Teaching Tax Flow: The Podcast

In Episode 193 of the Teaching Tax Flow podcast, hosts John Tripolsky and Chris Picciurro jump into the intricacies of tax planning for early retirees with the case study of Joe and Jill Pickleball. This episode sheds light on strategies outlined in Chapter 19 of the Defeating Taxes book, providing valuable insights tailored for individuals transitioning from peak earning years to retirement while maintaining tax efficiency. Chris shares his enthusiasm for discussing commonplace tax scenarios many retirees encounter, offering pragmatic strategies to optimize tax outcomes over a lifetime.

The conversation explores crucial topics such as Social Security benefits, Medicare premiums, and capital gains associated with appreciated assets. Focusing on Joe and Jill Pickleball, Chris outlines essential actions for retirees in high-income and tax-sensitive situations, including considerations for estate planning and charitable giving. By examining the nuances of required minimum distributions (RMDs) and Roth conversions, listeners gain a comprehensive understanding of how to navigate these financial elements to reduce taxable income.
 
Engaging in solutions ranging from downsizing homes to estate planning, the episode delivers a wealth of knowledge, making it clear that proactive tax preparation can greatly enhance financial well-being.

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  • (00:02) - Exploring Tax Strategies Through Joe and Jill Pickleball
  • (01:26) - Tax Planning Strategies for Younger Retirees
  • (03:48) - Defeating Taxes: It's Never Too Early or Late
  • (05:02) - Tax Efficiency Strategies for Retired Couples in High-Income States
  • (06:37) - Hidden Taxes Affecting Medicare Premiums and Social Security Benefits
  • (07:48) - Tax Efficiency and Estate Planning for High Net Worth Individuals
  • (10:24) - Strategies for Managing Retirement Distributions and Tax Implications
  • (12:53) - Tax Strategies for Charitable Donations and Estate Planning
  • (16:22) - Tax Planning Strategies for Retirees and Social Security Optimization

Creators and Guests

Host
Chris Picciurro
Founder, Teaching Tax Flow
Host
John Tripolsky
VP of Marketing, Teaching Tax Flow

What is Teaching Tax Flow: The Podcast?

Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.

Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.

In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.

Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.

Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com

John Tripolsky:

Everybody, welcome back to the Teaching Tax Flow podcast episode 193. We would normally say get your head out of the gutter. However, get your head out of the kitchen, and you'll know exactly what I'm talking about here momentarily. We are going to talk about a topic from another case study of the Defeating Taxes book. But this specific case study, I know we're going to cover some great topics in here, some great strategies, etcetera, for this specific case study.

John Tripolsky:

But I know my cohost Chris Picciurro is more excited because of the last name of these people from this case study in the book. So I won't introduce it. I'll let Chris do it. Chris, let's, let's get this one off and rolling. Volley me something.

John Tripolsky:

I'm thinking of a joke here, but me with it, man. What do we got?

Chris Picciurro, CPA:

Well, not a bad not not a bad term. So today, we're talking about the fourth out of the four real life case studies that we write on right here in our defeating taxes book, chapter 19, which is Joe and Jill Pickleball. Obviously, the last names are the the first names and last names have been changed, but the fact pattern is very, very common. And, we've walked through this journey of different case studies, and I think with the four case studies that we write on in the book, we've captured, you know, we captured a vast majority of of US taxpayers from different marital statuses to ages, income levels, asset levels. And I think with Joe and Jill, the reason I wanted to put this in the book is that a lot of times, people in their situation feel like it might be too late to do tax planning or, that they a lot of times people that are early retiree I I don't I don't like the term early retiree, but I guess that's younger retirees, we'll say.

John Tripolsky:

The younger pro younger retirees.

Chris Picciurro, CPA:

Abbitious, maybe. Ambitious retirees? Longer. Yeah. Or maybe a better term would be presocial security drawing retirees before they get full social security age.

