$10.40 is the scorecard. How much did were you able to grow your assets? Was it the right amount of risk? And are you creating inefficiencies in your tax return that may bubble up into other problems later? Welcome to the Retire On Time podcast, a show that answers your retirement questions.

Say goodbye to the oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty. That said, remember, this is just a show. Everything you hear should be considered informational. This is not financial advice, so do your research.

As always, text your questions to (913) 363-1234, and we will feature them on the show. David, what do we got today?

Hey, Mike. What should I be looking for in my $10.40 this year as I file my taxes?

Assuming you have a basic ten forty, so w two income, ten ninety nine income, you know, basic wages income, Maybe you're retired, you've got some IRA distributions. The the big things that I look for first, assuming there's no schedule e, there's no real estate investments, you're not a farmer, so schedule f or any any of those, you know, you're not running a business. Just the simple ten forty. I typically look at lines two a, two b, three a, three b, and seven.

Okay. What are those lines? Yeah. Work through

them. So two a, municipal interest. Oh. K. So this is the tax free interest from municipal bonds.

If you have any municipal bonds or tax free interest, it didn't really matter until lately because Trump's new, like, one big beautiful bill deduction or more tax planning strategies are revolving around your modified adjusted gross income, which includes line two a. So you have to report it before it really didn't matter. Now it's starting to matter. So I like to keep track of that. Line two b, that is your taxable interest.

Uh-huh. Okay.

Yeah. So think of the interest from your checking account, checkings and savings. If you have a high yield savings account, it's gonna matter. If you bank at where I bank, not gonna matter. You don't pay anything.

Because you have like a point 1%. That would be nice

If you are. If it were that high.

Wow. Okay.

But I mean, you get what you pay for.

Yeah.

Right? That there's a reason why they don't charge. They don't do anything because they're so stable. It's Yeah. Anyway.

But you wanna be mindful of those things. And the reason is, like, let's say you do an IRA to Roth conversion and and everything to the to the Irma limit. Let's say you're retired and you go exactly to the Irma limit, and then you have $1 more of interest on line two b, you're now paying a $100 extra a month in Medicare.

Oh, right.

So you have to be aware of these other expenses that creep you over. If you think you have tax free income from Social Security and line two b, that taxable interest or even two a, because two a is calculated in the provisional income tax, is Social Security, $1 over kicks you into a a a more a higher taxable situation. So you gotta be aware of these things. So I like to have the awareness of of two a, two b. And then with three a and three b, so three a is your qualified dividends.

So that number is taxed as if it were long term capital gains. So zero, fifteen, and 20%. If you're married, filing jointly the first 96,000 or so of 2025 twenty twenty five long term capital gains brackets was tax free. Now that that's not a straight number. You have to add an ordinary income and stuff like that.

But, anyway, it's it's pretty tax efficient. And then it goes to 15%. Line three b, those are ordinary dividends, not qualified dividends. Three a qualified, three b ordinary, your taxes ordinary income.

Okay.

So for some people, you might actually enjoy ordinary income as your your bit. You I'd I'd I'd say that kind of jokingly, but I'll explain my thesis here in a second. Okay. And then but you might not if you're if you're if it's pushing you into the 22 tax bracket, well, what if you can get a similar dividend but put it into the qualified and pay 15% instead of 22%? So that's where kind of it changes.

But here's here's my argument for ordinary dividends is what if your ordinary dividends were in the 10 to 12% bracket? You might say, Mike, it's better to get the 0% bracket. That's kind of true, but what if it's you got Social Security and a few other things as well, and and you wanna do some some IRA to Roth conversions or there are certain situations where you might enjoy it as a certain bracket if you're lower income, but I would say the rule of thumb is if you can enjoy qualified dividends, capital with with the long term capital gains brackets, and that was all that you had in there, that's probably more efficient.

So ordinary dividends, are they called ordinary because they count as ordinary income? So Yeah. Okay. Okay.

And you typically get them triggered if you're buying like ETFs that are actively trading to then get the dividend of that stock.

Oh, okay.

So they're generating more, but they're not qualified for the long term capital gains dividends. They're they're so it's set up differently. You might be able to get a little bit more of a return, so a slightly higher income through it, but you have to be cognizant of the tax consequences. And if the additional income is worth the potential additional tax situation. So it's just being mindful of of how they're playing out in your overall plan.

And then line seven, this is the one where you're gonna you're gonna declare, basically, your long term or short term capital gains. I have found that there's a lot of there there are many situations where an adviser is actively trading a brokerage account which creates capital gains, and they're saying, well, you know, we're we're doing this, we're doing that. They're just creating taxable tax drag.

Mhmm.

And they could have just bought similar funds, ETFs, let's say, accomplished a similar goal, and just kind of wrote it all out and not paid taxes. So you have to be able to rationalize the the tax burden if you're creating it. Sometimes people will come over and will say, well, we kinda wanna clean this portfolio up. We're gonna have one year of longer or more capital gains, but then we can sit back into a more tax efficient long term strategy. And they'll say, well, we're good with that.

But you don't want to pay taxes to rationalize the adviser's job of actively trading. My general opinion is brokerage accounts, which are not qualified, they're subject to capital gains, should have, generally speaking, a more longer term strategy. And your qualified accounts, think your IRAs and your Roth, are more able to have active because there's no capital gains issues as you trade them. And you can blend the strategies as such.

Yeah. That seems to make sense. If you can if you can actively trade without worrying about all the tax consequences of of dividends. Right? Yep.

That makes it easy.

Yeah. So $10.40 is the scorecard. Yeah. It really is. How much did were you able to grow your assets?

Was it the right amount of risk? And are you creating inefficiencies in your tax return that may bubble up into other problems later? But unless I mean, we we look at everyone's ten forty every single year and then adjust the portfolio as such. That's not a normal thing. But the amount of money you could save by being cognizant of paying taxes and investments is huge.

Huge, huge, huge. So be mindful of it. Look at your ten forty. I don't know if it's safe, but I mean you could maybe like take a screenshot of parts of it and upload it to your favorite AI and ask it a bunch of questions.

Yeah.

Or or seek a professional that can walk you through it and then come up with strategies that would be suited for you to make those adjustments and think more long term. But absolutely be looking at your ten forty when you file. That's a that's a big one.