Episode Transcript
[00:00:00] Speaker A: In this, our first episode of 2025, we go through the important information you need to know before you file this year's tax return. Let's get started.
[00:00:08] Speaker B: Let's get some money from New Money, New Problems. It's the New Money New Problems podcast. A show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
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I'm Brenton Harrison, and this is the New Money New Problems podcast.
[00:00:46] Speaker A: Hello, this is Brenton Harrison of New Money, New Problems and your host for the New Money New Problems podcast. I want to welcome you all to the first episode of 2025. I am back. I am refreshed. I have my voice. Um, I feel very, very good for the first time in a couple weeks. And the rest of my house is health as well. So it's been a good start to the year. Uh, and as we usually do, we take the last couple of weeks and have a little slower pace so that when the year really starts, which in my opinion is Monday, January 6, that we're up and raring to go. And for the first couple episodes of this year, we're going to go through some topics that we've gone through in the past. Not because we just love repeating ourselves, but because some things happen every single year. And one of those things is the early part of each year is the time when you need to start gathering your documents to file your tax return. And if you listen to this podcast in the past, you know, uh, that my feelings on this are pretty cemented. I am not a fan of people who are high income earners filing their own tax returns. It's not really a matter of can you do it, it's a matter of should you do it. And to me, if you're a high income earner, it's worth paying that fee. Both so that you can save money that you didn't know could be saved without the help of a tax professional, so that you don't cost yourself money that you wouldn't have had to pay, or in the worst scenario, that you don't make a crucial mistake that increases the odds of you owing back tax, or even worse, being subjected to an audit. But in addition to that, I want you to understand the difference between tax preparation and filing versus tax projection and strategy. So we're going to do a couple episodes in this little mini series where we talk about tax preparation earlier in the year. And tax preparation and filing is essentially looking backwards. And in my experience in this industry, working ahead with a proactive tax strategy puts you in a much better position than trying to do your best to go back and rehash the past when you're doing tax preparation filing only. So in our next episode, we're going to talk about some ways that you can strategize for the year ahead. But in this episode, since 2024 has already passed and those taxes have to be filed, we're going to share some things that you need to know and documents you want to make sure that you don't miss to make sure that both your tax return is accurate and also if you're a person who might be eligible for a certain tax deduction or a tax credit, that you're not missing out on that information just because you are unaware. So let's get into it. As a reminder, one of the first things that you have to determine when it comes to filing your taxes is all of your total income sources. So we're going to find all of our income, then we're going to subtract certain things called above the line deductions. That's going to eventually give us a number called adjusted gross income or modified. Adjusted gross income is another term that you'll hear throughout this podcast. And after we find that adjusted gross income, we're then going to make the decision of whether we're going to take the standard deduction or or if we're going to itemize our own deductions. The standard deduction is also available to any taxpayer, regardless of how they file their taxes. If you're looking on screen, you can see that in 2024, the standard deduction for a single person is $14,600. For someone married filing jointly, $29,200, married filing separately, $14,600. If you file head of household, it's $21,900. So you can use the standard deduction to take that adjusted gross income and lower the income on which you regardless of what's going on elsewhere in your taxes, you have this tool available to decrease your taxable income accordingly. Or if you have your own itemized deductions, which are called below the line deductions, you can itemize them on your tax return and you can take an even bigger deduction. To give you a quick example, let's say that we have a single person who makes $100,000 and they have above the line deductions of $10,000, they have lowered their taxable income to that point to $90,000. They can also then use the standard DED, lower it an additional $14,600. So that takes it from 90,000 down to $75,400. Or they could total up their own deductions and Maybe they have $20,000 of itemized deductions, which is a larger number. They could then choose to use that number instead. And even though they started and made $100,000 worth of income based on their above the line deductions and their itemized slash below the line deductions, they only actually pay income tax. They actually only have $70,000 of taxable income that's applied to the tax brackets. After we figure out how much they owe in taxes, we can then use a tool called tax credits to lower that tax dollar for dollar. So whereas a tax deduction lowers the amount of income on which you pay taxes, a tax credit actually reduces the taxes that you owe dollar for dollar. So with that primer, let's start at the top of the tax preparation process with gathering all of our income statements. And if you are a W2 employee only, then that's pretty straightforward. You just need to gather your