Chris Picciurro, CPA:

So a lot of times these folks were were in their peak earning years in their mid fifties to early sixties, and they've a lot of times, they may have not done a lot of tax planning. They haven't put a lot of money away in tax free instruments. A lot of times, it's tax deferred or it's in their home, and they've got a couple issues. Right? First of all, they they know that they're gonna have to take money out of their retirement plan in the near future, and that's gonna be taxed or whatever their rate is.

Chris Picciurro, CPA:

And they're moving from what we call a red diagnosis typically, which is that higher than 25% marginal tax rate into a green diagnosis because now they they might have a small pension. They might have Social Security. They might have some income streams, but, ultimately, they're not their taxable income is not as high as it was a year or two years previously. So so yeah. So in a lot of times, these folks are enjoying things like, you know, maybe their grandkids, maybe fishing, golf, pickleball.

Chris Picciurro, CPA:

You know, and they have more time on their hands, and they're thinking, gosh. What could I be doing right now? Because they see this big freight train coming, and that big freight train is we've worked our entire life to save for retirement. We're quote unquote in retirement, and now we know that we're going to be forced to take money out of our pretax accounts, our IRAs, etcetera, when we hit what's called required minimum distribution age in their seventies. And even though we don't necessarily need that money right now, we're gonna have to pay a tax on that.

Chris Picciurro, CPA:

So this is where things get a little interesting, and, we like to, wanna dive in. Yeah. Let's let's dive in. And this, again, this is chapter 19, the defeating taxes book. So for those of you that have already read it, listen to this book.

Chris Picciurro, CPA:

Thank you. We we genuinely appreciate your your support.

John Tripolsky:

Yeah. And you started this off too by saying, you know, about tax planning. Right? Some people think it's too late, too early, all all these things around it. Right?

John Tripolsky:

And and the answer to both of those is kind of lee or kind of a an overarching it's never too early. It's never too late. Right? So you you might as well start doing it because really, I guess from the taxpayer's perspective, you know, they might think of it as, oh, you know, a proverbial tax day. Right?

John Tripolsky:

We're doing the air quotes here for people that aren't watching it. They think of it as a yearly thing. Like, oh, everything I do this year is just for this year. It doesn't really go beyond that, which is not the case. And that's where we come in and especially this case study.

John Tripolsky:

I know this one, obviously, knowing how it ends. It's a great one because it runs through a lot of stuff, and it is very relatable.

Chris Picciurro, CPA:

Yeah. Try it out legally not to give reduced tax they pay in their lifetime. So let's set the stage for Joe and Joe. They're married. They filed jointly.

Chris Picciurro, CPA:

They are not working, and they're in their late mid to late sixties, and they're in a in a high income tax state. So maybe they might be in I don't know. Let's throw them in New Jersey. We pick on California enough. Right?

Chris Picciurro, CPA:

The combined marginal tax rate's about 22%. So it's not exorbitant, right? Remember, red diagnosis means 25% or higher. They have a lot of liquidity. What does that mean?

Chris Picciurro, CPA:

They have a lot of money in their brokerage accounts or in checking and savings accounts that they have access to, that if they pull that money out of a checking or savings account, it's not going to be necessarily taxable. So they've got a lot of brokerage accounts, and they're kind of looking for that. You know, they're not they're not in a situation where they're counting on their tax refund to live on. Their income is is coming from multiple sources. It used to be just w two ages, but now they have a Social Security.

Chris Picciurro, CPA:

They have pension payments. They have some portfolio withdrawals, interest, and dividends. And, now they're also grandparents. Right? So they're pretty excited about that, But they're also concerned about, you know, they're concerned about maybe helping out for with with that education expense for their grandkids.

Chris Picciurro, CPA:

So by no means are they, quote, unquote, struggling financially. By no means do they have a immediate tax problem. However, they realize that we've got some assets in these retirement accounts, and how do we become tax efficient with with what we have? And and, also, you know, you know, do they need to you know, are they in a place living situation where do they wanna downsize their house? Do they want to change a, you know, change their state of residency to a non tax state.

