Money Management Edition
According to some recent news from the congressional budget office, the economic forecast GDP growth is expected to grow by 7.4% in 2021. However, the deficit is expected to go to 3 trillion for the year, which is smaller than last year, but it’s three times the amount it was in 2019.
And the CBO is expecting that the deficit should grow by $1.2 trillion per year by 2031, which means that the United States is going to need some money. Where will that come from?
From American citizens’ taxes.
Depending on the state you currently live in, you might already be paying a lot of taxes. Have you ever wondered where these taxes go? Will these taxes be of benefit to us in the future? And most importantly, is there a way to legally pay the least amount in taxes?
For CPA and Small Business Tax Savings Podcast host Mike Jesowshek, there are multiple ways to do just that. Mike is a modern and innovative CPA on a mission to ensure small business owners pay the least amount in taxes as legally possible. Throughout his entrepreneurship journey, he has experienced all business stages, from the good to the bad. This is why it has become his mission to help out businesses that are going through those successes and struggles.
Luckily, there are various tax planning strategies for everyone to freely and legally utilize. Whether you’re a W2 earner, a small business owner, or an individual who earns a household income of $250,000 or more, you can plan and strategize how much taxes you’ll pay. No more grieving for the thousands of dollars you pay to Uncle Sam because there’s a way to “cheat on him” a bit.
Not entirely convinced yet? Join us as Mike discusses where American citizens’ taxes go, how tax planning works, and how to strategize paying the least amount of taxes legally possible. With hosts, wealth manager Lee Michael Murphy, career advisor Sergio Patterson, and attorney Matthew McElroy, tune in to this week’s episode of The Free Retiree Show.
What You’ll Learn:
- How tax planning works
- Baseline and Advanced Tax Strategies
- How to file and pay the least amount of taxes legally possible
[00:00:00] Lee Michael Murphy: Welcome in to the free retiree show your go-to podcast for your career, your money avoiding the big mistakes and where we learn from people that have done amazing things. I’m your host wealth manager, Lee Michael Murphy. And I’m alongside my main man interview, coach career mentor, Sergio Patterson. What is up everyone.
And everyone’s favorite attorney. He’s back, everybody. He’s back. Matthew McElroy. What’s going on. Hey Matt, this is your first recording back since baby number two. And I think Serge, myself and the audience want to know, have you lost the baby yet? Like, did you misplace him? Like, is he crawling around San Martine, California somewhere?
the mother is very strict on me and, you could say micromanaging things, so I don’t have anything to worry about
[00:00:48] Sergio Patterson: boxing it or kickboxing
[00:00:52] Lee Michael Murphy: If you are the child of a Matthew McElroy, or you learn kickboxing, Muay Thai fighting within the first three months. that’s a must, right?[00:01:00]
[00:01:01] Matt McElroy: didn’t. Anyway, didn’t you just visit your, a little, nephew yesterday? That’s like the same age.
[00:01:05] Lee Michael Murphy: Yeah, I have a little Sawyer now. He, I is my new nephew and so yeah, I just got to see him yesterday, so that was fantastic. You can enroll in my
[00:01:15] Matt McElroy: kickboxing classes too.
[00:01:19] Lee Michael Murphy: So for today’s episode, we laser down, we’re talking about taxes. big thing on a lot of people’s mind, we’ve got a lot of requests for this one, and this is something that, we all got to look at right now. So, according to some recent news from the congressional budget office, the economic forecast GDP growth is expected to grow by 7.4% in 2021.
So that’s awesome news.
[00:01:41] Matt McElroy: Is that real?
[00:01:42] Lee Michael Murphy: Yeah. Yeah.
[00:01:46] Sergio Patterson: Which new site
[00:01:47] Lee Michael Murphy: reported that? Yeah, this is the congressional budget office. They are legitimate neutral. Okay. However though, the deficit is expected to go to 3 trillion [00:02:00] for the year, which is smaller than last year, but it’s three times the amount it was in 2019.
So this $3 trillion deficit. put it out there and let you guys figure out like what that means. second largest since world war II, the only one being larger was the one that we racked up in 2020. And the CBO is expecting that the deficit should grow by $1.2 trillion per year, till 2031, which means if you guys haven’t got where I’m going with this uncle, Sam that stingy, greedy uncle, he’s going to need some money.
