TAX CREDITS, HOMEBUYING IN 2024, AND MORE TAX TALK

Join this discussion with me and Cory as we explore listener-suggested topics like school spending records and their opinions on flat taxes. Uncover the IRS secrets as they discuss whether the IRS pays you interest and demystify the concept of tax credits. Don’t miss Cory’s big news!

But that’s not all – catch up on the latest headlines, from navigating unpopular social security benefits to the homebuying landscape in 2024. Learn why retirees aren’t exempt from taxes in this comprehensive discussion. Don’t miss the opportunity to broaden your financial knowledge!

Jake: Welcome back to “Upticks” with Jake and Cory. Cory, Happy New Year!

Cory: Jake, Happy New Year! Thanks for having me back on the show.

Jake: Of course, and Happy New Year to all of you out there who are listening or watching “Upticks”. We don’t do resolutions, Cory, but as part of a New Year’s resolution, we are recording this on a different platform. So hopefully, the video quality is even better than what you’ve grown accustomed to from watching “Upticks.” Cory, do you have anything new you want to share with the audience before we jump into today’s headlines?

Cory: One big, exciting announcement, Jake. My wife, Cassie, and I are expecting our first child! Cassie is due with a baby girl in June of 2024, which we are super excited about. Thank you.

Jake: Yeah, congratulations, Cory! That is so awesome. I’m very happy for you and Cassie. June, what a great month. That’s your birth month.

Cory: It is, yeah. In fact, Cassie is due four days after my birthday.

Jake: So now, poor Cory, your birthday is never going to be the same. For a good reason, but it’s always going to be about your daughter.

Cory: That’s right. I think that’s better. I think after I turned 21, frankly, beyond that, it was, you know, I don’t think my birthday is that much about me anymore anyway. So, I think that’ll work out quite well.

Jake: Have you started getting asked about names?

Cory: A lot of people have asked. A lot of people have been quick to share their opinions on what they think great names are. Cassie and I have been kicking around ideas, but right now, the net that we have cast is wide. We’ll figure it out. Thank you.

Jake: Good. Yeah, there’s no rush. You’ve got six months. Congratulations. I’m happy for you. Yeah, Rachel and I, we’re still doing the same thing. We’re getting ready to move into our new home. So very excited about that on the Missouri side. And this is the time of year, Cory, that I work a lot. Been really putting in a lot of hours in the office so that I can play a lot of golf once springtime comes around. So don’t feel sorry for me, but I am working a lot right now. And thanks to everyone again for tuning into “Upticks.” The best way to make sure you don’t miss an episode is to subscribe to our content. You can do that on Spotify, Apple iTunes, or YouTube. And if you think our show’s any good, a thumbs up or a 5-star ranking is much appreciated. Again, the whole purpose of this show is to enhance financial literacy. So, Cory, let’s get into it. Very humbled, Cory, we’ve got a few, maybe four, listener suggestions today that we wanted to talk about before our headlines. So, these are headlines or topics from you, our audience on “Upticks,” things that you want us to talk about on our show. And if you have any topics or headlines that you would like us to talk about, simply email [email protected]. Luke is our communications manager; he’ll make sure that Cory and I get your email and talk about it live on the show here. All right, Cory, so let me kick it off here with the first one.

Cory: All right, I’m ready.

Jake: All right, here we go. “School spending sets new record: $17,650 per student.” Cory, what’s this talking about?

Cory: This is talking about the state of Kansas, and the dollars spent per student have risen to a record. I did not know, Jake, that Kansas was in the top 10 in the country in terms of dollars spent per student. I also found it really interesting in the article that was shared that states that spend more money do not necessarily have better outcomes.

Jake: Oh, because I was about to say, “Good for Kansas, right?” and investing in their education. But you’re saying that money doesn’t buy knowledge.