Chris Picciurro, CPA:

And it's interesting with Medicare too. So, you know, we talk a lot in our content on teaching tax flow about hidden taxes, right? And what you have to understand is that when you when you are on Medicare, if your income goes over a certain threshold, you are required to pay a higher premium for that Medicare. That does not show up on your tax return at all as as a as a quote unquote tax, but it there is a tax to having a large amount of adjusted gross income because that could affect your Medicare premium. That's a two year look back.

Chris Picciurro, CPA:

And the other thing is if your other income is of note, your social security benefits could be taxable. Up to 85% of those benefits can be taxable. So those are hidden taxes, and that's what these folks are are thinking about. They might not be thinking about estate planning too much with the one big beautiful bill act. We have about a $15,000,000 state tax exemption.

Chris Picciurro, CPA:

So between them, they could have 30,000,000 of assets and pass those on to their beneficiaries at no with no estate tax. However, they wanna be tax efficient just like everybody.

John Tripolsky:

And I'm glad you also mentioned something else here whether you know it or not. And and to give a little preview of people, three or four episodes for now, we're gonna dive into some specifics what people can do if they only get a w two. So somebody who's not self employed or anything else, they think it's a simple situation. You know, you mentioned these individuals started off or may have started off with that, but now there's other sources of income coming in, which does in a sense, some people might look at it as, hey. It complicates my situation.

John Tripolsky:

But really from the tax side, it could be a huge benefit because now you're even in more control of really your your tax life for lack of better terms. Right? But if you ignore it, then, you know, you you're not the you're not in control. Right? So

Chris Picciurro, CPA:

And and yeah. So, like, let's say, what are their concerns? Let's think the first thing is we've walked through that four step process, diagnose, prescribe, IQ test, implement. Their concerns are reducing their tax over their lifetime. Their concerns are having enough money to to make sure they have the medical care they need, making sure they can maintain the lifestyle they're comfortable with, thinking about now they have grandkids, thinking about the education of those grandkids, making sure that their family has financial security, and also thinking about their assets that have appreciated.

Chris Picciurro, CPA:

So those assets that have appreciated me, what does appreciated mean? That means they've gone up in value. So they might have significant amount of stocks and mutual funds that have a that have appreciated, and we know that there's a difference between realized and unrealized capital gains. So just because they own securities that went up in value until they sell those securities, it's not a realized capital gain. But whoever sells it is gonna pay a capital gain tax on that.

Chris Picciurro, CPA:

That. What about their home? Their primary homestead? Is do they is that becoming a burden to them? Are they, you know, do they wanna downsize?

Chris Picciurro, CPA:

Can they take advantage of the section one twenty one exclusion? Meaning, the primary homestead exclusion. Can they and and also they wanna think about, you know, do we want some assets that we own to pass on to our beneficiaries with a step up in basis? So there's so many things to consider. And those are the concerns I would say for these folks.

Chris Picciurro, CPA:

If they're in a 25% total they're barely a red diagnosis. Again, they don't have a tax problem, but they have a tax situation. So what what can we do for them? Right? What are some of the ideas we would have have for them?

Chris Picciurro, CPA:

Well, one idea is just kind of thinking about those pending retirement distributions, what are called the required minimum distributions. What we would probably want to do is say, okay, let's assume that they have let's look at their marginal tax rate and let's fill up their relatively lower marginal tax rates with by either accelerating green diagnosis rate of accelerating income into certain years such as Roth conversions, maybe some capital gain harvesting, that that's an option. So instead of waiting until they have to take money out of their retirement accounts via required minimum distributions, we take those distributions now, or if they don't need that money, we could put do a Roth conversion and let that money grow tax free. That's a really good option. So retirement distribution planning is going to be important for them.

Chris Picciurro, CPA:

They once they get to the point where they are in a situation where they have RMDs, which is which are required minimum distributions, they sounds like they have a significant amount of assets, and they're they're gonna say, well, we don't really need all this money. So just to put it in context, John, let's assume someone has $2,000,000 on their retirement accounts and they hit the required minimum distribution age. This is all based on if you're a male, a female, who your beneficiaries are, what your life expectancy tables are. But in general, you're going to have to take out about $120,000 out of that retirement account right away if you wanted to or not, which is all taxable, which all hits your Medicare surcharge. So this might say, we don't really need all that money.