So, we already pay a lot in taxes. I mean, I know I pay quite a bit and I’m sure you guys are all in the same boat. we’re trying to figure out, what can we do to lessen that burden? Because when you look at all the taxes that gets taken out of your check, and we’re going to go over that today, like, what exactly are you paying to the government?
you lose some of it, but, we got an expert on today. That’s gonna let us know, what exactly are they taking from you. And how to, some strategies to help lessen the tax [00:03:00] burden. So today’s guest is Mike Jesowshek.
[00:03:03] Lee Michael Murphy: He’s a fantastic resource in the world of taxes. he is well-known for his small business tax saving podcasts. and he’s got amazing strategies. Strategies that are outside the box, that most CPAs accountants never really do for their clients. so I’m a big fan of his and, Mike, glad to have you on the show today.
So, today we’d love to learn about, what is actually taken from us when it comes to taxes and then some strategies to lower it, because I don’t know about you guys, but I’m getting hammered. So, Mike, give us all the advice you can.
[00:03:36] Mike Jesowshek: Yeah, well, we could be here for a days and weeks if we’re giving you all the advice I could, but, you know,I think we could touch on a few things at least are top of mind and things that we can do initially.
And really when we sit down with,a potential person that is paying too much in taxes, we’re really looking at. What strategies are available, and this is part of what we call tax planning. And so when most people think of taxes in general, [00:04:00] they’re thinking of those things that come out of their paycheck once a week or every other week.
And then they’re thinking about preparing and filing tax documents at the end of the year. So most people think of tax. They say, Cassie, my accountant, once a year, during tax time, I’m filling out a form. Send it over to the state and local governments, as well as the IRS. And I move on to the next tax season and really what our goal is with the tax savings podcast.
and just my mission is to get people to change that mindset, tax preparation and tax filing is important. It’s required by law and it should be done accurately, but that’s only a small piece of taxes and that’s actually. At the end of what we consider taxes, what we think most people should be doing in the meantime is doing tax planning.
[00:04:43] Mike Jesowshek: And that tax planning is trying to dig and find what are ways that are in the tax code that are legal strategies that we can implement to make sure that we’re paying the least amount in taxes as legally possible. And tax planning is something that happens during the year. So [00:05:00] January through December is when you do your tax planning.
Ideally, we love to do tax planning in June just because we know, okay, we’re halfway through the year. We have an idea of where our income is going to end up for this year. And we also have a half a year left to implement kind of whatever strategies that we want to implement. So we’d like to do tax plan in June, but either way tax planning generally should be done during the year, once 12 30, 1 hits.
And now we’re into a new year. Majority of the strategies that are available are out the door. Now there’s still some things that we can do during tax time to reduce our tax burden from the prior year. But the majority of good options at that point are out there.
And so when we look at tax planning, there’s kind of a few different things.
We have what we call baseline tax strategies and baseline tax strategies that are these things that are really easy to understand, easy to implement. many people are doing them. They’re just kind of digging in and there’s usually no cost to implement it. so things like this, if you’re an individual, this.
Things like a college savings plan, a 5 [00:06:00] 29 plan for your children, or, just understanding capital gains in general, how to capital gains work, what is the difference between a short-term and long-term capital gain? this is things like HSHS, Maxina, retirements, those types of things. If you’re a business owner, this is things like maximizing deductions, being an S corporation, hiring our kids in our business, set up a retirement account for us as a business owner.
So those are kind of what we consider baseline tax strategies. Again, easy to understand, easy things to implement, and those are extremely important. We always say, let’s explore. Baseline tax strategies, as much as we can, then we have what we call *advanced tax strategies* and advanced tax strategies are generally a little bit more complex, a little bit harder to understand.
Sometimes they may have some type of cost with them because we’re building some type of structure underneath it or something like that. And sometimes they are a little bit more riskier now, of course, nothing that’s against the law, but sometimes. The IRS doesn’t like when people are saving a lot of money in taxes.
And so [00:07:00] sometimes an advanced strategy could be, we consider risky just meaning that it’s, it has a more opportunity for the IRS to say, Hey, I need you to prove what’s going on here. and so that’s what we always say. let’s use the free ones. Let’s use the easy ones. Utilize those as much as possible.
And once we’ve done that, then we can move to advanced tax strategies. What can we do to lower our tax load liability from that standpoint, forward. and typically an advanced tax strategy is going to start once we have a household income of $250,000 or more, or if we hit an income level of say a million dollars and that’s kind of a continuously income level, that’s where that door really opens up for creativity.