Cory: Correct, according to this. It’s good to see the numbers climbing. It is. I think it’s positive to be spending dollars and resources where we really should, which is on education, particularly with the youth. But I think that it’s interesting to read that just dollars spent do not fix the problems or it doesn’t mean that’s not the end-all, be-all, I should say.

Jake: Yeah, right, right. And that’s a good point for our show, Cory, is that you can’t throw money at a problem and expect it to resolve itself. So, whether you’re unhappy or you’ve got stress, certainly money can help with certain situations and circumstances. But ultimately, you got to get down to that core issue, and money doesn’t necessarily always solve problems. So, it’s good though. It’s good to see, though, like you said, that money is being pumped back into the school system. I think our youth obviously are the future of America. And it’s important that we continue to enhance that.

Cory: All right, next, Jake, is a message from a client. I’m going to read this to you here. “Love the podcast in the new format.” Thank you for that. “Any interest in featuring a flat income tax? Your opinions, articles, etc. Your last podcast made mention of the IRS’s new 8% penalty for failing to make estimated tax payments. This client pointed out I’m one of those earners that absolutely hates paying taxes throughout the year and letting my return be used interest-free all year long. A flat tax would seem much easier in theory to make the correct payments on a regular basis.” Jake, your thoughts.

Jake: Yeah, I think politicians have really messed up the tax code, Cory. I think we talked about this on previous episodes of the polarization of America and the Democrats versus Republicans. And I think the issue is you have these non-financial people in office making financial decisions. And I agree that the tax code has grown far too complex. I think a flat tax may look like everybody pays 20%, no matter what you make, no matter what you do. I don’t think that’s the worst thing, Cory, and I want to hear your opinion. We’ve also debated this internally in our office. I don’t know if you were in this conversation, Cory, but I also think some sort of usage tax or luxury tax. For example, if you don’t drive down Ward Parkway every day, why should you pay to maintain that road? So maybe that would be like an example of a toll road for heavily trafficked areas because those do exist, right? Toll roads do exist. So, I’m in favor of a flat tax. It just would simplify things—everybody pays 20% or whatever it is. Maybe you even get rid of a lot of the deductions, and it’s just like, boom, this is the taxes you pay based on the income you make. And here we are. I’m sure a lot of accountants would be mad to hear that because that would lower their job security, but Cory, what are your thoughts on a flat tax?

Cory: I think there are a lot of pros and cons to both sides of it. I think the suggestion that you just made, Jake, is an example like 20% for people to pay, regardless of what they make. The kicker is, for some people, that’s going to raise their income tax, for other people, it’s going to lower them, and a lot of that is going to depend upon how much income someone earns. The reality is that there are 13 states now in the United States that have implemented a flat tax at the state level. So, it’d be interesting to see how this plays out and how those states do because, to this point, I feel like in the United States, it has just been people pointing out the pros and cons, advantages and disadvantages are, but the reality is until that’s in practice, we won’t really know what the results are. What I would love to see reform around as far as taxes go is just the way that people pay taxes on their personal property, their rental property, their vehicles, etc. And I don’t think our income tax code is perfect. But I understand that it is challenging and difficult to make a lot of changes to it, but it seems to me like, especially for folks with less income, that their real estate tax, their homeowners’ tax, their personal property tax probably makes up a larger portion of their income than maybe even their income tax.

Jake: Yeah, that’s a good point. You’re right; that is a flawed system as well. Especially the fact that they can just raise it arbitrarily like they’re not even doing home appraisals, Cory, and they’re jacking people’s property taxes up high. So, yeah.

Cory: Right. Yeah, or if your home is paid for, you’re still paying your fee. So.