Chris Picciurro, CPA:

So, one of the things we might want to do once they hit the required minimum distribution age is do something called a QCD. That's a qualified charitable distribution and what that does is that takes money out of their retirement account and puts it, rolls it right into a into a charity. That way, it's never taxable. They don't and they meet the required minimum distribution, requirements.

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Chris Picciurro, CPA:

What if they have appreciated stock that they want and they want to be charitable? They might wanna donate that stock in kind to a charity and take a tax reduction. So, John, let's say something they bought, I don't know.

John Tripolsky:

Which is Amazon stock? I think everybody can associate with that one.

Chris Picciurro, CPA:

Yeah. A $100 and or let's say a thousand dollars, and now it's worth a $100,000. And they're thinking, well, we, you know, we really don't if we sell that stock and donate the 100,000, then they'd pay tax on $99,000. But if they donate the stock, an appreciated asset, to a charity, then they get a $100,000 tax deduction. So those are some of the things you want to think about because these people might be very charitably inclined.

Chris Picciurro, CPA:

So that person might come to you as a tax professional and say, hey, we really want to do, you know, our high school or church, they've done so much for us, and we want to make a very generous $100,000 donation. Our job as tax planners is say, great. Awesome that you're generous, but how do I do that tax efficiently? Because the common person would just say, I'll just take a $100 out of my retirement account and donate it to charity, which would be a tax disaster. They would probably lose, like, $2,024,000 dollars of tax by that move versus just donating the stock in kind.

Chris Picciurro, CPA:

So those are some of the things we're thinking about for for the the pickleball couple. Now let's talk about their legacy. Right? Let's make sure that their beneficiaries are up to date. Let's make sure that their estate plan is up to date.

Chris Picciurro, CPA:

And then thinking about those grandkids. If they're inclined to put money away for education, one of the most popular opportunities are five twenty nine plans. So they can donate not donate, but they can contribute to a five twenty nine plan. Is that a tax deduction on the federal return? No.

Chris Picciurro, CPA:

It could be a tax deduction on the state return, but it but here's the nice thing. It's moving money out of their estate and allowing that to grow tax free for their grandchildren because these folks aren't working. So they can't contribute new dollars into a traditional IRA or a Roth IRA, but they can certainly contribute to a five twenty nine plan or do Roth conversion. So there are definitely things someone like this can do, and one of the things that us tax professionals like to help them do is fill up their marginal tax bucket. So, John, what that means is let's assume you know you know I'm a big proponent that marginal tax rates lie to us.

Chris Picciurro, CPA:

Right?

John Tripolsky:

We're Tax brackets lie.

Chris Picciurro, CPA:

Lie to us. I'm sorry. Marginal tax rates are are the truth. But let's assume someone's in a, you know, 20% marginal tax rate between federal and state. And we look at it and we say, you know, you could have earned another $50,000 and only paid 20 percent, and they say, well, I'm not working.

Chris Picciurro, CPA:

That's where we say, well, okay, let's accelerate income. Maybe we take $50 out of the retirement account or we do that Roth conversion for 50 and say, look. Lock in the tax now. You're gonna pay a 20% tax because we know down the road, they're gonna have these retarded minimum distributions, and we know we're not gonna live in this 20% world ever again. So similar to, you know, if you sometimes you can buy tickets to a concert and it before, you know, in advance for a small discount and lock yourself into that good seat and not have to hit the secondary marker.

John Tripolsky:

I always think of it too when you talk about, you know, your role or or those that are also, like, tax planners. Right? It's almost similar like an interior designer. Right? Like, they're coming into into something, you stepping into somebody's tax life, tax situation.