W2s and thankfully much of the information that qualifies as an above the line deduction. If you are a W2 employee, those things are reflected on your W2 things like how much you put into your 401k or your 403b or other pre tax employer based retirement plans. Those will be reflected on your W2. You will also see reflected the amount that you contributed to health savings accounts, flex spending accounts and deposits. Flex spending accounts. However, if you are a W2 employee and you have certain investment accounts or have made certain activities, you could still have to gather other pieces of information. Or if you're an independent contractor or an entrepreneur, you definitely will have to gather more information. Things like your 1099s from all sources. And if you are an entrepreneur, that could be something like every vendor with which you've done business, any affiliate income that you earn based on your business dealings, you also could be a member of an LLC or a partnership that distributes a tax document called a K1 each year that gives the relevant amount of income that you earn from those business endeavors. All of that information has to be gathered when it comes to filing your income. But even if you do not find yourself in those situations of entrepreneurship or property ownership or things of the like, you could still as a W2 employee only have ah income documents that are easily missed that have to be included with your tax return. The most consistently missed tax document that I see, especially in this phase we've had of high interest bearing savings accounts, is a 1099 Int form and this is literally just a 1099 from your bank or high yield savings account that tells the amount of interest that you earn on the account each year. Another tax form that you will see for people who have taxable brokerage accounts is the 1099 div or dividend statements that say how much you earned in dividends from any holdings you have in those taxable accounts. You'll also have a 1099 from a tax brokerage account that shares things like capital gains both short term and long term, or capital losses both short term and long term based on the investment activities inside of that brokerage account. And even certain activities that you may have completed throughout the year that don't have a taxable impact may still have a corresponding tax document. An example of that would be something like a 1099R where if you roll over a retirement account from an employer account like a 401k into something like an IRA, even if it's a non taxable transfer, you will rece a document called a 1099R that has to be filed with the IRS to let them know that a transfer or rollover occurred that is not taxable. Once we've totaled up all of our relevant income, we now can start the process of chopping down that income on which we pay taxes first utilizing above the line deductions. We've talked about the fact that many of the deductions that you would use at this level if you are a W2 employee are found on your W2. But if you're a 1099 employee, things like the amount that you contribute to your HSA or the amount that you put into a retirement account that you have, such as an IRA or a SEP ira. These are things that have to be self reported with corresponding tax documents. Or you could be someone who's a W2 employee who still decided separate and apart from your employer sponsored retirement plan to contribute pre tax dollars to an ira. So if that's the case, you would receive a tax form called a Form 5498. But I would caution you in making outside IRA contributions if you either have a employer sponsored retirement plan at your job and earn a decent income, or if you're spouse who is utilizing your spouse's income to justify contributing to a spousal ira because based on the amount of income that you earn, if you as a high income earner or your income earning spouse, have a plan available to you at your employer, even if you don't utilize the plan, you're considered an active participant. And if you're an active participant of a certain income, your ability to deduct contributions to a pre tax retirement account elsewhere is severely, if not entirely diminished. And before we go further through the tax process, I do want to have a section where we talk to business owners. Now I will tell you that if you have a business that has a ton of employees running around and you're operating in multiple states, then the process of filing a tax return for that business is really kind of like a separate endeavor in and of itself. But if you have, you know, a couple employees, or you have an online based business, or even if you're earning a ton of money, but the way in which you earn it is fairly simple. I would still encourage you to use a professional. I would still encourage you to use a business tax planning software like a QuickBooks or Things and the like. We'll put some recommendations in the show notes. But you want to have a working knowledge of the things that from a business perspective can lower your net business income, thus lowering the amount of income on which you pay taxes. Some of these areas are things like advertising, legal fees, wages and contract labor. Any cost that you pay to maintain your continuing education or attend any seminars, business meals and entertainment, not just going to a meal with someone who you happen to do business with, and actual meal where you are discussing business or entertainment that has a business purpose. Office supplies, even things as simple as a stapler if you're using it for the furtherance of your business. Production is something that could be tax deductible. Software subscriptions, especially if you are a virtual or an online business, for example, we do most of our work virtually. Software subscriptions