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David, what have we got today?

Hey, Mike. I just got my tax return done. What should I be looking for?

How to read it. Yeah. So I have a whole section in my workbook, the official Retire On Time

workbook Okay. Alright.

That walks you through step by step what every line in your ten forty means. Oh. Now if you've got a business, if you've got real estate schedule e, let we'll talk about that, you know, so if I forget, bring that up. But but the main things to look at are really in my mind, it's two through seven. So first off, what is two a?

Tax exempt interest. No one really cared about that until recently. Your modified adjusted gross income is going to qualify you or disqualify you with certain things. Also, modified adjusted gross income affects your Irma, so be but that's your tax exempt, your municipal bonds, for example. K?

So you wanna be aware of that. Then you've got two or no. That's two a. Two b is taxable interest. Excuse me.

Taxable interest, that's an important one to keep tabs of. If you keep too much money in your high yield savings account, that can push you over the the the line Uh-huh. And create some tax issues. So you might think, oh, high high yield savings, how bad is that? Well, if it's three or 4% of a million dollars Mhmm.

That's gonna show up. And if that shows up, again, it could push you over an IRMA line, or it could disqualify you from a part of the one big beautiful bill deductions or something of the matter.

Okay?

But the bigger ones, I think, are three a and three b. So three a are qualified dividends. If you're buying a stock or holding it for a long enough period of time, your dividend can be taxed as long term capital gains. That's important to know. Mhmm.

That's more tax efficient. If you've got three b, three b is whatever your qualified dividends are, which are taxes ordinary income, plus your qualified dividends. So you have to kind of back out what the the actual number is. But when I see those numbers are really high, I always ask the question, what are you doing with your dividends? If you're spending them, it might not be an issue.

If you're reinvesting them, you are creating a tax bubble. Oh. And as as you reinvest them, it gets bigger and bigger and bigger. That's a problem. Right.

It might be a problem. Maybe you're not maybe you're okay with paying more taxes as you grow. But, I mean, would you be upset if you bought, let's say, I don't know, Apple stock, and you had to pay taxes on every year that it grew slightly? That's kind of what's happening. Dividend stocks are growing through the dividend, not necessarily through the price appreciation or the growth of the price.

So you just gave yourself an unnecessary tax headwind. If you want, you could sell it and move it over to your IRA and keep the stock just in a different part of your portfolio like that. That's fine. But you wanna be tax efficient. So three a and three b are often lines in the tax ten forty, the tax return

That people miss or don't know what to do about it. Those little adjustments can make big differences on your tax returns. And I'll I'll just skip down to line seven. That's I I think the the other big one here.

I mean, we had a ten forty here, we could probably do a lot more, but it's a it's a podcast. Yeah. So in line seven, those are your your capital gains being realized. If your if your brokerage account is actively managed, you have to ask yourself, are the trades worth the taxes you're paying, and what's the net of tax return, net of tax and net of fees, and what other consequences are you paying? See, people just look at, oh, well, here's the growth of the trades, and they forget the tax bill they have to pay.

Uh-huh. What's the growth of the trades, plus the tax bill, plus the fees, because if someone's actively trading, that's fine that people charge fees, but what are the fees? Okay? And then, are these trades triggering issues with your health care? With Irma, for example.

So I mean, what's an extra $400 a month because you wanted an actively managed asset? That's a lot of money. Yeah. And then $400 a month in additional health care costs, plus the taxes that you paid, plus the portfolio and the the fees associated with it, when you could reposition it potentially into a let's say it's very boring ETFs. You don't really rebalance it once maybe every three years or so.

It's long term. Maybe you're going with the big buyback ETFs like is it KPD? I forget the ETF. Invesco has one where it's large companies that typically buy back their shares.

Instead of paying out dividends, that's more tax efficient. Maybe it's Berkshire Hathaway. They don't pay a dividend. Yeah. They probably never will.

So that's the way you can restructure for long term growth. You can sell as needed under your terms for long term capital gains, but you're just being more tax efficient along the way, and the ten forty is the scorecard. Absolutely important to look at every single year. And I'll even add this. If If there are capital gains issues, or it's just a part of your life, that's where you go into direct indexing.

And people have never heard about this. Many people have never heard about this.

Okay. Tell us.

Instead of buying the S and P 500, you know, SPY, VOO, whatever. Uh-huh. You can hire a company, or do it yourself if you really wanna put in the time, it's a lot of work, and you buy, let's say, buy 200 of the S and P five hundred's positions.

But you bought every one of those positions, and you've had to allocate it to mimic what the S and P is expected to do. But instead, the division is things would be things like you know, some of these people are gonna be upset with me comparing, but Pepsi and Coke Uh-huh. Apple and Microsoft. Sure. Right.

Yeah. You know? Fighting words.

Yeah. We both have iPhones. It's okay. Yeah. But the idea is they're not gonna follow exactly the same.