When we look at. The idea behind all of this is saying let’s shift from thinking of preparation and filing. When we think of taxes to tax planning, what can I do to lower my tax liability today?
[00:07:50] Sergio Patterson: I love that. I think for me, I’m more of the latter. Like I see the tax guy once. We make sure we file our taxes and that’s it.
But I think the baseline [00:08:00] strategies are pretty interesting to me though. Like, are there of those, the ones you mentioned, are there any ones that we should be prioritizing just for our, like maybe people earlier in their careers? Like I know you said maximizing, 401k, any of the other ones that are. It should be top of mind.
[00:08:13] Mike Jesowshek: Yeah. And let’s say, when we look at tax strategies, we have to also kind of then split that up from there. we look at baseline tax strategies, we have personal, so it would be a W2, earner, no business or anything like that. And then we have a business owner. And so on the personal side, some of the key ones that always come to mind is obviously being able to max out a retirement account, especially if you’re getting a match.
the thing we look at retirement accounts, assuming it’s not a raw. Is that when we look at those accounts, it’s basically taking, getting a deduction today and then potentially in moving that income or that tax on that to down the road now of corporates of Roth, it’s exact opposite, but that’s one thing that retirement maximizing retirement accounts is great.
I would always recommend someone at least to your match because that’s free money that your [00:09:00] employer is matching you to. but you know, we might want to look into deeper strategies and then, an HSA is a big one, HSA, especially if you have a high deductible plan is a strategy where you get a deduction going in your money grows.
[00:09:12] Sergio Patterson: Tax-free if you invest in an HSA, do whatever you want to do. And then when you withdraw all, assuming you use it for qualified medical expenses, it’s tax-free. And so as a personal side, this is. A huge one for me. And I get so many people, especially young individuals that say I’m perfectly healthy.
why do I want to put money into an HSA? and I encourage them to think about it deeper. And think of this is one of the only strategies where you get a deduction going in. Grows tax-free and you get no tax coming out of there. And so even though that you might be healthy today, at some point more than likely you’re going to have some medical costs, and that might not even be from being non-healthy that could be from having a kid, like matches had that, that costs money.
and we will look at. An HSA can be used for, it’s not just, medical costs that you can use things like vitamins and stuff [00:10:00] like that. there’s a site out there where you can see what an HSA is used for. Again, this is a great strategy where go in tax, you get a deduction going in and grow.
[00:10:08] Sergio Patterson: Tax-free no, no tax on the withdrawal assume it’s used for a qualified medical expense. And so this is where we say, use an HSA. If you’re healthy now. Great. Put a bunch of money into an HSA. Let’s try to max that thing out and let’s grow this thing. you can use, you can have a self-funded HSA where you use those HSA funds and you buy rental properties and you buy, invest in Bitcoin.
You can invest in HSA, assuming you have the right provider, you can invest however you want with these. So it serves almost as that retirement account, with just better benefits from it. And so, instead of using retirement funds for medical expenses down the road, Now you have this HSA, that’s just going to cover that, that you may have grown.
Let’s say you put $10,000 in Bitcoin in there, and it turns into 300,000. That’s completely tax-free money that you have grown in that HSA. And I think it’s key to think about this as a [00:11:00] W2 versus a business owner. When you’re thinking of that tax planning ideas. Yeah, the
[00:11:05] Lee Michael Murphy: interest is a really great tool.
It’s like a triple tax strategy. and then,
what most people don’t realize is even outside of what, your insurance will cover and all that stuff later retirement average couple is around a quarter million dollars in health expenses. So it can be a really powerful tool. my, I want to just, give the listeners like a rundown of like, what does the taxes look like?
When it hits our paychecks, like, what are we, what do we lose? What are we losing to uncle Sam? What is, what are they sifting out of our money?
[00:11:34] Mike Jesowshek: Yeah. So there’s a lot of money when you’re looking at a W2 earner. When we look at taxes, you’ll notice if you look at your payslip, there’s just a bunch of different lines for all sorts of things.
You’re not really sure what’s going on. Who’s like, yeah.
[00:11:49] Sergio Patterson: D or
[00:11:50] Mike Jesowshek: something. Yeah. So you have what you have just federal withholding and state withholding. That’s going to be when you file your tax return. At the end of the year, basically what you’re doing is your [00:12:00] employer is prepaying the amount of tax that you’ll eventually.