are actually outside of wages and contract labor. The highest expense that we have when it comes to our deductible business expenses, dues and memberships as a certified financial planner. We have to pay, uh, membership fees, we have to pay refiling fees. There's associations of which I'm a part that have dues and membership costs. All of those things are potentially tax deductible. Taxi travel and parking, when used for the furtherance of business, is something that's potentially tax deductible. And taxes and licenses that are required for the upkeep of your profession or for you to work in your profession, in a legal format, all of these things are categories where you want to not just keep track of them. In an ideal world, you'll have some type of software or service that you're using where you can categorize these things and hand them over to a tax preparer so that they can calculate how much of it can be used to lower your business income. Now, there are other considerations, both in terms of whether it's actually beneficial in all scenarios to have your business income from a taxable perspective be as low as possible. When it comes to the tax return itself, there's things that many people don't think about. If you are trying to file things like the home office deduction, you not only have to have an idea of the square footage of your home office relative to the entirety of your home, you also have to be able to assign a certain percentage of things like the utilities, things like the water, things like the electricity that you pay in your home that can be reasonably seen as a byproduct of the use of that home office. Again, little things that don't seem like that big of a deal. But if you're doing these things and trying to file your taxes on your own is something where you could do it, but it's not something that I would want to put my stamp on when I turn in that return. And it says self prepared when I have the option of paying a slightly larger amount of money, but having a CPA or an enrolled agent put their stamp on their return to let the IRS know that a professional filed it on my behalf. But it's not just taxes. This podcast episode is about taxes. But when you are a business owner, you also have to keep in mind that if you decide to lower your business income from a taxable perspective to the lowest dollar that it could possibly be lowered, you're potentially setting yourself up to have a negative consequence for other things that you want do in your financial life. There's a phrase that we use in the tax and the financial world that says, don't let the tax tail wag the dog. Basically saying, don't let taxes be the thing that explains and justifies all of your decisions. This is an example of that. So, for example, if you are trying to get financing for your business, where you're trying to qualify for a small business loan or a line of credit that could help you make payroll or finance an expansion, part of what a banker or a lender is going to look at are, uh, your tax returns for the last two or three years. If you're not showing a progression in revenue or any taxable revenue at all from that business, you're making it harder for yourself to qualify for that business financing, if not impossible, even though from a tax perspective, it was something that had a benefit. There are times when you have to have an idea, and we're going to talk about this in the next episode of what's coming in the years ahead. This is also true when you're trying to do things like not just investment real estate, but even qualifying for your primary residence. This is not the same of all banks, but a consistent process that you'll find when it comes to a business owner, owner or an entrepreneur trying to get financing for a mortgage is that your bank is going to ask for your last two years tax returns as a business owner. They're going to then look at your net business income. And as much as this sucks, uh, what many lenders will do is if there's an increase in business income from one year to the next, let's say that you went in year one from $100,000 of net business income, and in year two you had 150,000. They are not going to give you credit for the 150,000. They're going to take the average of the two years and they're going to assume net business income on average is 125,000. Conversely, if you have a decrease in net business income from year to year, let's say that in year one you made 150,000, and in year two it goes down to 100,000. Maybe not because you truly had a worse year, but maybe because you utilize more business deductions and things of that nature, they don't give you the average, they take the lower of the two numbers. So instead of using 125,000, they're now using 100,000, which could make a significant difference in terms of the amount of home for which you're eligible. So even though it's important to have your eye on the ball for all of the business expenses that you could use as a deduction, you want to make sure that this is part of a comprehensive strategy which is part of the benefit of having a CPA or an enrolled agent that works in concert with people like your financial advisors and your lenders to make sure that you're not shooting yourself in the foot because of a tax strategy that you put in place without thinking about the past and also what it means in the future when it comes to the totality of your finances.
[00:16:01] Speaker C: This is the New MONEY New Problems Podcast A show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:16:20] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news.
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[00:16:59] Speaker C: You're listening to the New Money New Problems podcast. Subscribe now at new money, new problems.com welcome back.