Jake: I agree with that, and you’re right, the problem I have is these uber-wealthy people always complain about how they have all these shell companies and businesses, and they don’t pay any income tax or it’s all capital gains, which is typically at a lower rate than ordinary income depending on your tax bracket. So., I think, Cory, the bigger problem is in all the deductions and the loopholes. I think you could clean up and get a flat tax if you also got rid of some of the loopholes, right? So, I think that’s where it’s become more complex. We’ve talked about this, you, and I, about how the real estate industry, there’s so many tax breaks for people that invest in real estate because it’s been lobbied and gotten its way all the way through the system. That’s why a lot of wealthy people are in real estate. I don’t agree with that. I get it that maybe the government is trying to influence reinvestment back into the country, but there’s other ways to do it. Then creating these loopholes. And so, I don’t know; we’re not going to solve it today in 30 minutes on our show, but I love the idea, and I don’t know if it’ll ever be changed because there’s just way too many people involved, and there’s a lot of deep pockets that are really controlling it in the end.

Cory: Yep.

Jake: But I agree with the concept. All right, Cory, so here’s our next one: “When does the IRS pay you interest?”

Cory: Yes, this is a follow-up to a discussion.

Jake: Yeah, so somebody emailed me Cory, and they wanted me to bring this up because there’s a lot of things obviously about the tax code that people don’t know about. I’m going to read off a little bit of this just because a definition from this article, but a tax credit is an amount of money a taxpayer can claim to decrease their tax liability, also known as how much they owe in taxes in any given year. Technically, tax credits are incentives, so your eligibility is usually tied to qualities, behaviors, or actions. To me, Cory, more loopholes, right? But the government wants to reward you for this. Examples would be caring for kids, going to college, being environmentally friendly. This is like the electric vehicle tax thing we’ve talked about and so forth. So, the way they work is you qualify for a tax credit based on personal characteristics and then claim it on your individual income tax return. When you go to file your taxes, you may need to fill in an extra form or provide supporting documentation. Now, a very big disclosure here, Cory: we are not filing taxes for our clients. This is not tax advice. Just saying that people should be informed about how these tax credits potentially could work. Tax credits are what’s called dollar for dollar. So basically, you get subtracted directly from your federal tax liability. So, if you owe 500 bucks in taxes and you claim a $100 tax credit, Cory, you only owe $400.

Jake: So that’s why these things can be substantial. And you know, I’m not going to knock the CPAs. But I think as just citizens of a country, it pays to inform yourself on how you can again benefit from the system. Again, I don’t like it because there are all these loopholes that some people know about, and some people don’t. So again, I think it’s great that this person asked me to bring up tax credits. So, the key takeaway here or the call to action for today on this piece of the taxes is that you need to sit down with your CPA. 2023 is winding up here as we move into 2024, and you’re getting ready to file your taxes.

Jake: I want you to do two things. I want clients to go through our tax planning process, which again, we’re not giving tax advice, but we can do some tax planning and look at potential credits. And then I want you to go check in with your CPA or accountant and say, “Hey, do I qualify for any tax credits? I want to make sure I’m taking full advantage of what’s available to me.”

Cory: Very good. So, when we think that through, though, when tax deductions, which people are familiar with, Jake, it’s going to lower your taxable income. But a tax credit is going to almost lower your liability directly, like you said, dollar for dollar, right?

Jake: Exactly, and that’s what’s so confusing, Cory. Those are different. So, a tax write-off or deduction is different than a tax credit. So that’s why you need to be informed on your unique situation. Go through our tax planning process, and then sit down with your accountant or your CPA, say, “Hey, I listened to this podcast upticks. It’s a great one—special plug there, Cory—and they talked about tax credits. Do I qualify for any tax credits? I want to make sure I’m getting them.” It’s it.

Cory: Yep, that’s good advice.

Jake: All right, good. And thank you to everyone that’s been sending in ideas and topics and questions. Please keep them coming. That’s what this show is for. This show is for you, our audience. Again, we want to talk about things that are relevant to you and your family. All right, Cory, let’s kick off to our normal headlines here. We’ll let you start here. Social security. Not just for old coots, Cory. What are you talking about?