Determined if you paid enough or not enough, and you file your taxes. And so the us is a pay as you go tax it system, meaning that as you earn money, you owe taxes on it. And so a lot of people were confused on this because they say, well, I just found my tax return once a year. But the problem is that if you told your employer, I don’t want to have any federal withholding and I don’t want to have any state with.
They’d say fine, here’s your money. But when you come to the end of the year, you can have this big amount due. There’s going to be interest and penalties on that because you were not paying those funds as you earned it. so the us government works as a pay as you go system, whereas you’re in money, you pay it.
And that’s where as a business owner, you start to pay quarterly estimated taxes and things like that. So you have just your normal income tax money based on whatever tax bracket you’re in and depending on your deductions and things like that. That’s going to be your federal withholding and state withholding.
The next big one is going to be FICA taxes and that’s broken up into two [00:13:00] pieces. We have social security and Medicare and the combination of those two. So FICA is roughly going to be seven and a half percent. Of your income is what you pay to fight. And what many employees don’t understand is that your employer is also matching that.
So if you’re making a hundred thousand dollars a year, let’s say, and FICA is roughly 75%, you’re paying 7,500 yourself and that’s getting taken out of your paychecks and your employer is. Matching that same amount and send it to the government. So that’s what we call when we, when you’re a business owner, that’s what we call self-employment taxes.
Self-employment taxes is both the employee and the employer portion combined. so we have federal withholding, state withholding, phyco, social security, Medicare, and then it just depends on your state. every state has different types of withholdings and different things that need to go in there.
and on the flip side, your employer also. Federal unemployment that they’re paying on your behalf and state unemployment that you’re paying on your behalf. So those are there’s some [00:14:00] taxes that you might see in your paycheck that are actually mean paid related to your employment, but you don’t see them because your employer is actually covering those for you.
[00:14:10] Sergio Patterson: Yeah. And we’re in California, the three of us. So we’re getting screwed the most problem. Oh yeah,
[00:14:14] Mike Jesowshek: it’s true. Right? It’s out there. He had no California’s Buddha when it comes to taxes. But, when we look at, when we look at, okay, what is the best, what can somebody do to ensure that they’re paying the least amount of taxes?
there’s a lot of these baseline type strategies. But the one thing that we always tend to lean towards is let’s think about starting a business or purchasing a rental price. And that doesn’t have to be a replacement of your job. So if you’re a lawyer, you don’t have to say, well, I’m going to start a business.
[00:14:44] Mike Jesowshek: I’m going to quit my lawyer job. And I’m just going to be a business owner. That’s fine, but it doesn’t have to be that way. You could be a lawyer that likes to do consulting on the side, completely unrelated. You could do consulting for soccer camps, and earn some type of income, but it doesn’t have [00:15:00] to be a replacement.
And that’s where that door of baseline strategies just opens up so much more. And we often talk about when we talk about being a business owner, we talk about this idea of maximizing deductions and so lead, just to go back to kind of what you were talking about. As a W2 earner, we have gross wages and we have all these taxes taken out.
It’s a federal withholding, state withholding FICA. And then we come to the bottom. That’s just what, our amount that we receive, that’s our take-home amount. And we call that after tax dollars. So our money’s all been taxed. And whenever we get into our bank account is already been taxed in any spending that we do is using.
That’s already been taxed. And so, we saw this a lot when COVID hit, you were working in an office now you’re forced to go home. And so you, when you go home, you’re paying for internet that you maybe didn’t have, or you’re paying for a more robust internet, or you might’ve went and bought a desk, or you might’ve went and bought, various different things for this home [00:16:00] office that you have now because you’re forced to work at home.
And as a W2, There is nothing you don’t, you get no deduction for that. You go buy a desk, you have a home office, you have this internet, you don’t get any kind of deduction for that as a W2 owner, but let’s flip the switch and think of it as a business owner with a business owner, you have sales or revenue, and then you have all these expenses that go into.
And then whatever’s leftover after that is what you get taxed on. And so our idea on this is how can we turn after tax spending into pretext spending? So if we look at that same example at W2 earner that got forced to work at home due to COVID as a business owner, That desk that we bought business deduction, that home office that we’re using business deduction, that internet, that we’re using for work business deduction.
And so this is the kind of the idea of thought process going into businesses. This is spending that we’re doing either way, we’re buying that desk either way. We’re paying for that internet either [00:17:00] way. You have a home either way, but instead with a business owner, now we’re getting a tax deduction for that versus if we’re just W2 hundred and we get no tax deduction for it.