John Tripolsky:

You're not in theirs specific every day, but you know how things are in the future. Like say a designer came into a house and they said, you know what? It's really great that you want to do this and you want to do this. Here's some ideas. Here's why.

John Tripolsky:

Oh, you're are you going to have a family? You want to start a family? Yes. Well, I don't recommend doing this now because if you do this now, it's going to impact you when you have a toddler running around? So little things like that where you you're very similar to that, I think.

John Tripolsky:

Like, if you're in it all day long, you kind of you get the blinders on. Right? Or things kind of fall by. But when you come in, you see all this stuff, and you're seeing it, and you see how it is now versus what actions need to get taken. So it's optimized in three, five, ten years.

John Tripolsky:

Right? Absolutely.

Chris Picciurro, CPA:

Yeah. And and, you know, one of the thing that I mean, the other consideration for mister and missus Pickleball is drawing Social Security since they're in their late sixties. You know, do we we wait it out and go full Social Security? Do you draw it earlier? You know, they're one in the hands better than two in the bush.

Chris Picciurro, CPA:

We have to we typically look at you know, we typically look at a breakeven point somewhere in their mid-80s, right? And so gosh, there's just a lot to consider. Does one of the spouses have a more in a retirement account than the other? So these are the things we have to think about, and what we find is, especially for these pre social security drawing retirees, like these pickleball folks, there's a lot more coordination between their estate planner, their financial planner, and their tax planner. Now, there's just a lot more.

Chris Picciurro, CPA:

And that coordination should be occurring earlier, but that's you know, those are those are some of the things. So if you're in this situation, you might have a parent that's in this situation. John, we have parents that are a little older than this, but they were in this situation ten years ago. They did a good job planning. You might be in this situation.

Chris Picciurro, CPA:

Hey, you might even have a grandparent in this situation and you're just getting ahead of the game. So congratulations on that. Have them listen to this and think about, you know, are they in the exact situation as the case study from this beautiful book? No. But what are the thoughts?

Chris Picciurro, CPA:

What are we thinking about? How do we plan for retirement distributions in a tax efficient manner? How do we make sure we maximize their Social Security benefit? And how do we prevent hidden taxes like Medicare surtax or higher taxes on our Social Security? And those are the things that we have to think about when we're planning for these type of people.

Chris Picciurro, CPA:

And Jolly, as as you know, with the One Big Beautiful Bill Act, we now have a 65 we have a new senior deduction for anyone 65 or older. Right? But that phases out. So for these folks, you know, that's that could be significant. We want to take advantage of that deduction and it's $6,000 per bird.

Chris Picciurro, CPA:

That's $12,000 deduction. So we might that's that could but that's based on their adjusted gross income. So that could there's just so many things that that play a role. And so the point is, as we wrap up, no matter what, if you're in your sixties playing pickleball every day, tax planning could still be for you.

John Tripolsky:

You've got it. You've got it. It's a great great pivot point as we really get into the the other episodes we have coming up. We have some of them that I'm not gonna give anybody a hint, but it's been on the roster for a while. We we have a great guest joining us on that one.

John Tripolsky:

But, Chris, really, I will end with this part besides telling people go to that defeatingtaxes.com. It's kinda your your central point. We'll send you anywhere that you're looking for more information. But it really is where everybody's tax situation is very different. Even if it's one little thing, it is very different.

John Tripolsky:

However, the best mindset is the same. Right? And that mindset is really just wrapped around and encompasses the whole idea of planning for it and that it's not just a once a year activity and you're done with it. It's ever growing, ever evolving. So everybody think about that.

John Tripolsky:

When you go to sleep tonight and lay your head on your pillow, we want you thinking about taxes because it's not too early and it's not too late. So remember that and check out that defeatingtaxes.com. We will see Rudy back here again next week on the teaching tax law podcast. Have a great week, everybody.

Disclosure:

The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.

Disclosure:

Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment adviser. Chris Picciurro is a registered representative of Cabin Securities and an investment adviser representative with Cabin Advisors LLC. Teaching Tax Flow is an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.