Cory: Yes, this is from a newsletter that’s published by a CPA who’s been practicing for forty or fifty years. So, we keep coming right back to the tax piece, Jake, but this is not about tax. It’s about social security. So, this newsletter, I did think this was informative, and I just wanted to share a few pieces from this, Jake, because the argument the author was making is that there’s a basic lack of understanding by the American consumer and financial advisors around the benefits as it pertains to social security. The example really that they highlighted is that if somebody earns $6,600 or more, Jake, in this year and 2023, they receive the max. Four credits for social security. If you repeat that again for nine more years, you have 40 credits. You’ve paid into social security to qualify. So, in other words, for a minimum of 5 grand paid in taxes, that’s assuming that this person’s a W-2 employee, this person, the individual that’s paid into social security, has received total retirement and medical coverage under social security. The point there being that while we talk about social security…

Jake: Hold on one moment. You lost me there a little bit, so you said $6,600, then you said 5 grand. What do you mean there?

Cory: Yes, $6,600. If you earned that dollar amount in Calendar Year 2023, your tax liability would be around $500, or I’m sorry, not your tax liability, what you pay into social security, Jake, would be around $500. So, if you do that over 10 years, you’re paying 5.

Jake: Ah, oh, $500, okay, you said 5,000. So, I just want to clear that up for our audience. Okay, so $6,600 is what you need to make.

Cory: $500 a year for 10 years is 5,000. Yes, that’s what I didn’t clarify.

Jake: You’re paying $500 into social security. You do that for 10 years, and what are you saying? You qualify for future benefits, basically.

Cory: Yes, but what you’re really qualifying for is the point of this article, which is a retirement income starting potentially as soon as age 62, retirement income for someone’s wife or husband as early as age 62, even if they never have earned income, a medical system at 65, a medical system for a spouse at 65, regardless of whether or not they have income, disability benefits, disability benefits for a widow, disability benefits for children. The point there being, there is a lot of money that’s coming out of social security that is covering a lot of expenses beyond just the regular monthly cash flow that retirees collect when they’ve paid into it. And I also think this just effectively highlights part of the challenge that’s ahead around social security and the funding. And ultimately, the expenses that it’s intended to cover.

Jake: Awesome! Yeah, that’s interesting, and yeah, that’s a good point. I like it, not just for old coots. What a title.

Cory: Jake, what do fed rate cuts mean for homebuyers in 2024?

Jake: A little bit of a backstory here. So, if we remember from the pandemic, the fed came in, they lowered interest rates, helped prop up the economy. The economy kept rolling; everything kept going. Inflation then got way out of control. So, then the fed shot up interest rates, and now inflation has come back down. And now all the pundits, Cory, again, we don’t believe in anybody to predict the future, but they’re suggesting that the fed may lower rates next year or in 2024. And so, what’s exciting about that from a homebuyer’s perspective is that if you were in this weird dynamic of moving or needing a home, your mortgage rates are now seven or eight percent, or they got up to as high as 8%, roughly. And so, this article I thought was good because it talks about what are you supposed to do now if you think rates are going to cut. Which is crazy about some crunching the numbers here a little bit, Cory. So, the difference between an 8% mortgage and a 3% mortgage, which is where many people have, on the same thirty-year $500,000 loan, is about $1,560 a month. I mean, that’s almost like… Does that run around $18,000 a year, roughly? Yeah, almost $20,000 a year.

Cory: Yeah, the cost of capital.