So. This is one thing we talked about maximize deduction. So many people think, well, maximize the deductions means that I’m going to have to go buy a truck that I don’t need or buy this new computer that I don’t need. So I can just get a tax deduction from it. And we’re saying, that’s not the idea behind it.
The idea behind it is how can we take spending that you’re going to do no matter what, and find a business purpose for that and get a business deduction. So now, instead of that being an after-tax spending, now we’re moving it to pre-tax spending, we’re getting an expense for it prior to that funds being taxed.
And that is kind of where this idea of in this of work with a rental property, lot of these strategies are, part of you just have to have a business or a rental property in it. And, I kind of talked about at the beginning, how do you bring kids as a baseline tax strategy?
There’s a way that you can hire your kids, get a [00:18:00] business deduction in your kids, pay no income tax on that. So you get a business deduction, transferring money to your kids, and they paid no income tax on that. Now, if you’re paying for basketball camps and all these other things for your children, and that’s typically the money that you spend after it’s already been taxed well now for a business owner, we could find a way to turn that money into pre-tax.
So now we’re not going to pay for basketball camp. Out of your business. Let’s say you go buy a rental property. You’re going to have your kid, maybe paint some things or clean up around the house as a tenant leaves or something like that. And you’re just going to pay them a reasonable rate for the work that they’re doing.
Now, they take those funds that you paid them, you got a deduction for it, and now they can go pay for their own basketball camp if that’s what you want to do. So it’s just kind of this mindset shift of where can I find if I’m a business owner and if I can find a way to become a business owner, there’s so much of that spending that you’re already doing.
That we can find a business purpose too, and now going to tax adoption.
[00:18:56] Lee Michael Murphy: Yeah, that’s awesome, man. Like it’s super creative. let’s, since we got like [00:19:00] maybe a good example, Sergio, he’s our guy that, works at LinkedIn and his wife, mainly stays at home, but she’s got, she’s starting up her own like hair business, and she’s trying to grow that.
Like, do you see, like, that would be like a really great. Synergy between the two of them to like help with.
[00:19:19] Mike Jesowshek: Absolutely because now you have, let’s say you hit, your wife is doing this hair business and let’s just throw some rough numbers out there. Let’s say in a year she makes $20,000 from that.
Well, on a paper after we kind of think about these tax deductions that we’re able to use, she’s going to take a home office. That’s going to cut it down. So going to have a cell phone bill that you’re typically not getting a deduction for now, portion of your cell phone bill, we’re getting a deduction for, she might have a board of advisors that she’s working with, which could be user geo you’re part of her board of advisors, or maybe some in-laws or something like that.
And you’re going to meet once a month and talk about how our business is doing well. Now we have a lunch or something like that, that we have a [00:20:00] business deduction for. And so there’s a lot of the spending on things that you would already be doing. But now you’re going to get a deduction for it. So at $20,000 of income, we might only be paying taxes on 5,000 of it, maybe zero, maybe a couple thousand of it, whatever we can coop that makes sense for the type of business that we’re operating, that we can find a business purpose to.
We’re going to clear out a lot of that income doing spending by just shifting some of that spending that you’re already doing into a different.
[00:20:26] Lee Michael Murphy: So like if surgery is going to be the janitor, she would not give him a board of advisors sheet with like, what if he’s just lonely janitor? that’s all.
[00:20:35] Mike Jesowshek: Yeah. Everyone needs a good Chander on their board of advisors.
[00:20:38] Lee Michael Murphy: That would be Serge
[00:20:40] Sergio Patterson: Mike. I had kind of a dumb question maybe, but like what defines a business? Like if she’s only, let’s just say somewhat, like, is it a dollar amount or can I just say I’m starting a business today? We don’t have any income, but I have a business.
Cause then I it’s like a two-part question. Cause then I get, the legal aspect of it, Matt, like you might want to chime [00:21:00] in here, but that’s like, I think starting a business to me. Sounds awesome. But I would get, I get worried when I’m trying to get creative with all these deductions and then thinking about the legal aspect.
[00:21:11] Mike Jesowshek: Yeah. So, there’s, you don’t have to have an entity structure to start a business. You can operate as sole proprietorship. And I’m sure Matt will tell you why that might not be a good idea, but it’s totally fine. Totally possible. but when we’re talking about what is determined to be a business, what we need to look at profit model.
