to a minimum. To get to millionaire status, you’ll almost certainly need to be a stock owner, not a bond lender. Number six, don’t time the market. Invest every pay period no matter what’s happening in the markets. Ignore the noise. Don’t look at your account. Automatically contribute every single pay period. Number seven, if you can, accelerate your contribution as early in the year as possible. This gives your money more time to grow. But first, always make sure that you won’t lose any of your match by doing this, which I’ve seen happen before. Number eight, costs matter.

Get familiar with the costs of each investment option and have a strong bias toward controlling your fees. Number nine, index or use a model that has a core index. Most 401(k) plans offer index funds as options or have models that use some index funds. Odds are high these will outperform over the long run. The 10th and final step to make the most of your 401(k), wait until you reach full retirement age to withdraw funds. Let tax free or tax deferred compounding work for you as long as possible. Again, if you’d like to read those for yourself, I’ll post these on the radio section of our website at creativeplanning.com/radio.

As we head down the home stretch, I want to recap what I spent considerable time last week discussing, which is the Inflation Reduction Act, which was signed into law by President Biden on August 16th, 2022. Katie Stevens, a CPA here at Creative Planning, wrote a summary of the act. Again, I’ll post this along with the 401(k) piece on the radio page of our website at creativeplanning.com/radio. There are all sorts of details that Katie wrote about. This went out to all of our Creative Planning clients last week so that they had the information that they needed. I want you to have that as well. Here are the highlights.

The act includes several energy provisions and those have the most practical, personal finance planning implications. The two largest are: if you put solar on your house, you’ll receive a credit, and if you buy a new or used electric vehicle, you will receive a tax credit. Again, all the details can be found on the radio page of our website at creditplanning.com/radio. I want to end with an encouragement for you, and that is to take action. We all understand intellectually that knowing things in and of itself doesn’t improve our situation. It’s only in the doing that propels us forward.

I’ve been guilty of this at times in my life where I forget that when we choose to not make a decision, we are, in fact, making a decision. Choosing to back burner something doesn’t mean that it won’t potentially have a large negative impact. If you miss the beginning of the show, I spent time unpacking the continued deficit that has brought us as a nation to $30 trillion of national debt with an increased pace of that spending. And yet in the midst of that, we sit in one of the most opportunistic tax environments since prior to World War II. If there were ever a time to act, it is now. You need your CPA talking and involved and coordinating with your financial advisor.

You need to get a tax plan in place if you don’t have one. This doesn’t mean that you need to take this action with us at Creative Planning, but you need to take action one way or another. I don’t care who you go to as long as they’re a fiduciary and there’s a qualified CPA involved and integrated with your financial planner. But most importantly, I just don’t want you to lose the opportunity that won’t be around for long. If you do want help and you’re not sure where to turn, we’re happy to help. You can visit us anytime at creativeplanning.com to request your second opinion. Remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.

Disclosure: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion dollars 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 could 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 a wealth path analysis by going to CreativePlanning.com/radio. Creative Planning tax and legal are separate entities that must be engaged independently.

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