Jake: Yeah, which I thought was another interesting point in this article, Cory, and then I’ll get to my takeaways here. But 82% of US homeowners have mortgages with an interest rate below 5%, and this is according to Redfin. So, most people are not in this category. That’s why I don’t want to spend too much time on it. My key takeaway: it’s okay to rent. And I would focus, though, on getting a house at the right price, if you can cash flow that mortgage. And then again, the hope is that you will be able to refinance at a lower rate than they are today. Now, there’s a lot of people arguing that these two, three percent mortgage rates are a thing of the past, and it may… They may never get that low again, and they may or may not be right. I, again, Cory, you would think, “Well, Jake, you’re a wealth advisor; you bought a house, and interest rates are really high.” And, again, Cory, I bought the house because I got it at the right price. Yes, my mortgage rate is temporarily high. Will it go down into threes when I refinance? Hopefully, but probably not. And I’m okay with that because ultimately, Cory, I made sure that I could cash flow that mortgage payment. I know I bought at the right price, and when rates go lower, if or when, I will refinance and hopefully get my rate down in the fives or whatever. And I’ll live with it, but again, to me, price is more important. Do you have any thoughts on that before we move on to the next headline?

Cory: You’ve really stressed the same point, Jake, that I would make. But it is, for all the discussion about interest rates. You make up… Ah, you bring up a great point, which is how high rates are, is one thing. The price that you’re paying for a house is another. And that piece is really going to be crucial because that’s the amount of money that you’re going to borrow for 30 years, and the interest rate could change some along the way. But I think that’s what’s posed… It’s the numbers that you shared are fascinating, though, the $20,000 a year more in interest for 30 years.

Jake: Right.

Jake: For the same house. I know, so the same house. That’s what’s crazy. All right, Cory, here we go. Retirees must pay taxes too, but big tax-heavy show today. Sixth smart ways to reduce them, all right? Let’s hear it, six ways. No chart.

Cory: The first one, Jake, is don’t waste low tax years. This is great; I really enjoyed this takeaway because I think it’s important for anybody who’s watching or listening to understand that you want to plan for your long-term tax liability. Don’t focus too much on the short term. So, when they talk about don’t waste low tax years, that means if someone is in the ten or twelve percent tax bracket, it very well could make sense to accelerate Roth conversions or IRA distributions, whatever it may be. Don’t let those low tax years go to waste. Beyond that, Jake, was a dynamic withdrawal strategy, which we could talk about. Qualified charitable donations (QCDs), Donor Advised Funds (DAFs), or donor-advised funds. The still working exception for RMDs. That’s probably a small subset of people. And lastly was geographic arbitrage, which is basically just living and working somewhere where you can earn more money and you may have a higher cost of living and pay more taxes and then retire somewhere else where you will pay fewer taxes on the income when you draw it in retirement.

Jake: Wow, that’s a good one. You know what, Cory, let’s spend some time on this one, and we can save your chart for the next episode. So, take it. Let’s go back through those because I think because we’re already on the tax subject, when I must stick with it, keep it rolling today. So, you talked about the low tax years. What was number 2 again?

Cory: Good; consider a dynamic withdrawal strategy, which is basically reevaluating on an annual basis if you’re retired where you’re pulling money from.

Jake: This is very important, Cory. So again, clients need to go through our tax planning process. They sit down with one of our financial planners. They look at your 2022 or 2023 tax return. They look at all your income situations. We already have your financial plan. So, then they can develop a strategy: Do I pull this much from an IRA or a Roth or my trust or my brokerage or my checking, whatever, and they can help you juggle this tax code so that we can optimize your financial plan and hopefully lower that lifetime tax. That’s a good one; I like that one, and Barron’s did this article right? So good for Barron’s.

Cory: They did; QCDs, Qualified Charitable Donations.

Jake: I don’t know how many of your clients that you work with personally do it, but I feel like more and more mine are taking advantage of this every year. I do want to share an important tip on this. So, what that means is you take money, so you must be seventy and a half to qualify, and you must have an IRA. And the idea is that you could pull money out of that, move it directly to a qualified charity. So, a 501(c)(3) can’t be your kiddo, right? It needs to be an actual charity, and it will lower your IRA and your future required distributions. And with the key here, Cory, is it’s not taxed as income. Pretty sweet deal. Ah, here’s my tip though is that most, I don’t know of any custodian that will report this properly on your 1099, so when you get your 1099, you got to go to your accountant and say, “Hey, you know, I pulled out money, but I donated it directly to a charity.”