Do we have intentions to make a profit from this. And so that’s where we kind of get into this hobby versus business. when we’re being a business owner, we want this idea of, we want to be a business owner. We don’t want this to be a hobby. And essentially kind of what the difference is between that is a hobbyist.
Continuously loses money with no intention or motive to ever turn a profit. So if I like golfing, I can’t just say I’m going to be a golf coach and I’m just going to go golfing every day. And if I hopefully see someone on [00:22:00] the course, I’m going to go to them and say, Hey, your grip is a little bit off here.
So you should look at that and I’m going to get a deduction for all that golf. I play that would be. A hobby, but if I’m starting a business and I want to be a golf coach and I go in and say, okay, I’m going to buy some of this video equipment. I’m going to make some advertisements and I plan to make a profit from this that, make it into a business lens.
It’s a business, but it doesn’t necessarily need to be profitable immediately to make it a business. It’s just that motive or that intention to have a profit on it sometimes. So I usually say it’s pretty. It’s pretty black and white of what’s the hobby versus what’s a business, even though you can have a business that sure feels like a hobby, but it’s actually a business that’s obviously a great place to be.
[00:22:43] Matt McElroy: Is there like a threshold amount of income where you would like, kind of draw the line of that? Like what, like, say like, in the example that they were playing with here is what if she only makes 2000 for the year? You know what I mean? Is that. How would you handle that? I guess
[00:22:58] Mike Jesowshek: that for tax purposes.
Yeah, [00:23:00] totally fine. That’s that, that, that could be a business. And, you see a lot of this and that MLM type space where you’re selling a skincare product or something like that. And you’re just getting started. you might make a thousand dollars, $2,000 or something. Of course, you still get all those deductions that are related to that.
Now we also don’t want to, go overboard with it. So we’re not going to be like, okay, we’re taking 80% of our cell phone bill. $2,000 of income, it’s like, okay, well maybe that 80% maybe turns into 10% or something like that, because in reality, if you’re using your cell phone 80% for business, maybe we should be producing more income from that.
So we can kind of adjust those types of numbers a little bit, but yeah, for sure if you’re in business and have a profit motive and tend to make money from this,that dollar threshold does not. Obviously, if you’re making $2,000 a year losing money every single year for 10 years straight or four years or five years straight, you, it would be harder to support that’s a business versus a hobby.
but [00:24:00] you know, as long as there’s, the dollar amount is not necessarily, something that we need to key in.
[00:24:05] Matt McElroy: So, what you’re saying is like the deductions kind of have to be proportionate to the income in some ways.
[00:24:12] Mike Jesowshek: Exactly. So when we look at what is considered a business deduction, we say it should be ordinary and necessary.
So ordinary for the type of business that you’re in. If we’re doing MLM type skincare product that we’re selling. the expense that we’re, if we’re wanting to take a business deduction for it should be ordinary in that industry, ordinary for that type of work and the necessary thing, it just means it’s necessary to get clients it’s necessary to keep clients it’s necessary to keep an employee or get an employee or something like that.
So when we look at what a business expense has to do, we look at has to be ordinary and necessary. If so it qualifies, but yeah, when we look at percentages, and so this is kind of the idea of some of that spending that we already do. And this could be a home office. This could be a cell phone bill.
This could be your internet. that’s where we want to make it, make that proportion and say, okay, [00:25:00] what percentage of those clients. Are related to the business and yeah, if we’re making a thousand dollars a year, $2,000 a year saying that 80% of your cell phone bills related to the business might be tough to defend.
but saying 10, 20% is, I think that’s totally fine. and it, again, Sue is where are we going with this? you could make $2,000 in the first year because we’re all. Development. We’re trying to figure out what are we, what do we want to do? Or we’re trying to build this business, but ultimately the goal, if the goal is to next year, make 60,000, 70,000, 80,000.
[00:25:32] Mike Jesowshek: Well, now that 80% cell phone bill makes sense because we just haven’t opened up that flood gate of income yet. We’re just building that process currently.
[00:25:41] Lee Michael Murphy: Yeah. I’d
[00:25:41] Matt McElroy: imagine a lot of new people that are starting businesses and stuff would run into that problem where the first year is kind of rough like that.
And they put a lot more in than maybe they get out. And so, yeah, it’s good. It’s good to know how to handle those kinds of situations.