But let's say that the beverage industry goes down, and and you have Coca Cola. You didn't buy Pepsi, bought Coca Cola. And Coca Cola goes down, you sell it at a loss, and then you buy Pepsi, and then Pepsi grows, increases. You're still you're directly indexed, so you've kind of bought roughly what the S and P is. You're trying to track the S and P, but you're harvesting losses along the way.

It's very difficult to do, but this is how you get out of highly appreciated stock, or you just lower your overall tax bill. And in the first year, you might have and this is very general kind of setting expectations. It could be any given way. This can vary. But maybe you've got if you put in, you know, 250, 500,000 million dollars in there, 10% of your assets that you put in there maybe was able to generate some losses that offset other things.

And you might bank that. You might use it that year because if you harvest losses and you don't have and you don't offset enough gains, can just have it for the next year. It rolls over. Okay?

First year might be 10%, maybe 8% the next year, maybe 6% the next five percent after that. Like, at some point, everything has grown enough that there's really nothing left to harvest. That's that's the misconception is that you can do this in perpetuity. You can't. You can do it for a couple of years or so.

It's very nice. And then you can decide to reset it, just realize now all of them as long term capital gains, and then do another five years. It's up to you. But it's a way to create tax efficiency along the way. Direct indexing, a lot of people don't know it exists.

Can people just do this on their own, or do need to get with a professional advisor?

Yeah, just put in the time and place all the trades. It's an elevated amount of responsibility, and it's a lot more research. Yeah. It's just really hard to do. But I mean, anyone's allowed to, you know, buy and sell stocks in your portfolio.

Just manage managing and keeping track of hundred, two hundred, 250 positions.

Seems like a lot of work, but maybe some people like it.

Well, here's the other part too is when you trade, you're not just trading that price, you're trading with a spread. So what you sell is probably less than what will be purchased. So because the market makers have to make some money. So it's it's easy to screw up.

I'm just a lot I support the DIY in a lot of different ways. This is not what I would recommend wanting to do yourself unless you have a background in trading. Uh-huh. And you can manage those things, and you have a Bloomberg terminal or something like that.

Okay. Yeah.

Anyway and then the other things too is on your on your return, if you have real estate property, this is a big one. Schedule e is very telling. Mhmm. K? Here's what I mean.

In the schedule e, you're you're gonna you you wanna find out really what is your current market value of the home, And then you wanna look at how much is going to each different category. How much are you writing off? Because it's real estate's nice because it's very tax efficient for many years. You can depreciate the asset, which is advantageous from a tax standpoint. You can do all sorts of things.

Mhmm. But at some point, a lot of those tax benefits kind of stop. At some point, you get tired of tenants' trash toilets. Maybe the neighborhood's turned on you, whatever it is. And you have to look at yourself and say, I either have to sell this and pay a massive tax bill, or I keep it, and I'm basically a slave to this property for the rest of my life.

Yeah, it might be paying you. Mhmm. How well is it paying you? That's another question. Most landlords I have spoken with have not been able to properly assess their net operating income.

They skew the numbers. They conveniently omit certain factors. You know, like, oh, you know how you need to replace the water heater soon? Yeah. Yeah.

You're leaving that off your expense. Oh, you know how the roof probably ought to get replaced soon? Yeah. You're leaving that off of your calculations, aren't you? Yeah.

I know. I know. And and this is one of the reasons why on retireontime.com, we have the real estate exit calculator. Is that if you just go on there, fill it out, you're gonna see your actual net operating income. How valuable is your property really?

So it could be a wake up call.

Do you want a million dollars that's paying you 1%? You could do better in a checking account or a high yield savings account. You could I mean, you could triple your income in a high yield savings account, your cash flow. That's how sad some of these properties are because they just haven't either kept up with it, or they didn't raise rent or there's new rental laws now or whatever it is. Mhmm.

So you gotta be very careful about that. If the property is not doing well, it might be time to give it to another investor who's a long term investor willing to put in the capital and then depreciate it over, you know, many, many years and and, you know, put their heart and soul into it and then bring it up and then make an investment. There's a reason why a lot of institutional real estate investors only want a property for, like, ten years. They wanna get in, they wanna enjoy it, and they wanna be done with it. And if they get in, they wanna know what they're fixing that like, it's just it's this real estate game that exists.

So the moral of the story, if if I were to say anything, is your tax return is the secret. It is the key to your efficiencies. It tells all. I mean, really, it's it's incredible. Look through it.

If you buy the the Retire On Time Workbook, go through the tax section with your with your ten forty, which is your tax return summary. If you have real estate, go through that and go on the calculator, but use your tax return to highlight potential problems and inefficiencies, and then ask yourself, okay. Now that I've raised my awareness, what do I do to alleviate the burdens? Mhmm. You can't not pay taxes, but you could pay more or less, and that's gonna be up to you.

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