[00:17:09] Speaker A: Welcome back. We have worked our way from total income. We've utilized above the line deductions to lower our taxable income down to adjusted gross income. Now it's time to utilize either the standard deduction or below the line deductions to lower our tax taxable income even further. One of the biggest especially if you're a property owner, if you're someone who lives in a state that has high state income taxes, or if you're both a property owner who lives in a state with high income taxes, then state and local taxes are really important. And that is things like the state taxes that you pay. There are also places that have city tax. All of those things are considered state and local taxes. In addition to the property taxes that you pay as a homeowner, you also want to keep track of any charitable deductions. These are things that you make not just to your church or your temple or your mosque, but also any 501 that's eligible to take these donations. Mortgage interest is another one. Especially if you have a newer mortgage or a mortgage that has a high balance. The amount that you pay towards the principal is not deductible, but the amount that you pay in interest in many cases is a deductible expense as well as the interest that you pay on a home equity line of credit. In certain instances there are limitations in terms of the amount that you can have on a mortgage and then deduct the interest on a line of credit. And it also in most cases has to be something that is improving or maintaining the home. It can't be funds that you pull from a HELOC for any purpose. It has to be something that's used for the maintenance and improvement of the residents medical expenses are another one where we're going to talk about this more in the next episode when we talk about preparing for the year ahead. But if in the year prior you had significant medical expenses, those are things that are deductible to the point that they exceed 7.5% of your adjusted gross income. And I will tell you, more often than not, when I see someone who self prepares, they don't even go through this process. They just assume that the standard deduction is the thing that's going to give them the best juice for the squeeze. But I would encourage you, even if you're filing your taxes on your own, which I don't encourage you to do, to take the time at least this year and go through the process and see how much you actually had, even if you do decide to file the standard deduction. Because if you know that you're close to the line and there's some things that could have pushed you over the edge where it would have benefited you more to itemize in the year ahead, you may take advantage of that knowledge and have a little more strategy so that in 2025 you put yourself in a position to itemize. Now that we've taken our total income and reduced our above the line tax deductions, which brought us down to our adjusted gross income, we then used either the standard deduction or our below the line deductions to lower us down to our taxable income. This is the amount that will actually be applied to the tax brackets to figure out how much we owe in taxes for the year. After the amount of taxes that you owe is calculated, we can then use tax credits to reduce the amount of taxes that we pay. Dollar for dollar tax deductions lower the amount of income on which you pay taxes. Tax credits lower the actual taxes. So while this is a more powerful tool than a tax deduction, a, uh, tax credit is often something that's more limited by your income, adjusted gross income, modified adjusted gross income and the like. As an example, there's an education credit called the American Opportunity Tax Credit where your tuition, your room and board, certain fees and materials can be totaled up. Uh, to use as a tax credit, up to 40% of it is refundable, meaning that when you use this credit, even if it pushes the taxes owed into the negative, where you would get a refund, up to 40% of that credit can be used to increase the refund itself. That's only available for use for four years. Conversely, the lifetime learning credit is something that's not refundable. So if using the credit pushes you into the point where you're going to get a refund, you could pay no taxes, but you're not going to be able to get a refund by utilizing the credit. However, when you compare this to things like the IRAs, the Roth IRAs, the active participants when it comes to deductions, you'll see that the income ranges for these tools are often lower. Another tax credit that we won't put on screen because there's so many layers to it that Tamia might confuse more than help by putting it on a slide. But another big one is the Child Independent Care credit. This is a tax credit that you can use if you as a single tax preparer are incurring expenses in terms of childcare that allow you to work. Or if you're a married tax filer and both of you work and you incur these expenses, you can totally them up to potentially be used for this tax credit. For example, any tuition that's short of kindergarten. So pre K daycare, those are things that count towards the Child Independent Care credit if it's an expense for certain things like camps that you pay for during the summer or even for things for children who may be older than kindergarten, but they're doing after school activities such as aftercare or before school activities like before care that you're doing so that you can get to work earlier or stay at work later. Those are things that are potentially eligible. And in 2024, the maximum allowable credit is $3,000 for one qualifying individual, $6,000 for two individuals, and this is a refundable credit. So again, a very valuable one that you can use if you keep track of the relevant expenses. So while this episode was a lot, I know it was heavy on tax terminology. I'm trying to, number one, encourage you to go see a tax professional. Like, if you came out of this saying, this is so confusing, I don't even want to deal with it, I just want to pay somebody to do it. I would actually count that as a success. But whether you decide to do it on your own or use a, there is some responsibility and awareness that you have to have when it comes to the documents that have to be gathered to make sure you put yourself in the best position when it comes to filing your taxes. So this episode has been all about looking in the past, preparing yourself for the 2024 tax year filing. In our next episode, we're going to talk about looking to the future and how you can project the year ahead to form a strategy for your taxes that keeps into consideration the balance of your finances and positions you to have the best tax year possible possible in 2025.
[00:23:10] Speaker B: From new money, New Problems this was the New Money, New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