[00:25:53] Mike Jesowshek: Yeah. And that’s totally fine. Typically, when we look at hobby, we’re looking like three out of five years. So, if we lose money for five [00:26:00] years straight, that’s probably looking like a hobby now.
I would caveat that though, too, because we’re looking at two different pieces. What they call ordinary income and passive income in ordinary income means this you’re actively participating in it’s what you’re spending time on this. So this would be things like. Being a consultant doing that type of business, being a part of an MLM where passive is just saying, here’s some money now you’re just going to pay me, but I don’t have to really do anything for it.
[00:26:26] Mike Jesowshek: And so that would be something like interest on a savings account or a rental property,where we just kind of fund that rental property share. Place a tenant once a year, something like that, but we’re not really active in that business. That’s considered passive income. So most people that have rental properties are going to see losses for a good portion of the beginning years, because we have a bunch of depreciation that we’re getting from it.
And that’s totally fine. It’s just more on that ordinary income side. So sings that we’re actively participating in. Yeah. You run into issues if we’re [00:27:00] constantly losing money, not to say that it’s fine. Especially if you have a business where you do have depreciation or you’re buying equipment or buying vehicles, there’s a good chance that you will be at a loss.
At least the first few years,
[00:27:13] Lee Michael Murphy: Mike, let’s go to the advanced tax planning strategies. It’s like, well, what are some ones that we should think about? Maybe people that have, assets that have appreciated or have super high income. What are some advanced strategies that are out.
[00:27:27] Mike Jesowshek: Yeah, and I mean, these get a little complex, so they’re a little bit more detailed, but you know, when we look at advanced planning, there’s a few different factors that come into what strategy were gonna lean on.
some advanced planning is just, we have high. So we’re a W2 earner that does well. And typically we say that’s $250,000 or more when that strategy starts to open up. And so that’s just, we’re not selling a business, we’re not selling our crypto. We’re not doing anything like that.
[00:27:52] Mike Jesowshek: We’re just making money and earning a higher income and there’s tax strategies available for that. Then we run into the issue. we [00:28:00] have a highlyappreciated asset. So we bought a bunch of Bitcoin at $500. Now it’s at 50,000 and now we’re selling a ton of it. And we have a $1.2 million gain that we’re sitting on.
That’s going to be a one-time event. We’re not going to see that every single year, because it’s just that appreciate us, that we’re selling ones now. Sure. We could replicate that in some other coin or something else, but typically that’s just going to be a one-time event where we have a big game. And a highly appreciated asset.
That’s going to be a different strategy. A lot of times when we look at advanced planning, we look at charitable structures. So they have, charitable lead trusts, charitable, remainder, trusts, things like that, that we can utilize for it. but again, we’re looking at advanced side, we’re looking at a couple different things.
What type of strategies we want to use will depend on, are we doing this because it’s a consistent income? Is this just an ordinary income? Or are we looking for an advanced tax strategy? Because we had a pretty abnormal one-time event that we need to try to squash a big tax bill on. And that’s just going to depend on kind of [00:29:00] which angle you go there.
where they come into play again, about $250,000 is where a tax strategy like that can start to open up the door. That’s going to be for more ordinary income. some of that, one-time event income. Tech strategy say, 400, $500,000 or more up until, as you get into that more million dollar range, more strategies become available in a lot of these.
[00:29:23] Mike Jesowshek: I said they’re a little bit complex, a little bit harder to understand. and a lot of these too, we want to make sure that we’re doing our research on them and we’re working with a lawyer or a vendor that does these, that we can know like, and trust because as we get into some of this more advanced tax planning, when we’re talking about how do we implement it in that, that, that riskiness involved with it, the reason some of these become risky is because of.
People set up sham operations, a captive insurance company is an example and a captive insurance company basically just means that we’re buying insurance, that we can’t find on the market. We’re getting a business deduction for it. And there’s some tax [00:30:00] strategies involved in it. And the, an example of.
People are doing kind of sham operations of these is let’s say you’re an internet marketing business in Manhattan. There would be companies out there to say let’s buy captive and let’s do a million dollar policy in capable, volcanoes, erupts, and your business goes under in Manhattan. That’s likely never going to happen.
And that’s that’s but we can buy insurance for it. Does that make sense? No, but let’s say you’re in a marketing company. We might have buy insurance that says, Hey, if the FTC ever comes in and says, this type of marketing strategy that you utilize is no longer valid and your business goes from a $10 million business to zero because of this way that you’re doing marketing.