Jake: And it was $10,000 or $5,000, whatever it was, but you’ve got to make sure you communicate that because, unfortunately, I don’t know why, Cory, do you know why? They don’t have that, but maybe because they can’t prove it. Yeah.

Cory: From a lot, I think it’s a liability thing; I don’t think a Custodian wants to be in the business of determining whether you could or could not take a distribution and whether you’ll pay a penalty or tax.

Jake: Yeah, yeah, I think that opens them up for potential fraud; like someone could lie. So anyway, so you’ve got to prove that to your accountant, and again, it’s easy because you can show the money going to your charity. But I think that’s a very important one, and I see more and more clients using that. What’s the next one?

Cory: Donor Advised Funds or DAFs.

Jake: Yeah, big; we’re huge fans of Donor Advised Funds. This would be basically almost the reverse of that. So instead of pulling money from an IRA, you’d pull money or stock from a taxable account, put it into a Donor Advised Fund. Then you get to advise how that money’s invested and ultimately which charity goes to. But let’s say you know you made a ton of money in the stock market, or you got a big bonus at work, and you want to defer some of that, or you want to be able to write off some of that. We talked about you know you could put $30, $40, $50 thousand in this Donor Advised Fund all in one year, and maybe you only give out $5,000 a year or $10,000 a year to charity. It’s a good way to, they call it bunching, throw a bunch of money in, write it off on your taxes, and then give it out slowly over time. So, Donor Advised Funds. We’re huge fans of as well. Another good charitable tool out there. What’s the last one?

Cory: There’s two more; one is the still working exception for RMDs, which again would really be relevant for somebody who’s still working once they’ve reached RMDs.

Jake: Yeah, I want you to explain this one a little bit. It’s a little again, very small group of people. But what’s the gist of this?

Cory: Yeah, so if you are required to begin taking distributions from your IRA, age 73, for example, and you are still employed and still have earned income, you can continue to defer those RMDs. Interestingly, there’s not a lot of definition or clarity around what still working means in terms of the IRS.

Cory: The big takeaway from what I’ve gathered is that the fact that you’re still working and have earned income from employment is what matters.

Jake: Yeah, so, and again and all these there’s there may be some nuance there but depending on the type of account and so forth. So again, don’t take any of this as tax advice, go to your CPA and confirm it with them. But that’s something to be aware of if you’re working later in life and thank you, Cory! What’s the last one?

Cory: Geographic Arbitrage.

Jake: Oh yeah, which I think it’s very fascinating. So, you know you may work in New York right and had to pay New York taxes, and you may retire in Florida or Texas, right? where there are no state income taxes or like you mentioned in the article the lower cost of living right? It’s a whole lot cheaper to live in Kansas City than it is to live in San Francisco right or Washington Dc and so just being aware of where you want to move and where you want to spend your money. That’s very big deal retirees are migrating all over the country to typically warmer client climates where they have good healthcare. There’s a community, active activities. Good. You know again, good food, right? Why not and so that could be a big deal also just recognizing your standard of living how much you’re paying at the grocery store right? compared to somewhere else and so adding all those things up and being smart with that that was good for Barron’s I’m glad you included that.

Cory: It was good. I know.

Jake: Cory as always thank you for joining me on the show. Congrats on the baby girl. Can’t wait to hear what name you and Cassie choose that’ll be fun to find out and thank you all as always for tuning in. Happy New Year and we look forward to cranking out more content on Upticks and hope all of you have a great week.

Legal & PrivacySecurities offered through Hightower Securities, LLC, Member FINRA/SIPC, Hightower Advisors, LLC is a SEC registered investment adviser. brokercheck.finra.org?2024 Hightower Advisors. All Rights Reserved.