Well, that could be an insurance that we could purchase, and that would make a lot more sense than volcano insurance. So that’s why I’m just saying, like, in these advanced strategies, there’s a lot of people out there that just are not doing them. Some might’ve never get caught, but that is where the IRS is targeting.
They want to make sure that if we’re doing a strategy like this, [00:31:00] they want to make sure that you’re doing it correctly. And if you make a little misstep here, there, and they’re going to attack you, and that’s where it’s just finding that vendor, finding that lawyer attorney that’s setting these up and ensuring that you’re well aligned with them and no there and trust them.
And it all makes sense to you, understanding anything about what tax. It is so important, than just saying, Hey, I trust my accountant. So I’m just going to go with it. Know, I don’t like that idea. I want you to feel, not saying that you have to be an expert in whatever we’re talking about, but I want you to grasp a little bit of it to say, if you could tell your children someday was tax strategy utilized, you could try to, somewhat explain it to them where they’d be like, oh, I think that makes sense.
I don’t know the details, but it makes sense. That’s where I would want someone to be then just blindly trust in somebody, in such a major area that live Mike.
[00:31:48] Lee Michael Murphy: Thanks so much, man, for all that great advice. I mean, you got some really great strategies that we, that we can all digest and kind of let it sit.
I know Sergio his wheels are spinning and he’s like, ah, I see the light.
[00:31:59] Sergio Patterson: [00:32:00] The education that I was going to ask, like, I think education is a huge gap. So to me it sounds like there’s just free money out there that I’m assuming many business owners are just missing out on because they’re not engaging with folks.
is that a safe assumption? Like yeah. Advantage of the advanced tax strategies?
[00:32:16] Mike Jesowshek: Absolutely. It’s just the idea of tax planning in general. Again, so many people are so focused on this filing piece because that’s required by law and that’s important of course, but this whole tax planning piece is they’re like, well, they just don’t want to put the effort in to try to understand.
And they’re missing out on things, like hiring your kids, maximizing deductions, taking a home office deduction. These are all very easy and simple things, but someone’s like, well, that’s going to save me a hundred dollars here, maybe $800 here. And they’re like, I don’t want to deal with it because they think it might be risky.
They think there might be something in there. And I always just say, The tax code is written the way it was for a reason. The tax code is thousands and thousands of pages for a reason that there’s areas that we as business owners or [00:33:00] individuals in certain areas too, should be taken advantage of.
Whether we’re doing it or not. And so, yeah. I think you’re exactly right. There’s some people that just don’t want to put maybe the time and effort into, to understanding or implementing these strategies, but they’re relatively easy. they’re easy things to do. And that’s kind of where our goal has been with our small business tax savings podcasts is just bring awareness.
To the tax strategies that are available to you. And we have thousands of ideas and strategies that we can implement, and they’re not going to be perfect for everybody. I might meet with you guys and Lee might take 10 strategies and ditch 90 and Sergio, you might take 20 and ditch the rest of the 80 and Matt might take all of them.
but there’s different areas in everyone’s going to be different. And not saying that every strategy is right for everybody, but there’s plenty out there to pick and choose what is right for your scenario.
[00:33:48] Sergio Patterson: Yeah. If the rich guys are taking advantage of anyway,
[00:33:50] Lee Michael Murphy: everyone should. Yeah,
[00:33:51] Mike Jesowshek: exactly. And that’s another thing too.
Sergio is a lot of people think. The tax planning is only for the [00:34:00] rich that they couldn’t be more wrong. We see business owners making $2,000 a year that instead of paying taxes on 2000, now we’re painting on a hundred. Yeah. That’s savings right there. That the rich are utilizing that anybody, no matter what your size is.
So that’s another misconception people have is I got to be making $500,000 a year. I got to be making a million dollars. You just save on taxes. You can do it in any level.
[00:34:23] Lee Michael Murphy: Love it. Love that. So Mike, how can people reach out?
[00:34:27] Mike Jesowshek: Yeah, you can find us. You can look at the website is tax savings, podcast.com tax savings, podcast.com.
And you can find our podcast, small business tax savings podcast on any podcasting platform.
[00:34:40] Lee Michael Murphy: Mike, thank you for coming on the show today. Amazing advice. it was wonderful for all of us. I know our listeners are going to get a ton out of this episode. You’ve been listening to the pre-retiree show.
So long for now..